UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-K




x
              Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934
 
 for the
Fiscal Year Ended December 31, 2008
 OR
   ̈
              Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934
 
 for the
transition period from __________ to __________


Commission
file number 0-18412





YTBINTERNATIONAL,INC.


(Exact  name
of registrant as specified 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)





(618)
655-9477


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act: NONE





Securities
registered pursuant to Section 12(g) of the Act:





Class
      A Common Stock, par value $0.001 per share
              
              Class
      B Common Stock, par value $0.001 per share(Title
      of class)
              
              (Title
      of class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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  x
    No   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K     ̈





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer   ̈
              
              Accelerated
      filer  x
              
              Non-accelerated
      filer   ̈
              
              Smaller reporting company   ̈





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





The
aggregate market value of the registrant’s Class A Common Stock and Class B
Common Stock (which converts to Class A shares on a one-for-one basis when sold)
held by non-affiliates as of June 30, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$96.4 million based upon the closing price of $1.65 on June 30, 2008, as
reported by the Over-the-Counter Bulletin Board (“OTC-BB”).  As
of the close of business on March 9, 2009, there were total shares outstanding
of 69,741,312 and 34,051,629, respectively, of the registrant’s Class A Common
Stock and Class B Common Stock (excludes 3,268,554 shares of restricted Class A
Common Stock and 6,537,108 shares of restricted Class B Common Stock that have
been granted and are being held in escrow but have not yet vested and are
therefore not treated as outstanding).





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Definitive Proxy Statement for the registrant’s 2009 Annual Meeting of
Stockholders, expected to be held on or about June 15, 2009, are incorporated by
reference into Part III of this Form 10-K where indicated.








Table of
Contents
 
 PART
      IItem
      1.
                        Business
                        
                        4Item
      1A.
                        Risk
      Factors
                        
                        9Item
      1B.
                        Unresolved
      Staff Comments
                        
                        21Item
      2.
                        Properties
                        
                        21Item
      3.
                        Legal
      Proceedings
                        
                        24Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        
                        25PART
      IIItem
      5.
                        Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases
      of Equity Securities
                        
                        26Item
      6.
                        Selected
      Financial Data
                        
                        28Item
      7.
                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        29Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        56Item
      8.
                        Financial
      Statements and Supplementary Data
                        
                        56Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        
                        56Item
      9A.
                        Controls
      and Procedures
                        
                        56Item
      9B.
                        Other
      Information
                        
                        58PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        
                        59*Item
      11.
                        Executive
      Compensation
                        
                        59*Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        
                        59*Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        
                        59*Item
      14.
                        Principal
      Accountant Fees and Services
                        
                        59*PART
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules
                        
                        60Index
      to Exhibits
                        
                        61Signatures
                        
                        64Index
      to Financial Statements, Financial Statement Schedules
                        
                        65
 
 *       Portions
of the Issuer's Proxy Statement for its 2009 Annual Meeting of Stockholders are
incorporated herein by this
reference.
 
 The
Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”),
provide a safe harbor for forward-looking statements made by or on behalf of the
Company. The Company and its representatives may from time to time make written
or oral statements that are “forward-looking”, including statements contained in
this report and other filings with the Securities and Exchange Commission
(“SEC”) and in
our reports to stockholders. In some cases forward-looking statements can be
identified by words such as “believe,” “expect,” “anticipate,” “plan,”
“potential,” “continue” or similar expressions. Such forward-looking statements
include risks and uncertainties and there are important factors that could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements including those contained in Item 1A in this Annual
Report on Form 10-K as may be updated from time to time in our future
filings with the SEC.
  2
  Although
we believe the expectations reflected in our forward-looking statements are
based upon reasonable assumptions, it is not possible to foresee or identify all
facts that could have a material effect on the future financial performance of
the Company. The forward-looking statements in this report are made on the basis
of management’s assumptions and analyses, as of the time the statements are
made, in light of their experience and perception of historical conditions,
expected future developments and other factors believed to be appropriate under
the circumstances.
 
 In
addition, certain market data and other statistical information used throughout
this report are based on independent industry publications. Although we believe
these sources to be reliable, we have not independently verified the information
and cannot guarantee the accuracy and completeness of such sources.
 
 Except
as otherwise required by the federal securities laws, we disclaim any obligation
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this Annual Report on Form 10-K and the
information incorporated by reference in this report to reflect any change in
our expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
  3
 
 PART
I
  On
July 31, 2007 (the “Reclassification
Date”), we filed an Amended and Restated Certificate of Incorporation
which authorized the issuance of two classes of common stock - Class A Common
Stock and Class B Common Stock - and increased the Company’s total authorized
capital. Stockholders of record on the Reclassification Date received two shares
of Class B Common Stock and one share of Class A Common Stock in exchange for
each share of existing common stock held as of the Reclassification Date. All
shares and per share amounts in this Annual Report on Form 10-K reflect this
reclassification.
  Item
1.  Business.
  YTB
International, Inc., a Delaware corporation (the “Company”, “YTB” or “We”) is a leader in
the travel services business and has operated in the travel services industry
for 27 years. We offer an interactive, real-time travel booking engine with
access to travel inventories with leading travel industry suppliers to our
licensees and to small office and home office entrepreneurs and independent
travel agencies. Our revenue stream is comprised primarily of proceeds from
initial Internet Business Center (“IBC”) sales, monthly
web-hosting fees from our Referring Travel Agents (or Referring Travel
Affiliates in Canada, “RTAs”), and
commissions on the sale of travel products.
  We
believe that we are at the forefront of several growing trends: increased
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 and the ability to spend time with family as ever increasing concerns,
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. In addition, the “baby boomer” generation
is starting to retire, which may increase the demand for additional leisure
travel. As a result, 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 primarily through three distinct wholly-owned
subsidiaries: (i) YTB Travel Network, Inc., together with its subsidiary YTB
Travel Network of Illinois Inc., which licenses and services our RTAs; (ii)
YourTravelBiz.com, Inc., which uses a referral marketing system to offer and
sell IBCs; and (iii) REZconnect Technologies, Inc., which operates a franchise
chain of travel agencies and also acts as a host agency for traditional “brick
and mortar” travel companies.
 
 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 home-based travel and lodging industry by
investing in software development and offering new IBC opportunities. All travel
arrangements from the IBCs that we host are serviced by the divisions of the
Company. As of December 31, 2008, there were 92,383 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.”
  Our Class
A Common Stock is quoted on the Over the Counter Bulletin Board Exchange (“OTC-BB”) under the
symbol “YTBLA.OB.”  We intend to apply for listing on a national
securities exchange, when appropriate, although no assurances can be given in
this regard.  In 2008, we submitted to a Financial Industry Regulatory
Authority (“FINRA”) member firm
the requisite paperwork to be filed with FINRA to have our Class A Common Stock
quoted on the OTC-BB.  Previously, our Class A Common Stock was quoted
on the Pink Sheets because we had been delinquent in 2005 and part of 2006 in
filing our periodic reports under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”).
  4
  Current
Operations
  Our three
distinct, wholly-owned subsidiary divisions operate as follows:
  YTB
Travel Network, Inc. (and its subsidiaries)
  YTB
Travel Network, Inc.’s (together with its domestic and international
subsidiaries collectively “YTB Travel ”)
business is comprised of arrangements to sell airline tickets, cruise packages
and other services, plus travel sales, from the 92,383 RTAs’ IBCs that it hosts.
YTB Travel handles travel processing, document distribution and travel
commission payments, including tracking transactions for each of the sites. RTAs
are educated through our numerous travel training courses. This training is
accomplished through a combination of Company conference calls, e-training
modules and hands-on certification seminars.  RTAs earn transactional
compensation from travel purchased from their respective IBCs.
 
 YourTravelBiz.com,
Inc. (and its subsidiaries)
  YourTravelBiz.com,
Inc. together with its domestic and international subsidiaries (collectively
“YTB
Marketing”) conducts business through the development, training, and
support of its sales force. There are currently 8,337 “Independent
Marketing Representatives” (each, a “Rep”), who are
qualified to participate in the network markerting compensation plan of YTB
Marketing. In order to qualify for this compensation, Reps must personally make
three IBC sales.
  Reps are
independent contractors who primarily work from their homes. In addition to
earning compensation on personal IBC sales, Reps may also build a sales force
from whom they receive override compensation on IBC sales. Reps may utilize a
number of methods to sell IBCs including the use of informational meetings and
events, local advertising, and one-on-one meetings.
 
 YTB
Marketing was created to financially reward Reps for the sale of IBCs in a
referral marketing compensation program. YTB Marketing generally charges an
initial fee of $449.95 for the setup of an IBC plus $49.95 per month for
web-hosting fees.
  REZconnect
Technologies, Inc.
  REZconnect
Technologies, Inc. (“REZconnect”) operates
a franchise chain of travel agencies and also acts as a host agency for
traditional “brick and mortar” travel companies.  All of REZconnect’s
franchised operations are independently owned and operated. All sales of travel
products by REZconnect are made through its independent agencies and
franchisees, or through its interactive websites. REZconnect sells and services
travel stores within the travel industry.  REZconnect operates under
the following brands: Travel NetworkTM, Global Travel NetworkTM, Travel
Network/Vacation CentralTM, and Vacation CentralTM.
 
 Supplier
Relationships
 
 We
conduct our operations through relationships with various travel suppliers, such
as airlines, hotels and automobile rental companies.   We
serve as a portal and thus have few direct contracts with
suppliers.
 
 Segments
 
 We
operate in the following two business segments: marketing of IBCs including the
development of a sales network (“Marketing”); and sale
of travel through IBCs (“Travel”). Our
business segments operate primarily in the United States, but also have
operations in Canada and are structured for potential additional international
growth.
  Prior to
the second quarter of 2007, we had reported in three operating segments,
Marketing, Travel and Technology. The Marketing segment was comprised of the YTB
Marketing subsidiary and the Travel segment was comprised of the YTB Travel
subsidiary and an applicable portion of the operations of the REZconnect
subsidiary, with the remaining portion of REZconnect reported in the Technology
segment. During the second quarter of 2007, we collapsed the Technology segment
into the Travel segment as the amounts related to Technology were
immaterial.
  See Note
22 – “Segment Information” to the consolidated financial statements for
summarized financial information concerning our reportable
segments.
  5
  Intellectual
Property
 
 We
operate our businesses under various trade names including, “YourTravelBiz.com,”
“YourTravelBizTM,” “YTB Travel and CruisesTM,” “Travel NetworkTM,” “YTB Travel
NetworkTM,” “Sunrise Travel Service,” “Global Travel NetworkTM,” “Travel Network
Vacation CentralTM,” “Vacation CentralTM,” and “YTB.comTM,” as well as websites
“Bookmytravel.comTM,” and “REZconnect.comTM.”
 
 We regard
our technology and other intellectual property, including our brands, as a
critical part of our business. We protect our intellectual property rights
through a combination of copyright, trademark, trade secret and confidentiality
procedures, which is subject to certain risks.  See Item 1A for a
description of such risks.
 
 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 is 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 our Company to be more competitive.
 
 We have
the characteristics of both an online travel provider and a “brick and mortar”
travel agency, because we offer 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.comTM, Priceline.comTM,Expedia.comTM and
Orbitz.comTM are online retailers of travel, unlike YTB Travel which serves in a
facilitator function only. In addition, the YTB Travel target markets serve as
direct referrals for our Company’s RTAs. Travelocity, through its subsidiary
World Choice Travel, a competitor, is now a revenue-generating preferred
supplier for air ticketing, car rental and hotel on our IBCs.
  Because
of our direct marketing approach and our diverse customer base, we are not
dependent on any major customers for a significant portion of our revenues.
There are currently other direct network marketing companies specializing in the
marketing of online travel businesses similar to YTB Marketing. Our franchise
travel agency business is also subject to competition.
 
 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, and governmental approval is not required for the conduct of our
business (other than ordinary course travel licenses, multilevel distribution
company registration, and similar approvals). Similarly, environmental laws do
not materially limit or materially impact our operations, and compliance with
environmental laws does not impose a material cost on our business. YTB
Marketing, whose Reps market the IBCs of YTB Travel, is subject to the various
state and federal laws and regulations governing the structure and conduct of
network marketing companies.
  Laws and
regulations in each country in which we operate prevent the use of deceptive or
fraudulent practices that have sometimes been inappropriately associated with
legitimate direct selling and network marketing activities. These laws include
anti-pyramiding, securities, lottery, referral selling, anti-fraud and business
opportunity statutes, regulations, and court cases. Illegal schemes, typically
referred to as "pyramid," "chain distribution," or "endless chain" schemes,
compensate participants primarily or solely for the introduction or enrollment
of additional participants into the scheme. Often these schemes are
characterized by large up-front entry or sign-up fees, over-priced products of
low value, little or no emphasis on the sale or use of products, high-pressure
recruiting tactics, and claims of huge and quick financial rewards requiring
little or no effort. Generally these laws are directed at ensuring that product
sales ultimately are made to consumers and that advancement within sales
organizations is based on sales of the enterprise's products, rather than on
investments in the organizations or on other criteria or activity that are not
related to retail sales. Where required by law, we obtain regulatory approval of
our network marketing system, or, where approval is not required or available,
the favorable opinion of local counsel as to regulatory compliance.
  In
addition to federal regulation in the United States, each state has enacted its
own "Little FTC Act" to regulate sales and advertising. Occasionally, we receive
requests to supply information regarding our network marketing plan to
regulatory agencies. Although we have, from time to time, modified our network
marketing system to comply with interpretations of various regulatory
authorities, we believe that our network marketing program is in compliance with
the laws and regulations relating to network marketing activities in our current
markets.  Nevertheless, we remain subject to the risk that, in one or
more of our present or future markets, the marketing system or the conduct of
certain Reps or RTAs could be found not to be in compliance with applicable laws
and regulations. Failure by a Rep or RTA, or by us, to comply with these laws
and regulations could have a material adverse effect on our business in a
particular market or in general. Any or all of these factors could adversely
affect the way we do business and could affect our ability to attract potential
Reps or RTAs, or enter into new markets. In the United States, the Federal Trade
Commission (“FTC”) has been active
in its enforcement efforts against both pyramid schemes and legitimate network
marketing organizations with certain legally problematic components, having
instituted several enforcement actions resulting in signed settlement agreements
and the payment of large fines. Although, to our knowledge, we have not been the
target of an FTC investigation, there can be no assurance that the FTC will not
investigate us in the future.
  6
  On April 5, 2006, the
FTC released a proposed rule, The Business Opportunity Rule. This proposed
rule would require pre-sale disclosures for all business opportunities, which
might include network marketing compensation plans. The Business Opportunity
Rule is currently only a proposed rule. If implemented at all, the rule
ultimately may not be implemented in a form that applies to network marketing
compensation plans, or it may change significantly before it is implemented. If
this proposed rule were adopted as it is currently proposed, it would require us
to change some of our current practices regarding pre-sale disclosures.The proposed rule, if enacted in its current form, would likely cause us,
as well as most other direct sellers, to be regulated as a seller of business
opportunities in the United States.  Under the current Business
Opportunity Rule, we do not qualify as a seller of a business opportunity
because we offer U.S. distributors the opportunity to join our business for
$449.95, below the $500 threshold required for a company to be subject to the
current rule.  The proposed rule would eliminate that
threshold.  In addition, the proposed rule would require all sellers
of business opportunities to deliver written disclosure of certain information
to a prospective purchaser seven days prior to the time the prospective
purchaser could sign any agreement or make any payment in connection with the
business opportunity.  The information that a seller of a business
opportunity would have to provide all prospective purchasers would include: (1)
the seller’s and rep’s identification information, (2) whether an earnings claim
is made and, if so, a detailed earnings claim statement with substantiating
information and certain representations relating to the earnings of other
business opportunity purchasers, (3) legal actions involving deceptive practices
or other matters filed against the seller, its affiliates and other related
parties and/or the presenting distributor in the last 10 years, (4) whether a
cancellation or refund policy is available and, if so, a statement describing
the policy, (5) the number of business opportunity purchasers that have canceled
within the past two years, and (6) a reference list of the 10 nearest current or
past business opportunity purchasers, with personal information available to
allow the prospective purchaser to contact a listed purchaser.  We,
along with the Direct Selling Association ("DSA"), other direct selling
companies, and other interested parties have filed comments with the FTC
opposing adoption of the proposed rule in its current form and suggesting
alternative means to regulate fraudulent business activities without imposing
undue burdens on legitimate companies in the direct selling industry. If The
Business Opportunity Rule is adopted as proposed, it could negatively impact our
business and harm our ability to attract new Reps and RTAs in the United
States.
 
 We cannot
predict the nature of any future law, regulation, interpretation, or
application, nor can we predict what effect additional governmental legislation
or regulations, judicial decisions, or administrative orders, when and if
promulgated, would have on our business. It is possible that future legal
requirements may require that we revise our network marketing program. Such new
requirements could have a material adverse effect on our business, results of
operations, and financial condition.
 
 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, Inc. upon completion of the share exchange. Following the merger
with Playorena, Inc., the surviving entity’s name was changed to ETRAVNET.COM,
Inc., and its common stock was quoted on the OTC-BB under the symbol “ETRV,”
and, subsequently, under the symbol “ETVT.” In August 2001, ETRAVNET.COM, Inc.
changed its name to REZconnect Technologies, Inc., and its common stock was
thereafter quoted under the symbol “REZT.”
  7
  In
December 2004, we acquired all of the issued and outstanding stock of
YourTravelBiz.com, Inc., then a privately-held 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.
 
 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. As a
further result of the share exchange transaction, our trading symbol on the
OTC-BB was changed to “YTBL.OB.” When our common stock was removed from
quotation on the OTC-BB and began to be quoted on the Pink Sheets in 2006, our
trading symbol became “YTBL.PK.” On April 17, 2008, our common stock was once
again approved to be listed on the OTC-BB.  Commencing on May 19,
2008, our Class A Common Stock trades solely on the OTC-BB under the symbol
“YTBLA.OB.”
  On July
31, 2007, the Reclassification Date, we filed our Amended and Restated
Certificate of Incorporation, previously approved by our stockholders at our
2007 annual meeting of stockholders on June 11, 2007, which authorized the
issuance of two classes of common stock - Class A Common Stock (300,000,000
shares authorized) and Class B Common Stock (100,000,000 shares authorized) -
and an increase in our total authorized capital. This amendment and restatement
enabled a reclassification of our then-existing common stock, par value $0.001
per share (“Old Common
Stock”) into Class B Common Stock and an accompanying stock dividend
(collectively, the reclassification and the stock dividend, the “Reclassification”)
pursuant to which stockholders of record received one share of Class A Common
Stock and two shares of Class B Common Stock for each share of Old Common Stock
held as of the Reclassification Date.
  On August
1, 2007, immediately following the effectiveness of the Reclassification, we
announced that the new ticker symbol for our new Class A Common Stock was
“YTBLA”. Our Class B Common Stock is convertible into our Class A Common Stock
(on a one-share-for-one-share basis).  Our Class B Common Stock has
experienced very limited and sporadic trading, and as such, no established
public trading market exists for our Class B Common Stock.
  Employees
  As of
March 9, 2009, we had a total of 283 full-time employees and 5 part-time
employees (which excludes Reps and RTAs, who are independent contractors and not
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.
  Recent
Milestones and Achievements
  During
2008, we were named the 26th largest
travel agency in the United States by Travel Weekly for the year ended 2007.
Reflecting on our growing prominence in the travel industry, in 2007, YTB
Travel’s Chief Executive Officer, Kim Sorensen, was named among The 33 Most
Influential People in the Travel Industry. During fiscal 2007, the aggregate
value of the retail travel services that have been booked by our RTAs and
independent franchisees surpassed $400 million.
 
 Only the
commissions paid by travel suppliers are included in our financial results, as
we are not the merchant of record for these transactions.
  In
September 2007, we were admitted as a member company of the DSA, a national trade association of leading
firms that manufacture and distribute goods and services sold directly to
consumers. We thereby joined the ranks of DSA’s more than 220 active and pending
member companies in the United States. Our membership in DSA requires us to
maintain certain levels of ethical conduct and service in our marketing and
direct sales activities, in conformity with DSA’s Code of Ethics and DSA’s
stated mission—“to protect, serve and promote the effectiveness of member
companies and the independent business people they represent” and “to ensure
that the marketing by member companies of products and/or the direct sales
opportunity is conducted with the highest level of business ethics and service
to consumers.”  Our status with the DSA has continued in place through
the date of this report.
 
 Geographical
Financial Information
 
 See Note
22 – “Segment Information” to the consolidated financial statements for
summarized financial information concerning our geographical financial
information.
  8
  Seasonality
 
 We
experience seasonal fluctuations in the demand for the products and services we
offer. The majority of our customers book travel for leisure purposes rather
than for business. Gross bookings for leisure travel are generally highest in
the first and second calendar quarters as customers plan and book their spring
and summer vacations. However, net revenue is generally recognized when the
travel takes place and typically lags bookings by several weeks or longer. As a
result, our cash receipts are generally highest in the first and second calendar
quarters and our net revenue is typically highest in the second and third
calendar quarters. Our seasonality may also be affected by fluctuations in the
travel products our suppliers make available to us for booking, the continued
growth of our international operations or a change in our product
mix.
 
 Available
Information
 
 More
information about us can be found on our website at www.ytbi.com.  On
this website, we make available free of charge our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished as required by Section 13(a) or 15(d) of the
Exchange Act, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
 
 Item 1A. Risk
Factors.
 
 References
to “us,” “we” and “our” refer to the Company.  The following risk
factors could adversely affect our business, results of operations and financial
condition. The risks and uncertainties described below are not the only ones we
face.  Additional risks and uncertainties not presently known to us
may also negatively impact us and our travel sales.
 There
is a substantial doubt about our ability to continue as a going
concern.
  Our
independent registered public accounting firm has issued an opinion on our
consolidated financial statements that states that the consolidated financial
statements were prepared assuming we will continue as a going concern and
further states that our loss from operations and working capital deficiency
raise substantial doubt about our ability to continue as a going concern. Our
plans concerning these matters are discussed in Note 2 to the accompanying
audited consolidated financial statements. Our future is dependent on our
ability to execute our plan successfully or otherwise address these matters. If
we fail to do so for any reason, we potentially would not be able to continue as
a going concern.
 Global
economic conditions may continue to have an adverse effect on our business and
financial performance.
 
 Travel
expenditures are sensitive to personal and business discretionary spending
levels and tend to decline or grow more slowly during economic downturns,
including downturns in any of our major markets. In the second half of 2008,
there was a rapid softening of domestic and global economic conditions, and the
outlook for 2009 is uncertain. This slowing of the domestic and global economies
has increased unemployment and reduced the financial capacity of both corporate
and leisure travelers, thereby slowing spending on the services we provide. The
continuation, or worsening, of domestic and global economic conditions could
continue to adversely affect our businesses and financial
performance.
 
 Additionally,
disruptions in the credit and other financial markets and economic conditions
could, among other things, impair the financial condition of one or more of our
travel suppliers, thereby increasing the risk of non-performance by such
suppliers.  This could, in turn, adversely affect our financial
results.
 
 Declines
or disruptions in the travel industry could adversely affect our business or
financial performance.
 
 Our
business and financial performance are affected by the health of the worldwide
travel industry, including by decreases in hotel occupancy rates, hotel average
daily rates, decreases in airline capacity or rising airline ticket prices, all
of which we have recently experienced. Events or weakness specific to the air
travel industry that could negatively affect our business also include continued
fare increases, travel-related strikes or labor unrest, bankruptcies or
liquidations and fuel price volatility. Additionally, our business is sensitive
to safety concerns, and thus, our business has in the past and may in the future
decline after incidents of actual or threatened terrorism, during periods of
political instability or geopolitical conflict in which travelers become
concerned about safety issues, as a result of natural disasters such as
hurricanes or earthquakes or when travel might involve health-related risks.
Such concerns could result in a protracted decrease in demand for our travel
services. This decrease in demand, depending on its scope and duration, together
with any future issues affecting travel safety, could significantly and
adversely affect our business and financial performance over the short and
long-term.
 
 As
a company that distributes products and services through a network marketing
system, we experience constant turnover among our Reps and RTAs. Our failure to
establish and maintain Rep and RTA relationships for any reason could negatively
impact our sales of products and services and harm our financial condition and
operating results.
 
 We
conduct marketing activities, book travel and sell related products exclusively
through 8,337 independent contractors known as Reps and
92,383 RTAs (such numbers are provided as of December 31, 2008), and
we depend upon them directly for substantially all of our marketing activities
and travel bookings.  To increase our revenue, we must increase the
number, and/or the productivity, of our Reps and RTAs.  Accordingly,
our success depends in significant part upon our ability to attract, retain and
motivate a large base of Reps and RTAs. The loss of a significant number of Reps
and RTAs, including any key Reps and RTAs, together with Rep down-line sales
organizations, could materially and adversely affect sales of our services and
our travel bookings and could impair our ability to attract new Reps and
RTAs.
  9
  Reps and
RTAs have highly variable levels of training, skills and
capabilities.  The turnover rate for our Reps and RTAs, and our
operating results, can be adversely impacted if we and our upper-level Rep and
RTA leadership do not provide the necessary mentoring, training and business
support tools for new Reps and RTAs to become successful salespeople in a short
period of time.
 
 Our
financial success and business reputation depend, in large part, on our Reps and
RTAs, who are not employees and operate as independent contractors.
 
 As a
network marketing company, we are dependent upon an independent sales force and
we do not have direct control over the marketing of our products.  We
rely on non-employee, independent Reps and RTAs to market and sell our products
and services.  Reps and RTAs are independent contractors who market,
purchase, and/or sell our products and services to customers.  Reps
and RTAs typically work on a part-time basis and likely will engage in other
business activities, some of which may compete with us.  We have a
large number of Reps and RTAs and a relatively small corporate staff to
implement our marketing programs and to provide training and motivational
support to our Reps and RTAs.  Our net sales are directly dependent
upon the efforts of these non-employee, independent Reps and
RTAs.  Our ability to maintain and increase sales in the future will
depend in large part upon our success in increasing the number of new Reps and
RTAs, retaining our existing Reps and RTAs, and in improving the productivity of
our Reps and RTAs.
 
 We can
provide no assurances that the number of Reps and/or RTAs will increase or
remain constant or that their productivity will increase.  We
experienced a 44.3% decrease in active Reps and a 29.2% decrease in RTAs during
2008.  We experienced a 217.6% increase in active Reps and a 220.6%
increase in RTAs during 2007.  The number of active Reps and RTAs
may not increase and could decline in the future.  Reps and RTAs may
terminate their services at any time, and, like most direct selling companies,
we experience a high turnover among new Reps and RTAs from year to
year.  We cannot accurately predict any fluctuation in the number and
productivity of Reps or RTAs because we primarily rely upon existing Reps
to:  (1) sell IBCs to RTAs; (2) sponsor and train new Reps; and (3)
motivate new and existing Reps.  Operating results could be adversely
affected if our existing and new business strategies and products do not
generate sufficient economic incentive or interest to retain existing Reps and
to attract new RTAs and Reps.
 
 The loss
of a significant Rep or downline sales organization could adversely affect our
business.  We rely on the successful efforts of our Reps who become
leaders within our Compensation Plan.  Our Compensation Plan is
designed to permit Reps to sponsor new Reps, creating multiple levels in the
downline organization.  Sponsored Reps are referred to as "downline"
Reps within the sponsoring Rep's "downline network."  As a result of
this network marketing system, Reps develop business relationships with other
Reps.  The loss of a key Rep or group of Reps, large turnovers or
decreases in the size of the Rep force, seasonal or other decreases in sales
volume reduction, the costs associated with training new Reps, and other related
expenses may adversely affect our business, financial condition, or results of
operations.  Moreover, our ability to continue to attract and retain
Reps and RTAs can be affected by a number of factors, some of which are beyond
our control, including:
 
 ·
              General
      business and economic conditions;
 ·
              Public
      perceptions about network marketing
programs;
 ·
              High-visibility
      investigations or legal proceeding against network marketing companies by
      federal or state authorities or private
  citizens;
 ·
              Other
      competing network marketing organizations entering into the marketplace
      that may recruit our existing Reps or reduce the potential pool of new
      Reps; and
 ·
              Changes
      to the Compensation Plan required by law or implemented for business
      reasons that make attracting and retaining Reps more
      difficult.
 
 There can
be no assurance that we will be able to continue to attract and retain Reps or
RTAs in sufficient numbers to sustain future growth or to maintain our present
growth levels, which could have a material adverse effect on our business,
financial condition, or results of operations.
  10
  Our
revenues are highly dependent on IBC hosting fees received from Affiliates,
RTAs, travel agents and agencies.
  Fees from
hosting and sales of IBCs that we offer to home-based representatives make-up
over 75% of our revenues as of December 31, 2008. While our business model
is based primarily on IBC hosting of various products and services, we do intend
to pursue other sources of revenue to lower this percentage. In the event that
we are unable to do so, we will remain dependent on IBC hosting. The majority of
our IBC hosting agreements are terminable at will or upon 30 days’ notice. While
we are dependent on fees from IBC hosting, no single IBC hosting arrangement
accounts for more than 1% of our IBC hosting revenues. In the event of a
substantial decrease in the number of IBC hosting arrangements that we enter
into or renew, or the fees we are able to charge for such arrangements, our
financial condition, results of operations and future growth may be
substantially impaired.
  Since
we cannot exert the same level of influence or control over our Reps and RTAs as
we could were they our own employees, our Reps and RTAs could fail to comply
with our Rep and RTA Policies and Procedures and Terms and Conditions, which
could result in claims against us that could harm our financial condition and
operating results.
 
 Our Reps
and RTAs are independent contractors and, accordingly, we are not in a position
to directly provide the same direction, motivation and oversight as we would if
our Reps and RTAs were our own employees.  As a result, there can be
no assurance that our Reps or RTAs will participate in our marketing strategies
or plans, accept our introduction of new services or comply with our respective
Rep and RTA Policies and Procedures and Terms and Conditions.
 
 Our
Policies and Procedures and Terms and Conditions for our Reps and RTAs differ
according to the various legal requirements of each country in which we do
business.  While our respective Policies and Procedures and Terms and
Conditions are designed to govern Rep and RTA conduct and to protect the
goodwill associated with our trademarks, they can be difficult to enforce
because of the large number of Reps and RTAs and because of our Reps’ and RTAs’
independent status.  Violations by our Reps and RTAs of applicable law
or of our Policies and Procedures and Terms and Conditions in dealing with
customers or other third parties could reflect negatively on our services and
operations, and harm our business reputation.  In addition, it is
possible that a court could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our Reps and RTAs.  If
any of these events occurs, the value of an investment in our common stock could
be impaired.
 
 Because
our earnings from IBC sales, monthly fees, commissions, training programs and
marketing materials have exceeded marketing commissions and travel commissions
paid out to our Reps and RTAs in the past, such a trend, if continued, could
reflect our Reps’ and RTAs’ inability to achieve profitable results for
themselves, which, in turn, could threaten the sustainability of our business
model.
 
 Our
business model depends, to a significant extent, upon our ability to achieve a
profit from the activities carried out by our Reps and RTAs on our behalf and to
draw from their affiliation with our Company.  If Reps and RTAs are
unable to operate their own marketing and/or IBC profitably within the framework
of our organization, it could adversely impact Rep and RTA retention and could
threaten the sustainability of our business model.
 
 For the
2008 fiscal year, our revenues from IBC sales and monthly web-hosting fees paid
by RTAs, along with revenues from training programs held and marketing materials
sold to Reps and RTAs, exceeded the marketing commissions and travel commissions
that we expended in payments to our Reps and RTAs.  If, and to the
extent that, this excess reflected in our operating results actually reflects a
deficit in the operating results of our Reps and RTAs in their marketing and
travel-related activities within the YTB organization, such a deficit, if
continued indefinitely, would reflect a negation of the financial incentive for
Reps and RTAs to continue in their YTB-related activities on our
behalf.  Any such negative financial results for our Reps and RTAs
would adversely impact our ability to retain them within our organization,
which, in turn, would call into question the sustainability of our business
model and thereby harm our financial condition and operating
results.
 
 Our
growth cannot be assured; even if we do experience growth, we cannot assure you
that we will grow profitably.
 
 Our
business strategy is dependent upon the growth of our business. For us to
achieve significant growth, potential Reps and RTAs, consumers and travel
suppliers must accept our IBCs as a valuable commercial tool.  Travel
suppliers will also need to accept or expand their use of our IBCs and to view
our IBCs as an efficient and profitable channel of distribution for their travel
products.
 
 To a
lesser extent, our growth is also dependent on our ability to broaden the appeal
of our IBCs to business and other travelers. We have limited experience with
corporate travel, and our ability to offer products and services that will
attract a significant number of business travelers to use our services is not
certain. Consumers who have historically purchased travel products through
traditional commercial channels, whether by using local travel agents or by
calling suppliers directly, must instead purchase these products on our RTAs’
IBCs.  If any of these initiatives are not successful, our growth may
be limited and we may be unable to maintain profitability.
  11
  Our plans
to pursue other opportunities for revenue growth and cost reduction are at an
early stage, and we cannot assure you that our plans will be successful or that
we will actually proceed with them as described.
 
 If
we fail to further penetrate and expand our business in existing markets, the
growth in sales of our services, along with our operating results, could be
negatively impacted.
 
 The
success of our business is to a large extent contingent on our ability to
continue to grow by further penetrating existing markets, both domestically and,
most recently, internationally.  Our ability to further penetrate
existing markets in which we compete is subject to numerous factors, many of
which are out of our control.  Also, our ability to increase market
penetration in certain countries may be limited by the finite number of persons
in a given country inclined to participate in a network marketing business
model.  Moreover, our growth will depend upon improved training and
other activities that enhance Rep and RTA retention in our
markets.  As we continue to focus on expanding our existing
international operations, these and other risks associated with international
operations may increase, which could harm our financial condition and operating
results.
 
 Adverse
changes or interruptions in our relationships with travel suppliers could affect
our access to travel offerings and reduce our revenues.
  We rely
on various agreements with our airline, hotel and auto suppliers, and these
agreements contain terms that could affect our access to travel services and
reduce our revenues. Most of the relationships we have are freely terminable by
the supplier upon notice. The majority of our agreements with travel suppliers
are one year agreements. None of these arrangements are exclusive, and any of
our suppliers could enter into, and in some cases may have entered into, similar
agreements with our competitors.
  We cannot
ensure that our arrangements with travel suppliers will remain in effect or that
any of these suppliers will continue to supply us with the same level of access
to inventory of travel offerings in the future. If our access to inventory is
affected, or our ability to obtain inventory on favorable economic terms is
diminished, it could have a material adverse effect on our business, financial
condition or results of operations.
 
 In
addition, our travel suppliers have felt the impact of the global economic
recession.  For example, several U.S. airlines have implemented
capacity reductions and higher fares in the face of higher fuel prices and
slower customer demand, and are under increased pressure to reduce their overall
distribution costs.  As a result, our suppliers could attempt to
terminate or renegotiate their agreements with us on more favorable terms to
them, which could reduce the revenue we generate from those
agreements.
 
 Airline
“journey controls” may reduce the number of low-priced connecting itineraries we
can present to our customers.
  Some
carriers currently employ, or may adopt, “journey control logic” designed to
enhance the management of airfares and seat availability for connecting
itineraries, based on a traveler’s origin and final destination. Our software is
capable of accommodating journey control restrictions, but only if the
particular airline implements procedures to assure availability of information
to our database and update it regularly. If the carrier does not implement these
procedures to keep the database updated, then the journey control logic will
cause some fare and flight combinations for connecting itineraries to be
rejected by the airline. Consumers attempting to book a reservation on one of
these itineraries will receive an error message indicating that the desired fare
and flight combination is not available, which may affect their perception of
the reliability of our service. We believe that our charter associate agreements
and, as applicable, supplier link agreements with participating carriers require
them to provide availability data on a timely basis to our database on our
behalf. If airlines activate journey control restrictions, then our ability to
present a large number of low-priced fare and flight combinations on connecting
itineraries that can be successfully booked by consumers may be compromised.
This could have a material adverse effect on our business and financial
results.
 
 A
reduction in transaction fees or the elimination of commissions paid by travel
suppliers could reduce our revenues.
  The
minimum transaction fees many of our airline suppliers have agreed to pay to us
decrease in amount each year over the term of our charter associate agreements.
In recent years, less than approximately 5% of our revenues came from
transaction and segment fees paid directly by travel suppliers for airline
bookings made by our customers through our online travel service. Where we have
charter associate agreements with airline suppliers, these agreements obligate
the airline to pay us transaction fees on published fares that are not less than
certain agreed-upon floor rates for tickets sold through or on our RTAs’ IBCs.
These minimum transaction fees decrease in amount each year and are expected to
continue to decline on an annual basis as a percentage of gross revenues, among
other reasons, because it is unlikely that any of our charter associate airlines
will choose to pay us transaction fees above the minimum levels specified in our
contracts. Furthermore, our charter associate agreements have defined durations,
and we cannot assure you that our transaction fees will not be reduced or
eliminated in the future or will remain competitive with market terms during the
duration of the agreements.
  12
  Interruptions
in service from third parties or transitions to new service providers could
impair the quality of our service.
  We rely
on third-party computer systems and other service providers, including the
computerized central reservation systems of the airline, lodging and car rental
industries, to make airline ticket, lodging and car rental reservations and
credit card verifications and confirmations. Other third parties provide, for
instance, our data center, telecommunications access lines and significant
computer systems and software licensing, support and maintenance services. In
the past, third parties like these have suffered system outages that have
adversely affected the ability of their clients to offer travel services or to
process booking transactions. Any future interruption in these, or other,
third-party services or deterioration in their performance could impair the
quality of our service. We cannot be certain of the financial viability of all
of the third parties on which we rely. We work with many vendors in the
telecommunications industry, including Broadview and Verizon for Internet
access. If our arrangements with any of these third parties are terminated or if
they were to cease operations, we might not be able to find an alternate
provider on a timely basis or on reasonable terms, which could hurt our
business.
 
 We
rely on relationships with licensors for key components of our
software.
  We also
rely on licensed technology and hire contractors to assist in the development
and maintenance of our systems. Continued access to these licensors and
contractors on favorable contract terms or access to alternative software
licenses and information technology contractors is important to our operations.
Adverse changes in any of these relationships could have a material adverse
effect on our business, financial condition or results of
operations.
  We
attempt to negotiate favorable pricing, service, confidentiality and
intellectual property ownership or licensing terms in our contracts with all of
our service providers. These contracts usually have multi-year terms. However,
there is no guarantee that these contracts will not terminate and that we will
be able to negotiate successor agreements or agreements with alternate service
providers on competitive terms. Further, the existing agreements may bind us for
a period of time to terms and technology that become obsolete as our industry
and our competitors advance their own operations and contracts.
  We
are involved, and may become involved in the future, in legal proceedings that,
if adversely adjudicated or settled, could adversely affect our financial
results.
 
 We are
and may, in the future, become party to litigation, including, for example,
claims relating to advertising, unfair competition and anti-pyramid
laws.  We are also subject to the risk of private party challenges to
the legality of our network marketing program.  The multi-level
marketing programs of other companies have been successfully challenged in the
past.Currently, we are defending
against two such cases.  The first, now pending in state court in
California, involves claims brought by the Attorney General of California
alleging violations of Section 17200 of the California Business and Professions
Code.  The second, now pending in the United States District Court for the
Southern District of Illinois, involves claims brought by private plaintiffs on
behalf of a putative class alleging violations of the Illinois Consumer Fraud
Act.  See Item 3 for additional information.
 
 In
general, litigation claims can be expensive and time consuming to bring or
defend against and could result in settlements or damages that could
significantly affect financial results.  An adverse judicial
determination with respect to our network marketing program, or in proceedings
not involving us directly but which challenge the legality of multi-level
marketing systems in any market in which we operate, could negatively impact our
business.  It is not possible to predict the final resolution of the
litigation to which we currently are or may in the future become party to, and
the impact of certain of these matters on our business, results of operations
and financial condition could be material.
 
 Our
ongoing activities may require us to seek additional financing, which may not be
obtainable or may be unduly onerous or dilutive.
  Historically,
we have financed operations through operating revenue and the sale of equity
securities. Even if we are successful in raising additional capital to meet our
working capital requirements, we may nevertheless need to obtain additional
financing to fund ongoing operations or to expand our business through such
measures as increases in sales and marketing expense, joint ventures,
acquisitions or other strategic transactions we deem in the best interests of
our Company. We would expect to seek such financing through bank borrowings
and/or sales of our equity or debt securities. Particularly in light of existing
uncertainty in the capital and credit markets, we can provide no assurance that
sufficient financing will be available or desirable, or that our counterparties
in any such financings would honor their contractual commitments.  In
addition, any increases in general interest rates or the weakening in the credit
markets could increase our cost of capital.   There can be no
assurance that we will be able to obtain such financing as and when necessary to
meet our operating requirements or expansion plans, if any, or that the terms of
any available financing will not be unduly onerous or dilutive to our
stockholders.
  13
  Failure
to expand into, or to succeed in, new international markets will limit our
ability to grow sales of our services.
 
 We
believe that our ability to achieve future growth is dependent in part on our
ability to continue our international expansion efforts.  However,
there can be no assurance that we would be able to enter new international
markets on a timely basis, or that new markets would be
profitable.  Our ability to capitalize on growth in new international
markets and maintain the current level of operations in our existing
international markets is exposed to risks associated with our international
operations, including:
 
 ·
              the
      possibility that a foreign government might ban or severely restrict our
      business method of direct selling, or that local civil unrest, political
      instability or changes in diplomatic or trade relationships might disrupt
      our operations in an international
market;
 
 ·
              the
      possibility that a government authority might impose legal, tax or other
      financial burdens on our RTAs or Reps, as direct sellers, or to the
      structure of our operations in various markets;
  and
 
 ·
              the
      possibility that a government authority might challenge the status of our
      RTAs or Reps as independent contractors or impose employment or social
      security taxes on them.
 
 Once we
have entered a market, we must adhere to the regulatory and legal requirements
of that market.  No assurance can be given that we would be able to
successfully meet local regulatory requirements or attract local
customers.  There can be no assurance that we would be able to obtain
and retain necessary permits and approvals.
 
 In
addition to significant regulatory barriers, we may also encounter problems
conducting operations in new markets with different cultures and legal systems
from those encountered elsewhere.  It is difficult to assess the
extent to which our services and sales techniques would be accepted or
successful in any given country.
 
 Additionally,
in many markets, other network marketing companies already have significant
market penetration, the effect of which could be to desensitize the local
population to a new opportunity with our Company, or to make it more difficult
for us to recruit qualified Reps.  There can be no assurance that,
even if we are able to commence operations in new foreign countries, there would
be a sufficiently large population of potential Reps and RTAs inclined to
participate in a network marketing system or travel services opportunity offered
by us.
 
 We
depend on the integrity and reliability of our information technology
infrastructure, and any related inadequacies may result in substantial
interruptions to our business.
 
 Our
ability to timely provide services to our Reps and RTAs and their customers
depends on the integrity of our information technology system.  The
most important aspect of our information technology infrastructure is the system
through which we record and track Rep sales and RTA commissions, volume points,
bonuses and other incentives.  We have encountered, and may encounter
in the future, errors in our software or our enterprise network, or inadequacies
in the software and services supplied by our vendors.  Any such errors
or inadequacies that we may encounter in the future may result in substantial
interruptions to our services and may damage our relationships with, or cause us
to lose our Reps and RTAs if the errors or inadequacies impair our ability to
track sales and pay bonuses and other incentives.  Such errors may be
expensive or difficult to correct in a timely manner, and we may have little or
no control over whether any inadequacies in software or services supplied to us
by third parties are corrected, if at all.  Despite any precautions,
the occurrence of a natural disaster or other unanticipated problems could
result in interruptions in services and reduce our revenue and profits, thereby
harming our financial condition and operating results.
 
 Rapid
technological changes may render our technology obsolete or decrease the
attractiveness of our products to our RTAs and consumers.
  To remain
competitive in the online travel industry, we must continue to enhance and
improve the functionality and features of our IBCs. The Internet and the online
commerce industry are rapidly changing. In particular, the online travel
industry is characterized by increasingly complex systems and infrastructures
and new business models. If competitors introduce new products embodying new
technologies, or if new industry standards and practices emerge, our existing
IBCs, technology and systems may become obsolete. Our future success will depend
on our ability to accomplish the following:
  14
  •
              enhance
      our existing products;
 •
                develop
      and license new products and technologies that address the increasingly
      sophisticated and varied needs of our prospective customers and suppliers;
      and
 •
                respond
      to technological advances and emerging industry standards and practices on
      a cost-effective and timely
basis.
  We may
use new technologies ineffectively or we may fail to adapt our IBC transaction
processing systems and network infrastructure to consumer requirements or
emerging industry standards.  If we face material delays in
introducing new services, products and enhancements, we may have difficulty
enrolling and maintaining our Reps and selling and maintaining our IBCs, and
customers and suppliers may forego the use of our products and use those of our
competitors.
 
 We
may not protect our technology or other intellectual property effectively, which
would allow competitors to duplicate our products.  This could make it
more difficult for us to compete with them.
 
 If our
intellectual property is not adequate to provide us with a competitive advantage
or to prevent competitors from replicating our products, or if we infringe upon
the intellectual property rights of others, our financial condition and results
of operations could be harmed.  Our success and ability to compete in
the online travel industry depends, in part, upon our ability to timely produce
innovative products and product enhancements that motivate our Reps and RTAs and
their customers.  We attempt to protect our products and product
enhancements under a combination of trade secret laws, confidentiality
procedures and contractual provisions.  We rely primarily on trade
secret laws and provisions in our contracts to protect our
technology.  We own, or have licenses to use, the material trademark
and trade name rights used in connection with the packaging, marketing and
distribution of our products in the markets where those products are
sold.
 
 Laws and
our actual contractual terms, regarding the protection of our intellectual
property may not be sufficient to protect our technology from use or theft by
third parties.
 
 We may be
unable to prevent third parties from infringing upon or misappropriating our
proprietary rights, or from independently developing non-infringing products
that are competitive with, equivalent to, and/or superior to our products. We
may have legal or contractual rights that we could assert against such illegal
use, but monitoring infringement and/or misappropriation of intellectual
property can be difficult and expensive, and we may not be able to detect any
infringement or misappropriation of our proprietary rights.  Even if
we do detect infringement or misappropriation of our proprietary rights,
litigation to enforce these rights is complex and expensive and could cause us
to divert financial and other resources away from our business
operations.  Further, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
 
 Any of
these events could have a material adverse effect on our business, reputation,
results of operations or financial condition.
 
 Our
business could be negatively affected by changes in search engine algorithms and
dynamics.
 
 We
increasingly utilize internet search engines, principally through the purchase
of travel-related keywords, to generate traffic to our IBCs. Search engines
frequently update and change the logic that determines the placement and display
of results of a user’s search, such that the purchased or algorithmic placement
of links to our IBCs can be negatively affected. In addition, a significant
amount of our business is directed to our own IBCs through our participation in
pay-per-click and display advertising campaigns on internet media properties and
search engines whose pricing and operating dynamics can experience rapid change,
both technically and competitively. If a major search engine changes its
algorithms in a manner that negatively affects the search engine ranking, paid
or unpaid, of our IBCs or that of our third-party distribution partners, or if
competitive dynamics further impact market pricing in a negative manner, our
business and financial performance would be adversely affected.
 
 If
we do not attract and retain qualified personnel, we may not be able to expand
our business.
 
 Our
business and financial results depend on the continued service of our key
personnel, in particular J. Lloyd Tomer (Chairman of the Board), J. Scott Tomer
(Chief Executive Officer) and J. Kim Sorensen (Vice Chairman of the
Board).  Their relationship with our sales force and their experience
and reputation are key factors in our business.  The loss of the
services of our executive officers or other key personnel could harm our
business and financial results.  Our success also depends on our
ability to hire, train, retain and manage highly skilled
employees.  We cannot assure you that we will be able to attract and
retain a significant number of qualified employees or that we will successfully
train and manage the employees we hire.
  15
  In
the future, we may be responsible for withholding certain taxes relating to our
Reps and RTAs, which could harm our financial condition and operating
results.
 
 Under
current law, our Reps and RTAs in the United States and the other countries in
which we operate are treated for income tax purposes as independent contractors
and compensation paid to them is not subject to withholding by
us.  The definition of independent contractor has been challenged in
the past and any changes could possibly jeopardize the exempt status enjoyed by
direct sellers and negatively impact our recruiting efforts.  The
network marketing industry has strongly opposed such bills as they relate to
direct sellers.  States have become increasingly active in this area
as well.  To date, the status of direct sellers as independent
contractors has not been affected.  However, there is no assurance
that future legislation at the federal or state level, or in countries other
than the United States, affecting direct sellers will not be
enacted.
 
 The
federal, state, provincial, or local taxing authorities in any of the countries
where the Company has Reps or RTAs could classify the Reps or RTAs as employees
of the Company (as opposed to independent contractors).  In the event
that local laws and regulations or the interpretation of local laws and
regulations change to require us to treat our independent Reps or RTAs as
employees, or if our Reps or RTAs are deemed by local regulatory authorities in
one or more of the jurisdictions in which we operate to be our employees rather
than independent contractors, under existing laws and interpretations, we may be
held responsible for a variety of obligations that are imposed upon employers
relating to their employees, including social security, unemployment insurance,
workers compensation insurance, and related taxes in those jurisdictions, plus
any related assessments, interest, and penalties, which could harm our financial
condition and operating results.  Additionally, an adverse
determination by any one taxing authority could influence the decisions of
regulatory authorities in other jurisdictions.  Any or all of such
factors could adversely affect the way the Company does business and could
affect the Company's ability to attract potential Reps and RTAs.
 
 Our
business is exposed to risks associated with online commerce security and credit
card fraud.
  Consumer
concerns over the security of transactions conducted on the Internet or the
privacy of users may inhibit the growth of the Internet and online commerce. To
transmit confidential information such as customer credit card numbers securely,
we rely on encryption and authentication technology. Unanticipated events or
developments could result in a compromise or breach of the systems we use to
protect customer transaction data. Furthermore, our servers and those of our
service providers may be vulnerable to viruses or other harmful code or activity
transmitted over the Internet. While we proactively check for intrusions into
our infrastructure, a virus or other harmful activity could cause a service
disruption.
  In
addition, we bear financial risk from products or services purchased with
fraudulent credit card data. Although we have implemented anti-fraud measures, a
failure to control fraudulent credit card transactions adequately could
adversely affect our business.
 
 As
a result of our operating history in online commerce and the variability that
can be experienced by our operations, we are unable to accurately forecast our
revenues.
  Our
current and future expense levels are based predominantly on our operating
plans. We 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 our business, operating results
and financial condition.
 
 Due
to the high level of competition in our industry, we might fail to increase our
Rep and RTA base, which could negatively impact our sales of products and
services.
 
 In our
efforts to attract and retain Reps and RTAs, we compete with other network
marketing organizations, including those in the dietary and nutritional
supplement, weight management product and personal care and cosmetic product
industries.  Our competitors include both network marketing companies
such as Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife Ltd.,
Mary Kay Inc., Melaleuca, Inc., Nature’s Sunshine Products Inc., NuSkin
Enterprises Inc. and USANA Health Sciences Inc., as well as “brick and
mortar” travel agencies, and online travel providers.  Because the
industry in which we operate is not particularly capital-intensive or otherwise
subject to high barriers to entry, it is relatively easy for new competitors to
emerge who will compete with us for our Reps and RTAs and
customers.  In addition, the fact that our Reps and RTAs may easily
enter and exit our network marketing program contributes to the level of
competition that we face.  An RTA or Rep can enter or exit our
network marketing system with relative ease at any time without facing a
significant investment or loss of capital because, among other possible factors,
(1) there is a low upfront financial cost generally $449.95 for an RTA plus
monthly fees, and no upfront fee or monthly fees for a Rep, (2) we do not
require any minimal amount of time spent working as a prerequisite to work as a
Rep or RTA, (3) we do not insist on any special outside training as a
prerequisite to becoming a Rep or RTA, and (4) we do not prohibit a new Rep
or RTA from working with another company.  Our ability to remain
competitive, therefore, depends, in significant part, on our success in
recruiting and retaining Reps and RTAs through an attractive compensation plan,
the maintenance of an attractive product portfolio and other
incentives.  We cannot ensure that our programs for recruitment and
retention of Reps and RTAs will be successful, and if they are not, our
financial condition and operating results would be harmed.
  16
  Adverse
publicity and negative public perception associated with our services, or
network marketing program, or those of similar companies, could harm our
financial condition and operating results.
 
 The size
of our distribution network and the results of our operations may be
significantly affected by the public’s perception of us and similar companies.
 Our ability to attract and retain Reps and RTAs, and to sustain and
enhance sales through our Reps and RTAs can be affected by adverse publicity or
negative public perception regarding our industry, our competition, or our
business generally.  This perception is dependent upon opinions
concerning:
  •
                the
      reliability and quality of our
services;
 •
                the
      safety and quality of similar services provided by other
      companies;
 •
                regulatory
      investigations of us, our competitors and our respective
      services;
 •
                the
      actions of our current or former sales
force;
 •
                our
      network marketing program; and
 •
                the
      network marketing business
generally.
  Adverse
publicity concerning any actual or purported failure by us or our Reps or RTAs
to comply with applicable laws and regulations regarding service claims and
advertising, the regulation of our network marketing program, the licensing of
our services for sale in our target markets or other aspects of our business,
whether or not resulting in enforcement actions or the imposition of penalties,
could have an adverse effect on the reputation of our Company and could
negatively affect our ability to attract, motivate and retain Reps and RTAs,
which would negatively impact our ability to generate revenue.  We
cannot ensure that all Reps and RTAs will comply with applicable legal
requirements relating to the advertising, labeling, licensing or distribution of
our services. There can be no assurance that we will not be subject to adverse
publicity or negative public perception in the future or that such adverse
publicity will not have a material adverse effect on our business, financial
condition, or results of operations.
  Our
network marketing program could be found not to be in compliance with current or
newly adopted laws or regulations in one or more markets, which could prevent us
from conducting our business in those markets and harm our financial condition
and operating results.
 
 The
violation of marketing or advertising laws by Reps in connection with the sale
of our products and services, or the promotion of our Compensation Plan, could
adversely affect our business.  New Reps and RTAs sign a written
contract and agree to adhere to the YTB policies and
procedures.  Although these policies and procedures prohibit Reps and
RTAs from making false, misleading and other improper claims regarding products,
services, or income potential from the distribution of the products and
services, Reps and RTAs may, from time to time, without our knowledge and in
violation of our policies, create promotional materials or otherwise provide
information that does not accurately describe our marketing
program.  They also may make statements regarding potential earnings,
product or service claims, or other matters in violation of our policies or
applicable laws and regulations concerning these matters.  These
violations may result in legal action against us by regulatory agencies, state
attorneys general, or private parties.  Legal actions against our
Reps, RTAs, or others who are associated with us could lead to increased
regulatory scrutiny of our business, including our network marketing
system.  We take what we believe to be commercially reasonable steps
to monitor the activities of our Reps to guard against misrepresentation and
other illegal or unethical conduct by Reps and to assure that the terms of our
policies and procedures and Compensation Plan are observed.  There can
be no assurance, however, that our efforts in this regard will be sufficient to
accomplish this objective.  Adverse publicity resulting from such
activities could also make it more difficult for us to attract and retain Reps
and RTAs and may have an adverse effect on our business, financial condition,
and results of operations.
  17
  Network
marketing is subject to intense government scrutiny and regulation, including,
without limitation, federal and state regulation of marketing practices, and
federal and state regulation of the offer and sale of business franchises,
business opportunities, and securities.  This adds to the expense of
doing business and the possibility that changes in the law might adversely
affect our ability to sell some of our products in certain
markets.  Network marketing systems, such as ours, are frequently
subject to laws and regulations that are directed at ensuring that product sales
are made to consumers of the products and that compensation, recognition, and
advancement within the marketing organization are based primarily on the sale of
products rather than on investment in the sponsoring company.  The FTC
has recently been very active in its enforcement of the FTC Act against network
marketing or purported network marketing companies, having instituted several
enforcement actions resulting in signed agreements and payments of large fines
(consumer redress).  Although the Company has not been the target of
an FTC investigation, there can be no assurance that the FTC will not
investigate the Company's activities in the future.
 
 Regulatory
authorities in one or more of our present or future markets could determine that
our network marketing system does not comply with these laws and regulations or
that it is prohibited.  Failure to comply with these laws and
regulations or such a prohibition could have a material adverse effect on our
business, financial condition, or results of operations.  Further, we
may simply be prohibited from distributing products through a network-marketing
channel in some foreign countries, or we may be forced to alter our Compensation
Plan.
 
 We are
also subject to the risk that new laws or regulations might be implemented or
that current laws or regulations might change, which could require us to change
or modify the way we conduct our business in certain markets.  This
could be particularly detrimental to us if we had to change or modify the way we
conduct business in markets that represent a significant percentage of our net
sales.  For example, the FTC released a proposed Business Opportunity
Rule on April 5, 2006.  The proposed rule, if enacted in its current
form, would likely cause us, as well as most other direct sellers, to be
regulated as a seller of business opportunities in the United
States.  Under the current Business Opportunity Rule, we do not
qualify as a seller of a business opportunity because we offer U.S. distributors
the opportunity to join our business for $449.95, below the $500 threshold
required for a company to be subject to the current rule.  The
proposed rule would eliminate that threshold.  In addition, the
proposed rule would require all sellers of business opportunities to deliver
written disclosure of certain information to a prospective purchaser seven days
prior to the time the prospective purchaser could sign any agreement or make any
payment in connection with the business opportunity.  The information
that a seller of a business opportunity would have to provide all prospective
purchasers would include: (1) the seller’s and Rep’s identification information,
(2) whether an earnings claim is made and, if so, a detailed earnings claim
statement with substantiating information and certain representations relating
to the earnings of other business opportunity purchasers, (3) legal actions
involving deceptive practices or other matters filed against the seller, its
affiliates and other related parties and/or the presenting distributor in the
last 10 years, (4) whether a cancellation or refund policy is available and, if
so, a statement describing the policy, (5) the number of business opportunity
purchasers that have canceled within the past two years, and (6) a reference
list of the 10 nearest current or past business opportunity purchasers, with
personal information available to allow the prospective purchaser to contact a
listed purchaser.  We, along with the DSA, other direct selling
companies, and other interested parties have filed comments with the FTC
opposing adoption of the proposed rule in its current form and suggesting
alternative means to regulate fraudulent business activities without imposing
undue burdens on legitimate companies in the direct selling
industry.  The Business Opportunity Rule is currently only a proposed
rule.  If implemented at all, the rule ultimately may not be
implemented in a form that applies to network marketing compensation plans, or
it may change significantly before it is implemented.  If The Business
Opportunity Rule is adopted as proposed, it could negatively impact our business
and harm our ability to attract new Reps and RTAs in the United
States.
 
 Our
business may also be affected by other actions of governments to restrict the
activities of direct selling companies for various reasons, including the
limitation on the ability of direct selling companies to operate through direct
sales without the involvement of a traditional retail channel. Foreign
governments may also seek to require that non-domestic companies doing or
seeking to do business place a certain percentage of ownership of legal entities
in the hands of local nationals to protect the commercial interests of its
citizens. Customs laws, tariffs, import duties, export quotas and restrictions
on repatriation of foreign earnings may negatively affect our Company’s
international operations. Governments may seek either to impose taxes on
independent sales force members or to classify independent sales force members
as employees of direct selling companies with whom they may be associated,
triggering employment-related taxes on the part of the direct selling companies.
The U.S. government may impose restrictions on our Company’s ability to engage
in business in a foreign country in connection with the foreign policy of the
United States.
 
 Further,
our international operations require us to comply with a number of U.S. and
international regulations. For example, we must comply with the Foreign Corrupt
Practices Act, or FCPA, which prohibits U.S. companies or their agents and
employees from providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person or corporate entity or obtain any unfair advantage. Any failure by us to
adopt appropriate compliance procedures and ensure that our RTAs and Reps comply
with the FCPA and applicable laws and regulations, if necessary, in foreign
jurisdictions could result in substantial penalties or restrictions on our
ability to conduct business in certain foreign jurisdictions.
  18
  Changes
in consumer preferences could negatively impact our
operating results.
 
 Our
business is subject to changing consumer trends and preferences (both on the
level of our Reps and RTAs and on the level of consumers to whom our RTAs offer
travel services and products).  Our continued success depends in part
on our ability to anticipate and respond to these changes, and we may not
respond in a timely or commercially appropriate manner to such
changes.  Our failure to accurately predict these trends could
negatively impact consumer opinion of our services, which in turn could harm our
customer, Rep and RTA relationships and cause the loss of sales.  The
success of our service offerings and enhancements depends upon a number of
factors, including our ability to:
 •
                accurately
      anticipate customer needs;
 •
                innovate
      and develop new services or service enhancements that meet these
      needs;
 •
                successfully
      commercialize new services or service enhancements in a timely
      manner;
 •
                price
      our services competitively;
 •
                deliver
      our services in sufficient volume and in a timely manner;
    and
 •
                differentiate
      our service offerings from those of our
  competitors.
  If we do
not introduce new services or make enhancements to meet the changing needs of
our customers in a timely manner, some of our services could be rendered
obsolete, which could negatively impact our revenues, financial condition and
operating results.
 
 Our
processing, storage, use and disclosure of personal data could give rise to
liabilities as a result of governmental regulation, conflicting legal
requirements, differing views of personal privacy rights or security
breaches.
 
 In the
processing of our traveler transactions, we receive and store a large volume of
personally identifiable information. This information is increasingly subject to
legislation and regulations in numerous jurisdictions around the world. This
government action is typically intended to protect the privacy and security of
personal information, including credit card information that is collected,
processed and transmitted in or from the governing jurisdiction.
 
 We could
be adversely affected if domestic or international legislation or regulations
are expanded to require changes in our business practices, or if governing
jurisdictions interpret or implement their legislation or regulations in ways
that negatively affect our business.
 
 Travel
businesses have also been subjected to investigations, lawsuits and adverse
publicity due to allegedly improper disclosure of passenger information. As
privacy and data protection have become more sensitive issues, we may also
become exposed to potential liabilities as a result of differing views on the
privacy of travel data. These and other privacy concerns, including security
breaches, could adversely impact our business, financial condition and results
of operations.
 
 Risks
Related to Ownership of Our Common Stock
 
 The
trading price of shares of our Class A Common Stock is likely to be
volatile.
 
 The
trading price of our Class A Common Stock has been and is likely to be subject
to fluctuations.  Factors affecting the trading price of our Class A
Common Stock may include:
 •
                fluctuations
      in our quarterly operating and earnings per share
  results;
 •
                material
      developments with respect to future
  acquisitions;
 •
                loss
      of key personnel, key Reps or key
RTAs;
 •
                announcements
      of technological innovations or new services by us or our
      competitors;
 •
                delays
      in the development and introduction of new
  services;
 •
                our
      failure to timely address changing customer, RTA or Rep
      preferences;
 •
                legislative
      or regulatory changes;
 •
                general
      trends in the industry;
 •
                recommendations
      and/or changes in estimates by equity and market research
      analysts;
 •
                disputes
      and/or developments concerning intellectual property, including patents
      and litigation matters;
 •
                sales
      of Class A Common Stock by our existing holders, in particular sales by
      management;
 •
                securities
      class action or other litigation;
 •
                developments
      in our relationships with current or future Reps and RTAs, customers or
      suppliers;
 •
                general
      economic conditions, both in the United States and abroad;
      and
 •
                regulatory
      investigations or other litigation
matters.
  19
  Our
Chairman of the Board, together with his family members and affiliates, controls
a substantial portion of our combined stockholder voting power, and his
interests may be different from yours.
 
 Our
Chairman of the Board, J. Lloyd Tomer, together with his family (including his
son, our Chief Executive Officer, J. Scott Tomer) and affiliates, has the
ability to influence the election and removal of the members of our board of
directors and, as a result, to influence the future direction and operations of
our Company.  As of December 31, 2008, J. Lloyd Tomer, his family and
affiliates beneficially owned common stock with voting power constituting
approximately 45.8% of the combined voting power of our common stock (after
factoring in the relative voting power of our Class A Common Stock and Class B
Common Stock).  Accordingly, they may significantly influence
decisions concerning business opportunities, declaring dividends, issuing
additional shares of common stock or other securities and the approval of any
merger, consolidation or sale of all or substantially all of our
assets.  They may make decisions that are adverse to your
interests.
 
 Liquidity
on the OTC-BB is limited and we may not be able to obtain listing of our Class A
Common Stock on a more liquid market.
  Commencing
on May 19, 2008, our Class A Common Stock trades solely on the OTC-BB under the
symbol “YTBLA.OB.”  The OTC-BB provides significantly less liquidity
than national or regional securities exchanges.  Securities traded on
the OTC-BB are usually thinly traded, highly volatile, have fewer market makers
and are not followed by analysts.  Quotes for stocks included on the
OTC-BB are not listed in newspapers.  Therefore, prices for securities
traded solely on the OTC-BB may be difficult to obtain and holders of our
securities may be unable to resell their securities at or near their original
acquisition price, or at any price. We cannot give any assurance that we will be
able to meet, or, if met, maintain, the listing standards of any national or
regional securities exchanges.
  Our
Class A Common Stock has been thinly traded and the public market may provide
little or no liquidity for holders of our Class A Common Stock.
  Purchasers
of our Class A Common Stock may find it difficult to resell their shares at
prices quoted in the market or at all.  There is currently a limited
volume of trading in our Class A Common Stock.  Due to the
historically low trading price of our Class A Common Stock, many brokerage firms
may be unwilling to effect transactions in our Class A Common Stock,
particularly because low-priced securities are subject to an SEC rule that
imposes additional sales practice requirements on broker-dealers who sell
low-priced securities (generally those below $5.00 per share).  We
cannot predict when or whether investor interest in our Class A Common Stock
might lead to an increase in its market price or the development of a more
active trading market or how liquid that market might become.
 
 We
may issue preferred stock in the future, with rights senior to our common
stock.
 
 We have
authorized in our certificate of incorporation the issuance of up to five
million shares of preferred stock.  We may issue shares of preferred
stock in one or more new series.  Our board of directors may determine
the terms of the preferred stock without further action by our
stockholders.  These terms may include voting rights, preferences as
to dividends and liquidation, conversion and redemption rights, and sinking fund
provisions.  Although we have no present plans to issue shares of
preferred stock or to create new series of preferred stock, if we do issue
preferred stock, it could affect the rights, or even reduce the value, of our
common stock.
  20
  Item 1B. Unresolved Staff
Comments.
 None.
 
 Item 2. Properties.
  The
following table sets forth certain information concerning our principal
facilities:
 
 
 PROPERTY
      LOCATION
                                                      
                                                      APPROXIMATE
                                                        AREA
      IN
                                                        SQUARE
      FEET
                                                      
                                                      PRIMARY USES OF PROPERTY
                                                      
                                                      SEGMENT
                                                      
                                                      OWNERSHIP
      OR LEASE1901
      East Edwardsville RoadWood
      River, Illinois
                                                      
                                                      
                                                      120,000
                                                      
                                                      Corporate
      headquarters
                                                      
                                                      All
                                                      
                                                      Owned
      (1)560
      Sylvan Avenue
                                                      
                                                      
                                                      
                                                      
                                                      REZconnect
      Technologies, Inc.Englewood
      Cliffs, New Jersey
                                                      
                                                      
                                                      2,000
                                                      
                                                      (subsidiary)
      headquarters
                                                      
                                                      Primarily
      Travel
                                                      
                                                      Leased
      (2)600
      Country Club View Drive2nd
      FloorEdwardsville,
      Illinois
                                                      
                                                      
                                                      5,000
                                                      
                                                      Administration
                                                      
                                                      All
                                                      
                                                      Leased
      (3)#112
      Magnolia Drive, Lot #9Magnolia
      CommonsGlen
      Carbon, Illinois
                                                      
                                                      
                                                      5,500
                                                      
                                                      Administration
                                                      
                                                      All
                                                      
                                                      Leased
      (4)1151
      Dundas St. West
                                                      
                                                      
                                                      
                                                      
                                                      Sunrise
      Travel Service retailMississauga,
      Ontario / Canada
                                                      
                                                      
                                                      618
                                                      
                                                      travel
      agency
                                                      
                                                      Primarily
      Travel
                                                      
                                                      Leased
      (5)#12
      - 15243  91st AvenueSurrey,
      British Columbia / Canada
                                                      
                                                      
                                                      1200
                                                      
                                                      Administration
                                                      
                                                      Primarily
      Travel
                                                      
                                                      Leased
      (6)Purdy's
      Wharf Tower 11959
      Upper Water StreetSuite
      1700 / 1800Halifax,
      Nova Scotia / Canada
                                                      
                                                      
                                                      N/A
                                                      
                                                      Administration
                                                      
                                                      Primarily
      Travel
                                                      
                                                      Leased
      (7)
  (1)
Subject to mortgage in original principal amount of $2.5 million, mortgage was
renewed on July 26, 2008 for an additional 12 month period, which bears interest
at a floating rate equal to the prime rate, plus 1.00%. Currently, $2.0 million
of principal remains outstanding under such mortgage.
 (2)  Lease
term expires in April 30, 2013.
 (3)  Lease
term expires on October 31, 2010.
 (4) Lease
term expires on August 15, 2009.
 (5) Lease
term expires on June 30, 2009.
 (6) Lease
term expires on January 31, 2009.  Month-to-month rental
subsequently.
 (7) Lease
term expires on July 20, 2009.
  21
  Owned
Real Property
  Headquarters Office. 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 “Headquarters
Property”) for $2.5 million on July 26, 2006. In December 2006, we
acquired 1.08 acres of land that included a 20,000 square foot building
contiguous to the current facility for cash consideration of $508,693 as part of
the future facility plan for our corporate headquarters that we embarked upon
back in July 2006. We financed the purchase of the Headquarters Property by
borrowing $2.5 million from Meridian Bank, a local bank controlled by two of our
directors.  This transaction was approved by the independent members
of our Board of Directors.  The loan is evidenced by a note which was
renewed on July 26, 2008, at a current principal sum of $1,995,989, which bears
interest at a floating rate equal to the prime rate, plus 1.00% for a period of
12 months. Principal and interest are payable monthly on a 20-year amortization
schedule for the next 12 months 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, 2009, the note is payable upon demand per the
terms of the agreement. However, no demand has been made to date. The note is
collateralized by a mortgage on the Headquarters Property dated July 26, 2006,
and a Security Agreement dated July 26, 2008.  On October 10, 2008,
Meridian Bank was closed by the Illinois Department of Financial and
Professional Regulation, Division of Banking. Subsequently the Federal Deposit
Insurance Corporation (“FDIC”) was named
receiver.  On February 13, 2009, FirstCity Servicing Corporation as
Servicer for FH Partners LLC, Owner, purchased the note previously held by
Meridian Bank and subsequently held by the FDIC as receiver.  The
terms of the note did not change as a result of the purchase because those terms
are contractually agreed to in the promissory note with the failed
institution.
 
 Besides
the completion of $2.5 million in renovation of 20,000 square feet of the
building for our current operations, we have completed an additional $5.9
million renovation of 100,000 square feet. When working capital funds are
available or if external financing is acquired, we are planning to complete the
renovation project at an expected cost of $7.0 to $10.0
million.  Currently, our expansion project is on hold given the
current economic climate in general and the state of the credit
markets.
 
 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 also 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.
 
 Properties
Sold.On November 24, 2008, we entered into an agreement to
sell 9.9 acres of land for $1.0 million to an unaffiliated third party (the
“Buyer”). The
Buyer has paid a principal sum of $500,000 and agreed to terms under a
promissory note dated November 24, 2008, in connection with the subject
agreement to pay the remaining sum of $500,000 within 120 days.  The
note is collateralized by a mortgage on the subject land up to a maximum amount
of $500,000.  After closing, according to the
subject agreement, the Buyer must apply for and pursue subdividing the
9.9 acres of land into two parcels. If after
the successful completion of subdividing the land, the Buyer fails to pay the
remaining principal sum of $500,000 as agreed upon under the terms of the
promissory note, the Buyer may convey one of the parcels back to the Company. If
the land is not successfully subdivided and the Buyer fails to pay the remaining
principal sum of $500,000, the Company may exercise any of its rights under such
mortgage and promissory note.
 
 On
December 16, 2008, we entered into a contract for deed with an unaffiliated
third party, (the “Purchaser”), to sell
an administrative facility located at One Country Club View Drive, Edwardsville,
Illinois, (the “Building One
Property”) for the price of $1.5 million.  As of the contract
date, we received from the Purchaser the sum of $300,000 and will receive the
remaining $1.2 million subject to a promissory note signed in
connection with the subject contract for deed within 18 months and not later
than June 16, 2010.
 
 Properties for Future
Expansion. We also own additional real properties that may be used for
future expansion generally or for the expansion of our headquarters office
facility in particular.
 
 On August
23, 2007, we acquired approximately 12.55 acres of land for a purchase price of
$20,000 per acre, or approximately $251,000 which we also paid in cash to the
Seller at the closing. We are holding the land parcels for possible future
expansion, but have no definitive plans with respect to the use of the land at
the current time. The acquisition of the land was financed with general working
capital.
 
 In
September 2007, we acquired approximately twenty (20) acres of real property for
the future purpose of expanding our headquarters office facility.  We
paid a purchase price equal to $80,000 per acre of land, totaling approximately
$1.6 million, which was financed with general working
capital.
  22
  Leased
Real Property
  Additional Administrative
Facility. In addition to our owned real property, we lease approximately
5,000 square feet of office space (which served as part of our previous
headquarters office) at the real property location at 600 Country Club View,
Edwardsville, Illinois 62025 (the “Building Two
Property”) under a commercial lease agreement (the “Building Two Lease”),
dated August 4, 2005, by and between Meridian Land, as lessor, and us, as
lessee, which is to expire on October 31, 2010. The rental cost of 600 Country
Club View Drive space is $8,000 per month. Subsequent to December 31,
2007, we exercised its option within the stated lease agreement to
purchase the property for a cash price of $2.5 million and placed a
non-refundable earnest money deposit of $500,000 towards the purchase of this
property.  To date, no further action has been taken regarding the
purchase of the property, and we have continued monthly rental payments
according to the original commercial lease agreement.
 
 Meridian
Land is controlled by Timothy Kaiser, M.D. and Clay Winfield, each of whom is a
member of our Board of Directors.
 
 Magnolia Leased Premises. On
August 17, 2007, we entered into a Commercial Lease Agreement (the “Magnolia Lease”), by
and between Meridian Land, as lessor, and us, as lessee, covering the
approximately 5,500 square feet premises located at #112 Magnolia Drive (Lot #9
Magnolia Commons), Glen Carbon, Illinois 62034 (the “Magnolia Leased
Premises”). We intend to utilize the Magnolia Leased Premises as
additional office space.
 
 The
Magnolia Lease runs for an initial term of 18 months, originally commencing on
November 1, 2007 and expiring on April 30, 2009. Rent under the Magnolia Lease
has been set at $8,000 per month. Due to construction delays the original lease
commencement date was changed to February 15, 2008, while the expiration date
was moved to August 15, 2009. In addition to monthly rental payments, we are
responsible for utilities and maintenance and must pay all real estate taxes
assessed on the property on which the Magnolia Leased Premises are located
during the term of the Magnolia Lease, as well as all costs of maintaining any
common areas used by us in conjunction with the Magnolia Leased
Premises.
 
 Our entry
into the Building Two Lease, our exercise of our cash purchase option and entry
into a purchase contract with respect to the Building Two Property, and our
entry into the Magnolia Lease, were each approved by the independent members of
our Board of Directors. See Item 13 and the information incorporated by
reference therein.
  SunriseTravel Service Leased Premises.On July 1, 2008, we entered into a Commercial Lease Agreement (the
“Sunrise Lease”), by and between Paula Dale Ltd., as lessor, and our Company, as
lessee, covering the approximately 618 square feet premises located at 1151
Dundas St. West Mississauga, Ontario/ Canada L5C 1C6 (the “Sunrise Leased
Premises”).  We intend to utilize the Sunrise Leased Premises
as a retail travel agency.
 
 The
Sunrise Lease runs for an initial term of 12 months, originally commencing on
July 1, 2008 and expiring on June 30, 2009. Rent under the Sunrise Lease has
been set at $1,000 per month. In addition to monthly rental payments, we will be
responsible for utilities and maintenance and must pay all real estate taxes
assessed on the property on which the Sunrise Leased Premises are located during
the term of the Sunrise Lease, as well as all costs of maintaining any common
areas used by us in conjunction with the Sunrise Leased Premises.
 
 British Columbia Leased Premises.We entered into a Commercial Lease Agreement (the “British Columbia
Lease”), on February 1, 2008, by and between Janz & Assoc.
Distribution Inc., a corporation organized under the laws of the Province of
British Columbia.  The subject premise is located at #12 – 15243,
91st
Avenue, Surrey, British Columbia, Canada (the “British Columbia
Premises”). We intend to utilize the British Columbia Premises as
additional office space.
 
 The
British Columbia Lease runs for an initial term of 12 months, originally
commencing on February 1, 2008 and expiring on January 31, 2009 with an option
to renew the lease for one year after expiration of the term of this lease, with
all other terms and conditions the same. Rent under the British Columbia Lease
which includes common areas, utilities and taxes, has been set at $1,000 per
month.  The lease also calls for our Company to pay a monthly cleaning
service and Goods and Services Tax.  To date, a renewal of the British
Columbia Lease has not been executed.  We are currently renting on a
month-to-month basis.
  23
  Nova Scotia Agreement.We, as
lessee, entered into a services agreement (the “Nova Scotia
Agreement”), on July 28, 2008, by and between Purdy’s Wharf Business
Centre Ltd., as lessor, having its principal place of business at Purdy’s Wharf
Tower 1, 1959 Upper Water Street, Suite 1700, Halifax, Nova Scotia,
Canada.  The fee under the Nova Scotia Agreement is nominal (less than
$1000 per month) with an initial term of 12 months ending on July 20,
2009.
 
 Facility for REZconnect
Subsidiary. We also lease office space at 560 Sylvan Avenue,
Englewood Cliffs, New Jersey 07632, principally for the operations of our
REZconnect 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 $4,000 and such lease expires in April 2013.
 
 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 a $12.0-$15.0 million project for the renovation of our current
headquarters office in late 2007. Please see the description below in Item 7,
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 lease have been acquired and are leased, as appropriate,
to support our operations and for long-term investment purposes.
 
 Item 3. Legal
Proceedings.
  On August
4, 2008, a civil action was filed against three subsidiaries of our Company and
certain of our executive officers in the Superior Court of California, County of
Los Angeles, by the California Attorney General.  The complaint
alleges that the defendants violated California’s unfair competition,
anti-pyramid and advertising laws.  The complaint was filed after 18
months of dialogue, initiated by us with the Attorney General to discuss the
implementation of a new California travel law and its potential effect on our
business model.  Throughout these discussions, which broadened over
time, we have consistently cooperated with the state’s information
requests.  On December 19, 2008, the California Attorney General
amended its complaint to add YTB International, Inc. as an additional
defendant.  This addition did not otherwise change the nature of the
allegations or claims asserted in the litigation.  The California
Attorney General seeks a permanent injunction preventing the defendants from
making any untrue or misleading statements or committing any acts of unfair
competition, penalties of at least $15.0 million, and restitution of at least
$10.0 million.   We believe that we have meritorious defenses and
intend to vigorously defend the case.
 
 On August
8, 2008, a complaint seeking to be certified as a class-action was filed against
our Company, three Company subsidiaries, and certain executive officers, in the
United States District Court, Southern District of Illinois.  The
complaint alleges that the defendants violated the Illinois Consumer Fraud and
Deceptive Business Practices Act.  On August 14, 2008, a second,
substantively similar, complaint was filed against the same defendants in the
United States District Court for the Southern District of
Illinois.  The two cases have now been consolidated and are proceeding
together before the same judge.  The plaintiffs have filed a
consolidated complaint, seeking damages of over $100.0 million.  On
February 9, 2009, we filed motions to dismiss the consolidated complaint and
those motions are now pending before the Court.  We believe we have
meritorious defenses and intend to vigorously defend these
cases.
 
 After the
Illinois class action and California Attorney General suits were filed, we
provided notice to various insurance carriers.  Our primary Directors
and Officers Liability Insurance carrier, Illinois National Insurance Company
(an AIG company) (“Illinois National”)
agreed to provide coverage for the defense of the cases, subject to a
reservation of rights.  Because only the executive officers who were
sued ("the individual
insureds") are covered for this type of lawsuit under the policy and
the Company is not, Illinois National agreed to pay a portion of the
defense costs incurred in both cases, and in fact it has made some payments
toward defense costs.
 
 On
January 29, 2009, the California Attorney General sent a letter to our defense
counsel, with a copy to Illinois National and three excess insurance carriers,
stating that California Insurance Code section 533.5 provides that there shall
be no duty for any insurance carrier to defend lawsuits alleging violations of
Business and Professional Code Sections 17200 or 17500 in which the Attorney
General seeks recovery of a fine, penalty, or restitution.  The
lawsuit against our Company and its executives is such a
lawsuit.  After receipt of this letter, counsel for our Company and
the individual insureds informed Illinois National's counsel that their position
was that the Illinois National policy is governed by Illinois law, and therefore
California Insurance Code Section 533.5 does not apply. Counsel for the
Company sought Illinois National's assurances that it agreed with this
position, though it remains unresolved at the time of the filing of this Form
10-K.
  24
  On
February 6, 2009, the individual insureds filed a declaratory judgment action in
circuit court in Madison County, Illinois, in order to protect their rights
under the Illinois National policy.  The action seeks a declaration
from the court that Illinois National's obligation to advance and reimburse
their defense costs in connection with the California Attorney General's lawsuit
is not limited by California Insurance Code Section 533.5.  The
individual insureds have not yet served the complaint in this suit on Illinois
National and are in discussions with Illinois National about possible resolution
of the matter.
 
 Item 4. Submission of Matters to a
Vote of Security Holders.
  None.
  25
 
 PART
II
  Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
  Market
Information.
 
 For a
history of our trading symbols and the principal markets on which our common
stock has been traded in the past, see the description above in Item 1,
sub-heading “Corporate History.”
 
 Our Class
A Common Stock is currently quoted on the OTC-BB under the symbol “YTBLA.OB” and
we intend to at the appropriate time in the future apply for its listing on a
national securities exchange, although no assurances can be given in this
regard.
 
 Our Class
B Common Stock is convertible into our Class A Common Stock (on a
one-share-for-one-share basis).  Our Class B Common Stock has
experienced very limited and sporadic trading, and as such, no established
public trading market exists for our Class B Common Stock.
 
 Common
Stock Prices
  The
following table sets forth the high and low bid prices per share of our Class A
Common Stock, for the periods indicated, as reported on the OTC-BB. As such,
the prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.All
prices relating to periods prior to the July 31, 2007 Reclassification Date have
been given retroactive effect to the three-for-one stock split that resulted
from the Reclassification.
 
 High
                    
                    
                    LowFiscal
      year ended December 31, 2008First
      quarter
                    
                    $
                    2.10
                    
                    
                    $
                    0.60Second
      quarter
                    
                    
                    4.19
                    
                    
                    
                    1.13Third
      quarter
                    
                    
                    1.90
                    
                    
                    
                    0.49Fourth
      quarter
                    
                    
                    0.61
                    
                    
                    
                    0.19Fiscal
      year ended December 31, 2007First
      quarter
                    
                    $
                    5.62
                    
                    
                    $
                    1.03Second
      quarter
                    
                    
                    1.87
                    
                    
                    
                    1.32Third
      quarter
                    
                    
                    2.83
                    
                    
                    
                    1.87Fourth
      quarter
                    
                    
                    2.00
                    
                    
                    
                    0.96
 
 At March
9, 2009, the closing price per share of our Class A Common Stock, as reported by
the OTC-BB was $.20.
  Shareholders
  As of
March 9, 2009, we had 360 shareholders of record of our Class A Common Stock and
Class B Common Stock.
  Dividend
Policy
  We have
neither declared nor paid a cash dividend on any class of our common stock since
we became a publicly traded company. At this time, it remains 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.
  26
  Performance
Graph
 
 The
following graph shows the total stockholder return through December 31, 2008 of
an investment of $100 in cash on December 31, 2003 for YTB International, Inc.
common stock and an investment of $100 in cash on December 31, 2003 for (i) the
NASDAQ Market Index and (ii) the Hemscott Group Index.  The Hemscott
Group Index is an index of stocks representing Internet Information
Providers. Historic stock performance is not necessarily indicative of future
stock price performance.  All values assume reinvestment of the full
amount of all dividends and are calculated as of the last day of each
month:
  
 
   27
  Item 6. Selected Financial
Data.
 
 The
selected financial data set forth below should be read in conjunction with the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K.  The statements of
operations and cash flows data for the years ended December 31, 2008, 2007 and
2006 and the balance sheet data as of December 31, 2008 and 2007 have been
derived from audited consolidated financial statements for the Company included
elsewhere in this Annual Report on Form 10-K.  The consolidated
statements of operations and cash flows data for the years ended December 31,
2005 and 2004 and the balance sheet data as of December 31, 2006, 2005 and 2004
have been derived from audited consolidated financial statements that are not
included in this Annual Report on Form 10-K.  The 2004 merger of the
Company (formerly REZconnect Technologies, Inc. (“REZ”)) and
YourTravelBiz.com, Inc. (“YTB.com”) was
accounted for as a purchase business combination with the Company deemed the
acquirer.  The historical results are not necessarily indicative of
the results of operations to be expected in the future.
 
 Dollars
      in thousands except per share data
                  
                  For
      the Fiscal Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  
                  2004*Statements
      of Operations and Cash Flows Data:Net
      revenues
                  
                  
                  162,547
                  
                  
                  
                  141,285
                  
                  
                  
                  50,897
                  
                  
                  
                  21,593
                  
                  
                  
                  3,193Income
      (loss) from operations
                  
                  
                  (4,121
                  )
                  
                  
                  3,013
                  
                  
                  
                  (6,053
                  )
                  
                  
                  (5,881
                  )
                  
                  
                  (2,184
                  )Net
      income (loss)
                  
                  
                  (4,475
                  )
                  
                  
                  3,209
                  
                  
                  
                  (5,976
                  )
                  
                  
                  (8,453
                  )
                  
                  
                  (2,193
                  )Net
      income (loss) per share - Basic
                  
                  
                  (0.04
                  )
                  
                  
                  0.03
                  
                  
                  
                  (0.07
                  )
                  
                  
                  (0.34
                  )
                  
                  
                  (0.18
                  )Net
      income (loss) per share - Diluted
                  
                  
                  (0.04
                  )
                  
                  
                  0.03
                  
                  
                  
                  (0.07
                  )
                  
                  
                  (0.34
                  )
                  
                  
                  (0.18
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  7,422
                  
                  
                  
                  12,022
                  
                  
                  
                  159
                  
                  
                  
                  108
                  
                  
                  
                  (299
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (7,915
                  )
                  
                  
                  (9,417
                  )
                  
                  
                  (558
                  )
                  
                  
                  (3,590
                  )
                  
                  
                  192Net
      cash (used in) provided by financing activities
                  
                  
                  (13
                  )
                  
                  
                  (874
                  )
                  
                  
                  169
                  
                  
                  
                  3,687
                  
                  
                  
                  84Cash
      purchases of property and equipment
                  
                  
                  (9,337
                  )
                  
                  
                  (9,169
                  )
                  
                  
                  (3,155
                  )
                  
                  
                  (430
                  )
                  
                  
                  (12
                  )
  *  This
tabular information reflects the Company’s results of operations and cash flows
for the year ended December 31, 2004 and YTB.com’s post-merger results of
operations and cash flows for the period December 8 through December 31,
2004.
 
 Dollars
      in thousands
                  
                  As
      of the Fiscal Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Balance
      Sheets Data:Cash
      and cash equivalents
                  
                  
                  1,203
                  
                  
                  
                  1,731
                  
                  
                  
                  -
                  
                  
                  
                  230
                  
                  
                  
                  26Current
      assets
                  
                  
                  17,779
                  
                  
                  
                  40,770
                  
                  
                  
                  17,991
                  
                  
                  
                  8,423
                  
                  
                  
                  2,197Total
      assets
                  
                  
                  43,086
                  
                  
                  
                  62,894
                  
                  
                  
                  28,890
                  
                  
                  
                  13,838
                  
                  
                  
                  8,134Current
      liabilities
                  
                  
                  26,942
                  
                  
                  
                  44,418
                  
                  
                  
                  30,637
                  
                  
                  
                  10,478
                  
                  
                  
                  2,983Long-term
      obligations
                  
                  
                  951
                  
                  
                  
                  1,168
                  
                  
                  
                  270
                  
                  
                  
                  292
                  
                  
                  
                  394Retained
      earnings (deficit)
                  
                  
                  (23,683
                  )
                  
                  
                  (19,208
                  )
                  
                  
                  (22,312
                  )
                  
                  
                  (16,336
                  )
                  
                  
                  (7,883
                  )Stockholders'
      equity
                  
                  
                  15,193
                  
                  
                  
                  17,308
                  
                  
                  
                  (2,016
                  )
                  
                  
                  3,068
                  
                  
                  
                  4,757
  28
  Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
 Basis
of Presentation
  This Management’s
Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements which have been prepared assuming that we will continue as
a going concern.  As discussed in Note 2 to the consolidated financial
statements, our pending litigation, loss from operations and working capital
deficiency raise substantial doubt about our ability to continue as a going
concern.  Management’s plans concerning these matters are also
discussed in Note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
  Executive
Overview
  We are a
leading provider of Internet-based travel related services and operate primarily
through our three subsidiaries: YTB Marketing, YTB Travel and
REZconnect.
 ·
              YTB
      Marketing establishes IBCs and compensates its Reps via a multilevel
      marketing commission structure.
 ·
              YTB
      Travel contracts with the online travel businesses, provides online
      booking systems, fulfills travel orders and pays travel
      commissions.
 ·
              REZconnect
      operates as a travel vendor relationship management company and offers
      franchises to “brick and mortar” travel agencies. All of REZconnect’s
      franchised operations are independently owned and operated. All sales of
      travel products by REZconnect are made through its independent agencies
      and franchisees, or through its interactive
  websites.
 
 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 80,000 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 both travel and marketing. 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
IBCs on behalf of YTB Travel. YTB Marketing has a unique business model and
strategy of creating a network of commissioned Reps who exclusively market the
IBCs of YTB Travel. A purchaser of an IBC from YTB Travel is known as an RTA.
Each RTA generally pays $449.95 for the purchase of an IBC, plus the first
month’s IBC web-hosting fee of $49.95. The monthly fee continues for as long as
the RTA operates his/her IBC. YTB Travel retains a percentage of the travel
commissions generated by the RTAs. While certain of our competitors focus their
promotion efforts on the customer, typically spending from 15% to 37% of their
revenues on advertising, we spend less than 1% of our net revenues on
advertising.
 
 We
believe marketing of YTB Marketing’s IBCs on behalf of YTB Travel will not be
significantly affected by the seasonality of the travel business, or a decline
in travel, since the $49.95 monthly fee is a primary source of our revenue.
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
IBC, thereby creating a significant advantage for YTB compared to the major
online travel companies. The cost to book a trip through an RTA IBC is usually
nearly identical to booking a trip through a major online travel company. The
RTAs’ IBCs provide access to more than 40 booking engines, including World
Choice Travel (a subsidiary of Travelocity.comTM), Hotels.com, Apple Vacations,
Collette Vacations, Perry Golf, Travel Guard, Pleasant Holidays, Travel
Impressions, Carnival Cruise Line, Princess Cruise Line and more.
  As of
December 31, 2008, there are 92,383 RTA IBCs in operation and numerous
registered travel agents, which include franchisees and independent travel
agents, using the Vacation Central travel portal site. Site owners are also
permitted to solicit organizations and associations for travel
sales.
  29
  YTB
Travel is our travel management subsidiary that processes travel sales and
service bookings (reservations) generated by 92,383 independent RTAs through YTB
Travel.  In addition, YTB Travel negotiates deals with over 200
preferred vendors, and receives commissions 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.
Over 80 preferred suppliers are represented in our online store, while the
balance are accessed through traditional offline channels.  The
emerging market shift to the Internet for travel services, combined with the
personal marketing effort of our RTAs, presents the growth opportunity for sales
of products and services. 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 IBCs are available for use 24 hours, 7 days a
week.
  REZconnect
generates revenue through registered travel agents and 34 active franchised
travel agencies. REZconnect offers consumer driven websites which provide strong
content and travel booking ability with 55 booking engines incorporated into one
site, covering virtually all aspects of the travel industry.
  Our
revenues derive primarily from IBC sales, monthly IBC web-hosting fees and
commissions paid by travel providers. In addition, certain travel suppliers pay
performance-based compensation known as “override commissions” or
“overrides.”
 
 ·
              Commission
      revenues, net of allowances for cancellations, are recognized based on the
      departure date of travel.
 ·
              Overrides
      are recognized on an accrual basis based on prior year's experience
      adjusted for current year volumes.
 ·
              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 the sale of IBCs is deferred and recognized ratably as revenue over a
      12-month period, which represents the average lifespan during which an RTA
      remains an RTA with our Company.
 
 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% to 12% for hotel reservations, 5% to 10% for car
rentals, 10% to 18% 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, 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 average commission rate from online transaction revenues will increase due
to a higher proportion of non-commodity product sales and an increase in higher
profit negotiated preferred supplier contracts.  Each RTA pays a
monthly web-hosting fee of $49.95 to us, and can earn transactional compensation
from travel purchased from his or her IBC. 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.
  In order
to expand our potential revenue base internationally, in early 2008 we expanded
our services into Canada, the Bahamas, and Bermuda. YTB Bahamas commenced
operations on January 11, 2008, and YTB Canada and YTB Bermuda commenced
operations on February 8, 2008. As a result of this international expansion,
individuals living in these countries can now sell travel through IBCs that they
license from us, and, similarly, our Reps who are located there can market IBCs
to others in the U.S., Puerto Rico, the Bahamas, Bermuda and
Canada.
  It should
be noted that while only the commissions arising from our RTAs’ booking of
travel services are reflected as a component of our revenues in our financial
statements, we also keep track of the aggregate retail value of all travel
services that are booked by our RTAs (which directly impacts our commission
revenues). The value of such travel services increased 83.7% in 2007 to
over $414 million from approximately $225 million in 2006.  Comparable
data for 2008 sales (retail value) has not yet been reported to us by our travel
vendors.
  30
  Trends
 
 The
travel industry, including offline agencies, online agencies and suppliers of
travel products and services, has been characterized by intense competition, as
well as rapid and significant change. In addition, global economic and financial
market conditions worsened in the second half of 2008, creating uncertainty for
travelers and suppliers. This macroeconomic downturn pressured discretionary
spending on travel and advertising. We cannot predict the magnitude or duration
of the downturn, but we do not anticipate any improvement in the
short-term.
 
 The
airline sector in particular has historically experienced significant turmoil.
Most recently, U.S. airlines have reduced their cost structures and seating
capacity, increased fares and assessed charges for items such as baggage as a
result of the overcapacity, financial losses and extreme volatility in oil
prices.
 
 The
Company is generally negatively affected by reduced seating capacities as there
is less air supply available through our IBCs, and in turn less opportunity to
facilitate hotel rooms, car rental and other services on behalf of air
travelers. Carriers have announced incremental capacity reductions in 2009,
which will continue to impact our opportunity to sell other travel
products.
 
 Fare
increases, fuel surcharges and other fees may negatively impact traveler demand
with no corresponding increase in our remuneration as our air revenue is tied
principally to ticket volumes, not prices.  The exception will
be situations in which we can negotiate a commission for the sale of
an airline ticket.  We expect to have several of the popular U.S. low
cost carriers under contract this year.
 
 Airline
carriers have responded to the current industry conditions by aggressively
reducing costs in every aspect of their operations, including decreasing
distribution costs.  Due to the weakening economy, we may encounter
additional pressure on air remuneration as certain supply agreements renew in
2009 and beyond as well as potential pressure on air booking fees due to actions
by some of our competitors and increased traveler sensitivity to fees in the
current environment.
 
 In 2008,
the hotel sector experienced declining occupancy rates.  In 2008, our
hotel remuneration was adversely impacted as a result of lower fees and more
competitive hotel pricing.  Industry sources expect these trends to
continue in 2009, which with the general weakening economy and negative airline
trends, create challenges to our hotel business, which has comprised a
significant portion of our revenue. However, we
believe that our new resort focus products will help offset some of these
negative effects. We have entered into contracts with feature resorts
that boost our margins substantially in exchange for our marketing focus on a
particular resort in a particular area.  We expect to have most of the
major markets with resort coverage by year end.
  31
  Results
of Operations
  The
following tables sets forth, for the periods indicated, the percentage
relationship of certain items from our consolidated statement of operations to
our total revenues:
 
 Dollars
      in thousands
                                                
                                                2008
                                                
                                                
                                                2007
                                                
                                                
                                                VarianceYear
      Ended
                                                  December
      31,
                                                
                                                
                                                %
      of Net
                                                  Revenues
                                                
                                                
                                                Year
      Ended
                                                  December
      31,
                                                
                                                
                                                %
      of Net
                                                  Revenues
                                                
                                                
                                                Increase
                                                  (Decrease)
                                                
                                                
                                                Inc.(Decr.)
                                                  %NET
      REVENUESInternet
      business center sales and monthly fees
                                                
                                                $
                                                122,361
                                                
                                                
                                                
                                                75.3
                                                %
                                                
                                                $
                                                103,218
                                                
                                                
                                                
                                                73.1
                                                %
                                                
                                                $
                                                19,143
                                                
                                                
                                                
                                                18.5
                                                %Travel
      commissions and services
                                                
                                                
                                                27,907
                                                
                                                
                                                
                                                17.2
                                                %
                                                
                                                
                                                20,659
                                                
                                                
                                                
                                                14.6
                                                %
                                                
                                                
                                                7,248
                                                
                                                
                                                
                                                35.1
                                                %Training
      programs and marketing materials
                                                
                                                
                                                9,621
                                                
                                                
                                                
                                                5.9
                                                %
                                                
                                                
                                                15,402
                                                
                                                
                                                
                                                10.9
                                                %
                                                
                                                
                                                (5,781
                                                )
                                                
                                                
                                                (37.5
                                                )%Other
                                                
                                                
                                                2,658
                                                
                                                
                                                
                                                1.6
                                                %
                                                
                                                
                                                2,006
                                                
                                                
                                                
                                                1.4
                                                %
                                                
                                                
                                                652
                                                
                                                
                                                
                                                32.5
                                                %Total
      net revenues
                                                
                                                
                                                162,547
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                
                                                141,285
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                
                                                21,262
                                                
                                                
                                                
                                                15.0
                                                %OPERATING
      EXPENSESMarketing
      commissions
                                                
                                                
                                                80,172
                                                
                                                
                                                
                                                49.3
                                                %
                                                
                                                
                                                80,540
                                                
                                                
                                                
                                                57.0
                                                %
                                                
                                                
                                                (368
                                                )
                                                
                                                
                                                (0.5
                                                )%Travel
      commissions
                                                
                                                
                                                19,972
                                                
                                                
                                                
                                                12.3
                                                %
                                                
                                                
                                                13,427
                                                
                                                
                                                
                                                9.5
                                                %
                                                
                                                
                                                6,545
                                                
                                                
                                                
                                                48.7
                                                %Depreciation
      and amortization
                                                
                                                
                                                2,531
                                                
                                                
                                                
                                                1.6
                                                %
                                                
                                                
                                                1,152
                                                
                                                
                                                
                                                0.8
                                                %
                                                
                                                
                                                1,379
                                                
                                                
                                                
                                                119.7
                                                %Training
      programs and marketing materials
                                                
                                                
                                                11,329
                                                
                                                
                                                
                                                7.0
                                                %
                                                
                                                
                                                8,795
                                                
                                                
                                                
                                                6.2
                                                %
                                                
                                                
                                                2,534
                                                
                                                
                                                
                                                28.8
                                                %General
      and administrative
                                                
                                                
                                                52,664
                                                
                                                
                                                
                                                32.3
                                                %
                                                
                                                
                                                34,358
                                                
                                                
                                                
                                                24.4
                                                %
                                                
                                                
                                                18,306
                                                
                                                
                                                
                                                53.3
                                                %Total
      operating expenses
                                                
                                                
                                                166,668
                                                
                                                
                                                
                                                102.5
                                                %
                                                
                                                
                                                138,272
                                                
                                                
                                                
                                                97.9
                                                %
                                                
                                                
                                                28,396
                                                
                                                
                                                
                                                20.5
                                                %INCOME
      (LOSS) FROM OPERATIONS
                                                
                                                
                                                (4,121
                                                )
                                                
                                                
                                                (2.5
                                                )%
                                                
                                                
                                                3,013
                                                
                                                
                                                
                                                2.1
                                                %
                                                
                                                
                                                (7,134
                                                )
                                                
                                                
                                                (236.8
                                                )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                                                
                                                
                                                234
                                                
                                                
                                                
                                                0.1
                                                %
                                                
                                                
                                                447
                                                
                                                
                                                
                                                0.3
                                                %
                                                
                                                
                                                (213
                                                )
                                                
                                                
                                                (47.7
                                                )%Interest
      expense
                                                
                                                
                                                (85
                                                )
                                                
                                                
                                                (0.1
                                                )%
                                                
                                                
                                                (38
                                                )
                                                
                                                
                                                0.0
                                                %
                                                
                                                
                                                (47
                                                )
                                                
                                                
                                                123.7
                                                %Foreign
      currency translation loss
                                                
                                                
                                                (58
                                                )
                                                
                                                
                                                0.0
                                                %
                                                
                                                
                                                -
                                                
                                                
                                                
                                                0.0
                                                %
                                                
                                                
                                                (58
                                                )
                                                
                                                
                                                n/m
                                                *Total
      other income (expense)
                                                
                                                
                                                91
                                                
                                                
                                                
                                                0.0
                                                %
                                                
                                                
                                                409
                                                
                                                
                                                
                                                0.3
                                                %
                                                
                                                
                                                (318
                                                )
                                                
                                                
                                                (77.8
                                                )%INCOME
      (LOSS) BEFORE INCOME TAX PROVISION
                                                
                                                
                                                (4,030
                                                )
                                                
                                                
                                                (2.5
                                                )%
                                                
                                                
                                                3,422
                                                
                                                
                                                
                                                2.4
                                                %
                                                
                                                
                                                (7,452
                                                )
                                                
                                                
                                                (217.8
                                                )%INCOME
      TAX PROVISION
                                                
                                                
                                                445
                                                
                                                
                                                
                                                0.3
                                                %
                                                
                                                
                                                213
                                                
                                                
                                                
                                                0.1
                                                %
                                                
                                                
                                                232
                                                
                                                
                                                
                                                109
                                                %NET
      INCOME (LOSS)
                                                
                                                $
                                                (4,475
                                                )
                                                
                                                
                                                (2.8
                                                )%
                                                
                                                $
                                                3,209
                                                
                                                
                                                
                                                2.3
                                                %
                                                
                                                $
                                                (7,684
                                                )
                                                
                                                
                                                (239.5
                                                )%
    32
  Dollars
      in thousands
                                          
                                          2007
                                          
                                          
                                          2006
                                          
                                          
                                          VarianceYear
      Ended
                                            December
      31,
                                          
                                          
                                          %
      of Net
                                            Revenues
                                          
                                          
                                          Year
      Ended
                                            December
      31,
                                          
                                          
                                          %
      of Net
                                            Revenues
                                          
                                          
                                          Increase
                                            (Decrease)
                                          
                                          
                                          Inc.(Decr.)
                                            %NET
      REVENUESInternet
      business center sales and monthly fees
                                          
                                          $
                                          103,218
                                          
                                          
                                          
                                          73.1
                                          %
                                          
                                          $
                                          36,698
                                          
                                          
                                          
                                          72.1
                                          %
                                          
                                          $
                                          66,520
                                          
                                          
                                          
                                          181.3
                                          %Travel
      commissions and services
                                          
                                          
                                          20,659
                                          
                                          
                                          
                                          14.6
                                          %
                                          
                                          
                                          7,364
                                          
                                          
                                          
                                          14.5
                                          %
                                          
                                          
                                          13,295
                                          
                                          
                                          
                                          180.5
                                          %Training
      programs and marketing materials
                                          
                                          
                                          15,402
                                          
                                          
                                          
                                          10.9
                                          %
                                          
                                          
                                          6,266
                                          
                                          
                                          
                                          12.3
                                          %
                                          
                                          
                                          9,136
                                          
                                          
                                          
                                          145.8
                                          %Other
                                          
                                          
                                          2,006
                                          
                                          
                                          
                                          1.4
                                          %
                                          
                                          
                                          569
                                          
                                          
                                          
                                          1.1
                                          %
                                          
                                          
                                          1,437
                                          
                                          
                                          
                                          252.5
                                          %Total
      net revenues
                                          
                                          
                                          141,285
                                          
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          50,897
                                          
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          90,388
                                          
                                          
                                          
                                          177.6
                                          %OPERATING
      EXPENSESMarketing
      commissions
                                          
                                          
                                          80,540
                                          
                                          
                                          
                                          57.0
                                          %
                                          
                                          
                                          30,846
                                          
                                          
                                          
                                          60.6
                                          %
                                          
                                          
                                          49,694
                                          
                                          
                                          
                                          161.1
                                          %Travel
      commissions
                                          
                                          
                                          13,427
                                          
                                          
                                          
                                          9.5
                                          %
                                          
                                          
                                          4,893
                                          
                                          
                                          
                                          9.6
                                          %
                                          
                                          
                                          8,534
                                          
                                          
                                          
                                          174.4
                                          %Depreciation
      and amortization
                                          
                                          
                                          1,152
                                          
                                          
                                          
                                          0.8
                                          %
                                          
                                          
                                          408
                                          
                                          
                                          
                                          0.8
                                          %
                                          
                                          
                                          744
                                          
                                          
                                          
                                          182.4
                                          %Training
      programs and marketing materials
                                          
                                          
                                          8,795
                                          
                                          
                                          
                                          6.2
                                          %
                                          
                                          
                                          4,455
                                          
                                          
                                          
                                          8.8
                                          %
                                          
                                          
                                          4,340
                                          
                                          
                                          
                                          97.4
                                          %General
      and administrative
                                          
                                          
                                          34,358
                                          
                                          
                                          
                                          24.4
                                          %
                                          
                                          
                                          16,348
                                          
                                          
                                          
                                          32.1
                                          %
                                          
                                          
                                          18,010
                                          
                                          
                                          
                                          110.2
                                          %Total
      operating expenses
                                          
                                          
                                          138,272
                                          
                                          
                                          
                                          97.9
                                          %
                                          
                                          
                                          56,950
                                          
                                          
                                          
                                          111.9
                                          %
                                          
                                          
                                          81,322
                                          
                                          
                                          
                                          142.8
                                          %INCOME
      (LOSS) FROM OPERATIONS
                                          
                                          
                                          3,013
                                          
                                          
                                          
                                          2.1
                                          %
                                          
                                          
                                          (6,053
                                          )
                                          
                                          
                                          (11.9
                                          )%
                                          
                                          
                                          9,066
                                          
                                          
                                          
                                          (149.8
                                          )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                                          
                                          
                                          447
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          170
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          277
                                          
                                          
                                          
                                          162.9
                                          %Interest
      expense
                                          
                                          
                                          (38
                                          )
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          (93
                                          )
                                          
                                          
                                          (0.1
                                          )%
                                          
                                          
                                          55
                                          
                                          
                                          
                                          (59.1
                                          )%Total
      other income (expense)
                                          
                                          
                                          409
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          77
                                          
                                          
                                          
                                          0.2
                                          %
                                          
                                          
                                          332
                                          
                                          
                                          
                                          431.2
                                          %INCOME
      (LOSS) BEFORE INCOME TAX PROVISION
                                          
                                          
                                          3,422
                                          
                                          
                                          
                                          2.4
                                          %
                                          
                                          
                                          (5,976
                                          )
                                          
                                          
                                          -11.7
                                          %
                                          
                                          
                                          9,398
                                          
                                          
                                          
                                          (157.3
                                          )%INCOME
      TAX PROVISION
                                          
                                          
                                          213
                                          
                                          
                                          
                                          0.1
                                          %
                                          
                                          
                                          -
                                          
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          213
                                          
                                          
                                          
                                          n/mNET
      INCOME (LOSS)
                                          
                                          $
                                          3,209
                                          
                                          
                                          
                                          2.3
                                          %
                                          
                                          $
                                          (5,976
                                          )
                                          
                                          
                                          (11.7
                                          )%
                                          
                                          $
                                          9,185
                                          
                                          
                                          
                                          (153.7
                                          )%
  33


The
following table sets forth information concerning (i) the number of RTAs that
were added to, and those that were deactivated from (by non-payment or
cancellation), our organization during the years ended December 31, 2008,
2007 and 2006, and (ii) the weighted average number of active RTAs during each
year:





Year
                      
                      Beginning BalanceActive RTAs
                      
                      
                      New RTAs
                      
                      
                      Deactivations
                      
                      
                      Ending BalanceActive RTAs
                      
                      
                      Weighted
                        Average
                        Active
      RTAs2008
                      
                      
                      131,802
                      
                      
                      
                      74,402
                      
                      
                      
                      113,821
                      
                      
                      
                      92,383
                      
                      
                      
                      122,9102007
                      
                      
                      59,736
                      
                      
                      
                      134,946
                      
                      
                      
                      62,880
                      
                      
                      
                      131,802
                      
                      
                      
                      103,2192006
                      
                      
                      22,000
                      
                      
                      
                      58,985
                      
                      
                      
                      21,249
                      
                      
                      
                      59,736
                      
                      
                      
                      38,297





The above
RTA figures represent the number of active RTAs paying $49.95 per month for
monthly IBC web-hosting fees.  The new RTAs represent the number of IBC
sites sold during the respective fiscal years.  The number of sales, and
the number of recurring monthly web-hosting fees paid, each directly impacts our
revenues and expenses.  As each new IBC is sold for $449.95, marketing
commissions are paid on that sale.  During the last two weeks of 2008, we
sold 577 IBC sites at a rate of $250.00 as part of a Christmas special
promotional program.  Likewise, each recurring monthly IBC web-hosting
fee paid results in marketing commissions paid to our Reps.  As the number
of active RTAs grows, the amount of our travel commission revenue grows as
well.  Correspondingly, our travel commission expense follows
suit.





An RTA’s
IBC can be deactivated for a number of reasons.  For example, the
payment method used to pay for monthly web-hosting fees may no longer be valid
or may have been changed and an RTA may fail to update this
information.  If the RTA fails to provide payment for future months’
web-hosting fees in advance of the service being provided, the IBC will be
deactivated automatically after an applicable grace period.  We also
have a cancellation policy that allows an RTA to voluntarily discontinue his or
her IBC; such IBC is deactivated at the time the request is
made.  RTAs’ IBCs may be reactivated by simply resuming payment of
web-hosting fees from that point forward.  We reserve the right to
deactivate any IBC which we believe may have fraudulent activity associated with
it or with its owner.





Deactivations
of RTAs’ IBCs in relation to the number of new IBCs during a specified period
are a key component in the calculation performed to determine the average
lifespan that an RTA remains with our Company.  If the proportion of
RTA deactivations were to grow as a percentage of active paying RTAs, the
average lifespan of an RTA would decrease and vise versa.  In the
event of such a decrease, we would accelerate the time frame over which we
recognize the income and offsetting expense, relating to the RTA initial sign up
fees.  This acceleration would have a positive impact on our bottom
line, as the amount of revenue deferred from an RTA’s sign-up fees outweighs the
offsetting deferred expense for commissions related to such sign-up. With no
change in the commission structure, we expect the trend of revenues exceeding
the related expenses to continue.





The
growth and decline 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, and 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.  Conversely, as the number of sites sold and maintained
declines, the amount of marketing and travel commissions correspondingly
decreases.  As these decreases occur, we must reduce infrastructure
costs that are volume driven such as wage and benefit costs.






34




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




·
            National
      Convention:  The YTB National Convention has been
      conducted annually in St. Louis, Missouri since 2003.  The
      registration fee of $100 to $200 provides participants with four days of
      training, motivation, and recognition for sales achievement. The August
      2008 National Convention included “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 consisted
      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.  In August
      2008, attendance at the convention rose by over 47% relative to 2007, with
      15,900 sales force individuals of our organization in
      attendance.




Convention
attendance follows by year:


Year
            
            Attendance2004
            
            7002005
            
            1,3002006
            
            3,2002007
            
            10,8002008
            
            15,900





·
            Regional Meetings –
      Throughout the year our founders, corporate staff, and field leaders plan
      and participate in various regional meetings around the nation for our
      sales force. These events, ranging from single-evening to two-day meetings
      and seminars, involve some 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,” during which
      our founders travel to 60 to 70 cities to conduct
  meetings.





Ÿ
            First Class Training –
      This online travel training video program is offered primarily for the
      benefit of RTAs to increase their knowledge of booking travel with
      YTB.  Once the RTA pays the $149 tuition, the course may be
      completed at his or her convenience.  A test must be
      successfully completed at the conclusion of the program, triggering the
      qualification for increased commission rates on travel booked through the
      YTB travel IBC.  The RTAs may review the videos as often as they
      wish.




·
            Funshine Travel Trade
      Shows – The “Funshine Travel Trade Show” is held annually during
      the fall on the east coast.  Additionally, in 2007, a “Funshine
      Travel Trade Show” was held in the spring on the west coast. Historically,
      the “Funshine Travel Trade Show” has been attended by 3000 to 5000 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 U.S. and
      world wide travel packages, among others.  Event planning starts a
      year in advance for these travel events which feature major vendors such
      as Carnival Cruises,  Pleasant Holidays, Spring Tours, Trafalgar
      Tours, and many more.  Over 5,000 RTAs attended the Funshine
      event held in Orlando, Florida in September
  2008.






35






·
              YTB E-Campus – In
      October 2007, we launched “YTB E-Campus,” a proprietary web-based training
      certification and testing program for our RTAs.  The program was
      designed by Dr. Marc Mancini, the creative force behind some of the
      best-known and most successful training programs in the travel
      business.  The YTB E-Campus instructional series is designed to
      be one of the most ambitious and comprehensive training programs ever
      offered by a host agency and will initially consist of 10 unique
      courses.  We have been introducing a new course every six to
      eight weeks. The first course, Overview of the Travel
      Industry, was launched in October 2007, and has been followed by
      “Lodging”, “Tours and Groups Unit”, “Cruising”, “Air Travel”, and “Rail,
      Car Rentals and the Rest”.  We intend to present courses on
      sales, service, and marketing, and three courses on destination geography
      will follow in the near future.  Each course is interactive,
      instructionally sound and entertaining.  TheAcademy.com, a San
      Antonio-based firm that specializes in travel-related training solutions,
      has designed the program’s website. TheAcademy.com has built and currently
      manages several of the most prominent certification programs in the travel
      industry.





Net
Revenues





Net
revenues totaled $162.5 million, $141.3 million, and $50.9 million for the years
ending December 31, 2008, 2007, and 2006, respectively.





·
            IBC
      sales were $49.2 million, $47.9 million, and $25.0 million for the years
      ending December 31, 2008, 2007, and 2006,
  respectively.





The
increase was $1.3 million, or 2.7%, in 2008 compared to 2007.  While
we have experienced a decrease in the actual number of IBCs sold for the 12
months ended December 31, 2008 of 74,402 compared to 134,946 in 2007, the
revenue recognized actually increased due to the recognition of previously
deferred new IBC sales from periods with higher volume of new IBC
sales.   The average number of IBCs for which we are able to
recognize revenue increased to 9,448 in 2008 compared to 8,666 in
2007.   In addition, the average amount of recognized revenue
from each IBC increased to $449.87 in 2008 compared to $442.35 in
2007.  We believe the decline in the number of new IBCs is attributed
to the current economic downturn present in the United States.  We
anticipate slower growth in the coming months compared to what we have
experienced in the past.  However, with new marketing initiatives and
enhanced/expanded services being added, we believe that we will see a
stabilization of our sales and retention of existing RTAs.





The
increase of $22.9 million, or 91.6%, was due to the significant growth of YTB
Marketingand an
accompanying increase in the number of active RTAs in 2007 compared to
2006.  We experienced a significant growth in the actual number of
IBCs sold for the 12 months ended December 31, 2007 of 134,946 compared to
58,985 in 2006. The average number of IBCs for which we were able to recognize
revenue increased to 8,666 in 2007 compared to 3,259 in
2006.   In addition, the average amount of recognized revenue
from each IBC increased to $442.35 in 2007 compared to $388.84 in
2006.  We believe that the significant growth of RTAs was attributable
to (i) the emerging market shift to the Internet for travel services which
presents the opportunity for advancement of products and services by referral
relationships, and (ii) the increase in home-based businesses.





·
            Monthly
      renewal fees were $73.2 million, $55.3 million, and $11.7 million for the
      years ending December 31, 2008, 2007, and 2006,
    respectively.





The
increase of $17.9 million, or 32.4%, in 2008 compared to 2007 is in direct
relation to the number of active paying RTAs.  The weighted average
number of paying RTAs per month increased to 122,910 in 2008 from 103,219 in
2007.  We anticipate a decline in the second quarter of 2009 due to
the general economic conditions followed by stabilization and ultimate growth
because of new marketing efforts, although slower growth compared to what we
have experienced in the past because of the weak economy
generally.  However, with new marketing initiatives and
enhanced/expanded services being added, we believe that we will see a
stabilization of our sales and retention.





The
increase of $43.6 million, or 372.6%, in 2007 compared to 2006 is in direct
relation to the number of active paying RTAs.  The weighted average
number of paying RTAs per month increased to 103,219 in the twelve months of
2007 as compared to 38,297 in the same period for 2006.




36




·
              Travel
      commissions and services revenue was $27.9 million, $20.7 million, and
      $7.4 million for 2008, 2007, and 2006,
  respectively.





The $7.2
million increase, or 35.1%, in 2008 compared to 2007 is attributable to the
growth in gross travel retail bookings driven by the number of customers
utilizing us as their travel provider. Also attributing to the growth in travel
commissions is the fact that we held more travel educational events/trade shows
in 2008 as compared to 2007, which in turn increases product awareness, making
our RTAs more effective in selling travel.  As the increase in travel
bookings occur, a preferred travel bonus, or override, is given by certain
vendors in addition to commission.  The entire anticipated bonus for
2008 has been recorded as travel commission revenue with a corresponding
receivable.





Travel
commissions and services for 2007 increased $13.3 million, or 180.5%, compared
to 2006.  The increase in travel commissions is attributable to the
growth in gross travel bookings driven by the increase in the number of
customers utilizing us as their travel provider in 2007, due to the significant
increase in the number of RTAs.





·
            Training
      programs and marketing material revenue was $9.6 million, $15.4 million,
      and $6.3 million for 2008, 2007, and 2006,
  respectively.





The
decrease of $5.8 million, or 37.5%, in 2008 compared to 2007 was primarily due
to a reduction in sales of magazine and sales aids, partially due to a reduction
in the number of participants in the magazine Autoship Program, linked to the
$6,000 Guarantee Program.  We expect this trend to continue into
2009.  Also contributing to the decrease was a reduction in the number
of paying attendees at training events, partially due to a revamping of the
Association training and the replacement of the CRTA program with the First
Class Training during 2008.  We expect this trend to change as we roll
out a new training program, which we believe will increase the number of paid
participants in these training programs.





Training
programs and marketing materials revenue for 2007 increased $9.1 million, or
145.8%, compared to 2006.  The increase was due to the significant
growth of sales revenues primarily from training programs, sales aids, and
miscellaneous promotional and marketing materials purchased by an increasing
number of Reps.  Revenue from the sale of the “Success from Home”
magazine, which began to be sold in 2006 but was sold in greater quantity in
2007, accounts for $3.4 million of the increase from 2006.  Additional
increases in 2007 stemmed from increases in training program revenue, sales aids
and miscellaneous marketing materials revenue in amounts of $3.5 million and
$1.6 million, respectively, compared to 2006.





·
            Other
      revenue was $2.7 million, $2.0 million, and $569,000 for 2008, 2007, and
      2006, respectively.





The
increase of $652,000, or 32.5%, for 2008 compared to 2007 is primarily due to
the number of paying attendees at the 2008 National Convention compared to the
2007 National Convention. Other income increased in 2007 $1.4 million, or
252.5%, compared to 2006, primarily due to the increase in convention
revenue.





Operating
Expenses




·
            Marketing
      commissions expense was $80.2 million, $80.5 million, and $30.8 million
      for 2008, 2007, and 2006,
respectively.





The
decrease of $368,000, or 0.5%, from 2008 to 2007 is due to a $3.4 million
decrease in commission expense related to new IBC sales.  Additionally
we experienced a decrease of $6.4 million in director’s pool expense from the
elimination of level 6 and level 7 director pay in the third quarter of
2008.  These decreases were offset by the $8.7 million increase for
2008 as compared to 2007 for commissions paid relating to monthly hosting
fees.  This increase is due to the growth in the average number of
active paying RTAs in 2008 of 122,910 compared to 103,219 in 2007 for which
commissions were paid.





Marketing
commissions increased $49.7 million, or 161.1%, in 2007 compared to
2006.  This increase was due to the significant increase in both the
average number of active paying RTAs and the number of new IBC sales for which
commissions were paid.




37




·
              Travel
      commissions expense was $20.0 million, $13.4 million, and $4.9 million for
      2008, 2007, and 2006,
respectively.





Travel
commissions and services for 2008 increased $6.6 million, or 48.7%, as compared
to 2007.  The increase in travel commissions is attributable to the
growth in gross travel bookings driven by the increase in the number of
customers utilizing us as their travel provider in 2008.





Travel
commissions and other costs for 2007 increased $8.5 million, or 174.4%, as
compared to 2006.  The increase was attributable to an increase in the
number of customers utilizing our Company as their travel provider in 2007 due
to the significant growth in the number of RTAs.





·
            Depreciation
      and amortization expense was $2.5 million, $1.1 million, and $408,000 for
      2008, 2007, and 2006, respectively.





The
increase of $1.4 million, or 119.7%, of 2008 compared to 2007 is primarily
attributable to the new additions related to our current headquarters building
and assets related to the growth of our infrastructure.





Depreciation
and amortization increased by $744,000, or 182.4%, in 2007 as compared to
2006.  This increase was due to the acquisition of $7.3 million of
depreciable assets in 2007.  The additions included the purchase of
the old corporate headquarters (CCV1), work on the new headquarters, and IT
equipment.





·
            Training
      programs and marketing material expenses were $11.3 million, $8.8 million,
      and $4.4 million in 2008, 2007, and 2006,
  respectively.





Training
programs and marketing material expenses increased $2.5 million, or 28.8%, in
2008 compared to 2007.  This increase is primarily related to an
obsolete inventory expense of $3.0 million related to magazines and sales aids
for the year ended December 31, 2008 compared to no obsolete inventory expense
for 2007.  This increase was offset by a decrease in expense related
to magazine sales in 2008 compared to 2007.





Training
programs and marketing material expenses increased $4.3 million, or 97.4%, in
2007 compared to 2006.  This increase was partially due to expenses
related to “Success from Home” magazine. Additionally, we experienced an
increase in expenses related to CRTA events, regional meetings, and the number
and size of open houses at our headquarters office called “Red Carpet
Days.”







·
            General
      and administrative expenses were $52.7 million, $34.4 million, and $16.4
      million for 2008, 2007, and 2006,
respectively.





General
and administrative expenses increased $18.3 million, or 53.3%, in 2008
compared to 2007.  As a percentage of total net revenues, these
expenses were 32.3% in 2008 and 24.4% in 2007. The overall increase in general
and administrative expense in 2008 is primarily attributable to the growth in
the costs associated with the ongoing implementation of new business strategies
and to a lesser extent the growth of our infrastructure. Specifically:





§
            Salaries
      and benefits increased $6.8 million primarily as a result of additional
      staffing requirements at the home office directly related to an increase
      in the average number of RTAs, an increase in general regulatory
      compliance as well as salary increases of existing
      staff.


§
            Legal
      fees increased $800,000 as a result of work done relating to the Canadian
      expansion, and increased work surrounding general compliance,
      both domestic and international. In addition, legal fees increased $1.0
      million resulting from our Company’s defense against the suit filed
      by the California Attorney General’s office described in more detail in
      Item 3.


§
            Sarbanes-Oxley
      compliance consultant fees for 2008 were $534,000, an increase of $509,000
      due to first time Sarbanes-Oxley testing and
      compliance.   Approximately $190,000 of this expense
      related to fiscal year 2007 testing performed in
  2008.


§
            Building
      overhead increased approximately $704,000 due to the increase in
      employees, and number of locations at which we have
    employees.


§
            Sales
      and use tax expense increased $343,000 due to registration in new
      states during 2008.


§
              Consulting
      fees increased $546,000 primarily due to warrants given for marketing
      services provided.§
              Stock
      option expense increased $365,000 to $407,000 in 2008. Restricted
      stock expense increased $739,000 in 2008. See Note 19 – “Share-Based
      Payments” for a
      discussion of 2008 grants.






























38




§
              Contract
      labor increased approximately $1.1 million, partially due to support costs
      related to the implementation of SAP® along with
      other IT projects.
 §
              Bad
      debt expense increased $1.8 million due to a $311,000 deposit write-off
      related to a terminated acquisition, $944,000 of reserves established
      against advances and notes receivable, and approximately $500,000 related
      to the reserve of a nonrefundable earnest money
  deposit.
 §
              Marketing
      event costs for top Sales Directors in our Company was $832,000 in 2008,
      an increase of $702,000 due to an increase in the numbers of winners that
      qualified for the Coach’s Birthday Bash, an annual performance-based
      contest for our top sales producers of travel and
    marketing.
 §
              National
      Convention net expenses increased $3.6 million due to costs associated
      with the increased attendance at the
convention.
 §
              Accounting
      fees increased approximately $381,000 due to an increase in expenses
      surrounding general compliance, both international and
      domestic.
 §
              We
      recorded legal settlement fees of $548,000 related to
      a contractual agreement with a
consultant.
 §
              As
      a result of the jet purchase in February 2008, we incurred $324,000 of
      expenses associated with the usage and maintenance of the jet in 2008,
      compared to jet usage charges of $69,000 in
  2007.
 §
                    We
      incurred $366,000 of impairment charges associated with writing down the
      jet to its net realizable value of $844,000.§
                    We
      recorded a loss of $408,000 on the sale of assets;  a loss of
      $416,000 on the sale of the Building One Property, a gain of $120,000 on
      the sale of land in Wood River, and a loss of $94,000 related to the
      disposal of machinery, hardware, and
      vehicles.




General
and administrative expenses increased $18.0 million, or 110.2%, in 2007 compared
to 2006.  As a percentage of total net revenues, these expenses were
24.4% in 2007 and 32.1% in 2006.  The overall increase in general and
administrative expense in 2007 is primarily attributable to the significant
growth in the number of active RTAs, resulting in increased costs associated
with the growth in our infrastructure to support the increased
volume. Specifically:





§
            Salaries
      and benefits increased $6.6 million primarily as a result of additional
      staffing requirements at the home office directly related to
      the number of active RTA sites maintained by the Company as well
      as salary increases of existing
  staff.


§
            Legal
      fees increased $1.3 million as a result of work done relating to the
      Canadian expansion, and an increase in expenses surrounding general
      compliance, both domestic and
international.


§
            Building
      overhead increased approximately $606,000 due to the increase in
      employees, and number of locations at which we have
    employees.


§
              Travel
      expenses increased $139,000 primarily due to the Canadian expansion and
      other projects.


§
            Sales
      and use tax expense increased $733,000 due to registration in new
      states in 2007.


§
            Contract
      labor increased approximately $1.2 million, partially due to support costs
      related to the implementation of SAP® along with
      other IT projects.


§
            Bad
      debt expense increased $285,000 due to the write-off and establishment of
      reserves against advances and notes
receivable.


§
            National
      Convention net expenses increased $876,000 due to costs associated with
      the increased attendance at the
convention.


§
            Accounting
      fees increased approximately $212,000 due to an increase in expenses
      surrounding general compliance, both international and
      domestic.


§
            Credit
      card service fees increased $2.2 million due to the increase
      in revenues from 2007 over
2006.


§
            Printing
      expense increased $1.9 million due to the increase in revenues and the
      significant growth in new RTAs resulting in the expanded need for
      brochures and marketing materials.


§
            Postage
      and freight expense increased $884,000 due to the increase in RTAs
      resulting in increased shipping of brochures and marketing
      materials.







39







BUSINESS
SEGMENTS




As
discussed in Item 1, we operate in the following two business segments:
Marketing and Travel. Our business segments operate primarily in the United
States, but also have operations in Canada and are structured for potential
additional international growth.




Prior to
the second quarter of 2007, we had reported in three operating segments,
Marketing, Travel and Technology. The Marketing segment was comprised of the YTB
Marketing subsidiary and the Travel segment was comprised of the YTB Travel
subsidiary and an applicable portion of the operations of the REZconnect
subsidiary, with the remaining portion of REZconnect reported in the Technology
segment. During the second quarter of 2007, we collapsed the Technology segment
into the Travel segment as the amounts related to Technology were immaterial.
Certain
reallocations have been made to the marketing and travel segments in prior years
to conform to the current year presentation.




The
following is a discussion of our results of operations within each
segment.




Marketing
Segment




Dollars
      in thousands
                  
                  Year ended
                  
                  
                  % change
                  
                  
                  % change2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008 vs 2007
                  
                  
                  2007 vs 2006NET
      REVENUESInternet
      business center sales and monthly fees
                  
                  $
                  122,361
                  
                  
                  $
                  103,218
                  
                  
                  $
                  36,698
                  
                  
                  
                  18.5
                  %
                  
                  
                  181.3
                  %Training
      programs and marketing materials
                  
                  
                  9,319
                  
                  
                  
                  14,964
                  
                  
                  
                  6,059
                  
                  
                  
                  (37.7
                  )%
                  
                  
                  147.0
                  %Other
                  
                  
                  1,955
                  
                  
                  
                  1,027
                  
                  
                  
                  133
                  
                  
                  
                  90.4
                  %
                  
                  
                  672.2
                  %Total
      net revenues
                  
                  
                  133,635
                  
                  
                  
                  119,209
                  
                  
                  
                  42,890
                  
                  
                  
                  12.1
                  %
                  
                  
                  177.9
                  %OPERATING
      EXPENSESMarketing
      commissions
                  
                  
                  80,172
                  
                  
                  
                  80,540
                  
                  
                  
                  30,846
                  
                  
                  
                  (0.5
                  )%
                  
                  
                  161.1
                  %Depreciation
      and amortization
                  
                  
                  1,386
                  
                  
                  
                  860
                  
                  
                  
                  315
                  
                  
                  
                  61.2
                  %
                  
                  
                  173.0
                  %Training
      programs and marketing materials
                  
                  
                  10,307
                  
                  
                  
                  7,970
                  
                  
                  
                  3,831
                  
                  
                  
                  29.3
                  %
                  
                  
                  108.0
                  %General
      and administrative
                  
                  
                  37,014
                  
                  
                  
                  28,709
                  
                  
                  
                  11,191
                  
                  
                  
                  28.9
                  %
                  
                  
                  156.5
                  %Total
      operating expenses
                  
                  
                  128,879
                  
                  
                  
                  118,079
                  
                  
                  
                  46,183
                  
                  
                  
                  9.1
                  %
                  
                  
                  155.7
                  %INCOME
      (LOSS) FROM OPERATIONS
                  
                  
                  4,756
                  
                  
                  
                  1,130
                  
                  
                  
                  (3,293
                  )
                  
                  
                  320.9
                  %
                  
                  
                  (134.3
                  )%




Net
Revenues





Net
revenues totaled $133.6 million, $119.2 million, and $42.9 million for the years
ending December 31, 2008, 2007, and 2006, respectively.





·
            IBC
      sales were $49.2 million, $47.9 million, and $25.0 million for the years
      ending December 31, 2008, 2007, and 2006,
  respectively.





The
increase was $1.3 million or 2.7% in 2008 compared to 2007.  While we
have experienced a decrease in the actual number of IBCs sold for the twelve
months ended December 31, 2008 of 74,402 compared to 134,946 in 2007, the
revenue recognized actually increased due to the recognition of previously
deferred new IBC sales from periods with higher volume of new IBC
sales.   The average number of IBCs for which we are able to
recognize revenue increased to 9,448 in 2008 compared to 8,666 in
2007.   In addition, the average amount of recognized revenue
from each IBC increased to $449.87 in 2008 compared to $442.35 in
2007.  We believe the decline in the number of new IBCs is largely
attributable to the current economic downturn present in the United
States.  We anticipate slower growth in the coming months compared to
what we have experienced in the past.  However, with new marketing
initiatives and enhanced/expanded services being added, we believe that we will
see a stabilization of our sales and retention of our existing sales
force.




40




·
              The
      increase of $22.9 million or 91.6% was due to the significant growth of
      YTB Marketingand an
      accompanying increase in the number of active RTAs in 2007 compared to
      2006.  We experienced a significant growth in the actual number
      of IBCs sold for the twelve months ended December 31, 2007 of 134,946
      compared to 58,985 in 2006. The average number of IBCs for which we are
      able to recognize revenue increased to 8,666 in 2007 compared to 3,259 in
      2006.   In addition, the average amount of recognized
      revenue from each IBC increased to $442.35 in 2007 compared to $388.84 in
      2006.  We believe that the significant growth of RTAs was
      attributable to (i) the emerging market shift to the Internet for travel
      services which presents the opportunity for advancement of products and
      services by referral relationships, and (ii) the increase in home-based
      businesses.





·
            Monthly
      renewal fees were $73.2 million, $55.3 million, and $11.7 million for the
      years ending December 31, 2008, 2007, and 2006,
    respectively.





The
increase of $17.9 million, or 32.4%, in 2008 compared to 2007 is in direct
relation to the number of active paying RTAs.  The weighted average
number of paying RTAs per month increased to 122,910 in 2008 from 103,219 in
2007.  We anticipate a decline in the second quarter of 2009 due to
general economic conditions followed by stabilization and ultimate growth
because of new marketing efforts, although slower growth compared to what we
have experienced in the past because of the weak economy
generally.  However, with new marketing initiatives and
enhanced/expanded services being added, we believe that we will see a
stabilization of our sales and retention.





The
increase of $43.6 million, or 372.6%, in 2007 compared to 2006 is in direct
relation to the number of active paying RTAs.  The weighted average
number of paying RTAs per month increased to 103,219 in the twelve months of
2007 as compared to 38,297 for the same period for 2006.





·
            Training
      programs and marketing materials revenue were $9.3 million, $15.0 million,
      and $6.1 million in the years ending December 31, 2008, 2007, and 2006
      respectively.





The
decrease of $5.6 million, or 37.7%, from 2008 to 2007 was primarily due to a
reduction in sales of magazine and sales aids and partially due to a reduction
in the number of participants in the magazine Autoship Program, linked to the
$6,000 Guarantee Program.  We expect this trend to continue into
2009.  Also contributing to the decrease was a reduction in the number
of paying attendees at training events, partially due to a revamping of both the
Association and CRTA programs during 2008.  We expect this trend to
change as we roll out a new training program, which we believe will increase the
number of paid participants in these training programs.





The
increase of $8.9 million, or 147.0%, from 2007 compared to 2006 was due to the
significant growth of sales revenues primarily from training programs, sales
aids, and miscellaneous promotional and marketing materials purchased by an
increasing number of Reps.  Revenue from the sale of the “Success from
Home” magazine, which began to be sold in 2006 but was sold in greater quantity
in 2007, accounts for $3.4 million of the increase from
2006.  Additional increases in 2007 stemmed from increases in training
program revenue, sales aids and miscellaneous marketing materials revenue in
amounts of $3.5 million and $1.6 million, respectively, compared to
2006.





·
            Other
      revenue was $2.0 million, $1.0 million, and $133,000 for the years ending
      December 31, 2008, 2007, and 2006,
respectively.





Other
revenue increased $928,000, or 90.4%, in 2008 compared to 2007.  The
increase is primarily due to an increase in the number of paid attendees at the
National Convention in 2008 as compared to the 2007 National
Convention.





Other
revenue increased $894,000, or 672.2%, in 2007 compared to 2006.  The
increase is primarily due to an increase in the number of paying attendees at
the National Convention in 2007 as compared to the 2006 National
Convention.




41





Operating
Expenses





·
            Marketing
      commission expense was $80.2 million, $80.5 million, and $30.8 million for
      2008, 2007, and 2006, respectively.





The
decrease of $368,000, or 0.5%, from 2008 to 2007 is due to $3.4 million decrease
in weekly commissions based on the decrease of new IBC sales and the decrease of
$5.6 million in director’s pool by the elimination of level 6 and level 7
director pay in the third quarter of 2008.  The decrease is offset by
the $8.7 million increase for 2008 as compared to 2007 for monthly
commissions.  This increase is due to the growth in the average number
of active paying RTAs in 2008 of 122,910 compared to 103,219 in 2007 for which
commissions were paid.





Marketing
commissions increased $49.7 million, or 161.1%, in 2007 compared to
2006.  This increase was due to the significant increase in both the
average number of active paying RTAs and the number of new IBC sales for which
commissions were paid.





·
            Training
      programs and marketing material expenses were $10.3 million, $8.0 million,
      and $3.8 million in 2008, 2007, and 2006, respectively.





Training
programs and marketing material expenses increased $2.3 million, or 29.3%, in
2008 compared to 2007.  This increase is primarily related to an
obsolete inventory expense of $3.0 million related to magazines and sales aids
for the year ended December 31, 2008 compared to no obsolete inventory expense
for 2007.  This increase was offset by a decrease in expense related
to magazine sales in 2008 compared to 2007.





Training
programs and marketing material expenses increased $4.2 million, or 108.0%, in
2007 compared to 2006.  This increase was partially due to expenses
related to “Success from Home” magazine. Additionally, we experienced an
increase in expenses related to CRTA events, regional meetings, and the number
and size of open houses at our headquarters office called “Red Carpet
Days.”





·
            Depreciation
      and amortization expense was $1.4 million, $860,000, and $315,000 for
      2008, 2007, and 2006, respectively.





The
increase of $526,000, or 61.2%, in 2008 compared to 2007 is primarily
attributable to the new additions related to our current headquarters building
and assets related to the growth of our infrastructure.





Depreciation
and amortization increased by $545,000, or 173.0%, in 2007 as compared to
2006.  This increase was due primarily to the additional IT equipment,
furniture and fixtures acquired due to the increase of employees.





·
            General
      and administrative expenses were $37.0 million, $28.7 million, and $11.2
      million for the years ending December 31, 2008, 2007, and 2006,
      respectively.





General
and administrative expenses increased $8.3 million, or 28.9%, in 2008 compared
to 2007.  As a percentage of total marketing net revenues, these
expenses were 27.7% in 2008 and 24.1% in 2007. The increase in general and
administrative expense in 2008 is primarily attributable to the growth in the
costs associated with the ongoing implementation of new business strategies and
to a lesser extent the growth of our infrastructure.  The increases in
2008 compared to 2007 relate primarily to:





§
            Sales
      and use tax expense increased $339,000 in 2008 due to becoming registered
      in new states in 2008.


§
            Bad
      debt expense increased $936,000 in 2008 compared to 2007 due to our
      recording of reserves related to advances and notes receivable that had
      been made by our Sales Directors.


§
            Marketing
      event costs for top Sales Directors in our Company was $832,000 in 2008,
      an increase of $702,000 due to an increase in the number of winners that
      qualified for the Coach’s Birthday Bash, an annual performance-based
      contest for our top sales producers of travel and
    marketing.





§
              Salaries
      and benefits increased $6.5 million primarily as a result of additional
      staffing requirements at the home office directly related to the increased
      sales of IBCs and continuing renewals of RTAs as well as salary increases
      of existing staff.




























42




§
              National
      Convention net expense increased $3.0 million due to costs
      associated with the increased attendance at
      the convention.
 §
              Office
      supplies increased $393,000 due to the increase in numbers of
      employees.
 §
              Postage
      decreased $926,000 due to a decrease in RTAs resulting in decreased
      shipping of brochures and marketing
materials.
 §
                Printing
      decreased $1.5 million due to a decrease in RTAs resulting in decreased
      shipping of brochures and marketing materials.§
                Allocation
      from parent increased $2.4 million due to the change in the
      allocation method and variances in the following allocable parent
      expenses: salaries and benefits, legal fees, contract labor, consulting
      fees and accounting
fees.










General
and administrative expenses increased $17.5 million, or 156.5%, in 2007 compared
to 2006.  As a percentage of total marketing net revenues, these
expenses were 23.7% in 2007 and 25.2% in 2006. The increase in general and
administrative expense in 2007 is primarily attributable to the growth in the
costs associated with the ongoing implementation of new business strategies and
to a lesser extent the growth of our infrastructure.  The increases in
2007 compared to 2006 relate primarily to:





§
            Sales
      and use tax expense increase of $733,000 due to becoming registered in
      more states.


§
            Bad
      debt expense increased by $305,000 in 2007 compared to 2006 due to our
      recording of reserves related to advances and notes receivable that had
      been made by our Sales
Directors.


§
            Credit
      card service fees increased $2.2 million due to the increase in sales
      volume in 2007 compared to 2006.


§
            Postage
      and freight expense increased $848,000 in 2007 over 2006 due to the
      increase in RTAs resulting in increased printing brochures and marketing
      materials.


§
            Printing
      expense increased $1.9 million due to the increase of sales volume of 2007
      over 2006 and the significant growth in new RTAs resulting in the need for
      brochures and marketing materials.














§
            Salaries
      and benefits increased $6.7 million primarily as a result of additional
      staffing requirements at the home office directly related to the increased
      sales of IBCs and continuing renewals of IBCs as well as salary increases
      of existing staff.


§
              Convention
      expense increased $876,000 due to increased attendance at the
      convention.§
              Allocation
      from parent increased $2.3 million due to the change in the allocation
      method and variances in the following allocable parent expenses: salaries
      and benefits, legal fees, contract labor, consulting fees and accounting
      fees.







43





Travel
Segment




Dollars
      in thousands
                  
                  Year ended
                  
                  
                  % change
                  
                  
                  % change2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008 vs 2007
                  
                  
                  2007 vs 2006NET
      REVENUESTravel
      commissions and services
                  
                  $
                  27,907
                  
                  
                  $
                  20,659
                  
                  
                  $
                  7,364
                  
                  
                  
                  35.1
                  %
                  
                  
                  180.5
                  %Training
      programs and marketing materials
                  
                  
                  302
                  
                  
                  
                  438
                  
                  
                  
                  207
                  
                  
                  
                  (31.1
                  )%
                  
                  
                  111.6
                  %Other
                  
                  
                  631
                  
                  
                  
                  979
                  
                  
                  
                  436
                  
                  
                  
                  (35.5
                  )%
                  
                  
                  124.5
                  %Total
      net revenues
                  
                  
                  28,840
                  
                  
                  
                  22,076
                  
                  
                  
                  8,007
                  
                  
                  
                  30.6
                  %
                  
                  
                  175.7
                  %OPERATING
      EXPENSESTravel
      commissions
                  
                  
                  19,972
                  
                  
                  
                  13,427
                  
                  
                  
                  4,893
                  
                  
                  
                  48.7
                  %
                  
                  
                  174.4
                  %Depreciation
      and amortization
                  
                  
                  247
                  
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  n/m
                  *
                  
                  
                  n/m
                  *Training
      programs and marketing materials
                  
                  
                  1,022
                  
                  
                  
                  825
                  
                  
                  
                  420
                  
                  
                  
                  23.9
                  %
                  
                  
                  96.4
                  %General
      and administrative
                  
                  
                  11,883
                  
                  
                  
                  4,313
                  
                  
                  
                  996
                  
                  
                  
                  175.5
                  %
                  
                  
                  333.0
                  %Total
      operating expenses
                  
                  
                  33,124
                  
                  
                  
                  18,580
                  
                  
                  
                  6,309
                  
                  
                  
                  78.3
                  %
                  
                  
                  194.5
                  %INCOME
      (LOSS) FROM OPERATIONS
                  
                  
                  (4,284
                  )
                  
                  
                  3,496
                  
                  
                  
                  1,698
                  
                  
                  
                  (222.5
                  )%
                  
                  
                  105.9
                  %






Net
Revenues




·
            Travel
      commissions were $27.9 million, $20.7 million, and $7.4 million for the
      years ending December 31, 2008, 2007, and 2006,
    respectively.





The $7.2
million increase, or 35.1%, in 2008 compared to 2007 is attributable to the
growth in gross travel retail bookings driven by the number of customers
utilizing us as their travel provider. Also attributing to the growth in travel
commissions is the fact that we held more travel educational events/trade shows
in 2008 as compared to 2007, which in turn increases product awareness, making
our RTAs more effective in selling travel.  As the increase in travel
bookings occur, a preferred travel bonus, or override, is given by certain
vendors in addition to commission.  The entire anticipated bonus for
2008 has been recorded as travel commission revenue with a corresponding
receivable.





Travel
commissions and services for 2007 increased $13.3 million, or 180.5%, compared
to 2006.  The increase in travel commissions is attributable to the
growth in gross travel bookings driven by the increase in the number of
customers utilizing us as their travel provider in 2007, due to the significant
increase in the number of RTAs.





·
            Training
      programs and marketing materials were $302,000, $438,000, and $207,000 for
      the years ending December 31, 2008, 2007, and 2006
      respectively.





The
decrease of $136,000, or 31.1%, in 2008 compared to the same period in 2007 is
attributable to a decrease in the number of paying attendees at our travel
training meetings in 2008, primarily relating to not-for-profit organizations
that purchased an IBC.  The decrease in the number of paying attendees
at these events is a direct result of a decrease in the number of new IBCs that
were sold to not-for-profit organizations when compared to 2007.





The
increase of $231,000, or 111.6%, in 2007 compared to the same period in 2006 is
attributable to an increase in the number of paying attendees at our travel
training meetings in 2007, primarily relating to not-for-profit organizations
that purchased a travel site.  This increase was driven by both an
increase in the number of not-for-profit organizations purchasing a travel store
and an increased marketing effort of the training meetings available to these
organizations.





·
            Other
      income was $631,000, $979,000, and $436,000 for the years ending December
      31, 2008, 2007, and 2006,
respectively.





The
decrease of $348,000, or 35.5%, in 2008 compared to 2007 is attributable to a
decrease in sales of products at travel training events.  The increase
of $543,000, or 124.5%, in 2007 compared to 2006 is attributable to the growth
in the number of RTAs resulting in an increase in sales of products at travel
training events.






44





Operating
Expenses







·
            Travel
      commissions and other costs were $20.0 million, $13.4 million, and $4.9
      million for the years ending December 31, 2008, 2007, and 2006,
      respectively.





The
increase of $6.6 million, or 48.7%, in 2008 as compared to 2007 is attributable
to the growth in gross travel bookings driven by the increase in the number of
customers utilizing us as their travel provider in 2008.





Travel
commissions and other costs for 2007 increased $8.5 million, or 174.4%, as
compared to 2006.  The increase was attributable to an increase in the
number of customers utilizing our Company as their travel provider in 2007 due
to the significant growth in the number of RTAs.





·
            Depreciation
      and amortization was $247,000, $15,000, and $0 for the years ending
      December 31, 2008, 2007, and 2006,
respectively.





The
increase of $232,000 in 2008 over 2007 is primarily attributable to the new
addition of computer software related to our expansion into Canada, and the
overall growth in our infrastructure to support our growth.





·
            Training
      programs and marketing material expenses were $1.0 million, $825,000, and
      $420,000 for the years ending December 31, 2008, 2007, and 2006,
      respectively.





The
increase of $197,000, or 23.9%, for 2008 compared to 2007 is primarily due to an
increase in costs incurred related to travel trade shows that we hosted along
with an increase in costs incurred related to individual reimbursements for
unauthorized activities committed by our Company’s RTAs.   There
were three events held in 2008 compared to two in
2007.    The trade shows held in 2008 were on a larger scale
than those held in 2007.





The
increase of $405,000, or 96.4%, for 2007 compared to 2006 is primarily due to an
increase in costs incurred related to travel trade shows that we
hosted.





·
            General
      and administrative expenses were $11.9 million, $4.3 million, and $996,000
      for the years ending December 31, 2008, 2007, and 2006,
      respectively.





The
increase from 2007 to 2008 of $7.6 million, or 175.5%, is
primarily due to the increase in the allocation from parent as a result of a
change in the allocation method and variances in the following allocable parent
expenses: salaries and benefits, legal fees, contract labor, consulting fees and
accounting fees.As a percentage of total travel net revenues, these
expenses were 41.2% in 2008 and 19.5% in 2007.





The
increase from 2006 to 2007 of $3.3 million, or 333.0%, is
primarily due to the increase in the allocation from parent as a result of a
change in the allocation method and variances in the following allocable parent
expenses: salaries and benefits, legal fees, contract labor, consulting fees and
accounting fees.As a percentage of total travel net revenues, these
expenses were 19.5% in 2007 and 12.0% in 2006.





45





Parent





Dollars
      in thousands
                  
                  Year
      ended
                  
                  
                  %
      change
                  
                  
                  %
      change2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008
      vs 2007
                  
                  
                  2007
      vs 2006NET
      REVENUESOther
                  
                  $
                  72
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  n/m
                  *
                  
                  
                  n/m
                  *Total
      net revenues
                  
                  
                  72
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  n/m
                  *
                  
                  
                  n/m
                  *OPERATING
      EXPENSESDepreciation
      and amortization
                  
                  
                  898
                  
                  
                  
                  277
                  
                  
                  
                  93
                  
                  
                  
                  224.2
                  %
                  
                  
                  197.8
                  %Training
      programs and marketing materials
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204
                  
                  
                  
                  n/m
                  *
                  
                  
                  (100.0
                  )%General
      and administrative
                  
                  
                  3,767
                  
                  
                  
                  1,336
                  
                  
                  
                  4,161
                  
                  
                  
                  182.0
                  %
                  
                  
                  (67.9
                  )%Total
      operating expenses
                  
                  
                  4,665
                  
                  
                  
                  1,613
                  
                  
                  
                  4,458
                  
                  
                  
                  189.2
                  %
                  
                  
                  (63.8
                  )%LOSS
      FROM OPERATIONS
                  
                  
                  (4,593
                  )
                  
                  
                  (1,613
                  )
                  
                  
                  (4,458
                  )
                  
                  
                  184.7
                  %
                  
                  
                  (63.8
                  )%





Net
Revenues




·
            Other
      income of $72,000 for year ending December 31, 2008 is a result of third
      party use of the company jet.




Operating
Expenses




·
            Depreciation
      and amortization was $898,000, $277,000 and $93,000 for the years ending
      December 31, 2008, 2007, and 2006,
respectively.





The
increase of $621,000, or 224.2%, in 2008 compared to 2007 is primarily
attributable to the renovations to our current headquarters, which have
increased its depreciable value, SAP® software that was implemented this year as
our Enterprise Resource Planning (“ERP”), and the
purchase of the company jet.





The
increase of $184,000, or 197.8%, in 2007 compared to 2006 is primarily
attributable to the renovations to our current headquarters, which have
increased their depreciable value.





·
            Training
      programs and marketing material expense for 2006 of $204,000 of which
      $203,000 was attributable to shares of stock granted for services
      performed, relating to the creation of an infomercial that YTB aired
      throughout the country in certain test markets.  No such expense
      was incurred in 2007 and 2008.





·
            General
      and administrative expenses were $3.8 million, $1.3 million, and $4.2
      million for the years ending December 31, 2008, 2007, and 2006,
      respectively.




General
and administrative expenses increased overall $2.4 million, or 182.0%, in 2008
compared to 2007.  As a percentage of total net revenues, these
expenses were 2.3% in 2008 and 0.9% in 2007.  Specifically, the
increase is due to variances in the following expenses:
 
 §
              Bad
      debt expense increased $845,000 due a $311,000 deposit write-off related
      to a terminated acquisition and approximately $500,000 related to the
      reserve of a nonrefundable earnest money
  deposit.
 §
              We
      recorded legal settlement fees of $548,000 related to a contractual
      agreement with a consultant.
 §
              We
      incurred $366,000 of impairment charges associated with writing down the
      jet to its net realizable value of
$844,000.
 §
              We
      recorded a net loss of $314,000 on the sale of assets; a loss of $416,000
      on the sale of the Building One and a gain of $102,000 on the sale of Wood
      River property.
 §
              We
      recorded an impairment of Sunrise Travel goodwill of
    $149,000.




46




§
              Parent
      allocation to marketing and travel segments increased $10.3 million due to
      the following variances in allocable
expenses:
 §
              Legal
      fees increased $800,000 as a result of work done relating to the Canadian
      expansion and increased work surrounding general compliance, both domestic
      and international.  In addition, legal fees increased $1.0
      million resulting from our Company’s defense against the suit filed by the
      California Attorney General’s office described in more detail in Item
      3.
 §
              Sarbanes-Oxley
      compliance consultant accounting fees for 2008 were $534,000, an increase
      of $509,000 due to first time Sarbanes-Oxley testing and
      compliance.   Approximately $190,000 of this expense
      related to fiscal year 2007 testing performed in
  2008.
 §
              Consulting
      fees increased $572,000 primarily due to warrants given for marketing
      services provided. Contract labor increased approximately $1.0 million,
      partially due to support costs related to the implementation of SAP along
      with other IT projects.
 §
              Accounting
      fees increased approximately $325,000 due to an increase in expenses
      surrounding general compliance, both international and
      domestic.
 §
              Stock
      option expense increased $365,000 to $407,000 in
      2008.  Restricted stock expense increased $739,000 in
      2008.  See Note 19 - “Share-Based Payments” for a discussion of
      2008 grants.
 §
              As
      a result of the jet purchase in February 2008, we incurred $324,000 of
      expenses associated with the usage and maintenance of the jet in 2008,
      compared to jet usage charges of $69,000 in
  2007.
 
 General
and administrative expenses decreased $2.8 million, or 67.9%, in 2007 compared
to 2006.  As a percentage of total net revenues, these expenses were
0.9% in 2007 and 8.2% in 2006.  While gross expenses increased from
2006 to 2007, the parent segment experienced a decrease in net general and
administrative expenses due to a change in the allocation method to
segments.  Gross expenses increased due to the significant growth in
the number of active RTAs, resulting in increased costs associated with the
growth in our infrastructure to support the increased volume.


47





Liquidity
and Capital Resources




As of
December 31, 2008, we had $1.2 million in cash and cash
equivalents.  We believe that our cash generating capability will be
adequate to meet the needs of our future operations.  However, we
cannot predict what the effect on our business might be from events that are
beyond our control, such as the global credit and liquidity crisis. We will
continually assess our cash flow needs. We have also suspended the ongoing
construction costs of our new corporate headquarters as our revenue growth has
not kept pace with prior trends. We have not pursued any credit facilities at
the current time from which we may draw for our liquidity
needs.  Currently, our expansion project is on hold given the current
economic climate in general and the state of the credit markets.




As shown
in the accompanying financial statements, our Company has incurred a loss from
operations for the year December 31, 2008 of $4.1 million.  In
addition, negative current economic conditions and other factors have led to a
fall off in the number of active RTAs in our Company.  The number of
active IBC sites has declined during the year ended December 31, 2008 by a net
of 39,419 sites to 92,383 active RTA IBCs from the 131,802 reported as of
December 31, 2007. In addition, we are defending against two cases
challenging the legality of our network marketing program.  The
litigation claims can be expensive and time consuming to bring and defend
against and could result in settlements or damages that could significantly
affect financial results.  Consequently, the independent auditor’s
report for the year ended December 31, 2008, includes an explanatory paragraph
to their audit opinion stating that our loss from operations, deficiency in
working capital, and substantial uncertainties raise substantial doubt about our
Company’s ability to continue as a going concern.





48





We have
taken several actions to ensure that our Company will continue as a going
concern.  We have instituted a cost reduction program that included a
reduction in labor and fringe costs, as well as reductions of discretionary
expenditures in the operating structure of the organization.  In
addition, our Company has instituted more efficient management techniques
through better utilization of technology.  Our Company is also
evaluating the sale of certain non-core assets and raising new capital for
future operations.  We believe these factors will contribute toward
achieving profitability.  However, there can be no assurance that our
Company will be successful in achieving its objectives.





The
accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.  The Company’s ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions
referred to above, on the timeline contemplated by our plan.  The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and reclassification of assets or the
amounts and classifications of liabilities that may result should we be unable
to continue as a going concern.  Additionally, although the
Company believes that it has meritorious defenses against the legal proceedings
discussed in Item 3, and intends to vigorously defend the cases, if we
are unsuccessful in our defense against the claims, the result would
likely have a material adverse effect on our liquidity, financial condition,
results of operations and the value of our common stock.





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





Dollars
      in thousands
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Net
      cash provided by (used in):Operating
      activities
                    
                    $
                    7,422
                    
                    
                    $
                    12,022
                    
                    
                    $
                    159Investing
      activities
                    
                    
                    (7,915
                    )
                    
                    
                    (9,417
                    )
                    
                    
                    (558
                    )Financing
      activities
                    
                    
                    (13
                    )
                    
                    
                    (874
                    )
                    
                    
                    169Effect
      of exchange rate changes on cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      increase (decrease) in cash
                    
                    $
                    (528
                    )
                    
                    $
                    1,731
                    
                    
                    $
                    (230
                    )


Our
previously issued consolidated statements of cash flows for the years ended
December 31, 2007 and 2006 were restated to correct an overstatement of cash
provided by operating activities and a corresponding overstatement of cash used
in financing activities.  Refer to Note 27 to the consolidated
financial statements for further information.  This restatement has
been reflected in the following discussion.
  Net cash
provided by operating activities in 2008 decreased by $4.6 million to $7.4
million from the $12.0 million provided in 2007.  Net cash provided by
operating activities in 2007 increased by $11.9 million to $12.0 million from
the $159,000 provided in 2006.





Net cash
used in investing activities was $7.9 million, $9.4 million and $558,000 in
2008, 2007 and 2006, respectively.  The $1.5 million decrease in 2008
from 2007 was primarily related to an increase in proceeds from the sale of
available for sale securities of $1.1 million and $701,000 in proceeds from the
sales of property and equipment.





The $8.9
million increase in cash used in investing activities in 2007 compared to 2006
resulted primarily from an increase of $6.0 million in expenditures for
purchases of property and equipment and a decrease of $2.6 million in net
proceeds obtained from the sale of available-for-sale securities and a $311,000
deposit in connection with a proposed acquisition of a business.  The
increase in property and equipment resulted primarily from $5.1 million in
renovations to our Headquarters Property and approximately $559,000 for the
implementation of the SAP® ERP software application.





Net cash
used in financing activities was $13,000 in 2008 compared to $874,000 in
2007.  The $874,000 in cash consumed in 2007 was primarily
attributable to $917,000 and $412,000, respectively, in proceeds received during
2007 from the exercise of common stock warrants and common stock options issue
by us which were offset by the repayment of the bank overdraft of $812,464
and short-term debt of $1.4 million.  The $13,000 in cash consumed in
2008 resulted from the repayment of short-term and long-term debt, respectively,
of $527,000 and $242,000, offset by the release of a $500,000 certificate of
deposit representing collateral for the outstanding indebtedness on the property
serving as our new corporate headquarters and $254,000 and $2,000, respectively,
in proceeds received during 2008 from the exercise of common stock warrants and
common stock options issued by us.  Net cash provided by financing
activities in 2006 resulted primarily from the bank overdraft of $812,000 offset
by $500,000 in restricted cash representing collateral for the outstanding note
on the property for the new corporate headquarters.






49





As of
December 31, 2007, we had $1.0 million in long-term investments which
represented auction rate securities (“ARS”) for which,
subsequent to the end of fiscal 2007, auctions had failed.  On
September 7, 2008, the investment bank holding our ARS announced that it had
agreed to purchase a certain amount of ARS held by certain of its customers. The
offer was made in connection with the settlement and proposed settlements
between the investment bank and the Commonwealth of Massachusetts and other
regulators. On October 1, 2008, we received an offer from the investment bank to
purchase 100% of our outstanding ARS at par value of $1.0 million which we
accepted. The settlement date for this transaction on which we received the
funds was October 7, 2008.





On July
26, 2006, we spent $2.5 million for the purchase of our Headquarters
Property.  In December 2006, we acquired 1.08 acres of land that
included a 20,000 square foot building contiguous to the current facility for
cash consideration of $508,693 as part of the future facility plan for our
corporate headquarters that we embarked upon back in July 2006. We financed the
purchase of the Headquarters Property by borrowing $2.5 million from Meridian
Bank, a local bank controlled by two of our directors.  This
transaction was approved by the independent members of our Board of
Directors.  The loan is evidenced by a note which was renewed on July
26, 2008, at a current principal sum of $1,995,989, which bears interest at a
floating rate equal to the prime rate, plus 1.00% for a period of 12 months (the
“Note”).
Principal and interest are payable monthly on a 20-year amortization schedule
for the next 12 months 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, 2009, the Note is payable upon demand per the terms of the
agreement. However, no demand has been made to date.  Initially, the
Note was collateralized by a mortgage on the Headquarters Property and a
$500,000 certificate of deposit.  Currently, the Note is still
collateralized by a mortgage on the Headquarters Property as well as a Security
Agreement dated July 26, 2008.  The certificate of deposit was
released after we had made $625,000 of improvements to the Headquarters
Property. Through the use of working capital funds, we completed $2.5 million of
renovations to 20,000 square feet of the building located on the Headquarters
Property which we utilize for our current operations. Upon the completion of
such renovations to the Headquarters Property, in lieu of requesting release of
the certificate of deposit, on January 7, 2008 we instead opted to apply the
proceeds thereof towards repayment of a portion of the principal amount of the
Note.  On October 10, 2008, Meridian Bank was closed by the Illinois
Department of Financial and Professional Regulation, Division of Banking.
Subsequently the FDIC was named receiver.  On February 13, 2009,
FirstCity Servicing Corporation as Servicer for FH Partners LLC, Owner,
purchased the Note previously held by Meridian Bank and subsequently held by the
FDIC as receiver.  The closure of Meridian Bank will not impact our
liquidity, as the terms of the Note will not change under the terms of the loan
contract because they are contractually agreed to in the promissory note with
the failed institution. In addition to the $2.5 million of renovations that
we have already carried out, in 2008, we have completed an additional $5.1
million in renovations to the Headquarters Property.  When working
capital funds are available or if external financing is acquired, we are
planning to complete the renovation project at an expected cost of an additional
$7.0 to $10.0 million.  Currently, our expansion project is on hold
given the current economic climate in general and the state of the credit
markets.





On August
23, 2007, we acquired Parcel No. 1 and Parcel No. 2 located at or about 2201 Old
Alton Edwardsville Road, East Alton, Illinois (as described above in Item
2).  We expended approximately $792,000 and $251,000 for the
respective parcels, which we paid in cash to the seller at the closing
therefore.





Furthermore,
in September 2007, we acquired approximately 20 acres of real property adjacent
to our Headquarters Property for the purpose of expanding our headquarters
office facility.  We paid an aggregate cash purchase price equal to
$1.6 million which was financed with general working capital.





In
connection with our acquisition of the Building One Property from Meridian Land
(as described above in Item 2), we expended a total of $1.9 million in cash, of
which $481,000 was paid by us as of the signing of the Building One Purchase
Contract and the remaining $1.4 million of which constituted obligations of
Meridian Land which we paid following the closing under the Building One
Purchase Contract on August 14, 2007.





In order
to improve our internal information technology capabilities, in August 2007 we
selected the SAP® ERP software application to aid in the automation of our
business processes. Implementation of a state-of-the-art ERP system provides us
with a proven business solution, and serves to enhance controls and support for
all functional business units within our organization. The implementation of
this system resulted in expenditures of $732,000 in 2007, and has resulted in
approximately an additional $559,000 of expenditures in 2008 leading up to the
launch of this system, which occurred in February 2008.






50





On
November 28, 2007, we signed a letter of intent and made a deposit of $311,000
in connection with a proposed acquisition of a business.  We had also
previously advanced the potential target company $45,000 which was reserved as
of December 31, 2007.  We conducted certain due diligence
investigations and performed analysis and evaluations following the letter of
intent.  Based on those developments and other due diligence factors,
we had no further intent to proceed with the proposed transaction described in
the letter of intent, and terminated the agreement in 2008.  As of
December 31, 2008, the total deposit and advance of $356,000 has been written
off.  Any and all differences between our Company and the target
company concerning the termination of the letter of intent have been
resolved.





We lease
the Building Two Property under the Building Two Lease, dated August 4, 2005, by
and between Meridian Land as lessor, and us, as lessee, which is to expire on
October 31, 2010.  In January 2008, we exercised our purchase option
under the Building Two Lease to acquire the Building Two Property. Subsequently,
we entered into a purchase contract for $2.5 million with Meridian
Land.  We paid $500,000 of the $2.5 million purchase price as a
deposit as of the execution of the purchase contract, and the remaining $2.0
million is due at the closing of the acquisition of the Building Two
Property, originally scheduled to occur prior to the end of June 2008, which has
been extended to the end of 2009.  To date, no further action
has been taken regarding the purchase of the property, andwe havecontinued monthly rental
payments according to the original commercial lease
agreement.





In
December 2008, we sold our former headquarters office building, certain office
equipment and related land for proceeds of $300,000 in cash paid at closing and
the delivery by the buyer of a $1.2 million promissory note, less closing costs
of approximately $65,000, consisting primarily of $60,000 in
commissions.  The promissory note is secured by a mortgage on the
property and bears interest at a rate of 8% per annum, payable in monthly
installments of interest only for 18 months, at which time the full balance of
principal is due.





On
November 24, 2008, we sold a parcel of approximately 9.96 acres located in the
City of Wood River, Illinois 62095 for a purchase price of $1.0 million which
was satisfied by the receipt of $500,000 cash as adjusted for approximately
$4,000 in closing costs and a $500,000 non-interest bearing promissory note
payable by the buyer within 120 days.





51







Future
Cash Flows and Expenditures





Contractual
Obligations





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





Dollars
      in thousands
                          
                          PAYMENTS DUE BY PERIODTotal
                          
                          
                          2009
                          
                          
                          2010-11
                          
                          
                          2012-13
                          
                          
                          2014 &BeyondContractual
      obligations (1):Short-term
      debt
                          
                          $
                          1,973
                          
                          
                          $
                          1,973
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Long-term
      debt
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Operating
      leases
                          
                          
                          579
                          
                          
                          
                          299
                          
                          
                          
                          210
                          
                          
                          
                          70
                          
                          
                          
                          -Purchase
      obligations formaterials
      and services (2)
                          
                          
                          3,381
                          
                          
                          
                          1,594
                          
                          
                          
                          1,510
                          
                          
                          
                          277
                          
                          
                          
                          -TOTAL
                          
                          $
                          5,933
                          
                          
                          $
                          3,866
                          
                          
                          $
                          1,720
                          
                          
                          $
                          347
                          
                          
                          $
                          -





(1)
            We
      have not included in the above table our FIN 48 unrecognized tax benefits,
      as we are unable to make a reliable estimate of the amount and period in
      which these liabilities might be paid. As of December 31, 2008, the
      Company’s total gross unrecognized tax benefits were$1.4 million.
      It is reasonably possible that the amount of uncertain tax positions could
      change within the next 12 months based on the results of tax examinations,
      expiration of statutes of limitations in various jurisdictions and
      additions due to ongoing transactions and activity. However, the Company
      is unable to estimate the impact of such
events.





(2)
            Amount
      represents outstanding commitments to purchase goods or services as of
      December 31, 2008. The purchase commitments principally include $949,000
      for future services over the next four years related to the Company's
      annual convention and $1.5 million in commitments related to various
      travel services and technologies.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.




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 3 in the accompanying notes to consolidated financial
statements. Critical accounting estimates for us include: the determination of
the estimated lifespan during which an RTA remains an RTA and average marketing
commissions paid per enrollment transaction, which impact revenue recognition
and related marketing commissions/bonuses; impairment of goodwill and other
intangibles; realization of deferred tax assets and the determination of
uncertain tax positions; determination of inventory reserves; impairment of
long-lived assets; and collectability of notes receivable.  Such
accounting estimates are discussed in the following paragraphs.





52





Revenue
Recognition




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




IBC
sales and monthly fees





We
generate revenue from the sale of IBCs, and from providing training and ongoing
services to the new business owners of IBCs, i.e. RTAs. We have determined that
our initial sale of each IBC was deemed to fall under the SEC’s Staff Accounting
Bulletin No. 104, “Revenue Recognition” (“SAB 104”) and
Emerging Issues Task Force 00-21, “Accounting for Revenue Arrangements with
Multiple Deliverables” (“EITF 00-21”). SAB 104
and EITF 00-21 require the initial sales price, including all up-front fees
received from new IBC sales, to be amortized over the expected useful life of
the RTA. The calculation of the expected useful life is based upon a review of
the sales for each month and the length of time each RTA continues with our
Company. We then apply a weighted average to the calculations. Likewise, the
average commission paid in connection with negotiations to sell the business is
amortized over the same period.   The average commissionable
amount to be amortized is determined based on total commissions paid related to
new IBC sales the previous six months divided by the number of new IBC sales
over that same period.  Any excess of expense to acquire the business
over the proceeds received is recognized immediately and not amortized. Monthly
web-hosting fees are recognized in the month the services are provided. We
review the underlying calculations of the expected useful life of the RTA on a
monthly basis.





Travel
commissions and services





Commissions
and incentives earned from travel sales are recognized as revenue on the date of
departure or use. Commissions earned where we act 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.





Training
programs and marketing materials





Sales
revenues from the sale of Rep and RTA sales aids and miscellaneous promotional
and marketing materials are recognized when the related merchandise is shipped
to the Rep or RTA. Sales revenues from training programs are recognized when the
Rep or RTA has completed the related training course.





Other
revenue





Sales
revenues from convention attendance are recognized during the period in which
the convention occurs.





Marketing compensation
plan




We offer
a compensation plan to our sales representatives under an arrangement that pays
the representatives direct sales commissions, override compensation (if
qualified) and other bonus incentives based on the amounts attributable to each
representative’s personal and team IBC sales, or enrolled referrals. The
“commission override” is comprised of a small portion of the monthly web-hosting
fee that RTAs pay to our Company which is paid to the person responsible for
selling the IBC site.  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 IBCs, 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 and Other
Intangibles





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets,” (“SFAS No. 142”), we
assess goodwill and other intangibles 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 goodwill 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.





53





Income
Taxes




SFAS No.
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.





In 2007,
we adopted the provisions of the Financial Accounting Standard Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” “FIN 48”, which
addresses whether tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under FIN 48, we recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained upon examination by the taxing
authorities based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 requires increased disclosures,
provides guidance on derecognition, classification, interest and penalties on
income taxes and the accounting in interim periods.





Inventory
Valuation





We write
down our inventory for estimated obsolescence or unmarketability in an amount
equal to the difference between the cost of the inventory and the estimated
market value based upon estimates of future demand and selling price. The demand
is estimated based upon the historical sales of the inventory items as well as
the projected success of promotional programs, new marketing program
introductions and new markets or distribution channels. We prepare an analysis
of demand on an item by item basis for all of its inventory items. If inventory
quantity exceeds projected demand, the excess inventory is written down.
However, if actual demand is less than projected by management or the estimate
of selling prices of inventory on hand decreases, additional inventory
write-downs may be required.





Impairment of Long-lived
Assets





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.





Collectibility of Notes
Receivable





We
reflect notes receivable at the outstanding principal balance as of the balance
sheet date, as adjusted by any write-offs or reserves established for
potentially uncollectible notes.  If material, interest is imputed on
notes receivable that are non-interest bearing or bear interest at an
inappropriate rate.  When appropriate, a reserve is recorded against
notes receivable to reduce the balance to the estimated net realizable value.
The notes receivable reserve reflects management’s best estimate of probable
losses inherent in the notes receivable balance. Management determines the
reserve at the end of each reporting period based on the length of time notes
are past due, known troubled notes, historical experience and other currently
available evidence.  Notes receivable are written off when the note is
deemed uncollectible.





We have
made certain other estimates that, while not involving the same degree of
judgment, are important to understanding our financial statements.  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 Annual Report
on Form 10-K.





54




New
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141R (“SFAS No. 141R”),
“Business Combinations,” which establishes principles and requirements for how
the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, goodwill acquired in the business combination or a
gain from a bargain purchase. SFAS No. 141R is effective for business
combinations with an acquisition date on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. We adopted SFAS
No. 141R and expect such adoption to have an impact on the accounting for
any future business acquisitions occurring on or after the effective
date.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”).
SFAS No. 160 requires the recognition of a noncontrolling interest, or minority
interest, as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS No. 160 also includes expanded disclosure requirements regarding
the interests of the parent and its noncontrolling interest. SFAS No. 160 is
effective for our fiscal year ending December 31, 2009.  We have
determined that this statement will have no material impact on our future
financial statements.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), to
partially defer the effectiveness of SFAS No. 157, “Fair Value
Measurements”  (“SFAS No.
157”). FSP 157-2 defers the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. The Company does not expect the
adoption to have a material effect on our financial statements.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), which
requires expanded disclosures about derivative instruments and hedging
activities. The implementation of this standard is not expected to have a
material impact on our consolidated financial position and results of
operations.  SFAS No. 161 is effective for our fiscal year ending
December 31, 2009.





In April
2008, the FASB finalized FSP FAS No. 142-3,”Determination of the Useful
Life of Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142. The intent of FSP 142-3 is to improve the
consistency between the useful life of a recognized asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141R, and other U.S. generally accepted
accounting principles. In addition, FSP 142-3 requires additional disclosures
concerning recognized intangible assets. These additional disclosures would
enable users of financial statements to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008, and interim periods within those
years. Earlier adoption is prohibited. Therefore, we will adopt FSP 142-3 on
January 1, 2009. We do not expect the adoption to have a material effect on our
financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS
No. 162 identifies the sources of accounting principles and provides a
consistent framework, or hierarchy, for selecting the accounting principles to
be used in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles for nongovernmental entities. The
hierarchy of accounting principles within SFAS No. 162 is consistent with that
previously defined in the AICPA Statement on Auditing Standards No. 69, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles” (“SAS No.
69”). SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” We have previously utilized the guidance within SAS No. 69,
and, therefore, we do not expect the adoption of SFAS No. 162 to have a material
effect on our financial statements.





55





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active” (“FSP 157-3”), to
clarify the application of SFAS No. 157, which we partially adopted as of
January 1, 2008, in cases where a market is not active. We have considered the
guidance provided by FSP 157-3 and determined that there was no impact on
estimated fair values as of December 31, 2008.  We did not experience
any significant impact from changes in interest rates for the years ended
December 31, 2008, 2007 or 2006.





We do not
believe that there are any other new accounting pronouncements that we are
required to adopt that are likely to have at least some effect on our future
financial statements.





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





Our
primary market risks include fluctuations in interest rates and exchange rate
variability.





As of
December 31, 2008, we have a $2.0 million note bearing interest at the
prime rate plus 1.0 percent. Interest expense from this note is subject to
market risk in the form of fluctuations in interest rates. Assuming the current
levels of borrowings at variable rates and a two-percentage-point increase in
the average interest rate on these borrowings, it is estimated that our interest
expense would have increased by approximately $32,000. We do not perform any
interest rate hedging activities related to this note.





Additionally,
we have exposure to non-U.S. currency fluctuations for our operations in Canada.
As only approximately 2.5 percent of our revenue is denominated in non-U.S.
currencies, we estimate that a change in the relative strength of the dollar to
non-U.S. currencies would not have a material impact on our results of
operations. We do not conduct any hedging activities related to non-U.S.
currency.




Item
8.  Financial
Statements and Supplementary Data.





Our
consolidated financial statements prepared in accordance with Regulation S-X are
included in this Annual Report on Form 10-K after Item 15 and are incorporated
by reference into this Item 8.





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





None.





Item 9A. Controls and
Procedures.





Evaluation
of Disclosure Controls and Procedures.





We have
established and maintain disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that we file or submit
under 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-K for the fiscal year ended
December 31, 2008, 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 the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that certain of our disclosure controls and
procedures were not effective because of the material weaknesses described below
in “Management’s Report on Internal Control Over Financial Reporting.” The
Company’s internal audit group, under the direction of the Audit Committee,
performed additional procedures to address the material
weaknesses.  The results of this investigation were provided to the
Company and considered in the Company’s closing process.  Accordingly,
notwithstanding the material weaknessesin our internal control over
financial reporting as of December 31, 2008 as described below, we believe that
the consolidated financial statements contained in this report accurately
present our financial condition, results of operations, and cash flows for the
fiscal years covered thereby in all material respects.





56





Management’s
Report on Internal Control Over Financial Reporting.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.Internal control over financial reporting is defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act as a process designed by, or under the
supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:





·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of our
      Company;





·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of our Company
      are being made only in accordance with authorizations of management and
      directors of our Company; and





·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our Company’s assets that
      could have a material effect on our financial
  statements.





Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. However, these inherent limitations are
known features of the financial reporting process. It is possible to design into
the process safeguards to reduce, though not eliminate, the risk that
misstatements are not prevented or detected on a timely basis.





Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal
Control-Integrated Framework. Based on this assessment, our management concluded
that, as of December 31, 2008, our internal control over financial reporting was
not effective to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and presentation of financial statements
for external purposes in accordance with generally accepted accounting
principles.





An
internal control material weakness is a significant deficiency or combination of
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be presented
or detected.  In connection with the assessment described above,
management identified the following material weaknesses in our internal control
over financial reporting as of December 31, 2008:





Entity-Level
Controls





As of
December 31, 2008, management had sufficiently documented the Company’s control
environment using the COSO internal control framework but concluded that such
control activities were not operating effectively as of December 31,
2008.  Management concluded that it did not maintain a control
environment that fully emphasized the establishment of, adherence to, or
adequate communication regarding appropriate internal controls for all aspects
of its operations.  Specifically, the
Company’s tone at the top was not sufficient to assure the directives of the
Company’s Board of Directors were followed. Management did not obtain approval
of the Board prior to entering into certain contracts and agreements as required
by the Company’s control structure.  In addition, controls were not
sufficient to prevent management override of controls over approval of
disbursements.




Our
independent registered public accounting firm, UHY LLP, has audited our internal
control over financial reporting. UHY LLP’s report is included on page
F2 to this Annual Report on Form 10-K.
  /s/
      John D. Clagg
                              
                              /s/
      J. Scott TomerJohn
      D. Clagg
                              
                              J.
      Scott TomerChief
      Financial Officer
                              
                              Chief
      Executive OfficerMarch
      16, 2009
                              
                              March
      16,
2009


Remediation
Plan.





During
2008, an internal audit function was established and staffed.  That
function now reports directly to the Chairman of the Audit Committee of the
Board of Directors.
  In
addition, in fiscal 2009, the Board implemented restrictions on management's
authority to enter into certain transactions.  Specifically,
management must discuss with a board liaison (i) any proposed transaction
outside of the ordinary course of business; and (ii) any transaction that
exceeds $100,000 in aggregate annual expenditures, or $50,000 for related party
transactions.





57





Changes in
Internal Control Over Financial Reporting.





Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of any
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal
period covered by this Annual Report on Form 10-K, and, as a result of such
evaluation, has concluded that, except as noted below, there has not been any
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





During
2008, we implemented a new consolidation and financial reporting software
package, SAP®, to enhance our worldwide consolidation function. This software
implementation is part of an ongoing effort to improve the effectiveness of our
financial reporting process.  In connection with this implementation,
during the fourth fiscal quarter of 2008, we have continued to modify the
design, operation and documentation of our internal control processes impacted
by the new software.









Item
9B.  Other
Information.





None.





58





PART III




Item 10. Directors,
Executive Officers and Corporate Governance.




The
information required by this Item is set forth in the following sections of our
Definitive Proxy Statement for our 2009 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”), each of which is incorporated by
reference herein.





There
have been no material changes to the procedures by which stockholders may
recommend director nominees to our Board of Directors since the filing of our
Definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders.





Item 11. Executive
Compensation.




The
information required by this Item is set forth in the following section of our
Definitive Proxy Statement for our 2009 Annual Meeting of Stockholders:
“Executive Compensation” (including “Compensation Committee Report”), “Director
Compensation” and “Compensation Committee Interlocks and Insider Participation,”
each of which is incorporated by reference herein.





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




The
information required by this Item is set forth in the following sections of our
Definitive Proxy Statement for our 2009 Annual Meeting of Stockholders:
“Security Ownership of Officers, Directors and 5% Owners” and “Equity
Compensation Plan Information,” each of which is incorporated by reference
herein.





Item 13. Certain
Relationships and Related Transactions, and Director
Independence.




The
information required by this Item is set forth in the following sections of our
Definitive Proxy Statement for our 2009 Annual Meeting of Stockholders:
“Proposal 1- Election of Directors,” “Corporate Governance” and “Certain
Relationships and Related Transactions,” each of which is incorporated by
reference herein.





Item 14. Principal
AccountantFees and
Services.





The
information required by this Item is set forth in the following section of our
Definitive Proxy Statement for our 2009 Annual Meeting of Stockholders:
“Proposal 2- Ratification of the Company’s Selection of its Auditors,” which is
incorporated by reference herein.





59





PART IV




Item 15. Exhibits
and Financial Statement Schedules.





(a)
              The
      following documents are filed as part of this
  report:





1.
Financial Statements


The
consolidated financial statements and supplemental schedule of YTB
International, Inc., together with the reports thereon of the independent
registered public accounting firm, are included following the signatures to this
Annual Report on Form 10-K. See Index to Financial Statements, Financial
Statement Schedules included herein.





2. Financial
Statement Schedules


Schedule
II — Valuation Allowances and Qualifying Accounts follows the notes to the
consolidated financial statements, which are included following the signatures
to this Annual Report on Form 10-K. See Index to Financial Statements,
Financial Statement Schedules included herein.





3.
Exhibits


The
exhibits required to be filed as part of this Annual Report on Form 10-K are
listed in the attached Index to Exhibits.





(b)
              The
      exhibits filed with this Annual Report on Form 10-K are listed in the
      attached Index to Exhibits.





(c)
              None.




60





INDEX TO
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 with the SEC on June 20,
      2005.





3.1
            Amended
      and Restated Certificate Incorporation of the
  Company.





3.2
            Amended
      and Restated By-Laws of the Company, incorporated by reference to YTB
      International, Inc.’s Current Report on Form 8-K, Exhibit 3.1, filed with
      the SEC on September 28, 2007.





10.1
            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 the Company (as successor to REZconnect Technologies Inc.),
      incorporated by reference to YTB International, Inc.’s Current Report on
      Form 8-K, as amended, Exhibit 4.1, filed with the SEC on June 20,
      2005.





10.2
            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 with the SEC on
      November 24, 2006.





10.3
            Commercial
      Lease Agreement, effective as of November 1, 2005, by and between Meridian
      Land Company, Inc. and the Company with respect to that certain real
      property located at Two Country Club View, 2nd
      Floor, Edwardsville, Illinois 62025 incorporated by reference to the
      Company’s Annual Report on Form 10-KSB/A (Amendment No. 1) for the fiscal
      year ended December 31, 2005, Exhibit 10.14, filed with the SEC on March
      13, 2007.





10.4
            Commercial
      Lease Agreement, dated August 10, 2007, by and between Meridian Land
      Company, Inc. and the Company, covering the approximately 5,500 square
      feet premises located at #112 Magnolia Drive (Lot #9 Magnolia Commons),
      Glen Carbon, Illinois 62034, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.1, filed with the SEC on August 22,
      2008.





*10.5
            Form
      of Employment Agreement, dated as of January 1, 2008, by and between the
      Company and J. Lloyd Tomer, incorporated by reference to the Company’s
      Annual report on Form 10-KSB, Exhibit 10.5, filed with the SEC on March
      31, 2008.





*10.6
            Form
      of Employment Agreement, dated as of January 1, 2008, by and between the
      Company and J. Scott Tomer, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.1, filed with the SEC on January
      30, 2008.





*10.7
            Form
      of Employment Agreement, dated as of January 1, 2008, by and between the
      Company and J. Kim Sorensen, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.3, filed with the SEC on January
      30, 2008.





*10.8
            Form
      of Employment Agreement, dated as of January 1, 2008, by and between the
      Company and John D. Clagg, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.4, filed with the SEC on January
      30, 2008.





*10.9
            Form
      of Employment Agreement, dated as of January 1, 2008, by and between the
      Company and Andrew Cauthen, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.1, filed with the SEC on January
      10, 2008.





61





*10.10
            Amendment
      to Employment Agreement, dated as of November 22, 2006, by and between the
      Company and Derek Brent incorporated by reference to the Company’s Annual
      Report on Form 10-KSB, Exhibit 10.11, filed with the SEC on April 2,
      2007.





*10.11
            Amendment
      to Employment Agreement, dated as of November 22, 2006, by and between the
      Company and Derek Brent incorporated by reference to the Company’s Annual
      report on Form 10-KSB, Exhibit 10.12, filed with the SEC on April 2,
      2007.





*10.12
            YTB
      International, Inc. Amended Restated 2004 Stock Option and Restricted
      Stock Plan, incorporated by reference to the Company’s Annual Report on
      Form 10-KSB, Exhibit 10.12, filed with the SEC on March 31,
      2008.





*10.13
            YTB
      International, Inc. 2007 Sales Director Bonus
  Plan.





*10.14
            Membership
      Interests Purchase Agreement, incorporated by reference to the Company’s
      Quarterly Report on Form 10-Q, Exhibit 10.1, filed with the SEC on May 15,
      2008.





*10.15
            Employment
      Agreement, dated as of January 1, 2008, by and between the Company and
      Michael Y. Brent, incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q, Exhibit 10.7, filed with the SEC on May 15,
      2008.





*10.16
            2008
      Employee Stock Purchase Plan of YTB International, Inc., incorporated by
      reference to the Company’s Registration Statement on Form S-8, Exhibit
      4.1, filed with the SEC on May 23,
2008.





10.17
            Contract
      to Purchase Commercial Real Estate by and between YTB International, Inc.
      and Prestige Management Services L.L.C., dated November 6, 2008,
      incorporated by reference to the Company’s Current Report on Form 8-K,
      Exhibit 10.1, filed with the SEC on November 12,
  2008.





10.18
            Offer
      to Purchase relating to aircraft between Expectra Aviation, Inc. and YTB
      Air, Inc., incorporated by reference to the Company’s Quarterly Report on
      Form 10-Q, Exhibit 10.2, filed with the SEC on November 14,
      2008.





10.19
            Offer
      to Purchase relating to aircraft between Petebridge, LLC and YTB Air,
      Inc., incorporated by reference to the Company’s Current Report on form
      8-K, Exhibit 10.1, filed with the SEC on November 26,
  2008.





10.20
            Purchase
      and Sale Agreement between YTB International, Inc. and WR Landing, LLC,
      dated as of November 24, 2008, incorporated by reference to the Company’s
      Current Report on Form 8-K, Exhibit 10.2, filed with the SEC on November
      26, 2008.





10.21
            Aircraft
      Purchase Agreement between Expectra Aviation, Inc. and YTB Air, Inc.,
      dated December 4, 2008, incorporated by reference to the Company’s Current
      Report on Form 8-K, Exhibit 10.1, filed with the SEC on December 10,
      2008.





*10.22
            YTB
      International, Inc. TSO Stock Purchase Plan, incorporated by reference to
      the Company’s Registration Statement on Form S-8, Exhibit 4.1, filed with
      the SEC on February 23, 2009.





14
            YTB
      International, Inc. Code of Business Ethics Summary, incorporated by
      reference to the Company’s Current Report on Form 8-K, Exhibit 14.1, filed
      with the SEC on April 18, 2008.





21
            Subsidiaries
      of YTB International, Inc.





23
            Independent
      Auditor’s Consent.





62





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.





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 Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 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 Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 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, or incorporated by reference, to this Annual Report
      on Form 10-K.





#
            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.





63





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





YTB
      International, Inc.(Registrant)March
      16, 2009
              
              /s/  
      J. Scott TomerJ.
      Scott TomerChief
      Executive Officer and DirectorMarch
      16, 2009
              
              /s/  
      John D. ClaggJohn
      D. ClaggChief
      Financial Officer





Pursuant to the requirements of
the Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.





March
      16, 2009
              
              /s/  
      J. Scott TomerJ.
      Scott Tomer, Director and Chief Executive Officer(principal
      executive officer)March
      16, 2009
              
              /s/  
      J. Lloyd TomerJ.
      Lloyd Tomer, Chairman of the Board of DirectorsMarch
      16, 2009
              
              /s/  
      J. Kim SorensenJ.
      Kim Sorensen, Director and Vice ChairmanMarch
      16, 2009
              
              /s/  
      Harold KestenbaumHarold
      Kestenbaum, DirectorMarch
      16, 2009
              
              /s/  
      Clay WinfieldClay
      Winfield, DirectorMarch
      16, 2009
              
              /s/  
      Lou BrockLou
      Brock, DirectorMarch
      16, 2009
              
              /s/  
      Andrew WilderAndrew
      Wilder, DirectorMarch
      16, 2009
              
              /s/  
      Timothy KaiserTimothy
      Kaiser, DirectorMarch
      16, 2009
              
              /s/  
      Paul HemingsPaul
      Hemings, DirectorMarch
      16, 2009
              
              /s/  
      John D. ClaggJohn
      D. Clagg, Chief Financial Officer and Treasurer(principal
      financial and accounting officer)March
      16, 2009
              
              /s/  
      Andrew F. CauthenAndrew
      F. Cauthen, Secretary, President and ChiefOperating
      Officer




64





INDEX
TO


YTB
INTERNATIONAL, INC.


FINANCIAL
STATEMENTS,


FINANCIAL
STATEMENT SCHEDULES





(1)
      Financial StatementsReport
      of Independent Registered Public Accounting Firm, Financial
      Statements
                
                F1Report
      of Independent Registered Public Accounting Firm, Internal Control Over
      Financial Reporting
                
                F2-F3Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                
                F4Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007 and
      2006
                
                F5Consolidated
      Statements of Changes in Stockholders' Equity (Deficit) for the Years
      Ended December 31, 2008, 2007 and 2006
                
                F6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
                
                F7-F8Notes
      to Consolidated Financial Statements
                
                F9-F49(2)
      Financial Statement SchedulesSchedule
      II - Consolidated Valuation and Qualifying Accounts
                
                F50




65




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


YTB
International, Inc.:




We have
audited the accompanying consolidated balance sheets of YTB International, Inc.
(the “Company”)
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2008.  YTB
International, Inc.’s management is responsible for these consolidated financial
statements.  Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes 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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of YTB
International, Inc. as of December 31, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.


The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As more fully described
 in Note 2 to the consolidated financial statements, the Company suffered a
loss from operations, has a deficiency in its working capital, and is impacted
by substantial uncertainties, which raise substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters also are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.


As
discussed in Note 27, the 2007 and 2006 consolidated statements of cash flows
have been restated.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), YTB International, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 16, 2009 expressed an adverse
opinion.





/s/ UHY
LLP




St.
Louis, Missouri


March 16,
2009





F1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


YTB
International, Inc.:





We have
audited YTB International, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  YTB International, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting.  Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our
audit.





We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects.  Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audit also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





A
material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely
basis.  The following material weaknesses have been identified and
included in management’s assessment. The
Company’s tone at the top was not sufficient to assure the directives of the
Company’s Board of Directors were followed. Management did not obtain approval
of the Board prior to entering into certain contracts and agreements as required
by the Company’s control structure.  In addition, controls were not
sufficient to prevent management override of controls over approval of
disbursements. These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 consolidated financial
statements, and this report does not affect our report dated March 16, 2009, on
those consolidated financial statements.





In our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, YTB International, Inc.
has not maintained effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).





F2





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows of YTB International, Inc., and our report dated March 16, 2009 expressed
an unqualified opinion on those consolidated financial statements including
explanatory paragraphs relating to going concern and to the restatement of the
2007 and 2006 consolidated statements of cash flows as discussed in Notes 2 and
27, respectively, to the consolidated financial statements.





/s/ UHY
LLP




St.
Louis, Missouri


March 16,
2009





F3





On
July 31, 2007 (the “Reclassification
Date”), the Company filed an Amended and Restated Certificate of
Incorporation which authorized the issuance of two classes of common stock -
Class A Common Stock and Class B Common Stock - and increased the Company’s
total authorized capital. Stockholders of record on the Reclassification Date
received two shares of Class B Common Stock and one share of Class A Common
Stock in exchange for each share of existing common stock held as of the
Reclassification Date. All shares and per share amounts in the consolidated
financial statements reflect this reclassification.





YTB
INTERNATIONAL, INC.


Consolidated
Balance Sheets


December
31, 2008 and 2007




Dollars in thousands, except share and per share data
                            
                            December 31,
                              2008
                            
                            
                            December31,
                              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            1,203
                            
                            
                            $
                            1,731Restricted
      cash
                            
                            
                            1,667
                            
                            
                            
                            2,268Short-term
      investments
                            
                            
                            251
                            
                            
                            
                            -Available-for-sale
      securities
                            
                            
                            -
                            
                            
                            
                            27Accounts
      receivable (less allowance for doubtful accounts of $7 in 2008 and $6
      in 2007)
                            
                            
                            2,680
                            
                            
                            
                            2,662Notes
      receivable (less allowance for uncollectible notes of $562 in 2008
      and $45 in 2007)
                            
                            
                            458
                            
                            
                            
                            2,042Inventory
                            
                            
                            1,335
                            
                            
                            
                            4,903Prepaid
      marketing commissions and advances (less allowance for uncollectible
      advances of $162 in 2008 and $73 in 2007)
                            
                            
                            8,991
                            
                            
                            
                            25,081Assets
      held for sale
                            
                            
                            844
                            
                            
                            
                            -Other
      prepaid expenses and current assets, net
                            
                            
                            350
                            
                            
                            
                            2,056Total
      current assets
                            
                            
                            17,779
                            
                            
                            
                            40,770Long-term
      investments
                            
                            
                            -
                            
                            
                            
                            1,000Property
      and equipment, net
                            
                            
                            18,728
                            
                            
                            
                            15,433Intangible
      assets, net
                            
                            
                            2,322
                            
                            
                            
                            2,395Goodwill
                            
                            
                            2,979
                            
                            
                            
                            2,979Other
      assets
                            
                            
                            1,278
                            
                            
                            
                            317TOTAL
      ASSETS
                            
                            $
                            43,086
                            
                            
                            $
                            62,894LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                            
                            $
                            2,446
                            
                            
                            $
                            67Accrued
      marketing commissions
                            
                            
                            2,148
                            
                            
                            
                            3,494Accrued
      travel commissions
                            
                            
                            1,784
                            
                            
                            
                            1,692Other
      accrued expenses
                            
                            
                            4,219
                            
                            
                            
                            4,445Deferred
      revenue
                            
                            
                            13,505
                            
                            
                            
                            31,143Short-term
      debt
                            
                            
                            1,973
                            
                            
                            
                            2,500Other
      current liabilities
                            
                            
                            867
                            
                            
                            
                            1,077Total
      current liabilities
                            
                            
                            26,942
                            
                            
                            
                            44,418Other
      long-term liabilities:Long-term
      debt, less current maturities
                            
                            
                            -
                            
                            
                            
                            220Deferred
      tax liability
                            
                            
                            755
                            
                            
                            
                            755Other
      income tax liabilities
                            
                            
                            185
                            
                            
                            
                            182Other
      liabilities
                            
                            
                            11
                            
                            
                            
                            11Total
      other long-term liabilities
                            
                            
                            951
                            
                            
                            
                            1,168TOTAL
      LIABILITIES
                            
                            
                            27,893
                            
                            
                            
                            45,586Commitments
      and Contingencies (Notes 2, 23 and 25)STOCKHOLDERS' EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued
      and outstanding at December 31, 2008 and 2007
                            
                            
                            -
                            
                            
                            
                            -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized;
      69,379,259 and 51,144,275 shares issued and outstanding at December
      31, 2008 and December 31, 2007, respectively.
                            
                            
                            69
                            
                            
                            
                            51Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 34,413,682
      and 46,453,644 shares issued and outstanding at December 31, 2008 and
      December 31, 2007, respectively; convertible into Class A shares on a
      one-for-one basis
                            
                            
                            34
                            
                            
                            
                            46Additional
      paid-in capital
                            
                            
                            38,843
                            
                            
                            
                            36,419Accumulated
      other comprehensive loss
                            
                            
                            (70
                            )
                            
                            
                            -Retained
      earnings (deficit)
                            
                            
                            (23,683
                            )
                            
                            
                            (19,208
                            )TOTAL
      STOCKHOLDERS' EQUITY
                            
                            
                            15,193
                            
                            
                            
                            17,308TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                            
                            $
                            43,086
                            
                            
                            $
                            62,894





See
accompanying notes to consolidated financial statements.





F4





YTB
INTERNATIONAL, INC.


Consolidated
Statements of Operations


Years
Ended December 31, 2008, 2007 and 2006





Dollars in thousands, except share and per share data
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006NET
      REVENUESInternet
      business center sales and monthly fees
                    
                    $
                    122,361
                    
                    
                    $
                    103,218
                    
                    
                    $
                    36,698Travel
      commissions and services
                    
                    
                    27,907
                    
                    
                    
                    20,659
                    
                    
                    
                    7,364Training
      programs and marketing materials
                    
                    
                    9,621
                    
                    
                    
                    15,402
                    
                    
                    
                    6,266Other
                    
                    
                    2,658
                    
                    
                    
                    2,006
                    
                    
                    
                    569Total
      net revenues
                    
                    
                    162,547
                    
                    
                    
                    141,285
                    
                    
                    
                    50,897OPERATING
      EXPENSESMarketing
      commissions
                    
                    
                    80,172
                    
                    
                    
                    80,540
                    
                    
                    
                    30,846Travel
      commissions
                    
                    
                    19,972
                    
                    
                    
                    13,427
                    
                    
                    
                    4,893Depreciation
      and amortization
                    
                    
                    2,531
                    
                    
                    
                    1,152
                    
                    
                    
                    408Training
      programs and marketing materials
                    
                    
                    11,329
                    
                    
                    
                    8,795
                    
                    
                    
                    4,455General
      and administrative
                    
                    
                    52,664
                    
                    
                    
                    34,358
                    
                    
                    
                    16,348Total
      operating expenses
                    
                    
                    166,668
                    
                    
                    
                    138,272
                    
                    
                    
                    56,950INCOME
      (LOSS) FROM OPERATIONS
                    
                    
                    (4,121
                    )
                    
                    
                    3,013
                    
                    
                    
                    (6,053
                    )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                    
                    
                    234
                    
                    
                    
                    447
                    
                    
                    
                    170Interest
      expense
                    
                    
                    (85
                    )
                    
                    
                    (38
                    )
                    
                    
                    (93
                    )Foreign
      currency translation loss
                    
                    
                    (58
                    )
                    
                    
                    -
                    
                    
                    
                    -Total
      other income (expense)
                    
                    
                    91
                    
                    
                    
                    409
                    
                    
                    
                    77INCOME
      (LOSS) BEFORE INCOME TAX PROVISION
                    
                    
                    (4,030
                    )
                    
                    
                    3,422
                    
                    
                    
                    (5,976
                    )INCOME
      TAX PROVISION
                    
                    
                    445
                    
                    
                    
                    213
                    
                    
                    
                    -NET
      INCOME (LOSS)
                    
                    $
                    (4,475
                    )
                    
                    $
                    3,209
                    
                    
                    $
                    (5,976
                    )NET
      INCOME (LOSS) PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                    
                    
                    103,280,897
                    
                    
                    
                    97,377,194
                    
                    
                    
                    82,300,473Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                    
                    
                    103,280,897
                    
                    
                    
                    110,699,696
                    
                    
                    
                    82,300,473Net
      income (loss) per share - basic for Class A and Class B (amounts for
      Class A and Class B shares are the same under the two-class
      method.  See Note 4):
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.03
                    
                    
                    $
                    (0.07
                    )Net
      income (loss) per share - diluted for Class A and Class B (amounts
      for Class A and Class B shares are the same under the two-class
      method.  See Note 4):
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.03
                    
                    
                    $
                    (0.07
                    )





See
accompanying notes to consolidated financial statements.





F5





YTB
INTERNATIONAL, INC.


Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)


Years
Ended December 31, 2008, 2007 and 2006





Dollars in thousands, except share and
                        
                        Preferred
                        
                        
                        CommonStock
                        
                        
                        
                        
                        
                        Accumulated
                        
                        
                        
                        
                        
                        Totalper share data
                        
                        Stock
                        
                        
                        ClassA
                        
                        
                        ClassB
                        
                        
                        Additional
                        
                        
                        Other
                        
                        
                        Retained
                        
                        
                        Stockholders'Shares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Paid-in
                          Capital
                        
                        
                        Comprehensive
                          Loss
                        
                        
                        Earnings
                          (Deficit)
                        
                        
                        Equity
                          (Deficit)Balance
      at January 1, 2006
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        27,336,260
                        
                        
                        $
                        27
                        
                        
                        
                        54,672,520
                        
                        
                        $
                        55
                        
                        
                        $
                        19,322
                        
                        
                        $
                        -
                        
                        
                        $
                        (16,336
                        )
                        
                        $
                        3,068Settlement
      of Convertible debt derivative with common shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        200,000
                        
                        
                        
                        -
                        
                        
                        
                        400,000
                        
                        
                        
                        -
                        
                        
                        
                        400
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        400Common
      shares issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        184,194
                        
                        
                        
                        -
                        
                        
                        
                        368,388
                        
                        
                        
                        -
                        
                        
                        
                        294
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        294Common
      shares surrendered for cashless option exercise
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (150,000
                        )
                        
                        
                        -
                        
                        
                        
                        (300,000
                        )
                        
                        
                        -
                        
                        
                        
                        (300
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (300
                        )Common
      shares issued for cashless option exercise
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        300,000
                        
                        
                        
                        -
                        
                        
                        
                        600,000
                        
                        
                        
                        1
                        
                        
                        
                        299
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        300Stock
      option compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        198
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        198Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,976
                        )
                        
                        
                        (5,976
                        )Rounding
      difference
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance
      at December 31, 2006
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        27,870,454
                        
                        
                        $
                        28
                        
                        
                        
                        55,740,908
                        
                        
                        $
                        56
                        
                        
                        $
                        20,212
                        
                        
                        $
                        -
                        
                        
                        $
                        (22,312
                        )
                        
                        $
                        (2,016
                        )Exchange
      Class B Shares for Class A shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        18,593,930
                        
                        
                        
                        19
                        
                        
                        
                        (18,593,930
                        )
                        
                        
                        (19
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Adoption
      of FIN 48 cumulative effect adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (105
                        )
                        
                        
                        (105
                        )Common
      shares issued for restricted stock grant
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,112,901
                        
                        
                        
                        3
                        
                        
                        
                        6,225,802
                        
                        
                        
                        6
                        
                        
                        
                        9,641
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,650Amortization
      of restricted stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,066
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,066Shares
      issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,000
                        
                        
                        
                        -
                        
                        
                        
                        20,000
                        
                        
                        
                        -
                        
                        
                        
                        45
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        45Common
      shares issued for options exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        436,558
                        
                        
                        
                        -
                        
                        
                        
                        820,000
                        
                        
                        
                        1
                        
                        
                        
                        411
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        412Exercise
      of common stock warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,120,432
                        
                        
                        
                        1
                        
                        
                        
                        2,240,864
                        
                        
                        
                        2
                        
                        
                        
                        913
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        916Stock
      option compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        131
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        131Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,209
                        
                        
                        
                        3,209Balance
      at December 31, 2007
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        51,144,275
                        
                        
                        $
                        51
                        
                        
                        
                        46,453,644
                        
                        
                        $
                        46
                        
                        
                        $
                        36,419
                        
                        
                        $
                        -
                        
                        
                        $
                        (19,208
                        )
                        
                        $
                        17,308Exchange
      Class B Shares for Class A shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15,585,537
                        
                        
                        
                        16
                        
                        
                        
                        (15,585,537
                        )
                        
                        
                        (16
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Common
      shares issued for restricted stock grant
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,954,775
                        
                        
                        
                        2
                        
                        
                        
                        3,251,618
                        
                        
                        
                        3
                        
                        
                        
                        (5
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of restricted stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        739
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        739Shares
      issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        500,000
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        509
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        510Common
      shares issued for options exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        49,361
                        
                        
                        
                        -
                        
                        
                        
                        3,333
                        
                        
                        
                        -
                        
                        
                        
                        2
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2Exercise
      of common stock warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        145,311
                        
                        
                        
                        -
                        
                        
                        
                        290,624
                        
                        
                        
                        -
                        
                        
                        
                        254
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        254Stock
      option compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        925
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        925Net
      Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,475
                        )
                        
                        
                        (4,475
                        )Foreign
      currency translation adjustment
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (70
                        )
                        
                        
                        
                        
                        
                        
                        (70
                        )Total
      comprehensive loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (4,545
                        )Rounding
      difference
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1
                        )
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance
      at December 31, 2008
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        69,379,259
                        
                        
                        $
                        69
                        
                        
                        
                        34,413,682
                        
                        
                        $
                        34
                        
                        
                        $
                        38,843
                        
                        
                        $
                        (70
                        )
                        
                        $
                        (23,683
                        )
                        
                        $
                        15,193





See
accompanying notes to consolidated financial statements.





F6





YTB
INTERNATIONAL, INC.


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2008, 2007 and 2006





Dollars
      in thousands
                                                                                                              
                                                                                                              2008
                                                                                                              
                                                                                                              
                                                                                                              2007
                                                                                                              
                                                                                                              
                                                                                                              2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income (Loss)
                                                                                                              
                                                                                                              $
                                                                                                              (4,475
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              3,209
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (5,976
                                                                                                              )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                                                                                                              
                                                                                                              
                                                                                                              2,531
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,152
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              408Write-off
      of uncollectible notes and advances
                                                                                                              
                                                                                                              
                                                                                                              274
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Loss
      on disposal of property and equipment
                                                                                                              
                                                                                                              
                                                                                                              408
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              10
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Impairment
      loss on property and equipment
                                                                                                              
                                                                                                              
                                                                                                              366
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              376
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Reserve
      against inventory
                                                                                                              
                                                                                                              
                                                                                                              3,024
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Reserve
      against earnest money deposit
                                                                                                              
                                                                                                              
                                                                                                              534
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Goodwill
      impairment
                                                                                                              
                                                                                                              
                                                                                                              149
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Realized
      loss on investments
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              12Write-off
      of deposit on acquisition of business
                                                                                                              
                                                                                                              
                                                                                                              311
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Provision
      for uncollectible notes and advances
                                                                                                              
                                                                                                              
                                                                                                              856
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              201
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Interest
      income on notes receivable
                                                                                                              
                                                                                                              
                                                                                                              (113
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (156
                                                                                                              )Provision
      for uncollectible interest on notes receivable
                                                                                                              
                                                                                                              
                                                                                                              109
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Shares
      issued for restricted stock grant
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,800
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Shares
      issued for services
                                                                                                              
                                                                                                              
                                                                                                              510
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              46
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              294Amortization
      of restricted stock
                                                                                                              
                                                                                                              
                                                                                                              739
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              5,066
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Stock
      option expense
                                                                                                              
                                                                                                              
                                                                                                              407
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              42
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              198Compensation
      expense
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              553
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Gain
      on settlement of convertible debt derivative
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (461
                                                                                                              )Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card
processing
                                                                                                              
                                                                                                              
                                                                                                              198
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (1,018
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (750
                                                                                                              )Restricted
      cash-Canadian operations
                                                                                                              
                                                                                                              
                                                                                                              (147
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Accounts
      receivable, net
                                                                                                              
                                                                                                              
                                                                                                              35
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (2,559
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (39
                                                                                                              )Notes
      receivable
                                                                                                              
                                                                                                              
                                                                                                              1,244
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (853
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (1,214
                                                                                                              )Inventory
                                                                                                              
                                                                                                              
                                                                                                              544
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (3,887
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (1,017
                                                                                                              )Prepaid
      marketing commissions and advances
                                                                                                              
                                                                                                              
                                                                                                              15,738
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (12,102
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (8,766
                                                                                                              )Other
      prepaid expenses and current assets
                                                                                                              
                                                                                                              
                                                                                                              1,196
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (1,662
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (109
                                                                                                              )Other
      assets
                                                                                                              
                                                                                                              
                                                                                                              (72
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              9
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1Accounts
      payable
                                                                                                              
                                                                                                              
                                                                                                              1,891
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (123
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (574
                                                                                                              )Accrued
      marketing commissions
                                                                                                              
                                                                                                              
                                                                                                              (1,346
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              1,686
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,230Accrued
      travel commissions
                                                                                                              
                                                                                                              
                                                                                                              92
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,331
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              304Other
      accrued expenses
                                                                                                              
                                                                                                              
                                                                                                              (188
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              1,349
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,956Other
      current liabilities
                                                                                                              
                                                                                                              
                                                                                                              241
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              106
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              3,984Deferred
      revenue
                                                                                                              
                                                                                                              
                                                                                                              (17,637
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              16,370
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              10,109Convertible
      debt derivative
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              581Other
      income tax liabilities
                                                                                                              
                                                                                                              
                                                                                                              3
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              77
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Other
      liabilities
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (13
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                                                                                                              
                                                                                                              
                                                                                                              7,422
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              12,022
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              159CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                                                                                              
                                                                                                              
                                                                                                              (9,337
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (9,169
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (3,155
                                                                                                              )Proceeds
      from sale of property and equipment
                                                                                                              
                                                                                                              
                                                                                                              701
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              87
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Acquisition
      of business
                                                                                                              
                                                                                                              
                                                                                                              (149
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Deposit
      on purchase of business
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (311
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -Proceeds
      from sale of available-for-sale securities
                                                                                                              
                                                                                                              
                                                                                                              1,021
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,147
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,904Purchases
      of available-for-sale securities
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (1,171
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (307
                                                                                                              )Purchases
      of short-term investments
                                                                                                              
                                                                                                              
                                                                                                              (251
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Deposit
      received on business expansion
                                                                                                              
                                                                                                              
                                                                                                              100
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -NET
      CASH USED IN INVESTING ACTIVITIES
                                                                                                              
                                                                                                              
                                                                                                              (7,915
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (9,417
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (558
                                                                                                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              812Repayment
      of bank overdraft
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (812
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -Principal
      repayments of debt
                                                                                                              
                                                                                                              
                                                                                                              (242
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (21
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (21
                                                                                                              )Repayment
      of notes payable
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (122
                                                                                                              )Repayment
      of short-term debt
                                                                                                              
                                                                                                              
                                                                                                              (527
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (1,370
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -Cash
      collateral for standby letter of credit
                                                                                                              
                                                                                                              
                                                                                                              (1,910
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Reduction
      in cash collateral for standby letter of credit
                                                                                                              
                                                                                                              
                                                                                                              1,910
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Restricted
      cash-collateral for outstanding note
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (500
                                                                                                              )Reduction
      in restricted cash-collateral for outstanding note
                                                                                                              
                                                                                                              
                                                                                                              500
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Proceeds
      from exercise of common stock options
                                                                                                              
                                                                                                              
                                                                                                              2
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              412
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Proceeds
      from exercise of common stock warrants
                                                                                                              
                                                                                                              
                                                                                                              254
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              917
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                                                                                                              
                                                                                                              
                                                                                                              (13
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (874
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              169EFFECT
      OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
                                                                                                              
                                                                                                              
                                                                                                              (22
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                                                                                                              
                                                                                                              
                                                                                                              (528
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              1,731
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (230
                                                                                                              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                                                                                              
                                                                                                              
                                                                                                              1,731
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              230CASH
      AND CASH EQUIVALENTS, END OF YEAR
                                                                                                              
                                                                                                              $
                                                                                                              1,203
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1,731
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              -





See
accompanying notes to consolidated financial statements.





F7




YTB
INTERNATIONAL, INC.


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2008, 2007 and 2006




Dollars
      in thousands
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                    
                    $
                    75
                    
                    
                    $
                    41
                    
                    
                    $
                    95Income
      taxes paid
                    
                    
                    282
                    
                    
                    
                    29
                    
                    
                    
                    -SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Property
      and equipment included in accounts payable and accrued
      expenses
                    
                    $
                    488
                    
                    
                    $
                    356
                    
                    
                    $
                    239Notes
      receivable issued for sale of property and equipment
                    
                    
                    1,760
                    
                    
                    
                    -
                    
                    
                    
                    -Reclass
      of long-term investments to available-for-sale securities
                    
                    
                    1,000
                    
                    
                    
                    -
                    
                    
                    
                    -Reclass
      of property and equipment to assets held for sale
                    
                    
                    844
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      option compensation
                    
                    
                    518
                    
                    
                    
                    88
                    
                    
                    
                    -Reclass
      of notes receivable to other current assets / other assets
                    
                    
                    65
                    
                    
                    
                    -
                    
                    
                    
                    -Reclass
      of notes receivable reserve to acquisition of business
    reserve
                    
                    
                    45
                    
                    
                    
                    -
                    
                    
                    
                    -Reclass
      of commission advances to notes receivable
                    
                    
                    21
                    
                    
                    
                    -
                    
                    
                    
                    -Transfer
      of Class B common stock shares to Class A common stock
    shares
                    
                    
                    16
                    
                    
                    
                    19
                    
                    
                    
                    -Shares
      issued for restricted stock grant
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    -Shares
      issued under a restricted stock grant in settlement of bonus
      liability
                    
                    
                    -
                    
                    
                    
                    6,850
                    
                    
                    
                    -Increase
      in short-term obligations and property and equipment
                    
                    
                    -
                    
                    
                    
                    1,370
                    
                    
                    
                    2,500Reclass
      of available-for-sale securities to long-term investments
                    
                    
                    -
                    
                    
                    
                    1,000
                    
                    
                    
                    -Increase
      in goodwill related to increase in deferred tax liability
                    
                    
                    -
                    
                    
                    
                    755
                    
                    
                    
                    -FIN
      48 cumulative effect adjustment
                    
                    
                    -
                    
                    
                    
                    105
                    
                    
                    
                    -Property
      and equipment settlement of bonus liability
                    
                    
                    -
                    
                    
                    
                    101
                    
                    
                    
                    -Shares
      issued in cashless warrant exercise
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    -Shares
      issued in settlement of convertible debt derivative
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    400





See
accompanying notes to consolidated financial statements.




F8





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 1 - ORGANIZATION AND
NATURE OF OPERATIONS




YTB
International, Inc. (“YTB,” or the “Company”) has three
wholly-owned subsidiaries: YourTravelBiz.com, Inc. and its subsidiaries
(collectively “YTB
Marketing”); YTB Travel Network, Inc. and its subsidiaries (collectively
“YTB Travel”);
and REZconnect Technologies, Inc. (“REZconnect”). The
Company, together with its subsidiaries, are hereafter collectively referred to
as the “Company” unless noted otherwise.




Effective
July 31, 2007, the Company underwent a reclassification of its existing common
stock and an accompanying three-for-one stock split (structured as a stock
dividend) that resulted in the holders of the Company’s existing common stock
receiving one share of Class A Common Stock and two shares of Class B Common
Stock for each share of existing common stock held prior to such date. The
Company’s authorized capital was also increased in conjunction with the
reclassification, resulting in 300 million shares of Class A Common Stock and
100 million shares of Class B Common Stock being authorized under the Company’s
Amended and Restated Certificate of Incorporation. See Note 18 - “Common Stock
Reclassification.”




The
Company provides Internet-based travel-related services and technology, which
offers proprietary reservation systems for the travel industry, and is also a
full-service provider of travel products and services to the leisure and small
business traveler. The Company operates under various trade names, including
“Your Travel BizTM,” “YTBnet.comTM,” “Travel NetworkTM,” “Global Travel NetworkTM,”
“YTB Travel NetworkTM” and “Travel Network Vacation CentralTM,” as well as
Internet websites “Bookmytravel.comTM,” “REZconnect.comTM” and “RezCity.comTM.” 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. YTB Marketing markets Internet
Business Centers (“IBC” or “IBCs”), formerly
referred to as internet travel websites, on behalf of YTB Travel by use of
independent marketing representatives (“Reps”). YTB Travel
operates home based travel websites which book online travel transactions,
collect payments, collect licensing fees, and pay travel sales commissions.
REZconnect operates as a travel vendor relationship management company and
offers franchises to “brick and mortar” travel agencies. All of REZconnect’s
franchised operations are independently owned and operated. All sales of travel
products by REZconnect are made through its independent agencies and
franchisees, or through its interactive websites.





In early
2008, YTB expanded its services into Canada, the Bahamas, and Bermuda. YTB
commenced operations in the Bahamas in January 2008 and in Canada and Bermuda in
early February 2008. As a result of this international expansion, Referring
Travel Agents (or Referring Travel Affiliates in Canada, “RTAs”), living in
these countries can now refer customers to book travel through IBCs that RTAs
acquire from the Company, and, similarly, Reps who are located there can market
IBCs to others in the U.S., Puerto Rico, the Bahamas, Bermuda and
Canada.





NOTE 2 – GOING
CONCERN





As reflected
in the accompanying consolidated financial statements, the Company has incurred
losses from operations for the year ended December 31, 2008 of $4.1 million. In
addition, negative current economic conditions and other factors have led to
a reduction in the number of active RTAs in the Company. The number of
active IBC sites has declined during the year ended December 31, 2008 by a net
of 39,419 sites to 92,383 active RTA IBCs from the 131,802 reported as of
December 31, 2007. The Company is also defending against two cases challenging
the legality of its network marketing program. The litigation claims can be
expensive and time consuming to bring and defend against and could result in
settlements or damages that could significantly affect financial
results. The Company’s loss from
operations, the declining active IBC count, working capital deficiency,
uncertainties surrounding the Company’s pending litigation and the general
downturn in the economy raise substantial doubt about the Company’s ability to
continue as a going concern.





F9





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Management
has taken several actions to ensure that the Company will continue as a going
concern. Management has instituted a cost reduction program that included a
reduction in labor and fringe costs, as well as reductions of discretionary
expenditures in the operating structure of the organization. In addition, the
Company has instituted more efficient management techniques through better
utilization of technology. The Company is also evaluating the possibility
of raising new capital for future operations. Management believes these
factors will contribute toward achieving profitability. However, there can be no
assurance that the Company will be successful in achieving its
objectives.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company’s ability to continue as a going concern is substantially dependent on
the successful execution of many of the actions referred to above, on the
timeline contemplated by the Company's plan. Additionally, although the
Company believes that it has meritorious defenses against certain legal
proceedings described in Note 25 - “Commitments and Contingencies” and intends
to vigorously defend the cases, if the Company is unsuccessful in its defense
against the claims, the result would likely have a material adverse effect on
the Company’s liquidity and financial condition. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and reclassification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a
going concern.





NOTE 3 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Principles of
consolidation




The
consolidated financial statements include the accounts of YTB, and its
wholly-owned subsidiaries, YTB Marketing, YTB Travel, and REZconnect. All
intercompany accounts and transactions are eliminated in
consolidation.




Reclassifications





Certain
reclassifications have been made to the 2007 and 2006 financial statements to
conform to the current year presentation.




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.





Common Stock
Reclassification





All share
references and share-based calculations are presented to give retroactive effect
to the three-to-one stock split and reclassification that was effective July 31,
2007. See Note 18 - “Common Stock Reclassification.”




Cash and cash
equivalents




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





F10





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




Investments




Investments
designated as available-for-sale securities under Statement of Financial
Accounting Standards (“SFAS”) No. 115,
"Accounting for Investment in Certain Debt and Equity Securities," are carried
at fair value based on quoted market prices or estimated based on quoted market
prices for financial instruments with similar characteristics. Unrealized gains
and losses of the Company's available-for-sale securities are excluded from
earnings and reported as a component of other comprehensive income (loss).
Additionally, the Company assesses whether an other-than-temporary impairment
loss on its available-for-sale securities has occurred due to declines in fair
value or other market conditions. Declines in fair value that are considered
other than temporary are recorded as an impairment of investments in the
consolidated statements of operations.




In
general, investments with original maturities of greater than ninety days and
remaining maturities of less than one year are classified as short-term
investments. Investments with maturities beyond one year may also be classified
as short-term based on their highly liquid nature and because such investments
represent the investment of cash that is available for current
operations.




The
Company’s investments in Auction Rate Securities (“ARS”) as of December
31, 2007, were primarily backed by student loans originated under the Federal
Family Education Loan Program (“FFELP”), and were
over-collateralized and guaranteed by the U.S. Department of Education. In
addition, all ARS held were rated by one or more of the major independent rating
agencies as either AAA or Aaa. See Note 8 - “Long-term Investments” for
further details on the Company's investments. As of December 31, 2007, the cost
of marketable securities approximated fair value. There are no long-term
investments as of December 31, 2008.




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.





Notes
receivable





The
Company reflects notes receivable at the outstanding principal balance as of the
balance sheet date, as adjusted by any write-offs or reserves established for
potentially uncollectible notes. If material, interest is imputed on notes
receivable that are non-interest bearing or bear interest at an inappropriate
rate. When appropriate, a reserve is recorded against notes receivable to reduce
the balance to the estimated net realizable value. The notes receivable reserve
reflects management’s best estimate of probable losses inherent in the notes
receivable balance. Management determines the reserve at the end of each
reporting period based on the length of time notes are past due, known troubled
notes, historical experience and other currently available evidence. Notes
receivable are written off when the note is deemed uncollectible.





The
Company reflects notes receivable with terms of one year or less as a current
asset in the consolidated balance sheet, net of the related reserve. The
Company includes notes receivable with terms of greater than one year in other
assets on the consolidated balance sheet.




F11





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Interest
Receivableon
Notes





The
Company includes interest receivable on notes in other prepaid expenses and
current assets in the consolidated balance sheet, net of the related reserve. As
management believes that the collection of interest on notes issued to Reps is
not probable, a 100% reserve is established with a corresponding offset to bad
debt expense, when the interest is accrued. Interest receivable is written off
when the related note is deemed uncollectible.





Concentration of credit
risk




Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
At times, cash in banks is in excess of the Federal Deposit Insurance
Corporation (“FDIC”) insurance
limit and the Canada Deposit Insurance Corporation for our Canadian operations.
The Company has not experienced any loss as a result of those deposits and does
not expect any in the future.





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” and “Fun and Travel” magazines, a promotional tool for
the Reps, other printed marketing materials and apparel. Cost for all of the
Company’s inventories is determined on a first-in, first-out (FIFO) basis. At
the end of each reporting period, when required, a provision is made to reduce
excess and obsolete inventory to estimated net realizable value.





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 are as
follows:




Asset Category
                
                Useful LifeBuilding
      and building improvements
                
                15 - 30 yearsVehicles
                
                5 yearsEquipment
      including computer hardware and software
                
                3 - 5 yearsFurniture
      and fixtures
                
                2 - 5 yearsLeasehold
      improvements
                
                2 years ** Based
      on the term of the underlying lease





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 also 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.




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.





F12





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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 as of
December 31, 2008 are fully recoverable.





Intangible assets,
net





Intangible
assets other than 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 No. 142”). SFAS
No. 142 also requires the Company to compare the fair value of the reporting
unit to its carrying amount on an annual basis to determine if there is
potential goodwill impairment. If the fair value of the reporting unit 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
reporting units are determined based on discounted cash flows, market multiples
or appraised values. For further discussion of goodwill, see Note 12 -
“Goodwill.”





Revenue
Recognition





IBC
sales and monthly fees





The
Company generates revenue from the sale of IBCs, and from providing training and
ongoing license services to the new business owners of such IBCs, i.e. RTAs. The
recognition of all up-front fees received from new IBC sales is deferred and
recognized as income over a twelve-month period, which is the weighted average
RTA life.





Monthly
web hosting fees are collected prior to the service being performed (the IBC
remaining active) and are collected throughout a calendar month, based on the
anniversary date of each RTA. The proportion of the fees that are applicable to
the next calendar month are deferred and recognized the following month when the
services are provided.





Travel
commissions and services





Travel
commissions, incentives and other travel service revenues earned are recognized
as revenue in the period the travel departure takes place. Travel commissions,
incentives and other travel service revenues 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.





Training
programs and marketing materials revenue





Sales
revenues from the sale of Rep and RTA sales aides and miscellaneous promotional
and marketing materials are recognized when the related merchandise is shipped
to the Rep or RTA. Sales revenues from training programs are recognized when the
Rep or RTA has completed the related training course.





F13





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Other
revenue





Sales
revenues from convention attendance are recognized during the period in which
the convention occurs.





Accounting for Taxes
Collected from Customers and Remitted to Governmental
Authorities





In June
2006, the Financial Accounting Standards Board (“FASB”) ratified the
consensus reached by the Emerging Issues Task Force in Issue No. 06-3 (“EITF 06-3”), “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That is, Gross versus Net Presentation).”
The scope of EITF 06-3 includes any tax assessed by a governmental authority
that is directly imposed on a revenue-producing activity between a seller and a
customer and may include, but is not limited to, sales, use, value added, and
some excise taxes. EITF 06-3 also concluded that the presentation of taxes
within its scope on either a gross (included in revenues and costs) or net
(excluded from revenues) basis is an accounting policy decision subject to
appropriate disclosure. EITF 06-3 is effective for periods beginning after
December 15, 2006. The Company currently presents these taxes on a net basis and
has elected not to change its presentation method.




Expense recognition of
commission costs




The
Company incurs commission costs that are directly related to the origination of
new IBC sales, monthly web hosting fees and travel sales which result in the
deferral of revenue. Such incremental direct commission costs are capitalized in
accordance with 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 104 and FTB 90-1, by deferring and charging such costs to
expense in proportion to the related revenue recognized.





Commission
costs incurred directly related to the origination of new IBC sales are
recognized over the same revenue deferral period of twelve months.





Commission
costs related to monthly web hosting fees charged by the Company are capitalized
and deferred. Monthly web hosting fees are collected throughout a calendar
month, based on the anniversary date of each RTA. This fee is collected prior to
the service being performed (the IBC remaining active). The proportion of the
revenue that is applicable to the next calendar month is deferred, along with
the corresponding commission expense.





Travel
commission costs are charged to expense when the related travel revenue is
recognized, the period the travel departure takes place.





Marketing compensation
plan




The
Company offers a compensation plan to its Reps under an arrangement that pays
the Reps direct sales commissions, override compensation (if qualified) and
other bonus incentives based on the amounts attributable to each Rep’s personal
and team IBC sales, or enrolled referrals. The “commission override” is
comprised of a small portion of the monthly web hosting fee RTAs pay to the
Company which is paid to the Rep responsible for selling the IBC.  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 IBCs, 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 SOP No. 93-7 issued by the American Institute of Certified
Public Accountants, the Company expenses advertising costs as incurred.
Advertising expense was $50,000 in 2008 and $248,000 in 2007.





F14





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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.




The
Company recognizes tax liabilities when, despite the Company’s belief that its
tax return positions are supportable, the Company believes that certain
positions may not be fully sustained upon review by tax authorities. Benefits
from tax positions are measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon settlement. The current portion of
tax liabilities is included in other current liabilities and the noncurrent
portion of tax liabilities is included in other long-term liabilities in the
consolidated balance sheet. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences impact income
tax expense in the period in which such determination is made.





The
Company generally recognizes interest and penalties related to uncertain tax
positions through income tax expense.





The
Company’s federal income tax returns for the tax years after 2002 remain subject
to examination (2003 remains open due to amended tax returns). The various
states in which the Company is subject to income tax are generally open for the
tax years after 2003. There are no federal, state or foreign income tax audits
in process as of December 31, 2008.




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.




Earnings Per
Share





The
Company computes earnings per share in compliance with SFAS No. 128, “Earnings
per Share,” which requires companies that have multiple classes of equity
securities to use the “two-class” method in computing earnings per share.
Because both of the Company’s Class A Common Stock and Class B Common Stock
share the same rights with respect to dividends, basic and diluted earnings per
share are the same for both classes.





Basic
earnings (loss) per share is computed based on the weighted average number of
common shares (both Class A and Class B) outstanding for the period. Diluted
earnings (loss) per share is computed based on the weighted average number of
common shares (both Class A and Class B) and potentially dilutive common
equivalent shares (both Class A and Class B) outstanding for the period, based
on the treasury stock method.





Fair Value
Measurements





Effective
January 1, 2008, the Company partially adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS
No. 157”), for assets and liabilities measured at fair value on a
recurring basis as allowed by FASB Staff Position (“FSP”) No. 157-2,
“Effective Date of FASB Statement No. 157” (“FSP 157-2”) and FSP
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for
That Asset is Not Active” (“FSP
157-3”).  SFAS No. 157 accomplishes the following key
objectives:





·
            Defines
      fair value as the price that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market participants
      and the measurement date;


·
            Establishes
      a three-level hierarchy (“valuation
      hierarchy”) for fair value
measurements;


·
            Requires
      consideration of the Company’s creditworthiness when valuing liabilities;
      and


·
            Expands
      disclosures about instruments measured at fair
  value.




F15





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. A financial instrument’s
categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The three levels of the
valuation hierarchy and the distribution of the Company’s financial assets
within it are as follows:





·
            Level
      1 – inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.


·
            Level
      2 – inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, inputs that are observable for
      the asset or liability, either directly or indirectly, for substantially
      the full term of the financial
statement.


·
            Level
      3 – inputs to the valuation methodology are unobservable and significant
      to the fair value measurement.


When
determination is made to classify a financial instrument within level 2, the
determination is based upon quoted market prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly for substantially the full term of the
financial statement.


The
Company’s financial assets and liabilities including long-term
investments are reflected at fair value in accordance with SFAS No.
157.




The
Company performs fair value measurements on certain assets and liabilities as
the result of the application of accounting guidelines and pronouncements that
were relevant prior to the adoption of SFAS No. 157.  Some fair value
measurements, such as long-term investments referred to above, are performed on
a recurring basis, while others, such as impairment of goodwill and other
intangibles are performed on a nonrecurring basis.


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities –Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS
No. 159 permits an entity to elect fair value as the initial and subsequent
measurement attribution for many financial assets and liabilities. Entities
electing the fair value option would be required to recognize changes in fair
value in earnings. Entities electing the fair value option are required to
distinguish, on the face of the statement of financial position, the fair value
of assets and liabilities for which the fair value option has been elected and
similar assets and liabilities measured using another measuring attribute. SFAS
No. 159 became effective beginning January 1, 2008. The Company elected not to
measure any eligible items using the fair value option in accordance with SFAS
No. 159 and therefore, SFAS No. 159 did not have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.





New accounting
pronouncements





In
December 2007, the FASB issued SFAS No. 141R (“SFAS No. 141R”),
“Business Combinations,” which establishes principles and requirements for how
the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, goodwill acquired in the business combination or a
gain from a bargain purchase. SFAS No. 141R is effective for business
combinations with an acquisition date on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company
expects SFAS No. 141R to have an impact on the accounting for any future
business acquisitions of the effective date.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS
No. 160 requires the recognition of a noncontrolling interest, or minority
interest, as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS No. 160 also includes expanded disclosure requirements regarding
the interests of the parent and its noncontrolling interest. The Company has
determined that this statement will have no material impact on its future
financial statements.





F16





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





In
February 2008, the FASB issued FSP 157-2, to partially defer the effectiveness
of SFAS No. 157. FSP 157-2 defers the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. The Company does not expect the
adoption to have a material effect on our financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”),
which requires expanded disclosures about derivative instruments and hedging
activities. The implementation of this standard is not expected to have a
material impact on the Company’s consolidated financial position and results of
operations. SFAS No. 161 is effective for the Company for the year ending
December 31, 2009.





In April
2008, the FASB finalized FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142. The intent of FSP 142-3 is to improve
the consistency between the useful life of a recognized asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141R, and other U.S. generally accepted accounting
principles. In addition, FSP 142-3 requires additional disclosures concerning
recognized intangible assets. These additional disclosures would enable users of
financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entity’s intent and/or
ability to renew or extend the arrangement. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those years.
Earlier adoption is prohibited. Therefore, the Company will adopt FSP 142-3 on
January 1, 2009. The Company does not expect the adoption to have a material
effect on our financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No.
162”). SFAS No. 162 identifies the sources of accounting principles
and provides a consistent framework, or hierarchy, for selecting the accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy of accounting principles within SFAS No.
162 is consistent with that previously defined in the AICPA Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles” (“SAS No.
69”). SFAS No. 162 is effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” The Company has previously utilized the guidance within SAS No. 69,
and, therefore, it does not expect the adoption of SFAS No. 162 to have a
material effect on our financial statements.





In
October 2008, the FASB issued FSP 157-3 to clarify the application of SFAS No.
157, which the Company partially adopted as of January 1, 2008, in cases where a
market is not active. The Company has considered the guidance provided by
FSP 157-3 and determined that there was no impact on estimated fair values as of
December 31, 2008.





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.





F17





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




NOTE 4 - NET INCOME (LOSS)
PER SHARE





The
Company has two classes of common stock: Class A Common Stock and Class B Common
Stock. See Note 18 – “Common Stock Reclassification” for a discussion of the
rights and privileges of Class A Common Stock and Class B Common Stock. The
Company has computed the earnings per share in compliance with SFAS No. 128,
“Earnings per Share,” which requires companies that have multiple classes of
equity securities to use the “two-class” method in computing earnings per share.
Because both classes share the same rights with respect to dividends, basic and
diluted earnings per share are the same for both classes.





Basic
earnings (loss) per share is computed based on the weighted average number of
common shares (both Class A and Class B) outstanding for the period. Diluted
earnings (loss) per share is computed based on the weighted average number of
common shares (both Class A and Class B) and potentially dilutive common
equivalent shares (both Class A and Class B) outstanding for the period, based
on the treasury stock method. A reconciliation of basic and diluted earnings
(loss) is presented in the table below:





Dollars
      in thousands, except share and per share data
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Numerator:Net
      income (loss)
                      
                      $
                      (4,475
                      )
                      
                      $
                      3,209
                      
                      
                      $
                      (5,976
                      )Denominator:Weighted
      average common shares and denominator for basic
      calculation:
                      
                      
                      103,280,897
                      
                      
                      
                      97,377,194
                      
                      
                      
                      82,300,473Weighted
      average effects of dilutive equity based compensation
      awards:Stock
      options
                      
                      
                      -
                      
                      
                      
                      416,945
                      
                      
                      
                      -Stock
      warrants
                      
                      
                      -
                      
                      
                      
                      3,477,056
                      
                      
                      
                      -Restricted
      stock awards
                      
                      
                      -
                      
                      
                      
                      9,428,501
                      
                      
                      
                      -Denominator
      for diluted calculation
                      
                      
                      103,280,897
                      
                      
                      
                      110,699,696
                      
                      
                      
                      82,300,473Net
      income (loss) per share - basic for Class A and Class
    B
                      
                      $
                      (0.04
                      )
                      
                      $
                      0.03
                      
                      
                      $
                      (0.07
                      )Net
      income (loss) per share - diluted for Class A and Class
    B
                      
                      $
                      (0.04
                      )
                      
                      $
                      0.03
                      
                      
                      $
                      (0.07
                      )




An
aggregate of 3,828,314 and 3,722,080 shares (of both Class A Common Stock and
Class B Common Stock) for the years ended December 31, 2008 and 2006,
respectively, was excluded from the computation of diluted earnings per share as
the inclusion of such shares would have had an anti-dilutive
effect.





F18




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




NOTE 5 - RESTRICTED
CASH





Restricted
cash as of December 31, 2008 and 2007 was $1.7 million and $2.3 million,
respectively. Restricted cash as of December 31, 2007 included a $500,000
certificate of deposit representing collateral for the outstanding indebtedness
on the property serving as the Company’s new corporate headquarters and $1.8
million in reserves with the Company’s domestic credit card processor, the
former of which was released but subsequently surrendered by the Company on
January 8, 2008 in partial repayment of the principal amount outstanding under
such indebtedness. In addition, restricted
cash as of December 31, 2008 includes a $50,000 translation adjustment with a
corresponding decrease to accumulated other comprehensive income included in
stockholders’ equity (deficit).The decrease in restricted cash of
$601,000 as of December 31, 2008 compared with December 31, 2007 was primarily
due to the release of the $500,000 certificate of deposit as noted above and a
$198,000 decrease in reserves with the Company’s domestic credit card processor
partially offset by $147,000 deposited in reserve with an additional credit card
processor in connection with the Company’s launch of its Canadian operations on
February 8, 2008.





NOTE 6 - NOTES
RECEIVABLE





Included
in notes receivable are notes issued to certain Reps that bear interest at rates
that approximate current market interest rates and have terms of one year or
less.  The terms of many of the Rep notes have been extended beyond the
original terms. The notes are primarily guaranteed by Sales Directors with at
least 2,000 people or more in their organization, against future earnings of
those Sales Directors.  As of December 31, 2008 and 2007, reserves of
$562,000 and $45,000, respectively, have been recorded against the respective
note balances of $622,000 and $2.1 million.





Also
included in notes receivable as of December 31, 2008 is a $500,000 non-interest
bearing note received as proceeds for the sale of land on November 24, 2008.
Principal under the note, collateralized by the related land sold, is due and
payable 120 days from the date of the note. The Company did not impute interest
on the note as it was not material. The Company recorded a deferred gain of
$102,000 on the sale of land based upon the percentage of total profit to total
sales value, and included the deferred gain as a reduction from the related note
receivable. See Note 24 – “Real Estate Transactions.”





Included
in other assets on the consolidated balance sheet as of December 31, 2008 is a
$1.2 million 8% note received as proceeds for the sale of property and equipment
on December 16, 2008. Interest only payments of $8,000 are due monthly beginning
January 16, 2009. The principal of $1.2 million along with the final interest
payment of $8,000 is due June 16, 2010. The note is collateralized by the
related property sold. See Note 24 – “Real Estate Transactions.”




NOTE 7 -
INVENTORY




Inventory,
net of reserves, consists of the following materials available for sale to
Reps:





Dollars
      in thousands
                  
                  2008
                  
                  
                  2007"Success
      From Home" and "Success" magazines
                  
                  $
                  -
                  
                  
                  $
                  2,772"Fun
      and Travel" magazines
                  
                  
                  -
                  
                  
                  
                  1,173Audio
      / video marketing
                  
                  
                  4
                  
                  
                  
                  576Printed
      marketing materials
                  
                  
                  931
                  
                  
                  
                  382Apparel
                  
                  
                  400
                  
                  
                  
                  -Inventory,
      net
                  
                  $
                  1,335
                  
                  
                  $
                  4,903





The
Company recorded a reserve against slow-moving magazines, audio/video and
printed marketing materials of $3.0 million for the year ended December 31,
2008. There was no reserve recorded against inventory as of December 31,
2007.





F19





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




NOTE 8 - LONG-TERM
INVESTMENTS





ARS are
investments with contractual maturities generally between 20 to 30 years.
They are usually found in the form of municipal bonds, preferred stock, a pool
of student loans or collateralized debt obligations whose interest rates are
reset every seven to 35 days through an auction process. At the end of each
reset period, investors can sell or continue to hold the securities at
par.




As of
December 31, 2007, the Company's investment portfolio included $1.0 million
in par value of ARS which were primarily backed by student loans originated
under the FFELP and were over-collateralized, and guaranteed by the United
States Federal Department of Education. In addition, all ARS held by the Company
were rated by the major independent rating agencies as either AAA or Aaa at the
time of purchase. Most of these ARS were scheduled to reset subsequent to
December 31, 2007. As of February 29, 2008, $1.0 million of the
Company's ARS, failed auctions due to sell orders exceeding buy orders. As a
result, the Company classified the $1.0 million in ARS as long-term investments
as of December 31, 2007. This amount represented the entire balance of the ARS
as of December 31, 2007.




On
September 7, 2008, the investment bank holding the Company’s ARS announced that
it had agreed to purchase a certain amount of ARS held by certain of its
customers. The offer was made in connection with a settlement and proposed
settlements between the investment bank and the Commonwealth of Massachusetts
and other regulators. On October 1, 2008, the Company received an offer from the
investment bank holding its ARS to purchase 100% of the Company’s outstanding
ARS portfolio at par value of $1.0 million, which the Company accepted. The
settlement date for this transaction was October 7, 2008 and the Company
received the funds on that day.




NOTE 9 – ASSETS HELD FOR
SALE





On
February 29, 2008, the Company acquired a business jet for the purchase price of
$1.3 million. The Company utilizes the jet for the transport of its
employees, officers, directors, business guests, and property for
business-related purposes. The Company has determined the useful life of
the jet to be seven years.





In August
2008, the Company made the decision to sell the jet within the next 12 months
for an amount expected to be less than its current carrying amount and recorded
a pre-tax impairment loss of $366,000 reflected in general and adminstrative
expenses (which includes $56,000 in selling costs) to write down the jet to
its estimated realizable value less costs to sell of $844,000. On January 12,
2009, the Company sold the business jet for net proceeds of $872,000. In
addition, the Company incurred costs of $28,000 to prepare the jet for sale. The
Company reclassified it to assets held for sale on the Company’s
consolidated balance sheet as of December 31, 2008 in the parent
segment. The Company ceased depreciating the jet at the time it was
classified as held for sale. Depreciation for the year ended December 31,
2008 was $90,000, which is included in total depreciation and amortization
expense. See Note 26 - “Subsequent Events.”





F20





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 10 - PROPERTY AND
EQUIPMENT




Property
and equipment at December 31, 2008 and 2007 consists of the
following:





Dollars
      in thousands
                  
                  2008
                  
                  
                  2007Equipment
                  
                  $
                  3,131
                  
                  
                  $
                  2,737Furniture
      and fixtures
                  
                  
                  751
                  
                  
                  
                  847Capitalized
      software
                  
                  
                  5,296
                  
                  
                  
                  2,017Vehicles
                  
                  
                  64
                  
                  
                  
                  164Buildings
      and improvements
                  
                  
                  4,216
                  
                  
                  
                  5,408Land
                  
                  
                  3,341
                  
                  
                  
                  4,721Construction
      in progress and deposits
                  
                  
                  6,676
                  
                  
                  
                  2,210Leasehold
      improvements
                  
                  
                  142
                  
                  
                  
                  12123,617
                  
                  
                  
                  18,225Less: Accumulated
      depreciation
                  
                  
                  (4,889
                  )
                  
                  
                  (2,792
                  )Property
      and equipment, net
                  
                  $
                  18,728
                  
                  
                  $
                  15,433




Depreciation
and amortization expense on property and equipment was $2.5 million, $1.1
million and $335,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. Depreciation on leasehold improvements on the Company’s former
headquarters 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, 2008 and 2007, capitalized software development costs, net of
accumulated amortization, totaled $305,000 and $370,000, respectively. For the
years ended December 31, 2008, 2007 and 2006, the Company recorded amortization
of capitalized software development costs of $169,000, $65,000 and $29,000,
respectively, which is included in total depreciation and amortization expense
above.





On
February 1, 2008, SAP, the Company’s new enterprise resource planning software
application, was implemented. The cost of approximately $1.7 million,
$987,000 of which was included in assets under construction as of December 31,
2007, was recorded as an addition to software during 2008. Depreciation for
the year ended December 31, 2008 was $491,000 and is included in total
depreciation and amortization expense above.





The
Company capitalized interest related to its ongoing construction of its new
corporate headquarters in Wood River, Illinois of $110,000, $189,000 and $81,000
for the years ended December 31, 2008, 2007 and 2006,
respectively.




During
2008, the Company recorded an impairment charge of $366,000. See Note 9 –
“Assets held for Sale”. During
2007, due to a change in the design of the Company’s corporate headquarters
recorded in the parent segment, the Company recorded a pre-tax impairment of
$376,000 which is reflected in general and administrative
expenses.





F21




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 11 - INTANGIBLE
ASSETS, NET




The
following tables present the components of the Company’s intangible assets as of
December 31, 2008 and 2007:





Dollars in thousands
                    
                    At December 31, 2008
                    
                    
                    At December 31, 2007Accumulated
                    
                    
                    
                    
                    
                    
                    
                    
                    AccumulatedCost
                    
                    
                    Amortization
                    
                    
                    Net
                    
                    
                    Cost
                    
                    
                    Amortization
                    
                    
                    NetAmortized
      intangible assets (1)Non-compete
      agreement
                    
                    $
                    360
                    
                    
                    $
                    209
                    
                    
                    $
                    151
                    
                    
                    $
                    360
                    
                    
                    $
                    158
                    
                    
                    $
                    202RTA
      agreements
                    
                    
                    690
                    
                    
                    
                    690
                    
                    
                    
                    -
                    
                    
                    
                    690
                    
                    
                    
                    690
                    
                    
                    
                    -Vendor
      agreements
                    
                    
                    220
                    
                    
                    
                    89
                    
                    
                    
                    131
                    
                    
                    
                    220
                    
                    
                    
                    67
                    
                    
                    
                    153Total
      amortized intangible assets
                    
                    
                    1,270
                    
                    
                    
                    988
                    
                    
                    
                    282
                    
                    
                    
                    1,270
                    
                    
                    
                    915
                    
                    
                    
                    355Unamortized
      intangible assetsDomain
      names
                    
                    
                    2,040
                    
                    
                    
                    -
                    
                    
                    
                    2,040
                    
                    
                    
                    2,040
                    
                    
                    
                    -
                    
                    
                    
                    2,040Total
      unamortized intangible assets
                    
                    
                    2,040
                    
                    
                    
                    -
                    
                    
                    
                    2,040
                    
                    
                    
                    2,040
                    
                    
                    
                    -
                    
                    
                    
                    2,040Total
                    
                    $
                    3,310
                    
                    
                    $
                    988
                    
                    
                    $
                    2,322
                    
                    
                    $
                    3,310
                    
                    
                    $
                    915
                    
                    
                    $
                    2,395





(1)
            The
      estimated useful lives of non-compete agreements, RTA agreements and
      vendor agreements are seven years, one year and 10 years
      respectively.





Aggregate Amortization
    Expense2006
                  
                  $
                  732007
                  
                  
                  732008
                  
                  
                  73





The
estimated amortization expense related to intangible assets as of December 31,
2008 over the next five years and thereafter,
assuming no subsequent impairment of the underlying assets, is as
follows:





Estimated Amortization2009
                      
                      $
                      732010
                      
                      
                      732011
                      
                      
                      702012
                      
                      
                      222013
                      
                      
                      222014
      and thereafter
                      
                      
                      22$
                      282





F22







YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 NOTE 12 –
GOODWILL
 
 Goodwill
is the excess of the purchase price over the fair value of the net assets
acquired in business combinations accounted for under the purchase
method.
 
 Changes
in the carrying amount of goodwill by segment during 2007 and 2008 are as
follows:
 
 Dollars in thousands
                    
                    Marketing
                    
                    
                    Travel
                    
                    
                    Parent
                    
                    
                    TotalBalance
      as of December 31, 2006
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,224
                    
                    
                    $
                    2,224Tax
      adjustment (1)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    755
                    
                    
                    
                    755Balance
      as of December 31, 2007
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,979
                    
                    
                    $
                    2,979Acquisition
      of Sunrise Travel Service
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    149
                    
                    
                    
                    149Impairment
      of Sunrise Travel Service
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (149
                    )
                    
                    
                    (149
                    )Balance
      as of December 31, 2008
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,979
                    
                    
                    $
                    2,979
 
 (1)
              During the second quarter ended
      June 30, 2007, the Company discovered that a long-term deferred tax
      liability with a corresponding increase to goodwill had not been recorded
      on the Company’s balance sheet pertaining to the intangible assets created
      during the tax-free merger in 2004. The deferred tax liability associated
      with the intangible assets of $1.3 million should have been recorded with
      a reduction in the valuation allowance of approximately $500,000 and an
      increase to goodwill of $755,000, resulting in a net deferred tax
      liability of $755,000.
 
 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 quarters of 2008 and 2007, the Company
completed the annual impairment test of goodwill. As a
result, in 2008, goodwill of the Company’s subsidiary Sunrise Travel (purchased
in 2008) with a carrying amount of $149,000 was written down to its fair market
value of $0, resulting in an impairment charge of $149,000, which was included
in earnings for the year ended December 31, 2008. The Company concluded goodwill
was not impaired as of December 31, 2007.
  NOTE 13 - BONUS
ACCRUAL
  Sales Director Bonus Plans.
During the 4th quarter of 2005, the Company began a program to award bonuses to
its Reps to recognize certain Reps (Sales Director level Reps) for outstanding
contributions to the growth and success of the Company and to encourage all Reps
to fulfill specific goals or targets for sales levels, enrolling of new RTAs or
other business-critical functions. The awards offered were in the form of the
Company’s stock, based upon a predetermined calculation. That bonus program was
terminated in the first quarter of 2007, with an accompanying pay-out of a
one-time restricted stock award to Sales Director level Reps under the program
effective as of January 2, 2007. That initial award program was replaced by a
new plan— the 2007 Sales Director Bonus Plan— that was approved by the Company’s
Board of Directors on February 19, 2007 and by its stockholders on June 11,
2007.
 
 Bonus
expense, net of forfeitures, included in marketing commissions expense for the
years ended December 31, 2008, 2007 and 2006 were $422,000, $636,000 and
$4,083,000, respectively, under these Sales Director level bonus plans. Accrued
bonuses as of December 31, 2008 and 2007 totaled $452,000 and $548,070,
respectively, under these plans.
 
 Executive Employment
Agreements. Under the Company’s employment agreements with several of its
executives, in effect since the 2005 fiscal year, such executives were entitled
to a bonus based on the level of net pre-tax income of the Company. For fiscal
2007, based on the Company’s achievement of $3,422,095 in net pre-tax income,
post bonus, the Company accrued $380,233 in bonus awards for such executives,
representing 2.5% of the Company’s net pre-tax income for such year. There were
no bonus awards accrued for fiscal 2008.
  F23




YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 NOTE 14 - BENEFIT
PLANS
 
 The
Company maintains a 401(k) benefit plan for its United States’ employees.
Substantially all U.S. employees are eligible to elect coverage under the plan
which provides for Company matching contributions based on employee
contributions up to certain plan limits. In addition, discretionary
contributions are made by the Company and are dependent on the length of service
of each employee. The Company’s expense associated with the matching and
discretionary components of the plan for the years ended December 31, 2008,
2007 and 2006 was $400,000, $337,000 and $160,000, respectively, and is included
in the accompanying consolidated statements of operations in general and
administrative expense.
 
 NOTE 15 - FINANCING
ARRANGEMENTS
  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 its new corporate headquarters in Wood River, Illinois. The
Company financed the purchase of the Property by issuing a note (the
“Note”) in the
amount of $2.5 million bearing interest at a rate of Prime less 0.50%,
floating daily, from Meridian Bank, a local bank controlled by two of our
directors. The Note required interest only monthly payments for the first two
years of the Note after which the entire principal was to be paid or the Note
was to be refinanced. The Note was collateralized by the first mortgage on the
Property and a $500,000 Certificate of Deposit. The Certificate of Deposit was
released on January 8, 2008, after the Company made $625,000 of improvements to
the Property, but it was used by the Company to reduce the principal amount owed
under the Note. On July 26, 2008, the Company renewed the Note for the principal
sum of $2.0 million, the outstanding balance as of that date (the “Note Renewal”). The
Note Renewal bears interest at the rate of Prime plus 1.0%, floating daily, and
is collateralized by the first mortgage on the Property. Principal and interest
payments of $14,000 are due monthly based upon a 20-year amortization for the
first year 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, 2009, the Note Renewal is payable upon demand per the terms of the
agreement; however, no demand has been made to date. There are no other
restrictive covenants included in the Note Renewal.
 
 On
October 10, 2008, Meridian Bank was closed by the Illinois Department of
Financial and Professional Regulation, Division of Banking. Subsequently
the FDIC was named Receiver. The terms of the Company’s Note did not change
under the terms of the loan contract because they are contractually agreed to in
the promissory note with the failed institution.
 
 The
outstanding loan balance at December 31, 2008 and 2007 is $2.0 million and $2.5
million, respectively. See Note 21 – “Related Party
Transactions”
for additional information.
  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 was repayable via a monthly installment of $3,000, 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 Company, upon approval from
its Board of Directors, guaranteed the debt, thereby allowing for the
release of the guarantee by the President of the REZconnect subsidiary. The
outstanding loan balance as of December 31, 2007 was $242,000, of which current
maturities of $22,000 was included in other current liabilities on the
consolidated balance sheet. The loan was paid off during the fourth quarter of
2008.
  F24
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
  NOTE 16– BUSINESS
COMBINATIONS
 
 Proposed
Business Acquisition
 
 On
November 28, 2007, the Company signed a letter of intent and made a deposit of
$311,000 in connection with a proposed acquisition of a business which is
included in Other Assets, Net as of December 31, 2007. The Company had also
previously advanced the potential target company $45,000 which was reserved as
of December 31, 2007. During 2008, the Company reached an agreement on the
termination of the proposed acquisition and, consequently, as of December 31,
2008, the total deposit and advance of $356,000 have been written
off.
 
 Acquisition
of Travel Agency for Canadian Operations
 
 On
February 8, 2008, the Company completed the acquisition of the assets of Sunrise
Travel Service (“Sunrise”), a travel
agency located in Ontario, Canada, for $149,000. As there were no material
identifiable assets in Sunrise, the purchase price was recorded to goodwill in
the first quarter of 2008. During the fourth quarter of 2008, the Company
reassessed the value of the goodwill recorded for this purchase and has
determined it to have no value given current economic conditions. The
acquisition is expected to provide the Company with additional markets as part
of its new Canadian operations: leisure, honeymoon, and corporate
travel. However,
due to losses from operations and uncertainties surrounding the current global
economic downturn, the Company recorded an impairment loss of $149,000 during
the fourth quarter of 2008 to write off the goodwill previously recorded.
Travel commission revenues generated by Sunrise totaled $105,000 for the year
ended December 31, 2008.
 NOTE 17 – FAIR VALUE
DISCLOSURES
 
 Fair
Value Measurements.
 
 The
Company’s financial assets and liabilities, which include long-term investments,
recorded at fair value have been categorized based upon a fair value hierarchy
in accordance with SFAS No. 157. See Note 3, "Summary of Significant Accounting
Policies" for a discussion of the Company’s policies regarding this
hierarchy.
 
 Assets
Measured at Fair Value on a Recurring Basis
 
 The
Company’s assets carried at fair value on a recurring basis are investments in
auction rate securities as described in Note 8, "Long-term
Investments".  As of December 31, 2007, the entire $1.0 million in
securities were classified within level 3 and during 2008 were reclassified from
level 3 to level 2 as a result of the investment bank’s subsequent offer to
purchase such securities.  On October 1, 2008, the Company received an
offer from the investment bank holding its ARS to purchase 100% of the Company’s
outstanding ARS portfolio at par value of $1.0 million, which the Company
accepted.  The settlement date for this transaction was October 7,
2008 and the Company received the funds on that day.  Therefore, there
was no balance in long-term investments as of December 31, 2008.
 
 When
determination is made to classify a financial instrument within level 2, the
determination is based upon quoted market prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly for substantially the full term of the
financial statement.  The estimated fair value during 2008 at level 2
was based upon information provided by the investment bank, through which the
Company holds such securities, e.g. the offer to purchase.
 Assets
Measured at Fair Value on a Nonrecurring Basis
  Dollars
      in thousands
                                                              
                                                              Fair
      Value Measurements UsingDecember
      31, 2008
                                                              
                                                              Quoted
      Prices
                                                                in
      Active
                                                                Markets
      for
                                                              
                                                              
                                                              SignificantDescription
                                                              
                                                              Identical
                                                                Assets(Level
      1)
                                                              
                                                              
                                                              Other
                                                                  Observable
                                                                Inputs (Level 2)
                                                              
                                                              
                                                              Significant
                                                                Unobservable
      Inputs (Level 3)
                                                              
                                                              
                                                              Total Gains
                                                                (Losses)Long-lived
      assets held for sale
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              844
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              (366
                                                              )Goodwill
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (149
                                                              )TOTAL
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              844
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              (515
                                                              )
  In
accordance with the provisions of SFAS No. 144, long-lived assets held
for sale with a carrying amount of $1.2 million were written down to their fair
value of $900,000, less cost to sell of $56,000 (or $844,000), resulting in a
loss of $366,000, which was included in earnings for the period.
 
 In
accordance with the provisions of SFAS No. 142, goodwill of our
subsidiary Sunrise Travel with a carrying amount of $149,000 was
written down to its fair value of $0, resulting in an impairment charge of
$149,000, which was included in earnings for the
period.
 NOTE 18 - COMMON STOCK
RECLASSIFICATION
 
 On July
31, 2007, the Reclassification Date, the Company filed its Amended and Restated
Certificate of Incorporation, previously approved by the Company’s stockholders
at the Company’s annual meeting of stockholders on June 11, 2007, which
authorized the issuance of two classes of common stock - Class A Common Stock
and Class B Common Stock - and an increase in the Company’s total authorized
capital. This amendment and restatement enabled a reclassification of the
Company’s old common stock, par value $0.001 per share (“Old Common Stock”)
and an accompanying stock split (collectively, the “Reclassification”)
pursuant to which stockholders of record received one share of Class A Common
Stock and two shares of Class B Common Stock for each share of Old Common Stock
held as of the Reclassification Date.
 
 Shares of
Class B Common Stock are convertible into shares of Class A Common Stock at any
time, on a one-for-one basis. Shares of Class B Common Stock automatically
convert into shares of Class A Common Stock upon sale or other disposition
(except for transfers among related entities, transfers to trusts for the
benefit of the transferring holder of the Class B Common Stock, bona fide
pledges under financing arrangements and similar transfers). Under the Company’s
Amended and Restated Certificate of Incorporation, each share of Class A Common
Stock and each share of Class B Common Stock are equal with respect to the right
to receive dividends declared by the Company’s Board of Directors in its
discretion from time to time from funds legally available therefore, whether in
cash, stock or property. Each
holder of shares of Class A Common Stock shall be entitled to one-tenth (1/10)
vote for each share of Class A Common Stock held and each holder of shares of
Class B Common Stock shall be entitled to one vote for each share of Class B
Common Stock held.
 
 All
shares and per share amounts in this Annual Report on Form 10-K reflect this
Reclassification.
 
 The
Company announced on August 1, 2007, immediately following the effectiveness of
the Reclassification, that the new ticker symbol for the new Class A Common
Stock was “YTBLA.OB”. There is no symbol for the Class B Common Stock, as that
security does not trade.
  F25
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
  NOTE 19 - SHARE-BASED
PAYMENTS
  Stock
Options
 
 As of
December 31, 2008, the Company had a stock-based employee compensation plan and
a stock-based Sales Director bonus plan.
 
 2004 Stock Option and Restricted
Stock Plan. The Company’s stock-based employee compensation plan, the
2004 Stock Option and Restricted Stock Plan (the “2004 Plan”) was
approved by the Company’s stockholders in December 2004. The 2004 Plan is
administered by the compensation committee of the Company’s 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
2004 Plan is to make available to the Company’s key employees and directors
certain compensatory arrangements related to the growth in the value of the
Company’s 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 the Company’s employees
and directors with the interest of its stockholders. Following the
Reclassification Date, as amended and restated, the 2004 Plan authorizes
15,000,000 shares of common stock for issuance. All restricted stock awards and
all shares of stock issuable upon exercise of options that are granted after the
Reclassification Date shall consist of Class A Common Stock. As of December 31,
2008, 11,296,034 shares of Class A Common Stock remain available for future
grants under the 2004 Plan.
  On April
24, 2006, the Company’s Board of Directors granted 750,000 options under the
2004 Plan to certain employees, members of the Board of Directors and two
outside consultants, 75,000 of which were unexercised and forfeited September
30, 2006. These stock options vest in equal increments on the anniversary date
over the next five years following the grant and expire six years from the date
of grant. After the stock option award was granted, the Board of Directors
modified the stock option award to add a sixth year to the term and such options
were re-valued. The modification did not materially impact the value of the
awards. 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’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 2008 and 2007 has been insignificant thus
far.
 
 On
January 1, 2008, the Company’s Board of Directors granted an incentive stock
option to purchase 300,000 shares of the Company’s Class A Common Stock to each
of two officers of the Company pursuant to employment agreements entered into
with such officers effective as of such date. These stock options vest in five
equal installments of 60,000 shares on the effective date of the employment
agreements (January 1, 2008) and the first four anniversaries thereof and expire
ten years from the date of grant. 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 these grants: risk-free interest
rate of 3.58%; expected life of 6.0 years; dividend yield of 0% and expected
volatility of 58.91%. 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. Since
the Company had insufficient historical data available over the six-year
expected life term, expected volatility is based on the Company’s peer group
historical volatility as measured for the expected term of the grant. 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 2008 has been insignificant thus
far.
  F26
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
  On June
16, 2008, the Company’s Board of Directors granted incentive and non-qualified
stock options to purchase 279,640 and 120,360 shares, respectively, of the
Company’s Class A Common Stock to two employees of the Company. These stock
options vest in three equal installments, the first of which vests on the grant
date and the remaining on the next two anniversaries thereof and expire three
years from the date of grant. 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 these grants: risk-free interest rate of
3.02%; expected life of 2.0 years; dividend yield of 0% and expected volatility
of 127.92%. 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. Since the
Company had sufficient historical data available, expected volatility is based
on the Company’s historical volatility as measured for the expected term of the
grant. 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 2008 has been insignificant thus
far.
 
 The
Company recognized $407,000, $42,000 and $198,000 in compensation expense for
stock options granted under the 2004 Plan for the years ended December 31, 2008,
2007 and 2006, respectively. If the Company’s actual forfeiture rate is
materially different from its estimate, or if the Company re-evaluates the
forfeiture rate in the future, the stock-based compensation expense could be
significantly different than what was recorded in the current period.
Unrecognized expense related to future service on existing stock options granted
under the 2004 Plan as of December 31, 2008, 2007 and 2006 is $459,000, $57,000
and $99,000, respectively.
 
 Restricted
Stock Awards
 
 Effective
as of April 25, 2008, pursuant to its authority under its charter, the
Compensation Committee of the Company’s Board of Directors approved a new policy
that governs the compensation of the non-employee members of the Company’s Board
of Directors. Under the new policy, each non-employee director will receive (i)
a one-time restricted stock award valued at $40,000 (“At Election Award”)
upon election to the Company’s Board of Directors and (ii) annual compensation,
consisting of (A) a $30,000 cash and (B) a restricted stock award valued at
$30,000 (“Annual
Award”). In the case of the Company’s then current non-employee
directors, which does not include the two newest members of the Company’s Board
of Directors, in addition to the At Election Award (since the Company did not
provide compensation for their agreement to serve), they also received a
one-time catch-up restricted stock award (“Catch-up Award”)
valued at between $81,000 and $163,000, depending upon length of service. This
Catch-up Award compensated those then existing non-employee directors for their
service on the Company’s Board of Directors for the entire period of time during
which the Company lacked a market-level non-employee director compensation
policy.
 
 The
restricted stock award component of the Company’s ongoing non-employee director
compensation will be granted on an annual basis during the May 17th - May 30th
window following the filing of the Company’s quarterly report on Form 10-Q for
its first fiscal quarter and will consist of shares of the Company’s Class A
Common Stock having a grant-date fair market value of $30,000 (based on the
market price of the Company’s Class A Common Stock as of such date), vesting
entirely on the first anniversary of the grant date. The At Election Award
grants for non-employee directors upon election to the Board of Directors and
the Catch-up Award grants to then existing non-employee directors consisted of
shares of Class A Common Stock valued at fair market value as of the grant date.
While the At Election Award grants will vest over a period of four years, the
Catch-up Award grants to the Company’s then existing non-employee directors will
vest over eighteen months.
 
 On May
23, 2008, the Company’s Board of Directors granted restricted stock awards as
part of three separate grants - the At Election Award, the Annual Award and the
Catch-up Award, totaling 812,206 shares of the Company’s Class A Common Stock -
to its non-employee directors pursuant to the new policy referred to above, of
which 92,075 shares were forfeited September 3, 2008 and 24,391 were forfeited
on December 31, 2008. The At Election Award consisted of 195,128 shares which
vest over a period of four years beginning on the first grant date anniversary;
the Annual Award consisted of 109,758 shares which vest entirely on the first
anniversary of the grant date; and the Catch-up Award consisted of 507,320
shares, half of which vest in six months and the remainder vest one year later.
The Company calculated the cost for the restricted stock grants by using the
fair market value of the Company’s common stock on the grant date, the number of
shares issued, and an estimate of shares that will not vest due to
forfeitures.
  F27
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
  The
Company calculated the number of shares issued under the restricted stock grants
by using the total amount of compensation to be received under the new policy
divided by the fair market value of the Company’s Class A Common Stock on the
grant date. The Company will recognize amortization of the fair value of the
awards over the vesting period of each award. The effect of estimated
forfeitures was insignificant in the calculation of the
amortization.
 
 Due to
the resignations of two members of the Company’s Board of Directors during 2008,
the Company recorded a recovery of prior expense of $20,000 related to an actual
forfeiture which was higher than the estimated impact of
forfeitures.
 
 On
February 11, 2008, the Company’s Board of Directors granted restricted stock
awards to each of two RTAs of the Company for prior provision of services. The
first RTA accepted the award on July 11, 2008 (the “Measurement Date
One”). The second RTA accepted the award on October 14, 2008 (the “Measurement Date
Two”). The awards each consisted of 150,000 shares of the Company’s Class
A Common Stock of which 50,000 shares vested immediately on the Measurement Date
One and the Measurement Date Two, respectively, and 100,000 shares which vest
equally on the first and second anniversaries of the Measurement Date One and
the Measurement Date Two, respectively. The Company calculated the cost for the
restricted stock grants by using the fair market value of the Company’s Class A
Common Stock on the Measurement Date One and the Measurement Date Two,
respectively, the number of shares issued and an estimate of shares that will
not vest due to forfeitures. The effect of estimated forfeitures was
insignificant in the calculation of the amortization.
 
 For the
year ended December 31, 2008, the Company recorded $739,000 as net compensation
expense related to the amortization of the restricted stock awards issued under
the 2004 Plan. If the Company’s actual forfeiture rate is materially different
from its estimate, or if the Company re-evaluates the forfeiture rate in the
future, the stock-based compensation expense could be significantly different
than what was recorded in the current period. As of December 31, 2008, there was
approximately $700,000 of unrecognized compensation expense related to the
666,777 shares of restricted stock, which the Company expects to recognize over
the next 3.40 years.
 
 2007 Sales Director Bonus
Plan. The stock-based Sales Director bonus plan (the “2007 Sales Director Bonus
Plan”) is a bonus plan under which achievement-based unit awards are
granted on a semi-annual basis to Sales Directors who excel in their performance
on behalf of the Company and its wholly owned operating subsidiaries. Each award
under the 2007 Sales Director Bonus Plan consists of discounted stock options
exercisable to purchase shares of the Company’s Class A Common Stock. The
options have an exercise price equal to fifty percent (50%) of the fair market
value of the Class A Common Stock on the close of business on the business day
immediately preceding the grant date. The 2007 Sales Director Bonus Plan was
approved by the Company’s Board of Directors on February 19, 2007 and
subsequently approved by the Company’s stockholders at the Company’s annual
meeting of stockholders held on June 11, 2007.
  F28


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




On July
16, 2007, three of the Company’s Reps, who have qualified as Sales Directors,
received performance-based grants consisting of discounted stock options
pursuant to the 2007 Sales Director Bonus Plan. The three qualifying Sales
Directors received 211,266 options to purchase shares of Class A Common Stock
based upon the defined level of achievement measured as of June 30, 2007, 46,947
of which were unexercised and thus forfeited on September 18, 2008 due to sales
director status termination.  These options have an exercise price of
$0.71, which is equal to fifty percent (50%) of the fair market value of our
Common Stock on the close of business on the business day immediately preceding
the grant date as defined by the 2007 Sales Director Bonus Plan (as adjusted to
account for the three-for-one stock split that occurred pursuant to the
Reclassification). While all of the options that were granted vested immediately
on the date of the grant, the options are only exercisable in accordance with
the following schedule: 1/3 are exercisable at any time during the remainder of
calendar year 2007, 1/3 are exercisable on December 15, 2008 (and only on such
date) and the remaining 1/3 are exercisable on December 15, 2009 (and only on
such date). 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 these grants in 2007: risk-free average interest rate of
4.88%; expected life (in years) of 0.2-2.4; dividend yield of 0% and expected
volatility of 55.4.0%-98.3% (weighted average expected volatility of 83.9%). 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. Since the Company had sufficient
historical data available, expected volatility is based on the Company’s
historical volatility as measured for the expected term of each tranche. 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 fair value of the
three awards as of the date of the grant measured on June 30, 2007, based upon
the Black-Scholes option pricing model, was $187,000 and was recorded as accrued
bonuses and included in other current liabilities on the balance sheet as of
June 30, 2007 with a corresponding expense recorded as marketing commissions.
During 2008, accrued bonuses and marketing commissions expense were reduced by
$46,000 for actual forfeitures incurred during the year.




On
January 15, 2008, five of the Company’s Reps, who have qualified as Sales
Directors, received performance-based grants consisting of discounted stock
options to purchase shares of Class A Common Stock pursuant to the 2007 Sales
Director Bonus Plan.  Three of the qualifying Sales Directors each
received 95,238 stock options and two of the qualifying Sales Directors each
received 190,476 stock options, in each case based upon the defined levels of
achievement measured as of December 31, 2007.  All of the options
granted have an exercise price of $0.525, which was equal to fifty percent (50%)
of the fair market value of the Class A Common Stock on the close of business on
the business day immediately preceding the grant date, as defined under the 2007
Sales Director Bonus Plan. While all of the options that were granted vested
immediately on the date of grant, the options are only exercisable in accordance
with the following schedule: 1/3 are exercisable at any point until the end of
2008, 1/3 are exercisable on December 15, 2009 (and only on such date) and the
remaining 1/3 are exercisable on December 15, 2010 (and only on such
date).  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 these grants in the first quarter of
2008:  risk-free average interest rate of 2.73%; expected life (in
years) of 0.5-2.9; dividend yield of 0% and expected volatility of 89.7%-99.1%
(weighted average expected volatility of 94.3%).  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. Since the Company had sufficient historical
data available, expected volatility is based on the Company’s historical
volatility as measured for the expected term of each tranche. 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 2008 has been insignificant thus far. The fair value
of the five awards as of the date of the grant, based upon the Black-Scholes
option pricing model, was $449,000 and was recorded as accrued bonuses and
included in other current liabilities on the accompanying balance sheet as of
December 31, 2007 with a corresponding expense recorded as marketing
commissions.





F29





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





On July
15, 2008, two of the Company’s Reps, who qualified as Sales Directors, received
performance-based grants consisting of discounted stock options to purchase
shares of Class A Common Stock pursuant to the 2007 Sales Director Bonus Plan.
One of the qualifying Sales Directors received 137,931 stock options and the
other qualifying Sales Director received 344,828 stock options, in each case
based upon the defined levels of achievement measured as of June 30, 2008. All
of the options granted have an exercise price of $0.725 which was equal to fifty
percent (50%) of the fair market value of the Company’s Class A Common Stock on
the close of business on the business day immediately preceding the grant date,
as defined under the 2007 Sales Director Bonus Plan. While all of the options
that were granted vested immediately on the date of the grant, the options are
only exercisable in accordance with the following schedule: 1/3 are exercisable
at any point until the end of 2008, 1/3 are exercisable on December 15, 2009
(and only on such date) and the remaining 1/3 are exercisable on December 15,
2010 (and only on such date). 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 these grants in the third quarter of
2008:  risk-free average interest rate of 2.12%; expected life (in
years) of 0.2-2.4; dividend yield of 0% and expected volatility of
115.80%-134.48% (weighted average expected volatility of
123.24%).  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. Since
the Company had sufficient historical data available, expected volatility is
based on the Company’s historical volatility as measured for the expected term
of each tranche. 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 2008 has been insignificant
thus far.  The fair value of the two awards as of the date of the
grant, based upon the Black-Scholes option pricing model, was $467,000 and was
recorded as accrued bonuses and included in other current liabilities on the
accompanying balance sheet as of June 30, 2008 with a corresponding expense
recorded as marketing commissions.





The Company recorded a
reduction in accrued bonuses of $518,000 and $88,000 during the years ended
December 31, 2008 and 2007, respectively, and recorded related charges to
additional paid in capital associated with the fair value amount related to the
exercisable portion of the grants.  In addition, during 2008,
accrued bonuses and marketing commissions expense were reduced by $46,000 for
actual forfeitures incurred during the year.If the
Company’s actual forfeiture rate is materially different from its estimate, or
if the Company re-evaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different than what was recorded in
the current period.  Included in other current liabilities on the
consolidated balance sheet as of December 31, 2008
and 2007, respectively, are $452,000 and $545,000 of accrued bonuses that relate
to the options that are exercisable in the future.





The
following table provides additional information with respect to the stock option
plan activity during 2008 of the Company’s 2004 Plan and the 2007 Sales Director
Bonus Plan:




Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average Fair
                    Value
                  
                  
                  Weighted
                    Average
                    Remaining
                    Life (Years)Options
      outstanding, beginning of year
                  
                  
                  785,841
                  
                  
                  $
                  0.46
                  
                  
                  $
                  0.34Granted
                  
                  
                  2,149,425
                  
                  
                  
                  0.94
                  
                  
                  
                  0.80Forfeited
                  
                  
                  (46,947
                  )
                  
                  
                  0.71
                  
                  
                  
                  0.97Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (68,492
                  )
                  
                  
                  0.52
                  
                  
                  
                  0.54Options
      outstanding, end of year
                  
                  
                  2,819,827
                  
                  
                  $
                  0.82
                  
                  
                  $
                  0.68
                  
                  
                  
                  3.43Options
      exercisable, end of year
                  
                  
                  854,935
                  
                  
                  $
                  0.80
                  
                  
                  $
                  0.60
                  
                  
                  
                  2.56





The
weighted average grant date fair value of options granted during the years 2008,
2007 and 2006 was $0.80, $0.89, and $0.60, respectively.  The total
intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006 was $101,000, $917,000 and $300,000, respectively.





F30





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





A summary
of stock options outstanding and exercisable as of December 31, 2008 is as
follows:





Options Outstanding
                        
                        
                        Options ExercisableWeightedAverage
                        
                        
                        Weighted
                        
                        
                        
                        
                        
                        WeightedNumber
                        
                        
                        Remaining
                        
                        
                        Average
                        
                        
                        Number
                        
                        
                        AverageRange of Exercise Prices
                        
                        Outstanding
                        
                        
                        Life (Years)
                        
                        
                        ExercisePrice
                        
                        
                        Outstanding
                        
                        
                        ExercisePrice$0.40
      - $1.00
                        
                        
                        1,819,827
                        
                        
                        
                        1.80
                        
                        
                        $
                        0.54
                        
                        
                        
                        601,600
                        
                        
                        $
                        0.54$1.01
      - $1.67
                        
                        
                        1,000,000
                        
                        
                        
                        6.39
                        
                        
                        
                        1.32
                        
                        
                        
                        253,335
                        
                        
                        
                        1.40Total
                        
                        
                        2,819,827
                        
                        
                        
                        3.43
                        
                        
                        $
                        0.82
                        
                        
                        
                        854,935
                        
                        
                        $
                        0.80





One-Time Restricted Stock
Award





Effective
January 2, 2007, the Board of Directors of the Company approved a one-time
restricted stock award of an aggregate of 28,950,027 shares (as adjusted to
account for the three-for-one stock split that occurred pursuant to the
Reclassification) (the “Award Shares”) of the
Company’s common stock, par value $0.001 per share, to thirty Sales Director
level Reps (each, a “Grantee”) who have
made outstanding contributions to the growth and success of the Company and/or
its wholly owned operating subsidiaries. Of the 30 Grantees, three are members
of the Company’s Board of Directors and one is the President of an operating
subsidiary. The Award Shares vest in stages for each Grantee, provided various
performance-related conditions specified in the restricted stock award agreement
entered into by the Company and each Grantee (each, a “Restricted Stock Award
Agreement”) are satisfied at each vesting date. The Grantees are the
Company’s most successful Reps who have met the criteria for being deemed Sales
Directors.





An
aggregate of 9,338,703 of the Award Shares (or approximately 32.3% of each
award) vested immediately on the grant date, while up to an additional
19,611,324 Award Shares in the aggregate are subject to vesting in four equal
installments of up to 4,902,831 shares each on the first four anniversary dates
of the grant date. The vesting of any single Grantee’s award shall be determined
independently of the vesting of any other Grantee’s award; thus, each Grantee
must independently meet the performance related criteria specified in the
Restricted Stock Award Agreement between himself or herself and the Company. The
Company’s transfer agent, American Stock Transfer & Trust Company, serves as
escrow agent with respect to the unvested Award Shares awarded and will retain
such shares until the relevant vesting conditions in each Restricted Stock Award
Agreement are met. To the extent that the conditions to the vesting of any
unvested Award Shares of a Grantee have not been met by the relevant vesting
date, such shares shall be cancelled by the Company.





On
January 2, 2008, an additional 1,625,809 shares of Class A Common Stock and
3,251,618 shares of Class B Common Stock were issued, in the aggregate, to the
Grantees upon the vesting of the second tranche of the Award Shares,
representing an additional 16.9% of the Award Shares (as adjusted to reflect the
stock split pursuant to the Reclassification).





The
Company received no cash consideration for the Award Shares, as the shares were
issued in consideration of the outstanding contributions and services rendered
by the Grantees in their roles as Sales Directors on behalf of the Company
and/or its wholly owned operating subsidiaries. The grant of the Award Shares
was exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.  Although not obligated to
do so under the Restricted Stock Award Agreements, on May 17, 2007, the Company
filed a registration statement on Form S-8 to cover the resale of the Award
Shares.





F31





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company calculated the cost for the restricted stock grants by using the fair
market value of the Company’s common stock on the grant date, the number of
shares issued and an estimate of shares that will not vest due to forfeitures.
With respect to the grant of the Award Shares which vested immediately on the
grant date to the 26 Grantees who are not members of management, the Company
accrued for the cost of the Award Shares during the period over which the Sales
Directors qualified for the awards and reported these costs of $6.8 million as
marketing commission expense and a corresponding bonus liability in fiscal 2006.
The Company accounted for the grant of the Award Shares which vested immediately
on the grant date to the four members of management of $2.8 million as marketing
commission expense in the first quarter of 2007, the period in which the grant
was approved by the Board of Directors.  The Company also recorded
$4.9 million for the year ended December 31, 2007 as marketing commission
expense related to the amortization of the unvested portion of the Award Shares
vesting on January 2, 2008, which includes a nominal forfeiture rate of 4% due
to the performance related criteria that must be met to determine vesting at
each anniversary date.





As of
December 31, 2008, the performance-related vesting conditions specified in the
restricted stock award agreement were not met for all shares scheduled to vest
on January 2, 2009.  As such, the applicable shares were forfeited on
January 2, 2009.  In an effort to maintain an incentive and to help
promote retention, a one-time restricted stock grant to replace the forfeited
shares was approved by the Board of Directors on January 26,
2008.  See Note 26 - “Subsequent Events.”





The
following table summarizes the status of restricted shares under the Company’s
2004 Plan and the one-time restricted stock award during the year ended December
31, 2008:




WeightedaverageRestricted
                        
                        
                        grant-dateshares
                        
                        
                        fair
      valueNon-vested
      at beginning of 2008
                        
                        
                        19,611,324
                        
                        
                        $
                        1.03Granted
                        
                        
                        1,112,206
                        
                        
                        
                        1.45Vested
                        
                        
                        5,231,794
                        
                        
                        
                        1.06Forfeited
                        
                        
                        192,678
                        
                        
                        
                        1.40Non-vested
      at December 31, 2008
                        
                        
                        15,299,058
                        
                        
                        $
                        1.05





As of
December 31, 2008, there was approximately $15.8 million of unrecognized
compensation expense related to the 15.3 million shares of non-vested restricted
stock which includes $5.0 million of unrecognized compensation expense related
to the 4.9 million shares forfeited on January 2, 2009.  The Company
expects to recognize the remaining $10.8 million over the next 3.4
years.





Total
compensation cost recognized in the consolidated statement of operations for all
plans for the years ended December 31, 2008, 2007 and 2006 was $1.6 million,
$8.4 million and $7.0 million, respectively.





F32





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements







NOTE 20 - STOCKHOLDERS’
EQUITY




During
the fourth quarter of 2006, equity compensation in the amount of $294,000 was
recorded as a result of 552,582 shares issued as compensation for services to
non-employees with an offsetting adjustment to common stock in the amount of
$552 and additional paid in capital in the amount of approximately
$294,000.





During
the third quarter of 2007, equity compensation in the amount of $45,000 was
recorded as a result of 30,000 shares issued as compensation for services to
non-employees with an offsetting adjustment to common stock in the amount of $30
and additional paid in capital in the amount of $45,000.





During
2007, the Company received $470,000 in proceeds from the exercise of 806,784
common stock warrants associated with its February 2005 Private Placement
Offering. The Company recorded a corresponding amount of $469,000 to additional
paid in capital, $269 to Class A Common Stock and $536 to Class B Common Stock.
Each warrant is exercisable to purchase one share of common stock at an exercise
price of $0.58, exercisable for five years from date of issuance.




Also
during 2007, the Company received $446,000 in proceeds related to the exercise
of 750,000 warrants previously issued for services. The Company recorded a
corresponding amount of $444,000 to additional paid in capital, $250 to Class A
Common Stock and $500 to Class B Common Stock. The Company also recorded $602 to
Class A Common Stock and $1,204 to Class B Common Stock and a corresponding
amount of $1,806 as a reduction in additional paid in capital related to the
issuance of 1,804,512 net shares of common stock in connection with the cashless
exercise of 2,400,000 warrants also previously issued for services.





During
the first quarter of 2008, equity compensation in the amount of $510,000 was
recorded as a result of 500,000 shares issued as compensation for services to
non-employees with an offsetting adjustment to Class A Common Stock in the
amount of $500 and additional paid in capital in the amount of
$510,000.





During
2008, the Company received $254,000 in proceeds from the exercise of 435,935
common stock warrants associated with its February 2005 Private Placement
Offering. The Company recorded a corresponding amount of approximately $254,000
to additional paid in capital, $145 to Class A Common Stock and $291 to Class B
Common Stock. Each warrant is exercisable to purchase one share of common stock
at an exercise price of $0.58, exercisable for five years from date of
issuance. As of
December 31, 2008, 41.93 of the 64 warrant units (each unit consisting of 56,250
common stock purchase warrants) remain unexercised.





Also
during 2008, the Company recorded $48 to Class A Common Stock and a
corresponding amount of $48 as a reduction in additional paid in capital related
to the issuance of 47,694 net shares of Class A Common Stock in connection with
the cashless exercise of 63,492 stock options previously awarded under the
Company’s 2007 Sales Director Bonus Plan.  In addition, the Company
received $2,000 in proceeds from the exercise of 5,000 common stock options and
recorded a corresponding amount of $1,995 to additional paid in capital, $2 to
Class A Common Stock and $3 to Class B Common Stock.





F33





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




NOTE 21 - RELATED PARTY
TRANSACTIONS




Certain
members of management of the Company own a company that YTB Marketing utilizes
for the printing, shipping and fulfillment of its sales materials and for
various other marketing initiatives including the design and production of the
annual convention stage. During 2008, 2007 and 2006, the Company expended $3.4
million, $3.5 million and $1.5 million, respectively, for these services.
 At December 31, 2008, the Company had a receivable of $14,000 included in
accounts receivable on the consolidated balance sheet for an advance made to the
printing company.  At December 31, 2007, the Company has a prepaid
asset of $157,000 reflected on the balance sheet for payments related to work
not yet completed.  There was no prepaid balance as of December 31,
2008.





The
Company leased office space (which housed the Company’s previous headquarters
office) in two buildings under separate commercial lease agreements. The
buildings were owned and controlled by Meridian Land Company, Inc. (“Meridian Land”).
Meridian Land is controlled by Timothy Kaiser, M.D. and Clay Winfield, each of
whom is a member of the Company’s Board of Directors. The first lease (the
“Building One
Lease”), which covered the approximate 13,000 square foot premises
located at One Country Club View, Edwardsville, Illinois 62025 (the “Building One Leased
Premises”), commenced July 1, 2005 and was to expire on June 30, 2010.
The second lease (the “Building Two Lease”),
which covers approximately 5,000 square feet at the premises located at 600
Country Club View Drive, Edwardsville, Illinois 62025 (the “Building Two Leased
Premises”), commenced November 1, 2005 and was to expire on October 31,
2010.





Each
lease contained an addendum which granted to Meridian Land a two-year “put”
option to sell the property on which the respective leased premises were located
in exchange for shares of the Company’s common stock. In the case of the
Building One Lease, the put option, which expired June 30, 2007, entitled
Meridian Land to receive 1,500,000 shares of the Company’s common stock upon
exercise thereof. In the case of the Building Two Lease, the put option entitled
Meridian Land to receive 1,875,000 shares of the Company’s common stock upon
exercise thereof.





Separately,
under each of the Building One Lease and Building Two Lease, the Company had the
option to purchase the property on which the respective leased premises were
located for cash consideration. In the case of the Building One Lease, the cash
purchase price was set at $1.9 million, while under the Building Two Lease,
the cash purchase price under the original option was set at $2.4
million.





On July
27, 2007, the Company exercised its option (the “Building One Purchase
Option”) under the Building One Lease to purchase the real property on
which the Building One Leased Premises are located (the “Building One
Property”). As a result of its exercise of the Building One Purchase
Option, the Company entered into a contract with Meridian Land (the “Building One Purchase
Contract”).





Consistent
with the terms of the Building One Purchase Option, under the Building One
Purchase Contract, the purchase price for the Building One Property was set at
$1.9 million, of which $481,000 was paid by the Company in cash as of the
signing of the Building One Purchase Contract and the remaining $1.4
million of which constituted obligations of Meridian Land which were paid
and/or assumed by the Company at the closing, consisting of (i) $1.3
million principal amount of aggregate indebtedness owed by Meridian Land to
a local bank that was assumed by the Company, (ii) $58,000 of accrued property
taxes owed by Meridian Land for the Building One Property for 2006 and for a
pro-rata portion of 2007, and (iii) $6,000 of assorted closing costs of Meridian
Land. The indebtedness to the local bank assumed by the Company at the closing
was secured by a mortgage on the Building One Property. Closing under the
Building One Purchase Contract occurred on August 14, 2007. The outstanding
indebtedness on the Building One Property was subsequently retired by the
Company on October 30, 2007.





F34





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




As
previously reported in the Company’s Current Reports on Form 8-K filed with the
SEC on August 7, 2007 and August 30, 2007 and in its Quarterly Report on Form
10-QSB filed with the SEC on November 14, 2007, the Company had purportedly
entered into a contract (the “Building Two Purchase
Contract”) with Meridian Land to purchase the property on which the
Building Two Leased Premises are located (the “Building Two
Property”) effective as of August 3, 2007 and had purportedly closed upon
the acquisition of the Building Two Property on August 14, 2007, with the
Building Two Property to remain subject to $2.0 million principal amount of
existing indebtedness (as of August 3, 2007) that is owed by Meridian Land to a
bank that is secured by a mortgage on the Building Two Property. The purported
acquisition was to have resulted from Meridian Land’s exercise of its put option
(the “Building Two Put
Option”), pursuant to the Building Two Lease, pursuant to which the
Company was to issue to Meridian Land 1,875,000 shares of its common stock
(reflecting the three-for-one stock split resulting from the Reclassification),
of which 625,000 shares were to be Class A Common Stock and 1,250,000 shares
were to be Class B Common Stock (collectively, the “Meridian Option
Shares”).




However,
because Meridian Land had not been aware, as of its entry into the Building Two
Lease, that the Meridian Option Shares were to constitute “restricted
securities” (as defined in Rule 144 promulgated under the Securities Act of
1933, as amended) and could not be freely resold without compliance with the
then-applicable restrictions under Rule 144, and because the Company was not
aware of all relevant factors related to acceptance of encumbered title to the
Building Two Property, each of Meridian Land and the Company agreed (on November
8, 2007) to rescind its respective performance pursuant to the Building Two Put
Option, given the mutual mistake of fact between the parties. Meridian Land
agreed to return the Meridian Option Shares to the Company for cancellation, and
the Company agreed to re-convey title to the Building Two Property to Meridian
Land. Each of Meridian Land and the Company agreed to treat its respective
performance pursuant to the Building Two Put Option (including both the transfer
of title to the Building Two Property and the issuance of the Meridian Option
Shares) as void. The Company therefore does not reflect in its balance sheet at
December 31, 2007 the Building Two Property nor the issuance of the Meridian
Option Shares.




In
January 2008, the Company exercised its separate option under the Building Two
Lease to purchase the Building Two Property.  Subsequently, the
Company entered into a purchase contract with Meridian Land for $2.5
million.  The Company paid $500,000 of the $2.5 million purchase price
as a non-refundable earnest money deposit as of the execution of the purchase
contract, and the remaining $2.0 million is due at the closing of the
acquisition of the Building Two Property, originally scheduled to close by the
end of June 2008, which has been extended to occur on or before December 31,
2009.  Given the current downturn in the credit and real estate
markets, the Company extended the contract in order to preserve its interest in
purchasing the building or assigning their rights to purchase the
building.  There can be no assurances made that the Company will be
able to obtain proper financing to close on the acquisition or, even if it does
obtain financing, the Company may also elect not to exercise its right to
purchase the building, or that the Company will assign its rights to purchase
the property to a third party.  Therefore, the non-refundable earnest
money deposit has been fully reserved as of December 31, 2008 and the
expense has been included in general and administrative
expenses in the accompanying statement of operations for the period ended
December 31, 2008.


During
2006 and through August of 2007, the Company’s rental expense under the Building
One Lease and the Building Two Lease, in the aggregate, was $15,000 per
month.  While the Company no longer paid any rent with respect to the
Building One Property for the latter part of 2007 and all of 2008 (due to the
termination of the Building One Lease upon the Company’s acquisition of the
Building One Property in August 2007), the Company’s rental expense under the
Building Two Lease was $8,000 per month.  Combined rental expense for
these two leases was $101,000, $137,000 and $180,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.





The
Company had utilized a Learjet 35A business jet owned by Meridian/Silver, LC, a
Florida limited liability company (“Meridian/Silver”),
which had been owned 50% by Meridian Land and 50% by an unaffiliated third party
during the year ended December 31, 2007. Payments made to Meridian/Silver for
the use of the aircraft totaled $35,000 and $63,000 for the periods ended
December 31, 2008 and 2007, respectively.





On
February 29, 2008, the Company acquired all of the outstanding membership
interests of Meridian/Silver for the purchase price of $1.3 million. The only
significant asset held by Meridian/Silver was the executive jet, which was held
free and clear of any and all liens and encumbrances. Meridian/Silver was not
subject to any material liabilities or contractual obligations. The Company
utilized the executive jet for the transport of employees, officers, directors,
business guests and property for business-related purposes.  On
September 24, 2008, Meridian/Silver and YTB Air, Inc., a Delaware corporation
(“YTB Air”),
agreed to merge entities resulting in YTB Air being the surviving
entity.





In August
2008, the Company made the decision to sell the executive jet within the next 12
months for an amount expected to be less than its current carrying amount and
recorded a pre-tax impairment loss of $310,000 to write down the jet to its
estimated realizable value of $900,000.  On January 12, 2009, the
Company sold the business jet for net proceeds of $859,000.  As a
result, an additional impairment of $41,000 was recorded in the fourth quarter
of 2008 to write down the jet to its estimated realizable value as of December
31, 2008.  The Company reclassified the jet to assets held for sale on
the Company’s consolidated balance sheet as of December 31, 2008.  See
Note 26 - “Subsequent Events.”





F35





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





On August
17, 2007, the Company entered into a Commercial Lease Agreement (the “Magnolia Lease”), by
and between Meridian Land, as lessor, and the Company, as lessee, covering the
approximately 5,500 square feet premises located at #112 Magnolia Drive (Lot #9
Magnolia Commons), Glen Carbon, Illinois 62034 (the “Magnolia Leased
Premises”). The Magnolia Leased Premises serve as additional office space
for the Company.  The Magnolia Lease has an initial term of 18 months,
originally scheduled to commence on November 1, 2007 and expire on April 30,
2009.  Due to delays in construction being performed with respect to
the Magnolia Leased Premises, the term of the Magnolia Lease was postponed such
that it commenced on February 15, 2008 and extends until August 15, 2009. Rent
under the Magnolia Lease has been set at $8,000 per month. In addition to
monthly rental payments, the Company is responsible for utilities and
maintenance and must pay all real estate taxes assessed on the property on which
the Magnolia Leased Premises are located during the term of the Magnolia Lease,
as well as all costs of maintaining any common areas used by the Company in
conjunction with the Magnolia Leased Premises.  During the period
ended December 31, 2008, rental expense and real estate tax expense for the
Magnolia Leased Premises totaled $92,000 and $7,000, respectively.  In
addition, during the period ended December 31, 2008, payments related to the
cost of maintaining common areas totaled $5,000 and payments related to the
reimbursement of tenant build-out costs capitalized to leasehold improvements
totaled $19,000.




The
consent of Meridian Land is required for assignments or subletting of the
Magnolia Leased Premises by the Company under the Magnolia Lease, such consent
not to be unreasonably withheld or delayed. Any assignment or subletting by the
Company will not release the Company from any of its duties or obligations under
the Magnolia Lease.





Meridian
Land is controlled by its principals, Timothy Kaiser, M.D. and Clay Winfield,
each of whom is a member of the Company’s Board of Directors. Each of the
transactions entered into by the Company with Meridian Land (including the
Building Two Lease, the acquisition of the Building Two Property, the Building
One Lease, the acquisition of the Building One Property, the acquisition of the
membership interests of Meridian/Silver and the Magnolia Lease) was considered
and approved by the independent members of the Company’s Board of
Directors.





In July
2006, the Company borrowed $2.5 million from Meridian Bank in connection with
its acquisition of the land and building which houses its corporate headquarters
in Wood River, Illinois. The chairman and principal shareholder of, and another
director and principal shareholder of, Meridian Bank, Timothy Kaiser, M.D. and
Clay Winfield, respectively, are also directors of the Company. This transaction
was approved by the independent members of the Company’s Board of
Directors.  On January 8, 2008, the Company’s $500,000 certificate of
deposit representing restricted cash collateral for the Company’s outstanding
indebtedness related to its corporate headquarters property was surrendered in
partial repayment of the principal amount outstanding under such
indebtedness.





On July
26, 2008, the Company renewed the note for the principal sum of $2.0 million,
the outstanding balance as of that date (the “Note Renewal”). The
Note Renewal bears an interest rate of Prime, plus 1.00% floating
daily.  Interest and principal are due monthly based upon a 20-year
amortization for the first year 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, 2009, the Note Renewal is payable upon demand
per the terms of the agreement; however, no demand has been made to date. The
Note Renewal is collateralized by the first mortgage on the corporate
headquarters property.  There are no other restrictive covenants
included in the Note Renewal.  Interest paid on the note amounted to
$110,000, $189,000 and $81,000 for the years ended December 31, 2008, 2007 and
2006, respectively.




On
October 10, 2008, Meridian Bank, Eldred, Illinois, the holder of the Company’s
mortgage on its current headquarters, was closed by the Illinois Department of
Financial and Professional Regulation, Division of
Banking.  Subsequently, the FDIC was named Receiver.  The
terms of the Company’s note will not change under the terms of the loan contract
because they are contractually agreed to in the promissory note with the failed
institution.  The outstanding balance of the note as of December 31,
2008 and 2007 was $2.0 million and $2.5 million, respectively.  See
Note 26 - “Subsequent Events.”





On May 4,
2007, the Company purchased three vehicles for a total of $128,000 from a
company controlled by the Company’s Chairman of the Board, J. Lloyd Tomer. The
purchase price paid was set by independent dealers and approximated fair market
value for the vehicles.





F36





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





During
the years ended December 31, 2008 and 2007, the Company made aggregate payments
of $4.2 million and $1.0 million, respectively, pursuant to the terms of the
development contract for its new corporate headquarters in Wood River, Illinois.
In addition, at December 31, 2008 and 2007, the Company’s accounts payable and
accrued expenses included $414,000 and $0, respectively, of amounts due under
the development contract.  The contract for the development of the
real property on which such headquarters are located, which was approved by the
independent members of the Company’s Board of Directors, was awarded to Winfield
Development, which is controlled by Clay Winfield, a member of the Company’s
Board of Directors.





During
2008 and 2007, REZconnect paid approximately $8,000 and $9,000 in legal fees for
work performed by Harold Kestenbaum, a member of the Company's Board
of Directors. The fees were approved by the independent members of the Company's
Board of Directors.





At
December 31, 2008, the Company accrued $11,000 in fees to Israeloff, Trattner
& Co. for work performed by Andrew Wilder, a member of the
Company's Board of Directors.  The liability, included in
accounts payable and accrued expenses on the consolidated balance sheet as of
December 31, 2008, was paid in January 2009.  The fees covered
services performed by Andrew Wilder for expanded duties in his role as Audit
Committee Chairman and a member of the Compensation Committee of the Company's
Board of Directors. The fees were approved by the independent members of the
Company's Board of Directors.









NOTE 22 - SEGMENT
INFORMATION





The
Company operates in the following two business segments: marketing of IBCs
including the development of a sales network (“Marketing”); and
sales of travel through IBCs (“Travel”). The
Company’s business segments operate primarily in the United States, but also
have operations in Canada and are structured for potential additional
international growth.




Prior to
the second quarter of 2007, the Company had reported in three operating
segments, Marketing, Travel and Technology (as described immediately below). The
Marketing segment was comprised of the YTB Marketing subsidiary and the Travel
segment was comprised of the YTB Travel subsidiary and an applicable portion of
the operations of the REZconnect subsidiary, with the remaining portion of
REZconnect reported in the Technology segment. During the second quarter of
2007, the Company collapsed the Technology segment into the Travel segment as
the amounts related to Technology were immaterial. Certain
reallocations have been made to the marketing and travel segments in 2007 and
2006 to conform to the current year presentation.





F37





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




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.





Dollars
      in thousandsYear
      EndedDecember
      31, 2008
                    
                    Marketing
                    
                    
                    Travel
                    
                    
                    Parent
                    
                    
                    TotalExternal
      and inter-segment revenue
                    
                    $
                    133,635
                    
                    
                    $
                    28,840
                    
                    
                    $
                    72
                    
                    
                    $
                    162,547Net
      income (loss)
                    
                    
                    4,436
                    
                    
                    
                    (4,250
                    )
                    
                    
                    (4,661
                    )
                    
                    
                    (4,475
                    )Assets
                    
                    
                    16,359
                    
                    
                    
                    3,662
                    
                    
                    
                    23,065
                    
                    
                    
                    43,086Depreciation
      and amortization
                    
                    
                    1,386
                    
                    
                    
                    247
                    
                    
                    
                    898
                    
                    
                    
                    2,531Capital
      expenditures
                    
                    
                    1,190
                    
                    
                    
                    939
                    
                    
                    
                    7,696
                    
                    
                    
                    9,825





Year
      EndedDecember
      31, 2007
                  
                  Marketing
                  
                  
                  Travel
                  
                  
                  Parent
                  
                  
                  TotalExternal
      and inter-segment revenue
                  
                  $
                  119,209
                  
                  
                  $
                  22,076
                  
                  
                  $
                  -
                  
                  
                  $
                  141,285Net
      income (loss)
                  
                  
                  1,495
                  
                  
                  
                  3,532
                  
                  
                  
                  (1,818
                  )
                  
                  
                  3,209Assets
                  
                  
                  47,530
                  
                  
                  
                  8,749
                  
                  
                  
                  6,615
                  
                  
                  
                  62,894Depreciation
      and amortization
                  
                  
                  860
                  
                  
                  
                  15
                  
                  
                  
                  277
                  
                  
                  
                  1,152Capital
      expenditures
                  
                  
                  2,567
                  
                  
                  
                  311
                  
                  
                  
                  8,017
                  
                  
                  
                  10,895





Year
      EndedDecember
      31, 2006
                  
                  Marketing
                  
                  
                  Travel
                  
                  
                  Parent
                  
                  
                  TotalExternal
      and inter-segment revenue
                  
                  $
                  42,890
                  
                  
                  $
                  8,007
                  
                  
                  $
                  -
                  
                  
                  $
                  50,897Net
      income (loss)
                  
                  
                  (3,277
                  )
                  
                  
                  1,768
                  
                  
                  
                  (4,467
                  )
                  
                  
                  (5,976
                  )Assets
                  
                  
                  17,106
                  
                  
                  
                  1,125
                  
                  
                  
                  10,659
                  
                  
                  
                  28,890Depreciation
      and amortization
                  
                  
                  315
                  
                  
                  
                  -
                  
                  
                  
                  93
                  
                  
                  
                  408Capital
      expenditures
                  
                  
                  1,270
                  
                  
                  
                  -
                  
                  
                  
                  4,624
                  
                  
                  
                  5,894





F38





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





GEOGRAPHICAL
FINANCIAL INFORMATION:





NET
REVENUES:


GEOGRAPHIC
      FINANCIAL INFORMATION:NET
      REVENUES:Dollars
      in thousands
                                  
                                  Years
      Ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006United
      States
                                  
                                  $
                                  158,503
                                  
                                  
                                  $
                                  141,285
                                  
                                  
                                  $
                                  50,897Canada
                                  
                                  
                                  4,044
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  162,547
                                  
                                  
                                  $
                                  141,285
                                  
                                  
                                  $
                                  50,897
 
 LONG-LIVED
      ASSETS:2008
                          
                          
                          2007
                          
                          
                          2006United
      States
                          
                          $
                          25,040
                          
                          
                          $
                          22,014
                          
                          
                          $
                          -Canada
                          
                          
                          267
                          
                          
                          
                          110
                          
                          
                          
                          -$
                          25,307
                          
                          
                          $
                          22,124
                          
                          
                          $
                          -
 F39


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 23 - INCOME
TAXES







Dollars
      in thousands
                    
                    Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Income
      (loss) before income tax provisionUS
                    
                    $
                    (4,281
                    )
                    
                    $
                    3,422
                    
                    
                    $
                    (5,976
                    )Foreign
                    
                    
                    251
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    (4,030
                    )
                    
                    $
                    3,422
                    
                    
                    $
                    (5,976
                    )
  The
provision for income taxes is as follows:
  Years
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Income
      tax provisionCurrent:Federal
                            
                            $
                            12
                            
                            
                            $
                            50
                            
                            
                            $
                            -State
      and local
                            
                            
                            132
                            
                            
                            
                            76
                            
                            
                            
                            -Foreign
                            
                            
                            253
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      current
                            
                            
                            397
                            
                            
                            
                            126
                            
                            
                            
                            -Deferred:Federal
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -State
      and local
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Foreign
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      deferred
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -FIN
      48:Federal
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -State
      and local
                            
                            
                            48
                            
                            
                            
                            87
                            
                            
                            
                            -Foreign
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      FIN 48
                            
                            
                            48
                            
                            
                            
                            87
                            
                            
                            
                            -Total
      income tax provision
                            
                            $
                            445
                            
                            
                            $
                            213
                            
                            
                            $
                            -




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





Dollars
      in thousands
                    
                    Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Computed
      tax at federal statutory rate at 34%
                    
                    $
                    (1,370
                    )
                    
                    $
                    1,164
                    
                    
                    $
                    (2,032
                    )Alternative
      minimum tax
                    
                    
                    12
                    
                    
                    
                    50
                    
                    
                    
                    -Computed
      state tax net of federal benefit of 34%
                    
                    
                    87
                    
                    
                    
                    108
                    
                    
                    
                    -FIN
      48 state tax, not federal tax benefited
                    
                    
                    48
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
      taxes
                    
                    
                    253
                    
                    
                    
                    -
                    
                    
                    
                    -Non-deductible
      meals and entertainment
                    
                    
                    66
                    
                    
                    
                    100
                    
                    
                    
                    -Other,
      net
                    
                    
                    32
                    
                    
                    
                    58
                    
                    
                    
                    (446
                    )Change
      in valuation allowance
                    
                    
                    1,317
                    
                    
                    
                    (1,267
                    )
                    
                    
                    2,478Total
                    
                    $
                    445
                    
                    
                    $
                    213
                    
                    
                    $
                    -





F40





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Deferred
tax assets and liabilities consist of the following:


As
      of December 31,Dollars
      in thousands
                          
                          2008
                          
                          
                          2007Deferred
      tax assetsAllowance
      for doubtful accounts
                          
                          $
                          210
                          
                          
                          $
                          85Depreciation
                          
                          
                          -
                          
                          
                          
                          38Accrued
      vacation
                          
                          
                          153
                          
                          
                          
                          104Accrued
      expenses
                          
                          
                          284
                          
                          
                          
                          114Interest
      receivable reserve
                          
                          
                          80
                          
                          
                          
                          -Capital
      losses
                          
                          
                          107
                          
                          
                          
                          9Accrued
      compensation
                          
                          
                          589
                          
                          
                          
                          632Impairment
      loss
                          
                          
                          333
                          
                          
                          
                          -Inventory
      reserve
                          
                          
                          844
                          
                          
                          
                          -Contributions
      carryover
                          
                          
                          10
                          
                          
                          
                          33Alternative
      minimum tax deposit
                          
                          
                          62
                          
                          
                          
                          50Share-based
      payments
                          
                          
                          472
                          
                          
                          
                          1,923Capital
      organizational costs
                          
                          
                          47
                          
                          
                          
                          47Foreign
      tax credit carryforward
                          
                          
                          253
                          
                          
                          
                          -Net
      operating loss carryforward
                          
                          
                          5,413
                          
                          
                          
                          3,8908,857
                          
                          
                          
                          6,925Deferred
      tax liabilitiesIntangible
      assets
                          
                          
                          (1,262
                          )
                          
                          
                          (1,262
                          )Depreciation
      and amortization
                          
                          
                          (187
                          )
                          
                          
                          -(1,449
                          )
                          
                          
                          (1,262
                          )Net
      deferred tax asset before valuation allowance
                          
                          
                          7,408
                          
                          
                          
                          5,663Less
      valuation allowance
                          
                          
                          (8,163
                          )
                          
                          
                          (6,418
                          )Net
      deferred tax liability
                          
                          $
                          (755
                          )
                          
                          $
                          (755
                          )Federal
      deferred tax liability
                          
                          $
                          (662
                          )
                          
                          $
                          (662
                          )State
      deferred tax liability
                          
                          
                          (93
                          )
                          
                          
                          (93
                          )Net
      deferred tax liability
                          
                          $
                          (755
                          )
                          
                          $
                          (755
                          )





Income Taxes




SFAS
No. 109, “Accounting for Income Taxes,” establishes financial accounting
and reporting standards for the effect of income taxes. The Company provides
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. The Company assesses 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. The Company
assesses the likelihood that deferred tax assets will be realized. To the extent
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.





F41





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company’s tax provision for the year ended December 31, 2008 consists of
alternative minimum tax, state and foreign income taxes. The Company has a
federal tax loss for the year ended December 31, 2008, which received no tax
benefit, as the Company’s deferred tax assets have a full valuation allowance
recorded against them.





Federal
income tax receivable of $13,000 and $0 is included in other prepaid expenses
and current assets, net at December 31, 2008 and 2007,
respectively.  Federal income tax payable of $0 and $50,000, foreign
income tax payable of $253,000 and $0, and state income tax payable of $73,000
and $76,000 is included in other current liabilities at December 31, 2008 and
2007, respectively.





The
Company has provided for a full valuation allowance against its deferred tax
assets at December 31, 2008 and December 31, 2007. Fluctuations in the actual
outcome of these future tax consequences could materially impact our financial
position or our results of operations.





At
December 31, 2008 and 2007 the Company had approximately $15.5 million and $11.4
million, respectively, 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 2028 for federal and state
purposes. Net operating losses of $7.2 million may be subject to a substantial
limitation under the “Change of Ownership” section 382 of the Internal Revenue
Code.





During
the second quarter ended June 30, 2007, during the Company’s FIN 48 analysis,
the Company discovered that a long-term deferred tax liability with a
corresponding increase to goodwill had not been recorded on the Company’s
balance sheet pertaining to the intangible assets created during the tax-free
merger in 2004. The deferred tax liability associated with the intangible assets
of $1.3 million should have been recorded with a reduction in the valuation
allowance of approximately $500,000 and an increase to goodwill of $755,000,
resulting in a net deferred tax liability of $755,000. As these adjustments had
no impact on the Company’s results of operations or cash flows in any period,
the adjustments were made in the second quarter of 2007, with no prior period
adjustment.





FIN
48 Accounting for Uncertainties in Income Taxes





In June
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.





The
Company adopted FIN 48 in 2007. The cumulative effect of adopting FIN 48 was
recorded as a net decrease to retained earnings (deficit) of $105,000. On the
date of adoption of FIN 48 and December 31, 2007 and 2008, the Company had $2.0
million, $1.4 million and $1.4 million of unrecognized tax benefits,
respectively. The unrecognized tax liabilities relate to certain tax deductions
claimed on federal and state tax returns that are uncertain as to the ultimate
outcome.  The change in unrecognized tax benefit from the date of
adoption to December 31, 2007 resulted primarily from the filing of an automatic
change in accounting method with the Internal Revenue Service which eliminated
the previously existing tax uncertainty.





The
federal and state tax uncertainties identified as of December 31, 2008 and 2007,
if recognized, would only reduce the deferred tax asset related to the Company’s
net operating losses by approximately $1.2 million with a corresponding
reduction to the valuation allowance.





Of the
unrecognized tax liabilities at December 31, 2008 and 2007, $185,000 and
$182,000, respectively, if recognized, would impact the Company’s effective
income tax rate. For the year ended December 31, 2008 and 2007, taxes in the
amount of $48,000 and $87,000 for unrecognized tax liabilities, respectively,
were included in the tax provision.





F42





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




The
following table details the activity related to the Company's tax
uncertainties:




Unrecognized Tax BenefitsDollars in thousands
                  
                  Years Ended December 31,2008
                  
                  
                  2007Balance
      at beginning of period
                  
                  $
                  1,398
                  
                  
                  $
                  2,001Tax
      positions related to the current period:Gross
      increases
                  
                  
                  19
                  
                  
                  
                  87Gross
      decreases
                  
                  
                  -
                  
                  
                  
                  -Tax
      positions related to prior periods:Gross
      increases
                  
                  
                  29
                  
                  
                  
                  84Gross
      decreases
                  
                  
                  -
                  
                  
                  
                  (761
                  )Settlements
                  
                  
                  (44
                  )
                  
                  
                  (10
                  )Lapse
      of statute of limitations
                  
                  
                  -
                  
                  
                  
                  (3
                  )Balance
      at December 31,
                  
                  $
                  1,402
                  
                  
                  $
                  1,398





The
Company does not expect any significant changes in the unrecognized tax benefits
within twelve months of the filing date of this Annual Report on Form
10-K.





The
Company classifies interest expense and any related penalties related to income
tax uncertainties as a component of income tax expense. Accrued interest
expense, net of payments related to tax uncertainties recognized for the years
ended December 31, 2008 and 2007, was $9,000 and $7,000, respectively. Accrued
interest of $16,000 and $7,000 related to income tax uncertainties was
recognized as a component of other non-current income tax liabilities at
December 31, 2008 and 2007, respectively.  No penalties have been
recognized as of December 31, 2008 as management believes that any federal
adjustments will be offset in full by net operating losses. State penalties will
be waived when the applicable state returns are filed
voluntarily.





The
Company files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions and Canada and is subject to examination by the various taxing
authorities.  The Company’s federal income tax returns for the tax
years after 2002 remain subject to examination (2003 remains open due to amended
tax returns). The various states in which the Company is subject to income tax
are generally open for the tax years after 2003.





NOTE 24 – REAL ESTATE
TRANSACTIONS





The
Company recognized a $102,000 gain on the sale of assets during
2008.  This gain resulted from the November 2008 sale of approximately
10 acres of raw land located in the vicinity of the Company’s
headquarters.  The purchase price of $1.0 million was paid by way of a
$500,000 cash payment, less closing costs of approximately $4,000, and a
$500,000 non-interest bearing promissory note payable by the buyer within 120
days of November 24, 2008, the closing date.  The Company filed a
mortgage to secure the payment obligation of the buyer with respect to the
promissory note.  The Company recorded the gain on the sale based upon
applying the total gross profit to total sales value percentage of 20.4% to the
$500,000 cash payment, and deferred the remainder.  The resulting
deferred gain will be recognized based upon the same gross profit percentage to
the extent the Company receives proceeds in the future on the remaining note
receivable.  On the accompanying balance sheet as of December 31,
2008, the deferred gain of $102,000 on the sale is deducted from the related
note receivable.





In
December 2008, the Company sold its former headquarters office building, certain
office equipment and related land for proceeds of $300,000 in cash paid at
closing and the delivery by the buyer of a $1.2 million promissory note, less
closing costs of approximately $65,000, consisting primarily of $60,000 in
commissions.  The carrying value of the property was approximately
$1.9 million as of November 6, 2008, the effective date of the sales contract,
which resulted in a loss on the sale of $416,000.  The promissory note
is secured by a mortgage on the property and bears interest at a rate of eight
percent per annum, payable in monthly installments of interest only for 18
months, at which time the full balance of principal is due.





F43




YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements


The
Company did not have any gains or losses on sales of real estate assets during
2007 and 2006.





NOTE 25 – COMMITMENTS AND
CONTINGENCIES





Leases





The
Company leases office space at 600 Country Club View Drive in Edwardsville,
Illinois under a commercial lease agreement with Meridian Land, the owner of the
building. The commercial lease agreement is dated August 4, 2005, and is to
expire on October 31, 2010.  The rental cost of 600 Country Club View
Drive space is $8,000 per month. See Note 21 – “Related Party Transactions”
for additional information.





On August
17, 2007, the Company entered into the Magnolia Lease by and between
Meridian Land, as lessor, and the Company, as lessee, covering the Magnolia
Leased Premises. The Magnolia Leased Premises serves as additional office space
for the Company.  See Note 21 – “Related Party Transactions” for
additional information.





The
Magnolia Lease runs for an initial term of 18 months, commencing on February 15,
2008 and expiring on August 15, 2009. Rent under the Magnolia Lease has been set
at $8,000 per month. In addition to monthly rental payments, the
Company will be responsible for utilities and maintenance and must pay all
real estate taxes assessed on the property on which the Magnolia Leased Premises
are located during the term of the Magnolia Lease, as well as all costs of
maintaining any common areas used by the Company in conjunction with the
Magnolia Leased Premises.  To date, a renewal of the Magnolia Lease
has not been executed.





On July
1, 2008, the Company entered into a Commercial Lease Agreement (the “Sunrise Lease”), by
and between Paula Dale Ltd., as lessor, and the Company, as lessee, covering the
approximately 618 square feet premises located at 1151 Dundas St.
West Mississauga, Ontario/ Canada L5C 1C6 (the “Sunrise Leased
Premises”).  The Company is utilizing the Sunrise Leased
Premises as a retail travel agency.





The
Sunrise Lease runs for an initial term of 12 months, originally commencing on
July 1, 2008 and expiring on June 30, 2009. Rent under the Sunrise Lease has
been set at $1,000 per month. In addition to monthly rental payments, the
Company is responsible for utilities and maintenance and must pay all real
estate taxes assessed on the property on which the Sunrise Leased Premises are
located during the term of the Sunrise Lease, as well as all costs of
maintaining any common areas used by us in conjunction with the Sunrise Leased
Premises.  The Company has an option to renew the Sunrise Lease for an
additional one year term with the same terms and conditions except for the
rental rate which increases approximately 3.1%.  To date, a renewal of
the Sunrise Lease has not been executed.





The
Company entered into a Commercial Lease Agreement (the “British
Columbia Lease”), on February 1, 2008, by and between Janz & Assoc.
Distribution Inc., a corporation organized under the laws of the Province of
British Columbia.  The subject premise is located at 91st Avenue,
Surrey, British Columbia, Canada (the “British
Columbia Premises”). YTB Marketing is  utilizing the British
Columbia Premises as additional office space.





The
British Columbia Lease runs for an initial term of 12 months, originally
commencing on February 1, 2008 and expiring on January 31, 2009 with an option
to renew the lease for one year after expiration of the term of this lease, with
all other terms and conditions the same. Rent under the British Columbia Lease
which includes common areas, utilities and taxes, has been set at $1,000 per
month.  The lease also calls for the Company to pay a monthly cleaning
service and Goods and Services Tax.  To date, a renewal of the British
Columbia Lease has not been executed.  The Company is currently
renting on a month-to-month basis.





The
Company, as lessee, entered into a services agreement (the “Nova Scotia
Agreement”), on July 28, 2008, by and between Purdy’s Wharf Business
Centre Ltd., as lessor, having its principal place of business at Purdy’s Wharf
Tower 1, 1959 Upper Water Street, Suite 1700, Halifax, Nova Scotia,
Canada.  The fee under the Nova Scotia Agreement is nominal (less than
$1000 per month) with an initial term of 12 months ending on July 20,
2009.





F44





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company is also obligated under an operating office lease for Rezconnect's
offices in New Jersey, which expires on April 30, 2013. Under the lease the
Company must pay minimum annual rentals, currently at $50,000 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 four 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. Each of the stated lease agreements
expire at various dates through fiscal year 2009 and will not be
renewed.





The
Company also leases certain office equipment and one vehicle under
non-cancellable 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 income (expense) for all locations for the years
ended December 31, 2008, 2007 and 2006:





Dollars
      in thousands
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Rental
      expense
                    
                    $
                    584
                    
                    
                    $
                    296
                    
                    
                    $
                    377Less
      sublease rental income
                    
                    
                    81
                    
                    
                    
                    91
                    
                    
                    
                    110Net
      rental expense
                    
                    $
                    503
                    
                    
                    $
                    205
                    
                    
                    $
                    267





Minimum
future rental payments under non-cancelable operating leases as of December 31,
2008 are as follows:





Dollars
      in thousands
                
                
                
                
                
                
                
                
                
                
                
                Vehicle
                
                
                SubleaseYear
      ending
                
                
                
                
                RezConnect
                
                
                Canadian
                
                
                Wal-Mart
                
                
                and
      Office
                
                
                Rental
                
                
                Net
      RentalDecember
      31,
                
                IL
      Office
                
                
                NJ
      Office
                
                
                Locations
                
                
                Locations
                
                
                Equipment
                
                
                Income
                
                
                Expense2009
                
                $
                176
                
                
                $
                49
                
                
                $
                10
                
                
                $
                32
                
                
                $
                68
                
                
                $
                36
                
                
                $
                2992010
                
                
                84
                
                
                
                50
                
                
                
                -
                
                
                
                -
                
                
                
                21
                
                
                
                -
                
                
                
                1552011
                
                
                -
                
                
                
                51
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                -
                
                
                
                552012
                
                
                -
                
                
                
                52
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                522013
                
                
                -
                
                
                
                18
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                182014
      and beyond
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                260
                
                
                $
                220
                
                
                $
                10
                
                
                $
                32
                
                
                $
                93
                
                
                $
                36
                
                
                $
                579





In
addition, as of December 31, 2008, the Company had approximately $3.4 million in
purchase obligations related to commitments for future good and services. The
purchase commitments principally include $949,000 for future services over the
next four years related to the Company’s annual convention and $1.5 million in
commitments related to various travel services and technologies.





F45





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Employment
agreements




Effective
January 1, 2008, the Company entered into a long-term employment agreements with
each of Mr. J. Scott Tomer (Chief Executive Officer), Mr. J. Kim Sorensen
(President), Mr. J. Lloyd Tomer (Chairman of the Board), Mr. John D. Clagg
(Chief Financial Officer and Treasurer), Mr. Andrew Cauthen (President, Chief
Operating Officer and Secretary) and Mr. Michael Y. Brent (former President).
All employment agreements expire December 31, 2012 and subject each officer to
confidentiality requirements, as well as anti-raiding and non-competition
restrictions for an additional two years following termination of employment.
The new employment agreements for Messrs. J. Scott Tomer, J. Kim Sorensen and
Michael Y. Brent supersede the previous employment agreements for each such
individual that were effective January 1, 2005 and had been scheduled to
terminate on December 31, 2009.





Employment
Agreements with J. Scott Tomer, J. Kim Sorensen, J. Lloyd Tomer, and Michael Y.
Brent





Under
their employment agreements with the Company, each of Messrs. J. Scott Tomer, J.
Kim Sorensen, J. Lloyd Tomer and Michael Y. Brent will serve in their positions
for five-year terms, earning starting annual base salaries (in fiscal 2008) of
$325,000, which shall increase in increments of $25,000 for each successive year
under the agreements. Each employment agreement automatically renews for
additional one year terms at the then-current base salary upon the expiration of
the initial term or any successor term if either party does not provide notice
of non-renewal at least 90 days prior to such expiration. Each of Messrs. J.
Scott Tomer, J. Kim Sorensen, J. Lloyd Tomer and Michael J. Brent will be
eligible for a cash bonus equal to a percentage of the Company’s net pre-tax
income for each year in which such income surpasses certain thresholds, in the
following percentages: (i) 2.0%, if net pre-tax income is at least
$500,000, but less than $1,500,000; (ii) 2.25%, if net pre-tax income is at
least $1,500,000 but less than $3,000,000; and (iii) 2.5%, if net pre-tax
income is at least $3,000,000.





Beyond
providing for compensation payable to each of Messrs. J. Scott Tomer, J. Kim
Sorensen, J. Lloyd Tomer and Michael Y. Brent, the employment agreements
acknowledge their existing ownership of overrides on IBC sales and monthly fees
as follows: (i) each of J. Scott Tomer, J. Kim Sorensen and Michael Y. Brent
owns an override on the IBC sales and monthly fees generated by Representative
position #2 of our YourTravelBiz.com subsidiary’s sales organization equal to
50% of the monthly commissions and overrides earned by said position #2, paid on
a monthly basis; and (ii) J. Lloyd Tomer owns an override on the IBC sales and
monthly fees generated by Representative position #1 of our YourTravelBiz.com
subsidiary’s sales organization equal to 100% of the monthly commissions and
overrides earned by said position #1, paid on a monthly basis.




Commissions
paid to the officers of the Company are detailed in our 2008 Proxy Statement
which is incorporated herein by reference.





Each of
Messrs. J. Scott Tomer, J. Kim Sorensen, J. Lloyd Tomer and Michael Y. Brent is
subject to non-competition and non-solicitation restrictions for the entire
duration of his employment agreement and for a period of two years thereafter.
In the event of the termination, by the Company, of the employment of any of
each of Messrs. J. Scott Tomer, J. Kim Sorensen, J. Lloyd Tomer and Michael Y.
Brent without cause, such individual will be paid his base salary for the
remaining term of his employment agreement, in accordance with the Company’s
customary payroll practices, as if such employment had not been
terminated.





In
addition to receiving a car allowance and health and medical insurance provided
by the Company, Messrs. J. Scott Tomer, J. Kim Sorensen, J. Lloyd Tomer and
Michael Y. Brent receive term life insurance coverage payable to beneficiaries
designated by each.





Employment
Agreements with John D. Clagg and Andrew Cauthen





Under
their employment agreements with the Company, each of Messrs. John D. Clagg and
Andrew Cauthen will serve in their positions for five-year terms at a starting
annual base salary (in fiscal 2008) of $300,000, which shall increase in
increments of $25,000 for each successive year under the agreement. The
agreements automatically renew for additional one year terms at the then-current
base salary upon the expiration of the initial term or any successor term if
either party does not provide notice of non-renewal at least 90 days prior to
such expiration.





F46





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Beyond
base salary, each of Messrs. Clagg and Cauthen was awarded an incentive stock
option to purchase 300,000 shares of YTB’s Class A Common Stock, vesting in five
equal installments of 60,000 shares on the effective date of the employment
agreements (January 1, 2008) and the first four anniversaries thereof. Each such
officer is eligible for a bonus equal to two percent (2%) of YTB’s net pre-tax
income for each year in which such net pre-tax income equals or exceeds
$4,000,000, subject to the determination of the Compensation Committee of YTB’s
Board of Directors. Such bonus shall be payable in the form of a restricted
stock award.




Each of
Messrs. Clagg and Cauthen is subject to non-competition and non-solicitation
restrictions for the entire duration of his employment agreement and for a
period of two years thereafter. In the event of termination, by YTB, of the
employment of either of Messrs. Clagg or Cauthen without cause, such individual
is to be paid his base salary for the remaining term of his employment
agreement, in accordance with the Company’s customary payroll practices, as if
such employment had not been terminated.





Each of
Messrs. Clagg and Cauthen also receives health, life, and medical insurance from
YTB under their employment agreements.





Employment
Agreement with Derek J. Brent





Effective
January 1, 2005, the Company entered into a long-term employment agreement with
Mr. Derek J. Brent (former Secretary).  Mr. Derek J. Brent, who
provides services only to the REZconnect subsidiary, receives a base annual
salary of $180,000 (in fiscal 2006), increasing annually in $30,000 increments.
In 2009, the last year of the current agreement, the increase will be 6% of the
2008 salary.  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.





Deferral
of Annual Salary Increases





The
annual salary increases due to each of Messrs. J. Scott Tomer, J. Kim Sorensen,
J. Lloyd Tomer, Andrew Cauthen, and John D. Clagg under their employment
agreements effective January 1, 2008, have been deferred until further notice.





Legal
Proceedings


On August
4, 2008, a civil action was filed against three subsidiaries of the Company and
certain of its executive officers in the Superior Court of California, County of
Los Angeles, by the California Attorney General. The complaint alleges that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws.  The complaint was filed after 18 months of
dialogue, initiated by us with the Attorney General to discuss the
implementation of a new California travel law and its potential effect on our
business model.  Throughout these discussions, which broadened over
time, we have consistently cooperated with the state’s information
requests.   On December 19, 2008, the California Attorney General
amended its complaint to add YTB International, Inc. as an additional
defendant.  This addition did not otherwise change the nature of the
allegations or claims asserted in the litigation.   The
California Attorney General seeks a permanent injunction preventing the
defendants from making any untrue or misleading statements or committing any
acts of unfair competition, penalties of at least $15.0 million, and restitution
of at least $10.0 million.   Management believes that the Company
has meritorious defenses and intends to vigorously defend the case.





On August
8, 2008, a complaint seeking to be certified as a class-action was filed against
the Company, three Company subsidiaries, and certain executive officers, in the
United States District Court, Southern District of Illinois.  The
complaint alleges that the defendants violated the Illinois Consumer Fraud and
Deceptive Business Practices Act.  On August 14, 2008, a second,
substantively similar, complaint was filed against the same defendants in the
United States District Court for the Southern District of
Illinois.  The two cases have now been consolidated and are proceeding
together before the same judge.  The plaintiffs have filed a
consolidated complaint, seeking damages of over $100.0 million.  On
February 9, 2009, the Company filed motions to dismiss the consolidated
complaint and those motions are now pending before the
Court.  Management believes that the Company has meritorious defenses
and intends to vigorously defend these cases.





F47





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





After the
Illinois class action and California Attorney General suits were filed, the
Company provided notice to various insurance carriers.  The Company’s
primary Directors and Officers Liability Insurance carrier, Illinois National
Insurance Company (an AIG company) (“Illinois National”)
agreed to provide coverage for the defense of the cases, subject to a
reservation of rights.  Because only the executive officers who were
sued (“the individual
insureds”) are covered for this type of lawsuit under the policy and
the Company is not, Illinois National agreed to pay a portion of the
defense costs incurred in both cases, and in fact it has made some payments
toward defense costs.





On
January 29, 2009, the California Attorney General sent a letter to the Company's
defense counsel, with a copy to Illinois National and three excess insurance
carriers, stating that California Insurance Code Section 533.5 provides that
there shall be no duty for any insurance carrier to defend lawsuits alleging
violations of Business and Professional Code Sections 17200 or 17500 in which
the Attorney General seeks recovery of a fine, penalty, or
restitution.  The lawsuit against the Company and its executives is
such a lawsuit.  After receipt of this letter, counsel for the Company
and the individual insureds informed Illinois National's counsel that their
position was that the Illinois National policy is governed by Illinois law, and
therefore California Insurance Code Section 533.5 does not apply. Counsel
for the Company sought Illinois National's assurances that it agreed with
this position, though it remains unresolved at the time of the filing of this
Form 10-K





On
February 6, 2009, the individual insureds filed a declaratory judgment action in
circuit court in Madison County, Illinois, in order to protect their rights
under the Illinois National policy.  The action seeks a declaration
from the court that Illinois National's obligation to advance and reimburse
their defense costs in connection with the California Attorney General's lawsuit
is not limited by California Insurance Code Section 533.5.  The
individual insureds have not yet served the complaint in this suit on Illinois
National and are in discussions with Illinois National about possible resolution
of the matter.




Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur.  The Company’s management
and its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment.  In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability is accrued in the Company’s financial
statements.  If the assessment indicates that a potentially material
loss contingency is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material, is
disclosed.





Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee is disclosed.





NOTE 26 - SUBSEQUENT
EVENTS




On
January 12, 2009, the Company sold its business jet for net proceeds of $872,000
and incurred costs of $28,000 to prepare the jet for sale.  As of
December 31, 2008 the Company had recorded an impairment to write down the jet
to its estimated realizable value of $844,000.  The
Company classified the jet as assets held for sale on the
Company’s consolidated balance sheet as of December 31, 2008.




On
January 26, 2009, the Company’s Board of Directors approved the issuance of
3,821,451 shares of restricted stock to certain Sales Directors. These awards
were in replacement of previously issued restricted stock and option
awards.






On March
11, 2009, the Company incorporated a new subsidiary, YTB Franchise Services,
Inc., which was formed to service and offer future franchise efforts of the
Company.





F48





YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements


NOTE 27 – CASH FLOW
RESTATEMENT
 
 Subsequent
to the issuance of the Company’s consolidated financial statements for the year
ended December 31, 2007, the Company determined that its previously issued
consolidated statements of cash flows for the fiscal years ended December 31,
2007 and December 31, 2006 contained an error resulting from the classification
of certain cash flows for both the receipts and payments of the restricted cash
related to amounts withheld by credit card processors.  This error
resulted in an overstatement of cash provided by operating activities and a
corresponding overstatement of cash used in financing activities for the periods
described above.
 
 These
adjustments to the Consolidated Statements of Cash Flows do not affect the
Company’s Consolidated Statements of Operations, Consolidated Balance Sheets,
Consolidated Statement of Changes in Stockholders’ Equity (Deficit), or cash and
cash equivalents.
 
 A summary
presentation of this cash flow restatement for the years ended December 31, 2007
and December 31, 2006 is presented below.


Dollars in thousands
                  
                  As
      Previously Presented
                  
                  
                  Adjustment
                  
                  
                  As
      RestatedFor the year ended
      Decemeber 31, 2007:Restricted
      cash-collateral used as reserves for credit card
processing
                  
                  $
                  -
                  
                  
                  $
                  (1,018
                  )
                  
                  $
                  (1,018
                  )Net
      cash provided by operating activities
                  
                  
                  13,040
                  
                  
                  
                  (1,018
                  )
                  
                  
                  12,022Restricted
      cash-collateral for reserve for credit card processing
                  
                  
                  (1,768
                  )
                  
                  
                  (1,768
                  )
                  
                  
                  -Reduction
      in restricted cash for credit card processing - CD release
                  
                  
                  750
                  
                  
                  
                  750
                  
                  
                  
                  -Rounding
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  -Net
      cash used in financing activities
                  
                  $
                  (1,893
                  )
                  
                  $
                  (1,019
                  )
                  
                  $
                  (874
                  )For the year ended
      Decemeber 31, 2006:Restricted
      cash collateral for credit card processing
                  
                  $
                  -
                  
                  
                  $
                  (750
                  )
                  
                  $
                  (750
                  )Rounding
                  
                  
                  
                  
                  
                  
                  1Net
      cash provided by operating activities
                  
                  
                  908
                  
                  
                  
                  (749
                  )
                  
                  
                  159Restricted
      cash-collateral for outstanding note and reserve for credit card
      processing
                  
                  
                  (1,250
                  )
                  
                  
                  (1,250
                  )
                  
                  
                  -Reduction
      in restricted cash-collateral for outstanding note
                  
                  
                  -
                  
                  
                  
                  500
                  
                  
                  
                  500Rounding
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -Net
      cash provided by (used in) financing activities
                  
                  $
                  (580
                  )
                  
                  $
                  (749
                  )
                  
                  $
                  169




NOTE 28 – QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)





Unaudited
summarized financial information by quarter for 2008 and 2007 is as
follows:





Dollars
      in thousands, except share and per share data
                                                                    
                                                                    Year
      Ended December 31, 2008First
                                                                    
                                                                    
                                                                    Second
                                                                    
                                                                    
                                                                    Third
                                                                    
                                                                    
                                                                    FourthQuarter
                                                                    
                                                                    
                                                                    Quarter
                                                                    
                                                                    
                                                                    Quarter
                                                                    
                                                                    
                                                                    QuarterNet
      revenues
                                                                    
                                                                    $
                                                                    42,728
                                                                    
                                                                    
                                                                    $
                                                                    44,774
                                                                    
                                                                    
                                                                    $
                                                                    42,876
                                                                    
                                                                    
                                                                    $
                                                                    32,169Income
      (loss) from operations
                                                                    
                                                                    
                                                                    (3,463
                                                                    )
                                                                    
                                                                    
                                                                    (215
                                                                    )
                                                                    
                                                                    
                                                                    327
                                                                    
                                                                    
                                                                    
                                                                    (770
                                                                    )Net
      income (loss)
                                                                    
                                                                    
                                                                    (3,518
                                                                    )
                                                                    
                                                                    
                                                                    (200
                                                                    )
                                                                    
                                                                    
                                                                    288
                                                                    
                                                                    
                                                                    
                                                                    (1,045
                                                                    )Net
      income (loss) per share:Basic
                                                                    
                                                                    $
                                                                    (0.03
                                                                    )
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    (0.01
                                                                    )Diluted
                                                                    
                                                                    
                                                                    (0.03
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (0.01
                                                                    )Weighted
      average shares outstanding:Basic
                                                                    
                                                                    
                                                                    102,858,468
                                                                    
                                                                    
                                                                    
                                                                    103,183,276
                                                                    
                                                                    
                                                                    
                                                                    103,438,235
                                                                    
                                                                    
                                                                    
                                                                    103,629,200Diluted
                                                                    
                                                                    
                                                                    102,858,468
                                                                    
                                                                    
                                                                    
                                                                    103,183,276
                                                                    
                                                                    
                                                                    
                                                                    110,080,692
                                                                    
                                                                    
                                                                    
                                                                    103,629,200





Year
      Ended December 31, 2007First
                                                                          
                                                                          
                                                                          Second
                                                                          
                                                                          
                                                                          Third
                                                                          
                                                                          
                                                                          FourthQuarter
                                                                          
                                                                          
                                                                          Quarter
                                                                          
                                                                          
                                                                          Quarter
                                                                          
                                                                          
                                                                          QuarterNet
      revenues
                                                                          
                                                                          $
                                                                          24,049
                                                                          
                                                                          
                                                                          $
                                                                          32,000
                                                                          
                                                                          
                                                                          $
                                                                          39,869
                                                                          
                                                                          
                                                                          $
                                                                          45,367Income
      (loss) from operations
                                                                          
                                                                          
                                                                          (2,224
                                                                          )
                                                                          
                                                                          
                                                                          1,542
                                                                          
                                                                          
                                                                          
                                                                          2,188
                                                                          
                                                                          
                                                                          
                                                                          1,507Net
      Income (loss)
                                                                          
                                                                          
                                                                          (2,177
                                                                          )
                                                                          
                                                                          
                                                                          1,672
                                                                          
                                                                          
                                                                          
                                                                          2,149
                                                                          
                                                                          
                                                                          
                                                                          1,565Net
      income (loss) per share:Basic
                                                                          
                                                                          $
                                                                          (0.02
                                                                          )
                                                                          
                                                                          $
                                                                          0.02
                                                                          
                                                                          
                                                                          $
                                                                          0.02
                                                                          
                                                                          
                                                                          $
                                                                          0.02Diluted
                                                                          
                                                                          
                                                                          (0.02
                                                                          )
                                                                          
                                                                          
                                                                          0.02
                                                                          
                                                                          
                                                                          
                                                                          0.02
                                                                          
                                                                          
                                                                          
                                                                          0.01Weighted
      average shares outstanding:Basic
                                                                          
                                                                          
                                                                          94,309,323
                                                                          
                                                                          
                                                                          
                                                                          96,529,578
                                                                          
                                                                          
                                                                          
                                                                          97,209,960
                                                                          
                                                                          
                                                                          
                                                                          97,552,636Diluted
                                                                          
                                                                          
                                                                          94,309,323
                                                                          
                                                                          
                                                                          
                                                                          105,887,781
                                                                          
                                                                          
                                                                          
                                                                          110,801,031
                                                                          
                                                                          
                                                                          
                                                                          106,303,998





F49





Schedule
II





YTB
INTERNATIONAL, INC.


Consolidated
Valuation and Qualifying Accounts


Years
ended December 31, 2008, 2007 and 2006





Dollars
      in thousands
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              DeductionsAdditions
                                              
                                              
                                              
                                              
                                              
                                              Reclass
      toBalance
      at
                                              
                                              
                                              charged
      to
                                              
                                              
                                              Write-offs,
                                              
                                              
                                              acquisition
                                              
                                              
                                              Deferred
                                              
                                              
                                              Balancebeginning
                                              
                                              
                                              costs
      and
                                              
                                              
                                              net
      of
                                              
                                              
                                              of
      business
                                              
                                              
                                              tax
      asset,
                                              
                                              
                                              at
      end ofDescription
                                              
                                              of
      period
                                              
                                              
                                              expenses
                                              
                                              
                                              recoveries
                                              
                                              
                                              reserve
                                              
                                              
                                              net
                                              
                                              
                                              period2008Allowance
      for doubtful accounts
                                              
                                              $
                                              6
                                              
                                              
                                              $
                                              2
                                              
                                              
                                              $
                                              (1
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              7Inventory
      reserve
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,024
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,024Notes
      receivable reserve
                                              
                                              
                                              45
                                              
                                              
                                              
                                              562
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (45
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              562Interest
      receivable reserve
                                              
                                              
                                              156
                                              
                                              
                                              
                                              109
                                              
                                              
                                              
                                              (48
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              217Advance
      reserve
                                              
                                              
                                              73
                                              
                                              
                                              
                                              295
                                              
                                              
                                              
                                              (206
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              162Deferred
      tax assets-
      valuation allowance
                                              
                                              
                                              6,418
                                              
                                              
                                              
                                              1,745
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              8,1632007Allowance
      for doubtful accounts
                                              
                                              $
                                              7
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (1
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              6Notes
      receivable reserve
                                              
                                              
                                              -
                                              
                                              
                                              
                                              45
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              45Interest
      receivable reserve
                                              
                                              
                                              -
                                              
                                              
                                              
                                              156
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              156Advance
      reserve
                                              
                                              
                                              -
                                              
                                              
                                              
                                              73
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              73Deferred
      tax assets-
      valuation allowance
                                              
                                              
                                              8,041
                                              
                                              
                                              
                                              (1,116
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (507
                                              )
                                              
                                              
                                              6,4182006Allowance
      for doubtful accounts
                                              
                                              $
                                              25
                                              
                                              
                                              $
                                              5
                                              
                                              
                                              $
                                              (23
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              7Deferred
      tax assets-
      valuation allowance
                                              
                                              
                                              7,661
                                              
                                              
                                              
                                              380
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              8,041





F50