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, 2009


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    ̈
            
            Non-accelerated
      filer    ̈
            
            Smaller reporting company  
      x





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, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$7.7 million based upon the closing price of $.11 on June 30, 2009, as reported
by the Over-the-Counter Bulletin Board (“ OTC-BB”).  As of the close of business on April 7, 2010, there were
total shares outstanding of 79,601,069 and 34,357,428, respectively, of the
registrant’s Class A Common Stock and Class B Common Stock
(excludes 914,516 shares of restricted Class A Common Stock
and 1,829,032 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 2010 Annual Meeting of
Stockholders, expected to be held on or about June 7, 2010, 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
                        
                        
                        10Item
      1B.
                        Unresolved
      Staff Comments
                        
                        
                        24Item
      2.
                        Properties
                        
                        
                        24Item
      3.
                        Legal
      Proceedings
                        
                        
                        27PART
      IIItem
      4.
                        [Removed
      and reserved.]
                        
                        
                        29Item
      5.
                        Market
      for Registrant's Common Equity, Related Stockholder Matters and
      Issuer  Purchases of Equity Securities
                        
                        
                        29Item
      6.
                        Selected
      Financial Data
                        
                        
                        30Item
      7.
                        Management's
      Discussion and Analysis of Financial Condition and Results of Operations
                        
                        
                        30Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        
                        52Item
      8.
                        Financial
      Statements and Supplementary Data
                        
                        
                        52Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        
                        
                        52Item
      9A.
                        Controls
      and Procedures
                        
                        
                        52Item
      9B.
                        Other
      Information
                        
                        
                        54PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        
                        
                        55Item
      11.
                        Executive
      Compensation
                        
                        
                        55Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        
                        
                        55Item
      13.
                        Certain
      Relationships and Related Transactions, and Director Independence
                        
                        
                        55Item
      14.
                        Principal
      Accountant Fees and Services
                        
                        
                        55PART
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules
                        
                        
                        56Index
      to Exhibits
                        
                        
                        57Signatures
                        
                        
                        60Index
      to Financial Statements, Financial Statement Schedules
                        
                        
                        61




*
              Portions
      of the Issuer's Proxy Statement for its 2010 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 of 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




Item 1.Business.




YTB
International, Inc., a Delaware corporation (the “ Company”, “ YTB” or “ We”), is a leading
marketer and provider of internet-based business opportunities offering
travel-related services as well as shopping opportunities through 700 affiliate
stores and nine featured stores.  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,
formerly referred to as Internet Travel Centers or internet travel websites,
monthly web hosting fees from our Site Owners, formerly referred to as Referring
Travel Agents, or Referring Travel Affiliates in Canada, (“ Site Owners”), and commissions
on the sale of travel products and through shopYTB, commissions from merchandise
sales from a network of 700 affiliated stores and featured stores, as well as
training and mentoring.




We
believe that the shift to the internet for shopping and for booking travel and
our unique programs for our Site Owners place us in a valuable and unique
position to provide an income stream for our Site Owners and allows the ultimate
consumer a choice of booking his or her travel through the ever-growing internet
travel industry and/or to shop online at over 700 affiliate stores offering cash
back as well as discounts.  The emerging market shift to the internet
for shopping and travel services presents the opportunity for advancement of
products and services by referral relationships.  Typical online
travel merchants sell a commodity (travel), which does not engender strong
customer loyalty.  By contrast, each Site Owner develops personal
relationships with his or her customers, who book travel or shop through the
Site Owner’s IBC, thereby creating a significant advantage for our sales force
over the major online travel companies and online shopping
sites.  Typically, the cost to book a trip through a Site Owner is
nearly identical to booking a trip through a major online travel company,
although our costs are not necessarily the same or less expensive than other
travel websites. The IBCs provide access to more than 35 booking engines,
including World Choice Travel (a subsidiary of Travelocity), Hotels.com, Apple
Vacations, Collette Vacations, and others.  For shopping, customers
receive cash back in the range of 2.5% to 12% and are eligible for all discounts
offered by the online retailer.





In
addition to our expected demand in travel related products, we are very excited
about the introduction of new high commissionable retail products with the
launch of ZamZuu, Inc. (“ ZamZuu”) in January
2010, which replaces shopYTB from 2009.  See Recent Operations
Developments.  We believe we are at the beginning of a massive
paradigm shift as it pertains to retail shopping.  We are architecting
the appropriate product mix, technology platforms and marketing programs to
address this in the months and years to come.





We
conduct our business operations through three wholly-owned subsidiaries and
their respective subsidiaries: (i) YTB Travel Network, Inc., together with its
subsidiary YTB Travel Network of Illinois, Inc.; (ii) YTB Marketing, Inc.,
formerly known as YourTravelBiz.com, Inc.; and (iii) YTB Franchise Services,
Inc.





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.”





To
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, through shopYTB and ZamZuu
launched in January 2010, such as the affiliate store relationship and the
higher margin featured stores including insurance products, flowers,
electronics, cosmetics, as well as nutritional products. The divisions of the
Company service all travel arrangements from the IBCs that we
host.  As of December 31, 2009, there were 41,174 such online sites in
operation.




Our Class
A Common Stock is quoted on the Over the Counter Bulletin Board Exchange (“
OTC-BB”) under
the symbol “YTBLA.OB.”  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”).




Current
Operations




Our three
wholly-owned subsidiaries operate as follows:


4





YTB
Travel Network, Inc. (and its subsidiaries)




YTB
Travel Network, Inc. (together with its domestic and international subsidiaries
collectively “ YTB
Travel”) provides customer access to the travel vendor, supports online
booking transactions, supplies personal fulfillment services, collects travel
commissions from vendors and pays travel sales commissions.  YTB
Travel is the travel management subsidiary that processes travel sales from
online vendors, processes and handles bookings (reservations) from IBCs,
negotiates deals with preferred vendors, and receives incentives based on the
volume of business produced through our IBCs.  The
fulfillment services are offered through interactive, real time
booking engines and include access to preferred deals with leading travel
industry suppliers.  Site Owners 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.  Site Owners earn transactional compensation from travel
purchased from their respective IBCs.





YTB
Marketing, Inc. (and its subsidiaries)




YTB
Marketing, Inc., together with its domestic and international subsidiaries
(collectively “ YTB
Marketing”) establishes and sells IBCs and compensates its Independent
Marketing Representatives (“ Reps”).  YTB Marketing conducts business through marketing,
training and support of its Rep sales force which is responsible for marketing
and selling IBCs to Site Owners.  There are currently 7,245 Reps
who are qualified to participate in the network marketing compensation plan of
YTB Marketing.  In order to qualify for this compensation, you first
become an Associate that allows you to refer three site owners and once sold,
you qualify as a Rep and you must sign the Rep agreement.





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 compensate Reps for the sale of IBCs through a direct
sales model via a multilevel marketing commissions structure.  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.





YTB
Franchise Services, Inc.





YTB
Franchise Services, Inc. (“ YTB Franchise”) was
formed in March 2009, to serve as the corporate entity to offer a new franchise
offering designed to increase the training and qualifications of those IBC
owners who want to focus exclusively on travel.  There has been no
activity by YTB Franchise other than an initial capital contribution by YTB
International, Inc.    All intercompany transactions have
been eliminated in consolidation. Franchise applications have been filed
in 7 states and are pending approval.




Recent
Operational Developments





ZamZuu,
Inc.





In
January 2010, we renamed our YTB Marketing subsidiary to ZamZuu and launched
ZamZuu, an e-commerce business solution opportunity, on January 15, 2010. 
ZamZuu is strategically positioned in the world of e-commerce to not only
continue to capture online travel sales, but to also take advantage of the
growing trend of online retail sales and is an expansion of shopYTB from
2009.  ZamZuu is specifically designed for the individual who is
interested in all facets of online retail.  This business opportunity
is sold for a set up fee of $249.95 and a monthly hosting fee of $49.95.





Supplier
Relationships





We
conduct our operations through relationships with various travel and retail
suppliers, such as airlines, hotels, flowers, event tickets 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 and various high incentive products along with a network of
affiliated stores through IBCs (“ Travel”). Our
business segments operate primarily in the United States, but also have
operations in Canada, Bermuda, and the Bahamas and are structured for potential
additional international growth.




See Note
18 – “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 “ZamZuuTM,”
“YourTravelBizTM,” “YTB Travel and CruisesTM,” “Travel Network ®,”
“Global Travel NetworkTM,” “YTB Travel Network ®,” “Travel Network Vacation CentralTM,” “Vacation CentralTM” and
“Sunrise Travel ServicesTM,” as well as internet websites “ZamZuu.comTM,”
“ZamZuu.bizTM,” “YTB.comTM,” “YourTravelBiz.com ®,”
“YTBnet.comTM,” and “Bookmytravel.comTM.





In
January 2010, with the launch of ZamZuu, the Company no longer operates under
the trade name “YourTravelBizTM” or the website “YourTravelBiz.com ®.”





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.





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.





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 Site
Owners.  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.





For
non-travel related products and services, our competitors are the retail stores
that consumers can go to directly online such as Target, Wal-Mart,
etc.  However, those retail stores do not offer cash back or
commissions to the customer unless they go through our search engine.





Regulatory
Framework




Accounting
Standards





We follow
accounting standards set by the Financial Accounting Standards Board (“ FASB”) as well as
rules promulgated by the SEC.  The FASB sets generally accepted
accounting principles (“ GAAP”) that we
follow to ensure we report our financial condition, results of operations, and
cash flows consistently.  Over the years, the FASB and other
designated GAAP-setting bodies, have issued GAAP guidance in the form of
Statements of Financial Accounting Standards (“ SFASs”), FASB
Interpretations, FASB Staff Positions (“ FSPs”), Emerging
Issues Task Force (“ EITF”) consensuses
on issues, Accounting Standards Executive Committee Statements of Position (“
SOPs”),
etc.  The FASB recognized the complexity of its standard-setting
process and embarked on a revised process in 2004 that culminated in the release
on July 1, 2009, of the FASB Accounting Standards CodificationTM (the “ Codification”).  The Codification is the single source of authoritative
U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. In
addition, rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC
registrants.  The Codification does not change how we account for our
transactions or the nature of related required disclosures.  What the
Codification changes is how we reference guidance issued by the
FASB.  We refer to topics in the Codification rather than SFAS 165,
FSP 157-2, EITF 06-3, SOP 98-1, etc.  This change was made effective
by the FASB for periods ending on or after September 15, 2009.  Going
forward, the FASB will not issue new standards in the form of SFASs, FSPs, or
Interpretations. Instead, the FASB will issue Accounting Standards Updates (“
ASUs”), which
will serve only to: (a) update the Codification; (b) provide background
information about the guidance; and (c) provide the basis for conclusions on the
change(s) in the Codification.  We have updated our references to GAAP
in this Annual Report on Form 10-K to reflect the guidance in the Codification.


6


Industry
Regulations





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 Site Owners could be found not to be in compliance with
applicable laws and regulations. Failure by a Rep or Site Owner, 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 Site Owners, 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.





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 Site Owners in the United States.


7





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.”




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.


8


Discontinued
Operations





During
the second quarter of 2009, the Company’s Board of Directors made a strategic
decision to sell its subsidiary, REZconnect Technologies, Inc. (“ REZconnect”) on June
30, 2009.  The Board determined that the REZconnect business model,
serving primarily brick and mortar travel agencies, was not compatible with our
current and future plans.  During the first half of 2009, REZconnect
operations reported net revenues of $869,000 and a loss from operations of
$463,000. The Company recorded a loss on disposal, net of tax of $2.6
million for the year ended December 31, 2009.  See Note 17 –
“Discontinued Operations” to the consolidated financial statements for further
discussion.





Employees




As of
April 7, 2010, we had a total of 157 full-time employees, 3 part-time employees
and 28 furloughed employees (which excludes Reps and Site Owners, 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
2009, we were named the 25 thlargest
travel agency in the United States by Travel Weekly for the year ended 2008 and
during 2008, they named us the 26 thlargest
for the year ended 2007.  During fiscal 2008, the aggregate value of
the retail travel services that have been booked by our Site Owners and
independent franchisees surpassed $424 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
18 – “Segment Information” to the consolidated financial statements for
summarized financial information concerning our geographical financial
information.





Seasonality





YTB
Travel experiences seasonal fluctuations in the demand for the products and
services it offers. The majority of its 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. YTB Travel’s
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.





We
believe marketing of YTB Marketing’s IBCs is not significantly affected by the
seasonality of the travel business.





The
addition of shopYTB in January 2009 provided the opportunity to sell high
incentive products through our IBCs as well as connect to a network of
affiliated stores offering cash back to our customers has also helped offset the
seasonality of travel.





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.


9





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 sales.





Global
economic conditions may continue to have an adverse effect on our business and
financial performance.





Travel
and other retail 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. Domestic
and global economic conditions continued to weaken in 2009, and the outlook for
2010 is uncertain. This prolonged economic downturn has increased unemployment
and reduced the financial capacity of our customers, 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
suppliers, thereby increasing the risk of non-performance by such
suppliers.  This could, in turn, adversely affect our financial
results.





In
January, 2010, we introduced a new internet-based retail engine called
ZamZuu.  If ZamZuu does not generate sufficient economic incentive or
interest to retain existing Reps and to attract new Site Owners and Reps, our
business and financial performance could be adversely affected.





We plan
to offer ZamZuu as the exclusive IBC option for new Site Owners on a go-forward
basis, while continuing to maintain and operate our existing travel
IBCs.  Since the revenue generated by the sale of new IBCs constitutes
a material portion of the Company’s revenues, our business and financial
performance could be adversely affected if ZamZuu does not generate sufficient
economic incentive or interest to retain existing Reps and to attract new Site
Owners and Reps.  As noted below, there can be no assurance that
ZamZuu will attract Site Owners in sufficient numbers to sustain current revenue
levels or drive future growth.




As
a company that distributes products and services through a network marketing
system, we experience constant turnover among our Reps and Site Owners. Our
failure to establish and maintain Rep and Site Owner 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 a variety of products
exclusively through 7,245 independent contractors known as Reps (such
numbers are provided as of March 29, 2010) and 41,174 Site Owners (such numbers
are provided as of December 31, 2009), and we depend upon them directly for
substantially all of our marketing activities and bookings.  To
increase our revenue, we must increase the number, and/or the productivity, of
our Reps and Site Owners.  Accordingly, our success depends in
significant part upon our ability to attract, retain and motivate a large base
of Reps and Site Owners. Our ability to attract new Site Owners will be largely
dependent on the success of ZamZuu.  The loss of a significant number
of Reps and Site Owners, including any key Reps, together with Rep down-line
sales organizations, could materially and adversely affect sales of our services
and our bookings and could impair our ability to attract new Reps and Site
Owners.




Reps and
Site Owners have highly variable levels of training, skills and
capabilities.  The turnover rate for our Reps and Site Owners, and our
operating results, can be adversely impacted if we and our upper-level Rep and
Site Owner leadership do not provide the necessary mentoring, training and
business support tools for new Reps and Site Owners to become successful
salespeople in a short period of time.





10




Our
financial success and business reputation depend, in large part, on our Reps and
Site Owners, 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 Site Owners to market and sell our
products and services.  Reps and Site Owners are independent
contractors who market, purchase, and/or sell our products and services to
customers.  Reps and Site Owners 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 Site Owners and a
relatively small corporate staff to implement our marketing programs and to
provide training and motivational support to our Reps and Site
Owners.  Our net sales are directly dependent upon the efforts of
these non-employee, independent Reps and Site Owners.  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 Site Owners, retaining our
existing Reps and Site Owners, and in improving the productivity of our Reps and
Site Owners.





We can
provide no assurances that the number of Reps and/or Site Owners will increase
or remain constant or that their productivity will increase.  We
experienced a 13.1% decrease in active Reps and a 55.4% decrease in Site Owners
during 2009. The number of active Reps and Site Owners may not increase and
could decline in the future.  Reps and Site Owners may terminate their
services at any time, and, like most direct selling companies, we experience a
high turnover among new Reps and Site Owners from year to year.  We
cannot accurately predict any fluctuation in the number and productivity of Reps
or Site Owners because we primarily rely upon existing Reps to:  (1)
sell IBCs to new Site Owners; (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 (including ZamZuu) do
not generate sufficient economic incentive or interest to retain existing Reps
and to attract new Site Owners 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 Site Owners 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
Site Owners 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.





Our
revenues are highly dependent on the receipt of IBC hosting fees.





Fees from
hosting and sales of IBCs that we offer to home-based representatives make-up
over 76% of our revenues as of December 31, 2009. 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. During 2008 and 2009, we
experienced a substantial decrease in our number of IBC hosting arrangements. In
the event of a continued decrease in the number of such hosting arrangements, or
the fees we are able to charge for such arrangements, our financial condition,
results of operations and future growth may be further impaired.





11





Since
we cannot exert the same level of influence or control over our Reps and Site
Owners as we could were they our own employees, our Reps and Site Owners could
fail to comply with our Rep and Site Owner 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 Site Owners 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 Site Owners were our own employees.  As a
result, there can be no assurance that our Reps or Site Owners will participate
in our marketing strategies or plans, accept our introduction of new services or
comply with our respective Rep and Site Owner Policies and Procedures and Terms
and Conditions.





Our
Policies and Procedures and Terms and Conditions for our Reps and Site Owners
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 Site Owner conduct and to protect
the goodwill associated with our trademarks, they can be difficult to enforce
because of the large number of Reps and Site Owners and because of our Reps’ and
Site Owners’ independent status.  Violations by our Reps and Site
Owners 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 Site Owners.  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 commissions paid out
to our Reps and Site Owners in the past, such a trend, if continued, could
reflect our Reps’ and Site Owners’ 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 Site Owners on our behalf
and to draw from their affiliation with our Company.  If Reps and Site
Owners are unable to operate their own marketing and/or IBC profitably within
the framework of our organization, it could adversely impact Rep and Site Owner
retention and could threaten the sustainability of our business model.





For the
2009 fiscal year, our revenues from IBC sales and monthly web-hosting fees paid
by Site Owners, along with revenues from training programs held and marketing
materials sold to Reps and Site Owners, exceeded the marketing commissions and
commissions that we expended in payments to our Reps and Site
Owners.  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 Site Owners in their marketing and sales-related activities within the
YTB organization, such a deficit, if continued indefinitely, would reflect a
negation of the financial incentive for Reps and Site Owners to continue in
their YTB-related activities on our behalf.  Any such negative
financial results for our Reps and Site Owners 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 Site Owners, consumers and
suppliers must accept our IBCs, including ZamZuu, as a valuable commercial
tool.  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 products. To a lesser extent, our growth is also dependent on our
ability to broaden the appeal of our IBCs. 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.





12





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
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 Site Owner 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 suppliers could affect our
access to offerings and reduce our revenues.





We rely
on various agreements with our travel and retail suppliers, and these agreements
contain terms that could affect our access to 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 such 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 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 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 suppliers have felt the impact of the global economic
recession.  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.





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 travel 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.





Airline
“journey controls” may reduce the number of low-priced connecting itineraries we
can present to our Site Owners.





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.





13





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 Site Owners’
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.





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 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 AT&T for Internet access. If our
arrangement with this provider is 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.





14




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 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.  The
second involves a complaint filed by the Illinois Attorney General against the
Company and its officers alleging the Company’s business constitutes an illegal
pyramid sales scheme. 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.





If
our internal controls are found to be ineffective, our financial results or our
stock price may continue to be adversely affected.




Our most
recent evaluation resulted in our conclusion that as of December 31, 2009, in
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, our internal
control over financial reporting was 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.




Our
management previously identified and disclosed a material weakness in internal
control over financial reporting relating to our control environment. Our
management has been actively engaged in the implementation of remediation
efforts to address the material weakness in the control environment.




If our
internal control over financial reporting is found to be ineffective or if we
identify a material weakness or significant deficiency in our financial
reporting (relating to a failure to adequately remediate previously identified
material weaknesses, or the identification of new significant deficiencies or
material weaknesses), investors may lose confidence in the reliability of our
financial statements, which may continue to adversely affect our financial
results and/or our stock price.





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.





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:





15





·
            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 Site
      Owners 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 Site Owners 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 Site Owners inclined to
participate in a network marketing system or 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 Site Owners 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
Site Owner 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 Site Owners 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 Site Owners and consumers.





To remain
competitive in the online travel and retail 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 and retail 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:




•
            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.





16





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 and retail industry depends, in part, upon our ability to
timely produce innovative products and product enhancements that motivate our
Reps and Site Owners 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 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 Robert M. Van Patten (Chief Executive Officer), J.
Scott Tomer (Chairman of the Board) 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.




Since the
close of the fiscal year, there have been two executive officers leave the
Company, namely, John Clagg, Chief Financial Officer and Andrew Cauthen,
Corporate Secretary and President of YTB Marketing Inc.  The position
of Chief Financial Officer is being filled on an interim basis by Robert Van
Patten, Chief Executive Officer.  The position of YTB Marketing, Inc.
has been filled by a twenty-five year marketing executive, Bobby
Simpson.  The role of Corporate Secretary has been filled by J. Kim
Sorensen, Vice Chairman.


17




In
the future, we may be responsible for withholding certain taxes relating to our
Reps and Site Owners, which could harm our financial condition and operating
results.





Under
current law, our Reps and Site Owners 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 Site Owners could classify the Reps or Site Owners
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 Site Owners as employees, or if our Reps or Site Owners 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 Site Owners.





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.





18




Due
to the high level of competition in our industry, we might fail to increase our
Rep and Site Owner base, which could negatively impact our sales of products and
services.





In our
efforts to attract and retain Reps and Site Owners, 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 retail and 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 Site Owners and customers.  In addition, the fact that
our Reps and Site Owners may easily enter and exit our network marketing program
contributes to the level of competition that we face.  A Site Owner 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 ($249.95
for a ZamZuu Site Owner, plus the 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 Site Owner, (3) we do not
insist on any special outside training as a prerequisite to becoming a Rep or
Site Owner, and (4) we do not prohibit a new Rep or Site Owner from working
with another company.  Our ability to remain competitive, therefore,
depends, in significant part, on our success in recruiting and retaining Reps
and Site Owners 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 Site Owners will be
successful, and if they are not, our financial condition and operating results
would be harmed.





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 Site Owners, and to sustain and
enhance sales through our Reps and Site Owners 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 Site
Owners 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 Site
Owners, which would negatively impact our ability to generate
revenue.  We cannot ensure that all Reps and Site Owners 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.




19




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 Site Owners sign a
written contract and agree to adhere to the YTB policies and
procedures.  Although these policies and procedures prohibit Reps and
Site Owners from making false, misleading and other improper claims regarding
products, services, or income potential from the distribution of the products
and services, Reps and Site Owners 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, Site Owners, 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 Site Owners
and may have an adverse effect on our business, financial condition, and results
of operations.




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.




There is
a possibility that the Company will be unable to obtain all required permits,
licenses, and approvals in the various jurisdictions in which it operates,
including approvals to operate as a franchise.


20





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 Site Owners 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.




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 Site Owners and on the level of consumers to whom our Site
Owners offer retail and 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 Site Owner 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 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.





21





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.





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 data. These and other privacy concerns, including security breaches,
could adversely impact our business, financial condition and results of
operations.





We
face risks related to pandemic diseases, which could materially and adversely
affect travel and result in reduced demand for our travel services.





Our
business could be materially and adversely affected by the effect of a pandemic
disease on the travel industry. For example, the past outbreaks of SARS and
avian flu had a severe impact on the travel industry, and the current outbreak
of H1N1 flu in Mexico and the United States threatens to have a similar impact.
A prolonged recurrence of SARS, avian flu, H1N1 flu or another pandemic disease
also may result in health or other government authorities imposing restrictions
on travel. Any of these events could result in a significant drop in demand for
our travel services and adversely affect our 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;


•
            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, Site Owner 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 Site Owners, customers or suppliers;


•
            general economic conditions, both
      in the United States and abroad; and


•
            regulatory investigations or
      other litigation matters.





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. Scott Tomer, together with his family (including
his father, our former Chairman, J. Lloyd 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, 2009, J. Scott Tomer, his family and
affiliates beneficially owned common stock with voting power constituting
approximately 44.1% 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.





22





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.





23




Item
1B.  UnresolvedStaff 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
                                  
                                  
                                  20,000
                                  
                                  Corporate
      headquarters
                                  
                                  All
                                  
                                  Owned
      (1)1901
      East Edwardsville RoadWood
      River, Illinois
                                  
                                  
                                  100,000
                                  
                                  Held
      for sale
                                  
                                  Parent
                                  
                                  Owned600
      Country Club ViewEdwardsville,
      Illinois
                                  
                                  
                                  5,000
                                  
                                  Administration
                                  
                                  All
                                  
                                  Leased
      (2)20187
      56 thAvenue, Rycroft CentreLangley,
      British Columbia / Canada
                                  
                                  
                                  680
                                  
                                  Administration
                                  
                                  Primarily
      Travel
                                  
                                  Leased
      (3)1151
      Dundas St. West
                                  
                                  
                                  
                                  
                                  Sunrise
      Travel Service retailMississauga,
      Ontario / Canada
                                  
                                  
                                  618
                                  
                                  travel
      agency
                                  
                                  Primarily
      Travel
                                  
                                  Leased
      (4)Purdy's
      Wharf Tower 11959
      Upper Water StreetSuite
      1700 / 1800Halifax,
      Nova Scotia / Canada
                                  
                                  
                                  N/A
                                  
                                  Administration
                                  
                                  Primarily
      Travel
                                  
                                  Leased
      (5)




(1)
Subject to mortgage in original principal amount of $2.5 million, mortgage was
renewed on September 29, 2009, effective July 26, 2009, for a period through
April 30, 2010, which bears interest at 8.0%.  Currently, $1.6 million
of principal remains outstanding under such mortgage.
 (2)  Lease
term expires on October 31, 2010.
 (3)  Lease
term expires on October 31, 2010.
 (4) Lease
term expires on June 30, 2010.
 (5) Lease
term expires on July 7, 2010.




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 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 that houses our headquarters office (collectively,
the “ Headquarters
Property”) contiguous to the current facility for cash consideration of
$509,000 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 former directors.  The chairman and principal
shareholder of Meridian Bank, Timothy Kaiser, M.D., and another director and
principal shareholder of Meridian Bank, Clay Winfield, were directors of the
Company until June 16, 2009 and April 30, 2009, respectively.  The
independent members of the Company’s Board of Directors approved this
transaction.  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 bore interest at the rate of Prime plus 1.0%, floating daily, and
was collateralized by the first mortgage on the Property.


24





In
October 2008, Meridian Bank was closed by the Illinois Department of Financial
and Professional Regulation, Division of Banking and subsequently, the FDIC was
named Receiver.  On February 13, 2009, an unrelated third party,
FirstCity Servicing Corporation as Servicer for FH Partners LLC (“ FH Partners”),
Owner, purchased the Note Renewal.  The terms of the Note Renewal did
not change as a result of the purchase.  On July 26, 2009, the $1.9
million balloon payment on the Note Renewal came due.  On September
29, 2009, the Company executed a Loan Modification, Renewal, and Extension
Agreement (the “ Agreement”)
effective July 26, 2009, with FH Partners.  The Agreement renews the
note executed by the Company in connection with the Loan and the Note Renewal in
the new amount of $1.9 million (the “ Note”) and extends
the maturity of the Note Renewal and Loan to April 30, 2010.  The
amount due under the Note bears interest at a rate of 8.0%
annually.  A principal installment in the amount of $300,000 was due
and payable on September 30, 2009, which the Company paid timely, and a second
additional principal installment in the amount of $200,000, originally due and
payable on December 31, 2009, was extended to January 31, 2010.  To
date, the Company has not made the $200,000 payment.  FH Partners has
not given the Company notice of its intention to accelerate the debt as a result
of the Company’s failure to make the $200,000 payment that was due January 31,
2010.  In the event of default, as defined in the Note, FH Partners
has the right to declare the entire unpaid balance of principal and interest on
the Note due and payable.  All other terms of the Note Renewal and the
Loan, including the representations and warranties, remain unchanged.
 
 In
connection with the execution of the Agreement, the Company granted FH Partners
a mortgage on approximately nine acres of unencumbered raw land adjacent to the
Company’s headquarters (the “ Property”) as
additional security for the Note, as evidenced by a Mortgage executed by the
Company on September 29, 2009 (the “ Mortgage”).  Under the Mortgage, the Company assigned and conveyed to
FH Partners all rights, title and interest in existing or future leases for use
of the Property and all rents and profits that pertain to the use of the
Property.  In the event of default, as defined in the Mortgage, FH
Partners has the right to foreclose on the Property and take possession or
declare all payments immediately due and payable.
 
 The
outstanding balance of the Note as of December 31, 2009 was $1.6 million and the
outstanding balance of the Note Renewal as of December 31, 2008 was $2.0
million.  The Company is currently in discussions with FH Partners and
they have indicated their willingness to consider the possibility of renewing,
extending, amending or modifying the Agreement including, but not limited to,
potentially extending the $200,000 payment originally due on December 31, 2009
which was subsequently extended to January 31, 2010.




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.  During
the fourth quarter of 2009, the Company made the decision to sell its corporate
headquarters land and building within the next 12 months in a proposed
sale-leaseback transaction, selling the entire land and building and leasing
back the portion of the land and building that is used in
operations.  The Company recorded a pre-tax impairment loss of $3.9
million on the portion of the land and building that is not used in operations
to write down the carrying value to its estimated realizable value less costs to
sell of $5.2 million.




Properties
Sold.
 
 9.9 Acres of Land.On November 24, 2008, we entered into an agreement to sell 9.9 acres of
land (the “ 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 (the “ Land Note”), in
connection with the subject agreement to pay the remaining sum of $500,000
within 120 days.  The Land Note is collateralized by a mortgage (the “
Land Mortgage”) on the subject land up to a maximum amount of
$500,000.  Principal and other amounts under the Land Note,
collateralized by the Land, were due and payable on March 24,
2009.  The Buyer failed to pay the amount due under the Land Note, and
as a result, a notice of foreclosure was recorded against the Land on June 2,
2009.
 
 On
November 3, 2009, we entered into a settlement and release agreement (the “
Settlement Agreement”) with a principal of the Buyer (the “ New Buyer”) in which
the New Buyer agreed to purchase the Land Mortgage and related Land Note from
the Company associated with the 9.9 acres of land originally sold on November
24, 2008.  A principal payment of $25,000, along with $3,000 in
interest, was paid upon execution of the Settlement Agreement.  The
remaining principal amount of $475,000 will be paid upon sale or exchange of any
parcel of the secured property or within sixty (60) days of the New Buyer
receiving approval of the designation of an enterprise zone for the property.
 
 If the
New Buyer’s zoning designation is denied, any party to the Settlement Agreement
can cause the New Buyer to pay to the Company $75,000 for termination and
cancellation of the Settlement Agreement.  Upon termination under
these circumstances, the New Buyer may initiate negotiations with the Company
regarding the remaining amount due under the Land Note, and the Company shall
retain its interest in the Land Note, Land Mortgage and foreclosure action and
be able to proceed with all rights under these agreements.




Administrative Facility. 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.


25





On
January 20, 2010, the Company executed a commercial promissory note with an
unaffiliated third party (the “ Lender”), in the
amount of $650,000 with a maturity date of September 15, 2010.  The
note bears interest at a rate of 14.5 percent per annum, payable in monthly
installments of interest only beginning on February 16, 2010.  The
Company has also agreed to pay a loan fee for the note to the Lender in the
amount of $45,500, of which $3,250 was paid by the Company upon acceptance of
the note commitment letter, $9,750 was paid at closing and the remaining $32,500
shall be paid at maturity along with the remaining unpaid principal amount on
the note and all accrued and unpaid interest thereon.  From the
closing date through the 90 thday thereafter, no prepayment of principal is allowed.





In
connection with the execution of the note and as evidenced by the assignment of
promissory note dated January 20, 2010, the Company granted a security interest
to Lender in the promissory note dated December 16, 2008 related to the Building
One Property, and payable to the Company in the amount of $1.2
million.  As additional security for the note as evidenced by the
assignment of mortgage dated January 20, 2010, the Company assigned to Lender
the real estate mortgage dated December 16, 2008 made by Purchaser to secure
repayment of the Building One Property note to the Company.  In the
event that the Company has not received payment in full of all principal and
interest due under the terms and conditions of the Building One Property note by
June 16, 2010, the Company is to deliver to Lender a fully executed modification
of the Building One Property note no later than July 16, 2010, the terms of
which must be approved by Lender prior to the modification.





In the
event of default, as defined in the note, Lender has the right to declare the
entire unpaid balance of principal and interest on the note due and
payable.  In addition, the contract rate shall be changed to 18
percent per annum effective on the date notice of default is given to the
Company and shall remain in effect until the default is completely cured to the
satisfaction of Lender, its successors and assigns and all subsequent holders of
this note.  Default is defined in the note as (i) a default in the
payment of principal or interest due on the note; (ii) the Company’s insolvency
or the assignment for the benefit of creditors; (iii) the Company’s loss of
possession of any of the Company’s business or property to creditors of any
governmental agency or receiver; (iv) the commencement of bankruptcy or
insolvency proceedings for the relief of debtors against, by or in respect of
the Company; (v) the issuance of any execution against the Company; (vi) the
nonpayment, in whole or in part, of any judgment against the Company not fully
bonded for at least five days after the entry thereof;  (vii) in the
event of a Purchaser default, the Company’s failure to deliver to Lender a
modification of the Building One Property note on or before July 16, 2010, the
terms of which must be satisfactory to Lender; or (iv) any other default under
the terms of the note.





Other Properties.




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. 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.





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 under a commercial lease agreement, dated
August 4, 2005, by and between Meridian Land Company, Inc. (“ 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
approximately $8,000 per month.  In January 2008, we exercised our
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.  The option to
purchase the property expired on December 31, 2009.  The Company
intends to fulfill the terms of the lease until its expiration on October 31,
2010.  Meridian Land is controlled by its principals, Timothy Kaiser,
M.D. and Clay Winfield, each of whom were members of the Company’s Board of
Directors until June 16, 2009 and April 30, 2009, respectively.




Sunrise Travel 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 (the “ Sunrise Leased Premises”).  We 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.  We renewed the subject lease effective July 1, 2009 for
an additional 12 months expiring on June 30, 2010. 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, 91 stAvenue,
Surrey, British Columbia, Canada (the “ British Columbia Premises”).  We utilize the British Columbia Premises as additional
office space.





The
British Columbia Lease, commencing on February 1, 2008, ran for an initial
term of 12 months, expiring on January 31, 2009.  The British Columbia
Lease included an option to renew the lease for one year after expiration of the
original term, but we did not exercise the renewal option.  We rented
the British Columbia Premises on a month-to-month basis from February 1, 2009
through July 31, 2009.  Rent under the British Columbia Lease was set
at $1000 per month and included common areas, utilities and
taxes.  The lease also called for our Company to pay a monthly
cleaning service and Goods and Services Tax.


26





Langley Leased Premises.We
entered into a Commercial Lease Agreement (the “ Langley Lease”), on
July 8, 2009, by and between Rycroft Holdings Ltd., as lessor, having its
principal place of business at 21939 Zero Avenue, Langley, British Columbia/
Canada V2Z 1S2.  The subject premise is located at 20187 56 thAvenue,
Rycroft Centre, Langley, British Columbia/ Canada V3A 3Y6  (the “
Langley Premises”).  We utilize the Langley Premises as additional office
space.





The
Langley Lease, commencing on August 1, 2009, runs for an initial term of 15
months, expiring on October 31, 2010.  We have an option to renew the
lease for one to three years after expiration of the original term, with rent
equal to or exceeding rent under the original term.  Rent under the
Langley Lease is $1000 per month.  In addition to monthly rental
payments, we are responsible for utilities and Goods and Services Tax.





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.  The Nova
Scotia Agreement was renewed effective July 8, 2009, with a term of 12 months
ending on July 7, 2010.  There was no change to the monthly rental
fee.





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.





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 theCompany and
certain of itsexecutive officers in the Superior Court of California, County of Los
Angeles, by the California Attorney General. The complaint alleged that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws.  The California Attorney General sought 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.





On May
14, 2009, YTB International, Inc., YourTravelBiz.com, Inc., YTB Travel Network,
Inc., and YTB Travel Network of Illinois, Inc. (collectively, the “ YTB Parties”) and J.
Lloyd Tomer, J. Scott Tomer, J. Kim Sorensen and Andrew Cauthen (collectively, “
Certain Executive
Officers”) stipulated  to a  Proposed Final Judgment
and Permanent Injunction (“ Stipulated Judgment”) with the California Attorney General related to the civil action filed
against the YTB Parties and Certain Executive Officers in August
2008.  In addition, on May 14, 2009, the Los Angeles Superior Court
entered the Stipulated Judgment that reflected the agreement the YTB Parties and
Certain Executive Officers reached with the California Attorney
General.  The Stipulated Judgment is not evidence of any wrongdoing or
an admission on the part of the YTB Parties or the Certain Executive Officers
and does not represent any findings by the court as to any matter of law or
fact.  By entering into the Stipulated Judgment, each defendant waived
the right to appeal, challenge or vacate the Stipulated Judgment.


27





The
Stipulated Judgment applies to all defendants, subsidiaries, affiliates,
employees, agents and others who act in concert with the Company in connection
with the operation of the YTB Parties in California only.





The
Stipulated Judgment defines Website Owners as those who own a website from the
YTB Parties through which they sell travel or other goods.  Website
Owners include those persons who are or become a franchise under the YTB
Parties’ proposed franchise business model.  Website Sellers are those
who sell the Website Owner opportunity or recruit others to sell the Website
Owner opportunity and will include those who are or become franchise brokers
under the YTB Parties’ proposed franchise business model.





The
Stipulated Judgment provides, in part, for the following:





·
            The
      YTB Parties must provide consumers with certain information in a
      clear and conspicuous manner about the number and compensation of Website
      Owners and Website Sellers, including the typical income earned by Website
      Owners and Website Sellers, the typical cost of operations, the
      number of Website Owners who are deactivated, and the number of Website
      Owners and Website Sellers who have not earned
      compensation.  The YTB Parties must clearly explain their
      compensation calculations and any requirements a consumer must meet before
      he or she can participate in the YTB Parties.  It also requires
      the YTB Parties to establish a free demonstration website that must be
      used when recruiting others.


·
            The YTB
      Parties are prohibited from issuing travel credentials in California and
      advertising or representing that travel discounts, other perks or tax
      write-offs are available by purchasing a website.


·
            The
      YTB Parties must modify the practices and separate the functions of
      Website Owner and Website Seller, including the training, marketing and
      promotional information pertaining to each of them.  The YTB
      Parties must also revise its Website Owner and Website Seller compensation
      programs and may not compensate them unless certain conditions have been
      met.  The YTB Parties are prohibited from offering incentives to
      Website Owners to become Website Sellers, and vice versa.


·
            The
      YTB Parties have agreed to periodically provide the California Attorney
      General's Office status reports and certain information regarding the YTB
      Parties’ Website Owners and Website Sellers and give access to all YTB
      Parties marketing materials, events, meetings, gatherings and
      presentations to ensure the YTB Parties are complying with the Stipulated
      Judgment and California law.   In addition, the YTB Parties
      have agreed to seek the approval of the California Department of
      Corporations and make their best efforts to obtain approval from the
      California Department of Corporations to sell franchises on or before June
      15, 2009.  The registration application documents were timely
      submitted to the California Department of Corporations.  As of
      the date of this report, the application submitted by the Company has not
      been rejected or accepted.





Finally,
the YTB Parties agreed to pay a fine in the amount of $400,000, attorneys’ fees
and costs in the amount of $475,000 to the California Attorney General and
restitution to California residents in an amount not to exceed
$125,000.   In
accordance with the terms of the settlement, the Company made payments totalling
$1.0 million as of December 31, 2009.





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.





On June
5, 2009, the Court granted the Company’s motions and dismissed the class action
complaint, but granted the plaintiffs leave to file an amended complaint that
conformed to the Court’s ruling.  On July 15, 2009, the plaintiffs
filed an amended complaint that purported to conform to the Court’s
ruling.  The amended complaint asserts claims similar to those
contained in the dismissed complaint.  On July 20, 2009, the Court, acting
on its own motion, struck the plaintiffs’ amended complaint in its entirety
based on the Court’s belief that the amended complaint does not pass muster
under the applicable federal pleading standards.  As of July 27, 2009,
the plaintiffs filed motions for leave with the Court to amend their
complaints.  The Court granted their motions and a second amended
complaint was filed on December 24, 2009.  On February 12, 2010, the
Company filed motions to dismiss the second amended consolidated
complaint.  To date, the Court has not ruled on this
motion.  Management believes the Company has meritorious defenses and
intends to vigorously defend these cases.


28





On May
14, 2009, a civil action was filed against the Company, three of its
subsidiaries and certain executive officers of the Company in the Superior Court
of Illinois, Champaign County, by the Illinois Attorney
General.  The complaint alleges that the defendants violated Illinois’
unfair competition and advertising laws.  The Company believes it has
meritorious defenses to the claims and intends to vigorously defend the
case.   The
Company is in the process of exchanging information with the Office of the
Illinois Attorney General and exploring possible resolution alternatives.





PART
II




Item 4.  [Removed
and reserved.]





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”.





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, 2009First
      quarter
                
                $
                0.54
                
                
                $
                0.16Second
      quarter
                
                
                0.34
                
                
                
                0.10Third
      quarter
                
                
                0.17
                
                
                
                0.07Fourth
      quarter
                
                
                0.10
                
                
                
                0.05Fiscal
      year ended December 31, 2008First
      quarter
                
                $
                2.10
                
                
                $
                0.60Second
      quarter
                
                
                4.19
                
                
                
                1.13Third
      quarter
                
                
                1.90
                
                
                
                0.49Fourth
      quarter
                
                
                0.61
                
                
                
                0.19





At April
7, 2010, the closing price per share of our Class A Common Stock, as reported by
the OTC-BB was $0.04.




Shareholders




As of
April 7, 2010, we had 513 shareholders of record of our Class A Common Stock and
Class B Common Stock.


29


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.





Item6.  SelectedFinancial Data.





Not
applicable.





Item7.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.





Executive
Overview




We are a
leading provider of internet-based travel related services and operate primarily
through two subsidiaries: YTB Marketing and YTB Travel:


·
            YTB
      Marketing establishes and sells IBCs and compensates its Reps via a
      multilevel marketing commission structure.


·
            YTB
      Travel provides customer access to the travel vendor, supports online
      booking transactions, supplies personal fulfillment services, collects
      travel commissions from vendors and pays travel sales commissions.





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 320 airlines, at
more than 85,000 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.  As a multilevel marketing company, we offer opportunities for
entrepreneurs who desire to capitalize on the growing trend of online travel
bookings and retail purchases.




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
a Site Owner. Each Site Owner 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 Site Owner operates his/her IBC. YTB Travel retains
a percentage of the travel commissions generated by the Site Owners.





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.  A typical online travel merchant sells a commodity
(travel), which does not engender strong customer loyalty. By contrast, each
Site Owner develops personal relationships with his or her customers, who book
travel through the Site Owner’s own IBC, thereby creating a significant
advantage for YTB compared to the major online travel companies. The cost to
book a trip through a Site Owner IBC is usually nearly identical to booking a
trip through a major online travel company. The Site Owners’ 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, 2009, there are 41,174 Site Owner IBCs in
operation.  Site owners are also permitted to solicit organizations
and associations for travel sales.


30


YTB
Travel is our travel management subsidiary that processes travel sales and
service bookings (reservations) generated by 41,174 independent Site Owners
through YTB Travel.  In addition, YTB Travel negotiates deals with 268
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.
Thirty-seven preferred vendors 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 Site Owners, presents the growth opportunity
for sales of products and services. Future revenue growth should accelerate as
more Site Owners are added to the system, and as each goes through the various
training programs that YTB Travel provides. Site Owner IBCs are available for
use 24 hours, 7 days a week.




Our
revenues are comprised primarily of IBC sales and monthly IBC web hosting fees,
commissions paid by travel providers, commissions on the sales of products
through the shopYTB network of online retail stores and direct sales of
travel.  In addition, certain travel suppliers pay performance-based
compensation known as “override commissions” or “overrides.”





·
            Commission
      revenues and gross retail sales net of allowances for cancellations, are
      recognized generally based on the expected date of travel.


·
            Overrides
      are recognized on an accrual basis based on prior year's experience
      adjusted for current year volumes.


·
            Revenue
      from the sale of IBCs is deferred and recognized ratably as revenue over a
      twelve-month period, which represents the average lifespan during which a
      Site Owner remains a Site Owner 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 Site Owner pays a monthly web
hosting fee of $49.95 to us, and can earn transactional compensation from travel
purchased from his or her IBC in the range of 60%-80% of the commission
earned.  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 Site Owners’ 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 Site Owners (which directly impacts our
commission revenues). The value of such travel services increased
approximately $9 million in 2008 to over $424 million from approximately $414
million in 2007.  Comparable data for 2009 sales (retail value) has
been reported to us by our travel vendors in the amount of $252 million.




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.





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.


31





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.





During
2009, the hotel sector continued to experience declining occupancy
rates.  In 2008, our hotel remuneration was adversely impacted as a
result of lower fees and more competitive hotel pricing.  Industry
sources expected this trend to continue in 2009 as well, 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
anticipate a continuing decline in revenues in the coming months due to the
general economic conditions.  However, due to new marketing
initiatives, enhanced/expanded services and the new focus on ZamZuu, we believe
that we will see a stabilization of sales coupled with slower declines in
attrition over the next eighteen months.





We
anticipate that future travel revenue will decline as the average number of
active IBCs declines and also due to the current health of the general
economy.  We believe that this decline will be partially offset by an
increase in the average travel bookings per IBC, as we expect our existing Site
Owners will become more productive because of increased training
initiatives.  Site Owner IBCs are available for use 24 hours, 7 days a
week.





The
travel industry in general, 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 and
continue to decline through 2009, creating uncertainty for travelers and
suppliers. This macroeconomic downturn pressures discretionary spending on
travel and advertising. We cannot predict the magnitude or duration of the
downturn, but we do not anticipate any significant improvement in the
short-term.





The
travel industry was also hit with the H1N1 Flu in general but also restrictions
on travel to Mexico for an extended period of time.  There were
continued travel warnings even after the restrictions were lifted.





The
travel industry also experienced lower than normal pricing across the board
which greatly impacted our overall volume.


32


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
                                                          
                                                          Year
      Ended December 312009
                                                          
                                                          
                                                          % of Net
                                                            Revenues
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          % of Net
                                                            Revenues
                                                          
                                                          
                                                          Increase
                                                            (Decrease)
                                                          
                                                          
                                                          % Increase
                                                            (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                                                          
                                                          $
                                                          51,792
                                                          
                                                          
                                                          
                                                          76.9
                                                          %
                                                          
                                                          $
                                                          122,361
                                                          
                                                          
                                                          
                                                          76.7
                                                          %
                                                          
                                                          $
                                                          (70,569
                                                          )
                                                          
                                                          
                                                          (57.7
                                                          )%Travel
      commissions and services
                                                          
                                                          
                                                          12,201
                                                          
                                                          
                                                          
                                                          18.1
                                                          %
                                                          
                                                          
                                                          25,175
                                                          
                                                          
                                                          
                                                          15.8
                                                          %
                                                          
                                                          
                                                          (12,974
                                                          )
                                                          
                                                          
                                                          (51.5
                                                          )%Training
      programs and marketing materials
                                                          
                                                          
                                                          2,191
                                                          
                                                          
                                                          
                                                          3.3
                                                          %
                                                          
                                                          
                                                          9,621
                                                          
                                                          
                                                          
                                                          6.0
                                                          %
                                                          
                                                          
                                                          (7,430
                                                          )
                                                          
                                                          
                                                          (77.2
                                                          )%Other
                                                          
                                                          
                                                          1,137
                                                          
                                                          
                                                          
                                                          1.7
                                                          %
                                                          
                                                          
                                                          2,297
                                                          
                                                          
                                                          
                                                          1.5
                                                          %
                                                          
                                                          
                                                          (1,160
                                                          )
                                                          
                                                          
                                                          (50.5
                                                          )%Total
      net revenues
                                                          
                                                          
                                                          67,321
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          159,454
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          (92,133
                                                          )
                                                          
                                                          
                                                          (57.8
                                                          )%OPERATING
      EXPENSESMarketing
      commissions
                                                          
                                                          
                                                          24,903
                                                          
                                                          
                                                          
                                                          37.0
                                                          %
                                                          
                                                          
                                                          80,172
                                                          
                                                          
                                                          
                                                          50.3
                                                          %
                                                          
                                                          
                                                          (55,269
                                                          )
                                                          
                                                          
                                                          (68.9
                                                          )%Travel
      commissions
                                                          
                                                          
                                                          7,363
                                                          
                                                          
                                                          
                                                          10.9
                                                          %
                                                          
                                                          
                                                          17,649
                                                          
                                                          
                                                          
                                                          11.1
                                                          %
                                                          
                                                          
                                                          (10,286
                                                          )
                                                          
                                                          
                                                          (58.3
                                                          )%Depreciation
      and amortization
                                                          
                                                          
                                                          2,673
                                                          
                                                          
                                                          
                                                          4.0
                                                          %
                                                          
                                                          
                                                          2,531
                                                          
                                                          
                                                          
                                                          1.6
                                                          %
                                                          
                                                          
                                                          142
                                                          
                                                          
                                                          
                                                          5.6
                                                          %Training
      programs and marketing materials
                                                          
                                                          
                                                          1,449
                                                          
                                                          
                                                          
                                                          2.2
                                                          %
                                                          
                                                          
                                                          8,283
                                                          
                                                          
                                                          
                                                          5.2
                                                          %
                                                          
                                                          
                                                          (6,834
                                                          )
                                                          
                                                          
                                                          (82.5
                                                          )%Impairment
      of goodwill
                                                          
                                                          
                                                          450
                                                          
                                                          
                                                          
                                                          0.7
                                                          %
                                                          
                                                          
                                                          149
                                                          
                                                          
                                                          
                                                          0.1
                                                          %
                                                          
                                                          
                                                          301
                                                          
                                                          
                                                          
                                                          202.0
                                                          %Impairment
      of assets other than goodwill
                                                          
                                                          
                                                          7,443
                                                          
                                                          
                                                          
                                                          11.1
                                                          %
                                                          
                                                          
                                                          3,390
                                                          
                                                          
                                                          
                                                          2.1
                                                          %
                                                          
                                                          
                                                          4,053
                                                          
                                                          
                                                          
                                                          119.6
                                                          %General
      and administrative
                                                          
                                                          
                                                          30,708
                                                          
                                                          
                                                          
                                                          45.5
                                                          %
                                                          
                                                          
                                                          50,616
                                                          
                                                          
                                                          
                                                          31.7
                                                          %
                                                          
                                                          
                                                          (19,908
                                                          )
                                                          
                                                          
                                                          (39.3
                                                          )%Total
      operating expenses
                                                          
                                                          
                                                          74,989
                                                          
                                                          
                                                          
                                                          111.4
                                                          %
                                                          
                                                          
                                                          162,790
                                                          
                                                          
                                                          
                                                          102.1
                                                          %
                                                          
                                                          
                                                          (87,801
                                                          )
                                                          
                                                          
                                                          (53.9
                                                          )%OPERATING
      LOSS
                                                          
                                                          
                                                          (7,668
                                                          )
                                                          
                                                          
                                                          (11.4
                                                          )%
                                                          
                                                          
                                                          (3,336
                                                          )
                                                          
                                                          
                                                          (2.1
                                                          )%
                                                          
                                                          
                                                          (4,332
                                                          )
                                                          
                                                          
                                                          129.9
                                                          %OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                                                          
                                                          
                                                          154
                                                          
                                                          
                                                          
                                                          0.3
                                                          %
                                                          
                                                          
                                                          201
                                                          
                                                          
                                                          
                                                          0.1
                                                          %
                                                          
                                                          
                                                          (47
                                                          )
                                                          
                                                          
                                                          (23.4
                                                          )%Interest
      expense
                                                          
                                                          
                                                          (113
                                                          )
                                                          
                                                          
                                                          (0.2
                                                          )%
                                                          
                                                          
                                                          (75
                                                          )
                                                          
                                                          
                                                          0.0
                                                          %
                                                          
                                                          
                                                          (38
                                                          )
                                                          
                                                          
                                                          50.7
                                                          %Foreign
      currency translation loss
                                                          
                                                          
                                                          (5
                                                          )
                                                          
                                                          
                                                          0.0
                                                          %
                                                          
                                                          
                                                          (58
                                                          )
                                                          
                                                          
                                                          0.0
                                                          %
                                                          
                                                          
                                                          53
                                                          
                                                          
                                                          
                                                          (91.4
                                                          )%Total
      other income (expense)
                                                          
                                                          
                                                          36
                                                          
                                                          
                                                          
                                                          0.1
                                                          %
                                                          
                                                          
                                                          68
                                                          
                                                          
                                                          
                                                          0.1
                                                          %
                                                          
                                                          
                                                          (32
                                                          )
                                                          
                                                          
                                                          (47.1
                                                          )%LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX (BENEFIT) PROVISION
                                                          
                                                          
                                                          (7,632
                                                          )
                                                          
                                                          
                                                          (11.3
                                                          )%
                                                          
                                                          
                                                          (3,268
                                                          )
                                                          
                                                          
                                                          (2.0
                                                          )%
                                                          
                                                          
                                                          (4,364
                                                          )
                                                          
                                                          
                                                          133.5
                                                          %INCOME
      TAX (BENEFIT) PROVISION
                                                          
                                                          
                                                          (853
                                                          )
                                                          
                                                          
                                                          (1.2
                                                          )%
                                                          
                                                          
                                                          445
                                                          
                                                          
                                                          
                                                          0.3
                                                          %
                                                          
                                                          
                                                          (1,298
                                                          )
                                                          
                                                          
                                                          (291.7
                                                          )%LOSS
      FROM CONTINUING OPERATIONS
                                                          
                                                          
                                                          (6,779
                                                          )
                                                          
                                                          
                                                          (10.1
                                                          )%
                                                          
                                                          
                                                          (3,713
                                                          )
                                                          
                                                          
                                                          (2.3
                                                          )%
                                                          
                                                          
                                                          (3,066
                                                          )
                                                          
                                                          
                                                          82.6
                                                          %LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                                                          
                                                          
                                                          (3,079
                                                          )
                                                          
                                                          
                                                          (4.5
                                                          )%
                                                          
                                                          
                                                          (762
                                                          )
                                                          
                                                          
                                                          (0.5
                                                          )%
                                                          
                                                          
                                                          (2,317
                                                          )
                                                          
                                                          
                                                          304.1
                                                          %NET
      LOSS
                                                          
                                                          $
                                                          (9,858
                                                          )
                                                          
                                                          
                                                          (14.6
                                                          )%
                                                          
                                                          $
                                                          (4,475
                                                          )
                                                          
                                                          
                                                          (2.8
                                                          )%
                                                          
                                                          $
                                                          (5,383
                                                          )
                                                          
                                                          
                                                          120.3
                                                          %


33





The
following table sets forth information concerning (i) the number of Site Owners
that were added to, and those that were deactivated from (by non-payment or
cancellation), our organization during the years ended December 31, 2009
and 2008, and (ii) the weighted average number of active Site Owners during each
year:





Year
                  
                  Beginning Balance
                    Active Site Owners
                  
                  
                  New Site Owners
                  
                  
                  Deactivations
                  
                  
                  Ending Balance
                    Active Site Owners
                  
                  
                  Weighted Average
                    Active Site Owners2009
                  
                  
                  92,383
                  
                  
                  
                  15,840
                  
                  
                  
                  67,049
                  
                  
                  
                  41,174
                  
                  
                  
                  60,2872008
                  
                  
                  131,802
                  
                  
                  
                  74,402
                  
                  
                  
                  113,821
                  
                  
                  
                  92,383
                  
                  
                  
                  122,910





The above
Site Owner figures represent the number of active Site Owners paying $49.95 per
month for monthly IBC web hosting fees.  New Site Owners represents 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.  This program remained in place until July 31,
2009.  In August of 2009, the Company sold IBC sites under a payment
plan, under which the Site Owner could pay $99.95 per month for 5
months.  New sales made through each of these programs are reflected
in the chart above.  Likewise, each recurring monthly IBC web hosting
fee paid results in marketing commissions paid to our Reps.  As the number
of active Site Owners grows, the amount of our travel commission revenue grows
as well.  Correspondingly, our travel commission expense follows suit.





A Site
Owner’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 a Site Owner may fail to update this
information.  If the Site Owner 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 a Site Owner to voluntarily
discontinue his or her IBC; such IBC is deactivated at the time the request is
made.  Site Owners’ 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 Site Owners’ 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 a Site Owner remains with our Company.  If the
proportion of Site Owner deactivations were to grow as a percentage of active
paying Site Owners, the average lifespan of a Site Owner 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
Site Owner initial sign up fees.  This acceleration would have a
positive impact on our bottom line, as the amount of revenue deferred from a
Site Owner’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.





At YTB
Marketing, we engage direct sales as our method of distribution of the IBCs to
new Site Owners. 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 $98 to
      $150 provides participants with four days of training, motivation, and
      recognition for sales achievement. The August 2008 and 2009 National
      Conventions 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 generally consist of a
      series of general sessions, comprised of instructional and motivational
      speakers, awards and recognition, special announcements, launch of
      contests, travel industry vendor presentations, and keynote speeches by
      our corporate founders and field leaders.


34





·
            Regional Meetings–
      Throughout the year our three 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.





·
            Regional Product Marketing (RPM) – This training program was launched late in the third quarter of
      2009.   Qualified representatives of the Company in various
      cities throughout the country teach RPM training, which includes a
      complete study of all YTB products, how to sell them, and how to build a
      successful YTB business.





YTB
Travel offers the following programs to educate Site Owners:





Ÿ
            First Class Training–
      This online travel training video program is offered primarily for the
      benefit of Site Owners to increase their knowledge of booking travel with
      YTB.  Once the Site Owner 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 an
      IBC.  The Site Owners may review the videos as often as they
      wish to receive updated training.




·
            Funshine Travel Trade Shows– The “Funshine Travel Trade Show” is held annually during the fall
      on the east coast.  Historically, the “Funshine Travel Trade
      Show” has been attended by 3,000 to 5,000 of our Site
      Owners.  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 Site Owners
      attended the Funshine event held in Orlando, Florida in September 2008 and
      approximately 2,200 attended in September 2009.





·
            YTB E-Campus– In
      October 2007, we launched “YTB E-Campus,” a proprietary web-based training
      certification and testing program for our Site Owners.  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.  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”.  The remainder of the courses include
      topics such as sales, service, marketing, and destination
      geography.  Each course is interactive, instructionally sound
      and entertaining.  All 10 courses have been completed with the
      10 thand final course launched at the National Convention in 2009.





The
Company is addressing the decline in new IBC sales and the existing Site Owner
retention with the following key initiatives:





·
            Through
      our ongoing marketing we are balancing initiatives to attract new Site
      Owners and retain existing Site Owners. Understanding that today, our
      customers are more value oriented in their purchase decisions, we are
      expanding the “value” received in purchasing an IBC by bringing “in-house”
      our new ZamZuu opportunity where Site Owners can direct customers to shop
      for items they already purchase and receive commissions and cash back on
      normal purchases of everyday items as well as featured specialty products.





·
            We
      are developing new marketing programs and enhancing existing marketing
      programs to communicate the value of our IBCs by offering a marketing
      system that enhances consistent marketing and tracking of the Site Owner
      sales efforts via a systematic marketing program.





·
            Training
      has been expended by providing Site Owners with videos on how to conduct
      home “parties” to help sell the various featured products.


35


Year ended December 31, 2009
compared to year ended December 31, 2008





We
reported a net loss for the year ended December 31, 2009 of $9.9 million or $.09
per diluted share compared to a net loss of $4.5 million or $.04 per diluted
share for the comparable prior year period.  The net loss from
discontinued operations for the year ended December 31, 2009 was $3.1 million or
$.03 per diluted share compared to net loss of $762,000 or $.01 per diluted
share for 2008.




Our
operating results for 2009 and 2008 were affected by a number of significant
items.  We recorded impairment charges of $7.9 million and $3.5
million for 2009 and 2008, respectively.   The impairment charges
in 2009 related primarily to the write-down of our headquarters property of $3.9
million, the $450,000 write-off of goodwill associated with our Travel segment,
$724,000 in obsolete inventory, a $564,000 write-off of software and $2.2
million in intangible asset impairment charges, $2.0 million of which related to
our January 2010 launch of our new business opportunity, ZamZuu.  The
impairment charges in 2008 consisted of $3.0 million in obsolete inventory, a
write-down of $366,000 in property and equipment and $149,000 of goodwill
impairment.


The
following discussions of the Company’s results of continuing operations exclude
the results related to REZconnect. This business has been segregated from
continuing operations and included in discontinued operations for the years
ended December 31, 2009 and 2008.  See Note 17 – “Discontinued
Operations” to the consolidated financial statements for further discussion.





The
Company’s results of continuing operations were as follows:





Net
Revenues





Net
revenues totaled $67.3 million and $159.5 million for the years ending December
31, 2009 and 2008 respectively.





·
            IBC
      sales and monthly renewals fees were $51.8 million and $122.4 million for
      the years ending December 31, 2009 and 2008 respectively.





IBC sales
were $14.5 million and $49.2 million for the years ending December 31, 2009 and
2008 respectively.





The
decrease was $34.7 million in 2009 compared to 2008.  We have
experienced a decrease in the actual number of IBCs sold for the 12 months ended
December 31, 2009 to 15,840 compared to 74,402 in 2008, The average number of
IBCs for which we are able to recognize revenue decreased to 2,904 in 2009
compared to 9,448 in 2008.   In addition, the average amount of
recognized revenue from each IBC decreased to $428.17 in 2009 compared to
$449.87 in 2008, mostly due to the Christmas special program initiated during
2009.  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 Site Owners.





Monthly
renewal fees were $36.9 million and $72.9 million for the years ending December
31, 2009 and 2008, respectively.





The
decrease of $35.9 million in 2009 compared to 2008 is in direct relation to the
number of active paying Site Owners.  The weighted average number of
paying Site Owners per month decreased to 60,287 in 2009 from 122,910 in
2008.  We anticipate a decline in the first quarter of 2010 due to the
general economic conditions followed by stabilization and ultimate growth
because of new marketing efforts focused on retention and product improvement
through our new ZamZuu initiatives.  We anticipate slower growth
compared to what we have experienced in the past because of the weak economy
generally.





Enhanced
Rep Site fees were $393,000 and $345,000 for the years ending December 31, 2009
and 2008, respectively.





The
increase of $48,000 in 2009 compared to 2008 was due to the fact that the
program was new in the third quarter of 2008. The Enhanced Rep Site is a
marketing subscription that YTB Reps can pay for on a monthly
basis.  It includes a calendar system that details Company events and
meetings personalized to the Rep’s schedule, an archive of videos, audio files,
an automatic email marketing campaign system and new contact management tools.
This program was temporarily discontinued in June 2009 and restarted late in the
third quarter of 2009.





·
            Travel
      commissions and services revenue was $12.2 million and $25.2 million for
      the years ending December 31, 2009 and 2008, respectively.





The $13.0
million decrease in 2009 compared to 2008 was attributable to the decrease in
gross travel retail bookings driven by the number of customers utilizing us as
their travel provider, as well as a general decline in the travel industry due
to current economic conditions.


36





·
            Training
      programs and marketing materials revenue was $2.2 million and $9.6 million
      for the years ending December 31, 2009 and 2008, respectively.





The
decrease of $7.4 million in 2009 compared to 2008 was primarily due to a
reduction in sales of magazine and sales aids, along with shipping revenues
generated through the sale of those materials.  Also contributing to
this decline was the number of product sales at the 2009 National Convention
compared to the National Convention in 2008, directly related to the reduction
in attendance at the event.  We expect this trend to stabilize in
2010, as our active Site Owner base becomes more stable.  Also
contributing to the decrease was a reduction in the number of paying attendees
at training events, mostly due to a decline in the number of new IBC sales and
fewer events being held.





·
            Other
      revenue was $1.1 million and $2.3 million for the years ending December
      31, 2009 and 2008, respectively.





The
decrease of $1.2 million for 2009 compared to 2008 is primarily due to the
number of paying attendees at the 2009 National Convention compared to the 2008
National Convention.





Operating
Expenses




·
            Marketing
      commissions expense was $24.9 million and $80.2 million for the years
      ending December 31, 2009 and 2008, respectively.





The
decrease of $55.3 million from 2009 to 2008 is due to a $32.0 million decrease
in commission expense related to new IBC sales.  The average number of
new IBC sales for which we recognized a commission expense decreased to 2,904 in
2009 compared to 9,448 in 2008.  At the same time the average amount
of recognized expense for each new IBC sale decreased to $348.31 in 2009 from
$388.54 in 2008. Additionally, we experienced a decrease of $9.4 million in
director’s pool expense due to a complete revamping of the program including the
elimination of level 6 and level 7 director pay in the third quarter of 2008. We
experienced a decrease of $13.1 million for 2009 as compared to 2008 for
commissions paid relating to monthly hosting fees.  This decrease is
due to the decline in the average number of active paying Site Owners in 2009 of
60,287 compared to 122,910 in 2008 for which commissions were
paid.  Also contributing to the reduction in commission expense is
$693,000 related to the 2007 Sales Director Bonus Plan.  During 2009
and 2008, we incurred actual forfeitures greater than our estimated forfeitures
of $271,000 and $45,000, respectively.  In addition, during 2008 we
granted and immediately expensed stock options with a fair value of $467,000
under the 2007 Sales Director Bonus Plan.  No sales directors
qualified for a bonus under the 2007 Sales Director Bonus Plan during 2009.





·
            Travel
      commissions expense was $7.4 million and $17.6 million for the years
      ending December 31, 2009 and 2008, respectively.





Travel
commissions and services for 2009 decreased $10.3 million as compared to
2008.  The decrease in travel commissions is attributable to the
decrease in gross travel bookings driven by the decrease in the number of Site
Owners and the overall trend in the decline in leisure travel the industry
experienced in 2009.





·
            Depreciation
      and amortization expense was $2.7 million and $2.5 million for the years
      ending December 31, 2009 and 2008, respectively.





The
increase of $142,000 in 2009 compared to 2008 is primarily attributable to
computer software related to our expansion into Canada and the addition of sales
tax software.





·
            Training
      programs and marketing material expenses were $1.4 million and $8.3
      million for the years ending December 31, 2009 and 2008, respectively.





Training
programs and marketing material expenses decreased $6.8 million in 2009 compared
to 2008. This decrease is primarily related to a reduction in costs associated
with the production and shipping of magazines and other sales
aides.  Also adding to the decline in cost was the reduction in the
amount of inventory that was impaired or destroyed in 2009 when compared to
2008.  Additionally, we experienced a reduction in costs incurred by
the Company related to training events and meetings.  All of these
costs were directly related to a reduction in sales driven by our declining Site
Owner base and a decline in the number of new IBC sales.





·
            Goodwill
      impairment was $450,000 and $149,000 for the years ending December 31,
      2009 and 2008, respectively.


37




During
the fourth quarter of 2009, we performed our annual impairment test of goodwill
and intangible assets pursuant to accounting standards governing goodwill and
other intangible assets.  As a result of our tests, we recorded an
impairment charge of $450,000 related to the fair value of goodwill associated
with our Travel segment.  Our annual impairment test of goodwill
during the fourth quarter of 2008 concluded that the goodwill of our Sunrise
Travel subsidiary (purchased in 2008) with a carrying amount of $149,000 had no
fair market value, resulting in an impairment charge of $149,000.  See
Note 9 – “Goodwill and Intangible Assets, Net.”




·
              Impairment
      other than goodwill was $7.4 million and $3.4 million for the years ending
      December 31, 2009 and 2008, respectively.





During
the fourth quarter of 2009, we made the decision to sell our headquarters
property within the next 12 months in a proposed sale-leaseback transaction,
selling the entire land and building and leasing back the portion of the land
and building used in operations.  In accordance with accounting
standards governing the impairment or disposal of long-lived assets, we recorded
a $3.9 million impairment charge on the portion of the land and building not
used in operations to write down the carrying value to its estimated realizable
value less costs to sell and reclassified it to assets held for
sale.  In accordance with accounting standards governing other
intangible assets, we recorded $2.2 million in impairment charges primarily
related to the write-off of trade and domain names associated with our Marketing
segment in conjunction with our January 2010 launch of our new ZamZuu business
model.  In addition, during 2009, we recorded impairment charges of
$724,000 related to obsolete inventory and $564,000 for purchased software no
longer used in operations.
 
 The
impairment charges in 2008 consisted of $3.0 million in obsolete inventory
related to expired magazines and a write-down of $366,000 associated with the
sale of our company jet.  See Note 6 – “Inventory,” Note 7 –
“Assets Held for Sale,” Note 8 – “Property and Equipment,” and Note 9
– “Goodwill and Intangible Assets, Net” for further discussions on impairment
charges.


·
            General
      and administrative expenses were $30.7 million and $50.6 million for the
      years ending December 31, 2009 and 2008, respectively.





General
and administrative expenses decreased $19.9 million in 2009 compared to
2008.  As a percentage of total net revenues, these expenses were
45.5% in 2009 and 31.7% in 2008. The overall decrease in general and
administrative expense in 2009 is primarily attributable to:





§
            National
      Convention expenses decreased $4.4 million due to costs associated with
      lower attendance at the convention and cost cutting measures by
      management.


§
            Salaries
      and benefits decreased $2.9 million primarily as a result of reduction in
      staffing requirements at the home office directly related to a decrease in
      the average number of Site Owners.


§
            Bad
      debt expense decreased $2.1 million due to non-recurring entry from 2008
      of $311,000 deposit write-off related to a terminated acquisition,
      reduction of $1.2 million of reserves established against advances and
      notes receivable, and non-recurring 2008 entry of $500,000 related to the
      reserve of a non-refundable earnest money deposit.


§
            Merchant
      processing fees decreased $2.0 million directly related to the number of
      transactions processed by the Company, linked to the downturn in revenue.


§
            Legal
      fees decreased $1.0 million partially related to our settlement of the
      suit filed by the California Attorney General’s Office.  See
      Note 21 – “Commitments and Contingencies.”  In addition, legal
      fees decreased $1.0 million as a result of work done performed in 2008
      relating to the Canadian expansion, and increased work surrounding general
      compliance that was not repeated in 2009.


§
            Contract
      labor decreased $1.4 million, partially due to the elimination of some
      consulting contracts and the conversion of consultants to full time
      employees.   Also contributing to the decrease was the
      elimination of the onsite security that was needed during the build out of
      the Wood River expansion in 2008.


§
            Printing
      and postage decreased $1.4 million due to a decrease in Site Owners
      resulting in decreased shipping of brochures and marketing materials.


§
            Sales
      and use tax expense decreased $980,000 due to the Company’s change in
      policy in 2009 to collect sales tax from the customer rather than
      expensing the tax payments under the policy in effect during 2008.


§
            Consulting
      fees decreased $878,000 partially due to a number of marketing initiatives
      which required consulting resources in 2008 that were eliminated in
      2009.  Also contributing to the decrease was the 2008 expense
      for warrants given for marketing services provided.


§
            Accounting
      fees decreased $839,000 due to a decrease in expenses surrounding general
      compliance, both international and domestic.  Also contributing
      to the decrease was first time Sarbanes-Oxley testing and compliance that
      was performed in 2008 but performed mostly internally in 2009.


§
            Marketing
      event costs for top Sales Directors in our Company was $37,000 in 2009, a
      decrease of $795,000.  In 2009, there was no Coach’s Birthday
      Bash event held, which was an annual performance-based event/contest for
      our top sales producers of travel and marketing.  Although there
      was no formal event held, the contest did take place in 2009.  A
      liability of $37,000 was established for the awards to be paid in January
      2010 although the actual contest occurred in 2009.


38


§
            Rep
      recognition awards decreased $625,000 directly related to the number of
      awards given for achieving milestones in the business driven by the
      decrease in new IBC sales.


§
            Restricted
      stock amortization and stock option expense increased $504,000 in 2009
      primarily due to amortization associated with restricted stock and stock
      option awards granted during the first and second quarters of 2009.





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, Bermuda, and the Bahamas and
are structured for potential additional international growth.  The
“Parent” discussions include corporate items not specifically allocated to the
segments.





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





Marketing
Segment




Dollars in thousands
                    
                    Year Ended December 312009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    % Increase
                      (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                    
                    $
                    51,792
                    
                    
                    $
                    122,361
                    
                    
                    $
                    (70,569
                    )
                    
                    
                    (57.7
                    )%Training
      programs and marketing materials
                    
                    
                    2,112
                    
                    
                    
                    9,319
                    
                    
                    
                    (7,207
                    )
                    
                    
                    (77.3
                    )%Other
                    
                    
                    695
                    
                    
                    
                    1,955
                    
                    
                    
                    (1,260
                    )
                    
                    
                    (64.5
                    )%Total
      net revenues
                    
                    
                    54,599
                    
                    
                    
                    133,635
                    
                    
                    
                    (79,036
                    )
                    
                    
                    (59.1
                    )%OPERATING
      EXPENSESMarketing
      commissions
                    
                    
                    24,903
                    
                    
                    
                    80,172
                    
                    
                    
                    (55,269
                    )
                    
                    
                    (68.9
                    )%Depreciation
      and amortization
                    
                    
                    1,419
                    
                    
                    
                    1,430
                    
                    
                    
                    (11
                    )
                    
                    
                    (0.8
                    )%Training
      programs and marketing materials
                    
                    
                    1,280
                    
                    
                    
                    7,283
                    
                    
                    
                    (6,003
                    )
                    
                    
                    (82.4
                    )%Impairment
      of assets other than goodwill
                    
                    
                    2,848
                    
                    
                    
                    3,024
                    
                    
                    
                    (176
                    )
                    
                    
                    (5.8
                    )%General
      and administrative
                    
                    
                    20,507
                    
                    
                    
                    37,014
                    
                    
                    
                    (16,507
                    )
                    
                    
                    (44.6
                    )%Total
      operating expenses
                    
                    
                    50,957
                    
                    
                    
                    128,923
                    
                    
                    
                    (77,966
                    )
                    
                    
                    (60.5
                    )%INCOME
      FROM OPERATIONS
                    
                    
                    3,642
                    
                    
                    
                    4,712
                    
                    
                    
                    (1,070
                    )
                    
                    
                    (22.7
                    )%





Net
Revenues





Net
revenues totaled $54.6 million and $133.6 million for the years ending December
31, 2009 and 2008 respectively.





·
            IBC
      sales and monthly renewals fees were $51.8 million and $122.4 million for
      the years ending December 31, 2009 and 2008 respectively.





IBC sales
were $14.5 million and $49.2 million for the years ending December 31, 2009 and
2008 respectively.





The
decrease was $34.7 million in 2009 compared to 2008.  We have
experienced a decrease in the actual number of IBCs sold for the 12 months ended
December 31, 2009 to 15,840 compared to 74,402 in 2008, The average number of
IBCs for which we are able to recognize revenue decreased to 2,904 in 2009
compared to 9,448 in 2008.   In addition, the average amount of
recognized revenue from each IBC decreased to $428.17 in 2009 compared to
$449.87 in 2008, mostly due to the Christmas special program initiated during
2009.  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 Site Owners.





Monthly
renewal fees were $36.9 million and $72.9 million for the years ending December
31, 2009 and 2008, respectively.




39


The
decrease of $35.9 million in 2009 compared to 2008 is in direct relation to the
number of active paying Site Owners.  The weighted average number of
paying Site Owners per month decreased to 60,287 in 2009 from 122,910 in
2008.  We anticipate a decline in the first quarter of 2010 due to the
general economic conditions followed by stabilization and ultimate growth
because of new marketing efforts focused on retention and product improvement
through our new ZamZuu initiatives.  We anticipate slower growth
compared to what we have experienced in the past because of the weak economy
generally.





Enhanced
Rep Site fees were $393,000 and $345,000 for the years ending December 31, 2009
and 2008, respectively.





The
increase of $48,000 in 2009 compared to 2008 was due to the fact that the
program was new in the third quarter of 2008. The Enhanced Rep Site is a
marketing subscription that YTB Reps can pay for on a monthly
basis.  It includes a calendar system that details Company events and
meetings personalized to the Rep’s schedule, an archive of videos, audio files,
an automatic email marketing campaign system and new contact management tools.
This program was temporarily discontinued in June 2009 and restarted late in the
third quarter of 2009.





·
            Training
      programs and marketing materials revenue were $2.1 million and $9.3
      million for the years ending December 31, 2009, and 2008, respectively.





The
decrease of $7.2 million from 2009 to 2008 was primarily due to a reduction in
sales of magazine and sales aids, along with shipping revenues generated through
the sale of those materials.  Also contributing to this decline was
the number of product sales that we had at the 2009 National Convention compared
to the National Convention in 2008, directly related to the reduction in
attendance at the event.  We expect this trend to stabilize in 2010,
as our active Site Owner base becomes more stable.  Also contributing
to the decrease was a reduction in the number of paying attendees at training
events, mostly due to a decline in the number of new IBC sales and fewer events
being held.





·
            Other
      revenue was $695,000 and $2.0 million for the years ending December 31,
      2009 and 2008, respectively.





Other
revenue decreased $1.3 million in 2009 compared to 2008.  The decrease
is primarily due to a reduction in the number of paid attendees at the National
Convention in 2009 as compared to the 2008 National Convention.





Operating
Expenses





·
            Marketing
      commissions expense was $24.9 million and $80.2 million for the years
      ending December 31, 2009 and 2008, respectively.





The
decrease of $55.3 million from 2009 to 2008 is due to a $32.0 million decrease
in commission expense related to new IBC sales.  The average number of
new IBC sales for which we recognized a commission expense decreased to 2,904 in
2009 compared to 9,448 in 2008.  At the same time the average amount
of recognized expense for each new IBC sale decreased to $348.31 in 2009 from
$388.54 in 2008.  Additionally we experienced a decrease of $9.4
million in director’s pool expense due to a complete revamping of the program
including the elimination of level 6 and level 7 director pay in the third
quarter of 2008.  We experienced a decrease of $13.1 million for 2009
as compared to 2008 for commissions paid relating to monthly hosting
fees.  This decrease is due to the decline in the average number of
active paying Site Owners in 2009 of 60,287 compared to 122,910 in 2008 for
which commissions were paid. Also contributing to the reduction in commission
expense is $693,000 related to the 2007 Sales Director Bonus
Plan.  During 2009 and 2008, we incurred actual forfeitures greater
than our estimated forfeitures of $271,000 and $45,000,
respectively.  In addition, during 2008 we granted and immediately
expensed stock options with a fair value of $467,000 under the 2007 Sales
Director Bonus Plan.  No sales directors qualified for a bonus under
the 2007 Sales Director Bonus Plan during 2009.





·
            Training
      programs and marketing material expenses were $1.3 million and $7.3
      million for the years ending December 31, 2009 and 2008, respectively.




40


Training
programs and marketing material expenses decreased $6.0 million in 2009 compared
to 2008. The decrease is primarily related to a reduction in costs associated
with the production and shipping of magazines and other sales aides.
Additionally, we experienced a reduction of costs incurred by the Company
related to training events and meetings.  All of these costs were
directly related to a reduction in sales driven by our declining Site Owner base
and a decline in the number of new IBC sales.





·
            Impairment
      other than goodwill was $2.8 million and $3.0 million for the years
      ending December 31, 2009 and 2008, respectively.





In
accordance with accounting standards governing other intangible assets, we
recorded $2.2 million in impairment charges primarily related to the write-off
of trade and domain names associated with our Marketing segment in conjunction
with our January 2010 launch of our new ZamZuu business model.  In
addition, during 2009, we recorded impairment charges of $724,000 primarily
related to obsolete printed marketing materials.  In 2008, the
impairment charge of $3.0 million was due to the write-off of expired
magazines.  See Note 6 – “Inventory” and Note 9 – “Goodwill and
Intangible Assets, Net” for further discussion on impairment charges.





·
            General
      and administrative expenses were $20.5 million and $37.0 million for the
      years ending December 31, 2009 and 2008, respectively.





General
and administrative expenses decreased $16.5 million in 2009 compared to
2008.  As a percentage of total marketing net revenues, these expenses
were 37.6% in 2009 and 27.7% in 2008.  The decreases in 2009 compared
to 2008 relate primarily to:


.


§
            National
      Convention expense decreased $4.4 million due to costs associated with
      lower attendance at the convention and cost cutting measures by
      management.


§
            Bad
      debt expense decreased $1.4 million in 2009 compared to 2008 due to our
      recording of reserves in 2008 related to advances and notes receivable
      that had been made by our Sales Directors.  No significant
      addition of bad debt for advances and notes receivable were made in 2009.


§
            Salaries
      and benefits decreased $1.0 million primarily as a result of a reduction
      in staffing requirements at the home office directly related to the
      decrease in sales of IBCs and continuing renewals of Site Owners as
      well.


§
            Sales
      and use tax expense decreased $982,000 due to the Company’s change in
      policy in 2009 to collect sales tax from the customer rather than
      expensing the tax payments under the policy in effect during 2008.


§
            Marketing
      event costs for top Sales Directors in the Company was $37,000 in 2009, a
      decrease of $795,000; no Coach’s Birthday Bash, an annual
      performance-based contest for our top sales producers of travel and
      marketing, was held in 2009. The only expense that was recorded in 2009
      was the accrual for the awards associated with the contest itself.


§
            Printing
      and postage decreased $1.4 million due to a decrease in Site Owners
      resulting in decreased shipping of brochures and marketing materials.


§
            Merchant
      processing fees decreased $2.0 million directly related to the number of
      transactions processed by the Company, linked to the downturn in revenue.


§
            Allocation
      from parent decreased $3.3 million due to variances in the following
      allocable parent expenses:  salaries and benefits, legal fees,
      contract labor, consulting fees, and accounting fees.




41


Travel
Segment




Dollars in thousands
                    
                    Year Ended December 312009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    % Increase
                      (Decrease)NET
      REVENUESTravel
      commissions and services
                    
                    $
                    12,201
                    
                    
                    $
                    25,175
                    
                    
                    $
                    (12,974
                    )
                    
                    
                    (51.5
                    )%Training
      programs and marketing materials
                    
                    
                    79
                    
                    
                    
                    302
                    
                    
                    
                    (223
                    )
                    
                    
                    (73.8
                    )%Other
                    
                    
                    438
                    
                    
                    
                    270
                    
                    
                    
                    168
                    
                    
                    
                    62.2
                    %-Total
      net revenues
                    
                    
                    12,718
                    
                    
                    
                    25,747
                    
                    
                    
                    (13,029
                    )
                    
                    
                    (50.6
                    )%OPERATING
      EXPENSESTravel
      commissions
                    
                    
                    7,363
                    
                    
                    
                    17,649
                    
                    
                    
                    (10,286
                    )
                    
                    
                    (58.3
                    )%Depreciation
      and amortization
                    
                    
                    471
                    
                    
                    
                    276
                    
                    
                    
                    195
                    
                    
                    
                    70.7
                    %Training
      programs and marketing materials
                    
                    
                    168
                    
                    
                    
                    1,000
                    
                    
                    
                    (832
                    )
                    
                    
                    (83.2
                    )%Impairment
      of goodwill
                    
                    
                    450
                    
                    
                    
                    149
                    
                    
                    
                    301
                    
                    
                    
                    202.0
                    %Impairment
      of assets other than goodwill
                    
                    
                    688
                    
                    
                    
                    -
                    
                    
                    
                    688
                    
                    
                    
                    n/m
                    *General
      and administrative
                    
                    
                    8,030
                    
                    
                    
                    10,342
                    
                    
                    
                    (2,312
                    )
                    
                    
                    (22.4
                    )%Total
      operating expenses
                    
                    
                    17,170
                    
                    
                    
                    29,416
                    
                    
                    
                    (12,246
                    )
                    
                    
                    (41.6
                    )%LOSS
      FROM OPERATIONS
                    
                    
                    (4,452
                    )
                    
                    
                    (3,669
                    )
                    
                    
                    (783
                    )
                    
                    
                    21.3
                    %





*Not
meaningful





Net
Revenues




·
            Travel
      commissions and services revenue was $12.2 million and $25.2 million for
      the years ending December 31, 2009 and 2008, respectively.





The $13.0
million decrease in 2009 compared to 2008 is attributable to the decrease in
gross travel retail bookings driven by the number of customers utilizing us as
their travel provider, as well as a general decline in the travel industry due
to current economic conditions.





·
            Training
      programs and marketing materials revenue was $79,000 and $302,000 for the
      years ending December 31, 2009 and 2008 respectively.





The
decrease of $223,000 in 2009 compared to the same period in 2008 is attributable
to a decrease in training revenues generated by our Passport to Giving program,
which is a program focused on non-profit organizations.





·
            Other
      income was $438,000 and $270,000 for the years ending December 31, 2009
      and 2008, respectively.





The
increase of $168,000 in 2009 compared to 2008 is attributable to an increase in
shopYTB revenue, partially offset by a decline in revenues earned through flower
sales and payment processing fees earned by the Company.





Operating
Expenses




·
            Travel
      commissions expense was $7.4 million and $17.6 million for the years
      December 31, 2009 and 2008, respectively.





Travel
commissions and services for 2009 decreased $10.3 million as compared to
2008.  The decrease in travel commissions is attributable to the
decrease in gross travel bookings driven by the decrease in the number of Site
Owners and the overall trend in the decline in leisure travel the industry
experienced in 2009.





·
            Depreciation
      and amortization was $471,000 and $276,000 for the years ending December
      31, 2009 and 2008, respectively.





The
increase of $195,000 in 2009 over 2008 is primarily attributable to computer
software related to our expansion into Canada.




42


·
            Training
      programs and marketing material expenses were $168,000 and $1.0 million
      for the years ending December 31, 2009 and 2008, respectively.





The
decrease of $832,000 for 2009 compared to 2008 is primarily due to an decrease
in costs incurred related to travel trade shows that we hosted along with an
decrease in costs incurred related to individual reimbursements for unauthorized
activities committed by our Company’s Site Owners.   There was
one event held in 2009 compared to two in 2008.    The trade
show held in 2009 was on a smaller scale than those held in 2008.





·
            Goodwill
      impairment was $450,000 and $149,000 for the years ending December 31,
      2009 and 2008, respectively.





During
the fourth quarter of 2009, we performed our annual impairment test of goodwill
and intangible assets pursuant to accounting standards governing goodwill and
other intangible assets.  As a result of our tests, we recorded an
impairment charge of $450,000 related to the fair value of goodwill associated
with our Travel segment.  Our annual impairment test of goodwill
during the fourth quarter of 2008 concluded that the goodwill of our Sunrise
Travel subsidiary (purchased in 2008) with a carrying amount of $149,000 had no
fair market value, resulting in an impairment charge of $149,000.  See
Note 9 – “Goodwill and Intangible Assets, Net.”


·
            Impairment
      other than goodwill was $688,000 and $0 for the years ending December 31,
      2009 and 2008, respectively.





The
increase of $688,000 in 2009 compared to 2008 was the result of writing
off $564,000 in capitalized costs for a travel booking search
engine that did not perform as expected and had to be removed from
production.   An additional $124,000 was due to the impairment of
intangible assets allocated to the travel segment.  See
Note 9 – “Goodwill and Intangible Assets, Net.”





·
            General
      and administrative expenses were $8.0 million and $10.3 million for the
      years ending December 31, 2009 and 2008, respectively.





General
and administrative expenses decreased $2.3 million in 2009 compared to
2008.   As a percentage of total travel net revenues, these
expenses were 63.1% in 2009 and 40.2% in 2008.  The decreases in 2009
compared to 2008 relate primarily to:





§
            Allocation
      from parent decreased $1.8 million due to variances in the following
      allocable parent expenses:  salaries and benefits, legal fees,
      contract labor, consulting fees, and accounting fees.


§
            Salaries
      and benefits decreased $1.1 million primarily as a result of a reduction
      in staffing requirements at the home office directly related to the
      decrease in sales of IBCs and continuing renewals of Site Owners as
      well.








Parent




Dollars in thousands
                    
                    Year Ended December 312009
                    
                    
                    2008
                    
                    
                    Increase(Decrease)
                    
                    
                    % Increase(Decrease)NET
      REVENUESOther
                    
                    $
                    4
                    
                    
                    $
                    72
                    
                    
                    $
                    (68
                    )
                    
                    
                    (94.4
                    )%Total
      net revenues
                    
                    
                    4
                    
                    
                    
                    72
                    
                    
                    
                    (68
                    )
                    
                    
                    (94.4
                    )%OPERATING
      EXPENSESDepreciation
      and amortization
                    
                    
                    783
                    
                    
                    
                    825
                    
                    
                    
                    (42
                    )
                    
                    
                    (5.1
                    )%Training
      programs and marketing materials
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    n/m
                    *Impairment
      of assets other than goodwill
                    
                    
                    3,907
                    
                    
                    
                    366
                    
                    
                    
                    3,541
                    
                    
                    
                    967.5
                    %General
      and administrative
                    
                    
                    2,171
                    
                    
                    
                    3,260
                    
                    
                    
                    (1,089
                    )
                    
                    
                    (33.4
                    )%Total
      operating expenses
                    
                    
                    6,862
                    
                    
                    
                    4,451
                    
                    
                    
                    2,411
                    
                    
                    
                    54.2
                    %LOSS
      FROM OPERATIONS
                    
                    
                    (6,858
                    )
                    
                    
                    (4,379
                    )
                    
                    
                    (2,479
                    )
                    
                    
                    56.6
                    %





*Not
meaningful




43


Net
Revenues




·
            Other
      income was $4,000 and $72,000 for the years ending December 31, 2009 and
      2008, respectively.  The decrease of $68,000 in 2009 compared to
      2008 is a result of revenue for the use of the Company
      jet.   The Company jet was sold in early 2009.




Operating
Expenses




·
            Depreciation
      and amortization was $783,000 and $825,000 for the years ending December
      31, 2009 and 2008, respectively.





·
            Impairment
      other than goodwill was $3.9 million and $366,000 for the years ending
      December 31, 2009 and 2008, respectively.





During
the fourth quarter of 2009, we made the decision to sell our headquarters
property within the next 12 months in a proposed sale-leaseback transaction,
selling the entire land and building and leasing back the portion of the land
and building used in operations.  In accordance with accounting
standards governing the impairment or disposal of long-lived assets, we recorded
a $3.9 million impairment charge on the portion of the land and building not
used in operations to write down the carrying value to its estimated realizable
value less costs to sell and reclassified it to assets held for sale.
 
 The
impairment charges in 2008 consisted of a write-down of $366,000 associated with
the sale of our company jet.  See Note 7 – “Assets Held for Sale”
for further discussions on these impairment charges.


·
            General
      and administrative expenses were $2.2 million and $3.3 million for the
      years ending December 31, 2009 and 2008, respectively.





General
and administrative expenses decreased overall $1.1 million in 2009 compared to
2008.  As a percentage of total net revenues, these expenses were 3.2%
in 2009 and 2.0% in 2008.  Specifically, the increase is due to
variances in the following expenses:


.


§
            Salaries
      and benefits decreased $764,000 primarily as a result of a reduction in
      staffing requirements at the home office directly related to the decrease
      in sales of IBCs and continuing renewals of Site Owners as well.


§
            Bad
      debt expense decreased $834,000 due to a 2008 $311,000 deposit write-off
      related to a terminated acquisition and approximately $500,000 related to
      the reserve of a nonrefundable earnest money deposit.


§
            Legal
      settlement fees increased $1.0 million in 2009 due to the settlement of
      the suit filed by the California Attorney General’s Office offset by a
      decrease of $571,000 related to the fulfillment of a contractual agreement
      in 2008 with a consultant.


§
            Parent
      allocation to marketing and travel segments decreased $5.0 million due to
      the following variances in allocable expenses:


·
            Legal
      fees decreased $1.0 million partially due to our settlement of the suit
      filed by the California Attorney General’s Office described in the legal
      settlement detail.  In addition, legal fees decreased $1.0
      million as a result of work performed in 2008 relating to the Canadian
      expansion, and increased work surrounding general compliance that was not
      repeated in 2009.


·
            Contract
      labor decreased $1.5 million, partially due to the elimination of some
      consulting contracts and the conversion of consultants to full time
      employees.  Also contributing to the decrease was the
      elimination of the onsite security that was needed during the build out of
      the Wood River expansion in 2008.


·
            Consulting
      fees decreased $900,000 primarily due to a number of marketing initiatives
      which required consulting resources in 2008 that were eliminated in
      2009.  Also contributing to the decrease was the 2008 expense
      for shares issued for marketing services provided.


·
            Accounting
      fees decreased $852,000 due to a decrease in expenses surrounding general
      compliance, both international and domestic.  Also contributing
      to the decrease was first time Sarbanes-Oxley testing and compliance that
      was performed in 2008 but performed mostly internally in 2009.


44


·
            Restricted
      stock amortization and stock option expense increased $504,000 in 2009
      primarily due to amortization associated with restricted stock and stock
      option awards granted during the first and second quarters of 2009.




DISCONTINUED
OPERATIONS





The
results of the REZconnect subsidiary, formerly included in our Travel segment,
are classified as discontinued operations.  Results of the business as
well as the loss on disposal are summarized below:
 
 Dollars
      in thousands
                    
                    Year
      endedDecember
      31,
                      2009
                    
                    
                    December
      31,
                      2008
                    
                    
                    $
      Incr
                      (decr)Net
      revenues
                    
                    $
                    869
                    
                    
                    $
                    3,093
                    
                    
                    $
                    (2,224
                    )Loss
      from operations before income tax provision
                    
                    $
                    (463
                    )
                    
                    $
                    (762
                    )
                    
                    $
                    (299
                    )Income
      tax provision
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    $
                    1Loss
      on disposal, net of tax
                    
                    
                    (2,615
                    )
                    
                    
                    -
                    
                    
                    $
                    2,615Loss
      from discontinued operations, net of tax
                    
                    $
                    (3,079
                    )
                    
                    $
                    (762
                    )
                    
                    $
                    2,317
 
 The
Company recorded a net loss form discontinued operations in 2009 of $3.1
million, an increase of $2.3 million from a $762,000 loss recorded in
2008.  This increase primarily reflects the net loss on disposal of
the REZconnect subsidiary of $2.6 million.  The loss on disposal
included pre-tax exit costs of $2.6 million for the termination of certain
employment agreements.  See Note 17 – “Discontinued Operations” to the
consolidated financial statements for further discussion.




45


Liquidity
and Capital Resources




As of
December 31, 2009, we had $678,000 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 continually assess our cash
flow needs.  We do not have but are pursuing establishing a credit
facility from which we may draw for our liquidity needs.





As shown
in the accompanying financial statements, our Company has incurred losses from
continuing operations for 2009 and 2008 of $6.8 million and $3.7 million,
respectively.  In addition, negative current economic conditions and
other factors have led to a falloff in the number of active Site Owner IBCs in
our Company.  The number of active Site Owner IBC sites has declined
during the 2009 by a net of 51,209 to 41,174 active Site Owner IBCs from the
92,383 reported as of December 31, 2008.  In addition, from August
2008 through May 2009, we were defending against a case brought by the
California Attorney General challenging the legality of our network marketing
program.  The Company settled this case on May 14,
2009.  See Note 21 – “Commitments and
Contingencies.”  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.





As part
of our continual efforts to improve the operating efficiency of our Company and
in response to these challenges, we have taken several actions and continue to
evaluate other areas of opportunity to ensure that our Company will be
successful.  In April 2009, our Board of Directors appointed a
consultant, Robert Van Patten, with 25 years of senior management experience to
provide recommendations to the Chief Executive Officer, the Board of Directors
and management on cost structure improvements, compliance and other matters to
improve the overall profitability of our Company.  On October 6, 2009,
the Board appointed Mr. Van Patten Chief Executive Officer and President of the
Company, effective immediately.  Additionally, we have instituted a
cost reduction program that includes a reduction in labor and fringe costs, as
well as reductions of discretionary expenditures in the operating structure of
the organization.  In addition, numerous other discretionary costs
have been eliminated, although these amounts are difficult to
quantify.  Furthermore, to raise additional capital, the Company
implemented the TSO Stock Purchase Plan which became operational in April 2009
(see Note 14 – “Share-Based Payments” to the consolidated financial statements)
and generated $144,000 in proceeds as of December 31,
2009.  Management has decided to temporarily suspend this
program.  Our Company is also evaluating the sale of certain noncore
assets and additional programs to raise new capital for future operations.





In
addition, the Company achieved resolution to some uncertainties that existed as
of December 31, 2008, such as the civil action with the State of California as
well as the dispute with its insurance carriers regarding their coverage for the
defense of the case with California.  On May 14, 2009, the Company
settled its case with the California Attorney General by entering into a
Stipulated Judgment and agreeing to pay $1.0 million to the State of California
for restitution and the reimbursement of legal fees incurred by the State which
has been paid in full as of December 31, 2009.  The Stipulated
Judgment is not evidence of any wrongdoing or an admission on the part of the
Company or its executive officers.  With the California case settled,
the Company finalized an agreement with its insurance carriers regarding the
amount of coverage they would provide for the defense of the California case, as
well as the Illinois class action suit.  See Note 21 – “Commitments
and Contingencies.”





Additionally,
the Company is addressing the decline in new IBC sales and existing Site Owner
retention with the following key initiatives:





·
            Through
      our ongoing marketing we are balancing initiatives to attract new Site
      Owners and retain existing Site Owners. Understanding that today, our
      customers are more value oriented in their purchase decisions, we are
      expanding the “value” received in purchasing an IBC by bringing “in-house”
      our new ZamZuu initiative where Site Owners can direct customers to shop
      for items they already purchase online and receive commissions and cash
      back on normal purchases of everyday items.





·
            We
      are developing new marketing programs and enhancing existing marketing
      programs to communicate the value of our IBC by offering a marketing
      system that enhances consistent marketing and tracking of the Site Owner
      sales efforts via a systematic marketing program.





·
            Training
      has been expended by providing Site Owners with videos on how to conduct
      home “parties” to help sell the various featured products.





We
believe these factors will contribute toward reducing our operating losses and
working capital deficiency.  However, there can be no assurance that
our Company will be successful in achieving its objectives.


46


On May
14, 2009, a civil action was filed by the Illinois Attorney General against
three subsidiaries of the Company and certain of its executive officers alleging
that the Company violated Illinois’ unfair competition and advertising
laws.  Although we believe that we have meritorious defenses against
this action as well as the legal proceedings discussed in Note 21 – “Commitments
and Contingencies” to the consolidated financial statements, and we intend 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.





Cash
flows generated from continuing operations is combined with cash flows generated
from discontinued operations within operating activities, investing activities,
and financing activities in our consolidated statement of cash
flows.  The following table presents a summary of our cash flows
individually for continuing and discontinued operations for each of the three
activities for the last two years:





Year ended December 31Dollars
      in thousands
                        
                        2009
                        
                        
                        2008Net
      cash provided by (used in):Operating
      activitiesContinuing
                        
                        $
                        (854
                        )
                        
                        $
                        7,324Discontinued
                        
                        
                        (345
                        )
                        
                        
                        98Total
      operating activities
                        
                        
                        (1,199
                        )
                        
                        
                        7,422Investing
      activitiesContinuing
                        
                        
                        602
                        
                        
                        
                        (8,664
                        )Discontinued
                        
                        
                        251
                        
                        
                        
                        749Total
      investing activities
                        
                        
                        853
                        
                        
                        
                        (7,915
                        )Financing
      activitiesContinuing
                        
                        
                        (242
                        )
                        
                        
                        229Discontinued
                        
                        
                        -
                        
                        
                        
                        (242
                        )Total
      financing activities
                        
                        
                        (242
                        )
                        
                        
                        (13
                        )Effect
      of exchange rate changes on cash
                        
                        
                        63
                        
                        
                        
                        (22
                        )Net
      decrease in cash
                        
                        $
                        (525
                        )
                        
                        $
                        (528
                        )





Net cash
used in operating activities of our continuing operations in 2009 was $854,000
compared to cash provided by operating activities of $7.3 million in
2008.  In addition, the operating activities of our discontinued
operations used $345,000 of cash in 2009 and provided $98,000 in 2008.





Net cash
provided by investing activities of our continuing operations was $602,000
during 2009 compared to $8.7 million used in 2008.  This $8.1 million
decrease in cash consumed was primarily related to a decrease in purchases of
property and equipment of $9.2 million as well as an increase of $872,000 in
proceeds received from the sale of assets held for sale resulting from the sale
of the Company’s business jet for $872,000, net of $28,000 in closing
costs.  Also partially offsetting the decrease in cash consumed was
$378,000 in cash relinquished in the sale of our REZconnect subsidiary during
2009.  In addition, the investing activities of our discontinued
operations provided $251,000 of cash in 2009, which represents net proceeds from
the sale of short term investments.





Net cash
used in financing activities of our continuing operations was $242,000 in 2009
compared to net cash provided by financing activities of $229,000 in
2008.  Net cash used in financing activities during 2009 primarily
related to a $300,000 principal payment made in connection with the headquarters
note renewal offset by $144,000 in proceeds received from the Company’s TSO
Stock Purchase Plan.  Net cash provided by financing activities in
2008 resulted primarily from proceeds received from the exercise of common stock
warrants.  In addition, during 2008, we deposited funds in connection
with our obtaining a Standby Letter of Credit of $1.9 million collateralizing
the obligations of our Sales Director-level Reps under two cruises that they
booked, both of which set sail prior to June 30, 2008 triggering the release of
all funds under this Letter of Credit to satisfy our obligations to the cruise
line.  Also during 2008, a $500,000 certificate of deposit
representing collateral for the outstanding indebtedness on the property serving
as the Company’s new corporate headquarters was released and subsequently
surrendered by the Company in partial repayment of the principal amount
outstanding under such indebtedness.




47


On March
23, 2009, the Company’s primary domestic credit card processor (the “ processor”) increased the reserve
requirement from 3% of the average rolling six-month transaction volume to a
flat $3.0 million.  Subsequently on May 29, 2009, the processor agreed
to discontinue withholding additional reserves once a $2.7 million balance was
attained.  During 2009, the full amount of the $2.7 million reserve
requirement was funded, of which $250,000 was returned to the Company on
December 31, 2009, representing a net use of funds of $1.0 million in 2009.





In
addition, the Company expended approximately $931,000 in legal defense costs
during 2009 that are not expected to continue into future
periods.  However, additional legal expenses will be incurred related
to the civil action filed by the State of Illinois, which the Company
anticipates will be significantly lower than those incurred in conjunction with
the California Attorney General suit.





The
Company recognized a loss of $2.6 million during 2009 as a result of the sale of
the REZconnect subsidiary, which will be paid through December 31, 2014 in
common stock of the Company and cash payments of approximately
$631,000.  As a result, the Company expects to realize cash
savings of $2.4 million over the 5.5 years from the date of disposal based upon
the cash payments to be made under the employment severance
agreement versus the cash payments that would have been required under the
original employment contracts.  Thus, while the Company has recognized
significant expense in 2009, the cash savings over the 5.5 years from the date
of disposal will serve to contribute a significant savings in terms
of liquidity, helping to strengthen the Company’s position.  During
2009, the cash savings recognized by the Company was $145,000.





On July
26, 2009, the $1.9 million balloon payment on the Company’s note on its
corporate headquarters came due.  On September 29, 2009, we executed
a Loan Modification, Renewal, and Extension Agreement (the “ Agreement”),
effective July 26, 2009, with FH Partners LLC (“ FH Partners”) with respect to
our corporate headquarters.





The
Agreement renews the note executed in connection with the Loan, and subsequently
extended in July 2008 (the “ Note”), in the new
amount of $1.9 million and extends the maturity of the Note and Loan to April
30, 2010.  The amount due under the Note bears an annual interest rate
of 8.0%.  We paid a principal installment of $300,000 on September 30,
2009.  A second additional
principal installment in the amount of $200,000, originally due and payable on
December 31, 2009, was extended to January 31, 2010.  To date, the
Company has not made the $200,000 payment.  FH Partners has not given
the Company notice of its intention to accelerate the debt as a result of the
Company’s failure to make the $200,000 payment that was due January 31, 2010.    In the event of default, as defined in the Note,
FH Partners has the right to declare the entire unpaid balance of principal and
interest on the Note due and payable.  All other terms of the Note and
the Loan, including the representations and warranties, remain unchanged.
 
 In
connection with the execution of the Agreement, the Company granted FH Partners
a mortgage on approximately nine acres of unencumbered raw land adjacent to the
Company’s headquarters (the “ Property”) as
additional security for the Note, as evidenced by a Mortgage executed on
September 29, 2009 (the “ Mortgage”).  Under the Mortgage, we assigned and conveyed to FH
Partners all rights, title and interest in existing or future leases for use of
the Property and all rents and profits that pertain to the use of the
Property.  In the event of default, as defined in the Mortgage, FH
Partners has the right to foreclose on the Property and take possession or
declare all payments immediately due and payable
 
 The
outstanding balance of the Note as of December 31, 2009 was $1.6 million and the
outstanding balance of the Note Renewal as of December 31, 2008 was $2.0
million.  The Company is currently in discussions with FH Partners and
they have indicated their willingness to consider the possibility of renewing,
extending, amending or modifying the Agreement including, but not limited to,
potentially extending the $200,000 payment originally due on December 31, 2009
which was subsequently extended to January 31, 2010.




On
January 20, 2010, the Company executed a commercial promissory note with an
unaffiliated third party (the “ Lender”), in the
amount of $650,000 with a maturity date of September 15, 2010.  The
note bears interest at a rate of 14.5 percent per annum, payable in monthly
installments of interest only beginning on February 16, 2010.  In
connection with the execution of the note and as evidenced by the assignment of
promissory note dated January 20, 2010, the Company granted a security interest
to Lender in the promissory note dated December 16, 2008 related to the Building
One Property, and payable to the Company in the amount of $1.2
million.  As additional security for the note as evidenced by the
assignment of mortgage dated January 20, 2010, the Company assigned to Lender
the real estate mortgage dated December 16, 2008 made by Purchaser to secure
repayment of the Building One Property note to the Company.  In the
event that the Company has not received payment in full of all principal and
interest due under the terms and conditions of the Building One Property note by
June 16, 2010, the Company is to deliver to Lender a fully executed modification
of the Building One Property note no later than July 16, 2010, the terms of
which must be approved by Lender prior to the modification.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.




48


Critical
Accounting Policies and Estimates




Our
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements requires that we estimate the effect of
various matters that are inherently uncertain as of the date of the financial
statements. Each of these required estimates varies in regard to the level of
judgment involved and its potential impact on our reported financial results.
Estimates are deemed critical when a different estimate could have reasonably
been used or where changes in the estimate are reasonably likely to occur from
period to period, and would materially impact our financial condition, changes
in financial condition or results of operations. Our significant accounting
policies are discussed in Note 2 – “Summary of Significant Accounting Policies”
in the accompanying notes to consolidated financial
statements.  Critical accounting estimates for us include: the
determination of the estimated lifespan during which a Site Owner remains a Site
Owner 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 collectibility of notes
receivable.  Such accounting estimates are discussed in the following
paragraphs.




Revenue Recognition




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




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. Site Owners.  We
amortize the initial sales price, including all up-front fees received from new
IBC sales, over the expected useful life of the Site Owner.  The
calculation of the expected useful life is based upon a review of the sales for
each month and the length of time each Site Owner 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
twelve 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 Site Owner 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 Site Owner sales aids and miscellaneous
promotional and marketing materials are recognized when the related merchandise
is shipped to the Rep or Site Owner.  Sales revenues from training
programs are recognized when the Rep or Site Owner 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 Site Owners 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 Site Owner 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.




49


Goodwill and Intangible
Assets, Net





Goodwill.Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business
combination.  Goodwill is not amortized but it is tested for
impairment annually as of year end using the two-step method, and is tested for
impairment between annual tests if an event occurs or circumstances change that
would indicate the carrying amount may be impaired.  Impairment
testing for goodwill is done at a reporting unit level, with all goodwill
assigned to a reporting unit.  Reporting units for purposes of testing
goodwill are the same as our business segments.  Application of the
goodwill impairment test requires judgment, including the identification of
reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units and determination of the fair value of
each reporting unit.
 
 The
goodwill impairment test involves a two-step process.  The first step
is a comparison of each reporting unit’s fair value to its carrying
value.  The fair value of each reporting unit is estimated using the
best information available through the use of different valuation techniques,
including the income approach and/or market approach.  Determining the
fair value of a reporting unit is a matter of judgment and often involves the
use of significant estimates and assumptions including estimation of future cash
flows, which is dependent on internal forecasts, estimation of the long-term
rate of growth for our reporting units, the useful life over which cash flows
will occur, determination of our weighted average cost of capital and relevant
market data.  If there is no calculated fair value for a reporting
unit, the goodwill is deemed fully impaired and written off.  If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment loss.  The amount of impairment is
determined by comparing the implied fair value of reporting unit goodwill after
allocating value to our tangible and intangible assets and liabilities as of the
valuation date to the carrying value of the goodwill.  If the implied
fair value of goodwill is less than the recorded goodwill, we would record an
impairment charge for the difference.
 
 The use
of different assumptions, estimates or judgments in either step of the goodwill
impairment testing process, such as the estimated future cash flows of our
reporting units, the discount rate used to discount such cash flows, or the
estimated fair value of the reporting units’ tangible and intangible assets and
liabilities, could significantly increase or decrease the estimated fair value
of a reporting unit or its net assets, and therefore, impact the related
impairment charge.  For the fiscal 2009 annual impairment test, the
conclusion that no indication of goodwill impairment for the Marketing unit
existed would not have changed had the test been conducted assuming: 1) a 200
basis point increase in the discount rate used to discount the aggregate
estimated cash flows of our reporting units to their net present value (without
any change in the aggregate estimated cash flows of our reporting units), or 2)
a 600 basis point decrease in the estimated sales growth rate or terminal period
growth rate without a change in the discount rate of each reporting
unit.  Even if both of these factors were changed, the conclusion that
no indication of goodwill impairment for the Marketing unit would not have
changed.





Intangible assets. Intangible assets include tradenames, non-compete agreements and
other intangible assets assumed in a business combination.  Intangible
assets with an indefinite life, namely trade and domain names, are not
amortized. Intangible assets with a definite life are amortized on a
straight-line basis, with estimated useful lives ranging from one to 10
years.  Indefinite-lived intangible assets are tested for impairment
annually, and are tested for impairment between annual tests if an event occurs
or circumstances change that would indicate that the carrying amount may be
impaired. Intangible assets with a definite life are tested for impairment
whenever events or circumstances indicate that the carrying amount of an asset
(asset group) may not be recoverable.  An impairment loss is recognized
when the carrying amount of an asset exceeds the estimated undiscounted cash
flows used in determining the fair value of the asset.  The amount of the
impairment loss to be recorded is calculated by the excess of the asset’s
carrying value over its fair value.  Fair value is generally determined
using a discounted cash flow analysis.




50





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
addition, 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.





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 our 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





We review
the recoverability of our long-lived assets, including buildings, equipment,
internal-use software and other intangible assets, when events or changes in
circumstances occur that indicate that the carrying value of the asset may not
be recoverable.  The assessment of possible impairment is based on our
ability to recover the carrying value of the asset from the expected future
pre-tax cash flows (undiscounted and without interest charges) of the related
operations.  If these cash flows are less than the carrying value of
such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value.  Our primary measure of fair
value is based on discounted cash flows.




51


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.





New
Accounting Guidance





See Note
2 – “Summary of Significant Accounting Policies” to Consolidated Financial
Statements for information regarding new accounting guidance.





Item7A.  Quantitative
and Qualitative Disclosures About Market Risk.





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





As of
December 31, 2009, we have a $1.6 million note bearing interest at 8.0% per
annum. Interest expense from this note is subject to market risk in the form of
fluctuations in interest rates. The maturitydate of this loan is April 30, 2010.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.




Item8.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.





Item9A.  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.




52


In
connection with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, 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 our disclosure controls and procedures were
effective as of December 31, 2009.





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, 2009. 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, 2009, our internal control
over financial reporting was 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.





This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this Annual Report.





/s/
      Robert M. Van PattenRobert
      M. Van PattenChief
      Executive Officer and Interim Chief Financial OfficerApril
      14, 2010





Remediation
of Prior Material Weakness in Internal Control Over Financial Reporting.





Our
management previously identified and disclosed a material weakness in internal
control over financial reporting relating to our control
environment.  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.    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.




53


Our
management has been actively engaged in the implementation of remediation
efforts to address the material weakness in the control
environment.  These remediation efforts, outlined below, were
specifically designed to address the material weakness previously indentified by
Management.





Early in
2009, the internal audit function began reporting directly to the Chairman of
the Audit Committee of the Board of Directors. In addition, our Board of
Directors 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.





During
the second quarter of 2009, the Board of Directors appointed a consultant with
25 years of senior management experience to provide recommendations to the Board
of Directors and management on cost structure, compliance and other matters to
improve the overall profitability of the Company.





On
October 6, 2009, Robert M. Van Patten accepted the position of President and CEO
of the Company.  Previously, since April 2009, Mr. Van Patten had
served in the consulting capacity discussed earlier.  The Board and
management believe that the appointment of Mr. Van Patten to direct and provide
guidance in the day-to-day operating activities of the organization will provide
the business leadership necessary to guide the Company in future
periods.  The changes in leadership and reporting responsibilities are
believed to provide structure and accountability to the organization in the
future.





Changes
to Internal Controls over Financial Reporting.





There
have been no changes to our internal control over financial reporting that
occurred during 2009 except the ones noted above to address the material
weakness that have materially affected, or are reasonably likely to materially
affect, our Company’s internal control over financial reporting.





Item9B.Other
Information.





None.




54


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 2010 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.





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 2010 Annual Meeting of Stockholders:
“Proposal 2- Ratification of the Company’s Selection of its Auditors,” which is
incorporated by reference herein.


55


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.
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.




56


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 the Company’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, incorporated by
      reference to the Company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2008, Exhibit 3.1, filed with the SEC on March 16,
      2009.





3.2
            Amended
      and Restated By-Laws of the Company, incorporated by reference to the
      Company’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 the Company’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, 2 ndFloor, 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 for the fiscal year ended December 31, 2007,
      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.





*10.10
            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 for the fiscal year ended December 31, 2007, Exhibit 10.12,
      filed with the SEC on March 31, 2008.




57


*10.11
            YTB
      International, Inc. 2008 Sales Director Bonus Plan, incorporated by
      reference to the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2009, Exhibit 10.12, filed with the SEC on March
      16, 2009.





*10.12
            Membership
      Interests Purchase Agreement, incorporated by reference to the Company’s
      Quarterly Report on Form 10-Q for the three months ended March 31, 2008,
      Exhibit 10.1, filed with the SEC on May 15, 2008.





*10.13
            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.





10.14
            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.





10.15
            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 for the three and nine months ended September 30, 2008, Exhibit
      10.2, filed with the SEC on November 14, 2008.





10.16
            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.





10.17
            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.





10.18
            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.





*10.19
            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.





*10.20
            Form
      of Restricted Stock Award Agreement – At Election Award for Non-Employee
      Directors, by and between the Company and eligible members of the
      Company’s board of Directors upon election to the Board, incorporated by
      reference to the Company’s Quarterly Report on Form 10-Q for the three and
      six months ended June 30, 2009, Exhibit 10.1, filed with the SEC on August
      7, 2009.





10.21
            Stipulation
      For Entry of Final Judgment and Permanent Injunction, dated May 14, 2009,
      incorporated by reference to the Company’s Quarterly Report on Form 10-Q
      for the three and six months ended June 30, 2009, Exhibit 10.1, filed with
      the SEC on August 7, 2009.





10.22
            Employment
      Severance Agreement by and between YTB International, Inc., Michael Brent,
      Derek Brent and REZconnect Technologies, Inc., dated as of June 30, 2009,
      incorporated by reference to the Company’s Current Report on Form 8-K/A,
      Exhibit 10.1, filed with the SEC on August 5, 2009.





10.23
            Agreement
      of Purchase and Sale by and between Michael Y. Brent and Derek Brent, as
      Purchasers, and YTB International, Inc., as Seller, dated as of June 30,
      2009, incorporated by reference to the Company’s Current Report on Form
      8-K, Exhibit 10.2, filed with the SEC on July 7, 2009.





10.24
            Loan
      Modification, Renewal, and Extension Agreement dated September 29, 2009 by
      and between YTB International, Inc. and FH Partners, LLC, incorporated by
      reference to the Company’s Quarterly Report on Form 10-Q for the three and
      nine months ended September 30, 2009, Exhibit 10.1, filed with the SEC on
      November 6, 2009.





10.25
            Mortgage
      dated September 29, 2009 by and between YTB International, Inc. and FH
      Partners, LLC, incorporated by reference to the Company’s Quarterly Report
      on Form 10-Q for the three and nine months ended September 30, 2009,
      Exhibit 10.2, filed with the SEC on November 6, 2009.




58


10.26
            Headquarters
      Property Note dated July 26, 2006 by and between YTB International, Inc.
      and Meridian Bank, incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q for the three and nine months ended September 30,
      2009, Exhibit 10.3, filed with the SEC on November 6, 2009.





10.27
            Commercial
      Security Agreement dated July 26, 2006 by and between YTB International,
      Inc. and Meridian Bank, incorporated by reference to the Company’s
      Quarterly Report on Form 10-Q for the three and nine months ended
      September 30, 2009, Exhibit 10.4, filed with the SEC on November 6, 2009.





10.28
            Indemnification
      Agreement dated November 5, 2009 by and between YTB International, Inc.
      and Harold L. Kestenbaum, incorporated by reference to the Company’s
      Quarterly Report on Form 10-Q for the three and nine months ended
      September 30, 2009, Exhibit 10.5, filed with the SEC on November 6, 2009.


.


10.29
            Indemnification
      Agreement dated November 5, 2009 by and between YTB International, Inc.
      and Andrew J. Wilder, incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q for the three and nine months ended September 30,
      2009, Exhibit 10.6, filed with the SEC on November 6, 2009.





*10.30
            Employment
      Agreement, dated as of October 6, 2009, by and between YTB International,
      Inc. and Robert M. Van Patten.








10.31
              Commercial
      Promissory Note dated January 20, 2010 by and between YTB International,
      Inc. and Normandy Corporation.
 
 10.32
              Assignment
      of Promissory Note dated January 20, 2010 by and between YTB
      International, Inc. and Normandy Corporation.
 
 10.33
              Assignment
      of Mortgage dated January 20, 2010 by and between YTB International, Inc.
      and Normandy Corporation.




14
            YTB
      International, Inc. Code of Business Ethics Summary





21
            Subsidiaries
      of YTB International, Inc.





23.1
            Independent
      Auditor’s Consent.





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-K 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.


59


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)April
      14, 2010
                            
                            /s/
      Robert M. Van PattenRobert
      M. Van PattenChief
      Executive Officer, President, Interim Chief Financial Officer and
      Director





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.





April
      14, 2010
                                                            
                                                            /s/
      Robert M. Van PattenRobert
      M. Van Patten, Director,
                                                              Chief
      Executive Officer, President and
                                                              Interim
      Chief Financial Officer
                                                              (principal
      executive officer andprincipal financial officer)April
      14, 2010
                                                            
                                                            /s/
      J. Scott TomerJ.
      Scott Tomer,Chairman
      of the Board ofDirectorsApril
      14, 2010
                                                            
                                                            /s/
      J. Kim SorensenJ.
      Kim Sorensen, Director, Secretary, Treasurer and Vice ChairmanApril
      14, 2010
                                                            
                                                            /s/
      Thomas B. Baker, Jr.Thomas
      B. Baker, Jr., DirectorApril
      14, 2010
                                                            
                                                            /s/
      Louis C. BrockLouis
      C. Brock, DirectorApril
      14, 2010
                                                            
                                                            /s/
      Paul A. HemingsPaul
      A. Hemings, DirectorApril
      14, 2010
                                                            
                                                            /s/
      Jack H. Humes, Jr.Jack
      H. Humes, Jr., DirectorApril
      14, 2010
                                                            
                                                            /s/
      Burt L. SaundersBurt
      L. Saunders, DirectorApril
      14, 2010
                                                            
                                                            /s/
      Patricia S. WilliamsPatricia
      S. Williams, Director




60




INDEX TO


YTB
INTERNATIONAL, INC.


FINANCIAL
STATEMENTS,


FINANCIAL
STATEMENT SCHEDULES





(1)
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
                  F1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  F2Consolidated
      Statements of Operations for the Years Ended December 31, 2009 and 2008
                  F3Consolidated
      Statements of Changes in Stockholders' Equity for the Years Ended December
      31, 2009 and 2008
                  F4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
                  F5-F6Notes
      to Consolidated Financial Statements
                  F7-F61




61




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, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive
loss, and cash flows for each of the years in the two-year period ended December
31, 2009.  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.  The Company is not required to have, nor were we
engaged to perform an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of YTB
International, Inc. as of December 31, 2009 and 2008, and the consolidated
results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.




/s/ UHY
LLP





St.
Louis, Missouri


April 14,
2010


F1


YTB
INTERNATIONAL, INC.


Consolidated
Balance Sheets


December
31, 2009 and 2008





Dollars in thousands, except share and per share data
                                              
                                              2009
                                              
                                              
                                              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                              
                                              $
                                              678
                                              
                                              
                                              $
                                              1,203Restricted
      cash
                                              
                                              
                                              2,637
                                              
                                              
                                              
                                              1,667Short-term
      investments
                                              
                                              
                                              28
                                              
                                              
                                              
                                              251Accounts
      receivable (less allowance for doubtful accounts of $110 in 2009 and $7 in
      2008)
                                              
                                              
                                              674
                                              
                                              
                                              
                                              2,680Notes
      receivable (less allowance for uncollectible notes of $0 in 2009 and $562
      in 2008)
                                              
                                              
                                              1,602
                                              
                                              
                                              
                                              458Inventory
                                              
                                              
                                              125
                                              
                                              
                                              
                                              1,335Prepaid
      marketing commissions and advances (less allowance for uncollectible
      advances of $0 in 2009 and $162 in 2008)
                                              
                                              
                                              1,282
                                              
                                              
                                              
                                              8,991Other
      prepaid expenses and current assets, net
                                              
                                              
                                              332
                                              
                                              
                                              
                                              350Total
      current assets
                                              
                                              
                                              7,358
                                              
                                              
                                              
                                              16,935Assets
      held for sale
                                              
                                              
                                              5,248
                                              
                                              
                                              
                                              844Property
      and equipment, net
                                              
                                              
                                              6,432
                                              
                                              
                                              
                                              18,728Intangible
      assets, net
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,322Goodwill
                                              
                                              
                                              2,529
                                              
                                              
                                              
                                              2,979Other
      assets
                                              
                                              
                                              49
                                              
                                              
                                              
                                              1,278TOTAL
      ASSETS
                                              
                                              $
                                              21,616
                                              
                                              
                                              $
                                              43,086LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                                              
                                              $
                                              1,275
                                              
                                              
                                              $
                                              2,446Accrued
      expenses
                                              
                                              
                                              5,164
                                              
                                              
                                              
                                              7,715Deferred
      revenue
                                              
                                              
                                              2,989
                                              
                                              
                                              
                                              13,505Short-term
      debt
                                              
                                              
                                              1,587
                                              
                                              
                                              
                                              1,973Unclaimed
      property
                                              
                                              
                                              1,136
                                              
                                              
                                              
                                              892Other
      current liabilities
                                              
                                              
                                              138
                                              
                                              
                                              
                                              411Total
      current liabilities
                                              
                                              
                                              12,289
                                              
                                              
                                              
                                              26,942Other
      long-term liabilities:Deferred
      tax liability
                                              
                                              
                                              -
                                              
                                              
                                              
                                              755Other
      income tax liabilities
                                              
                                              
                                              183
                                              
                                              
                                              
                                              185Accrued
      severance
                                              
                                              
                                              1,731
                                              
                                              
                                              
                                              -Other
      liabilities
                                              
                                              
                                              -
                                              
                                              
                                              
                                              11Total
      other long-term liabilities
                                              
                                              
                                              1,914
                                              
                                              
                                              
                                              951TOTAL
      LIABILITIES
                                              
                                              
                                              14,203
                                              
                                              
                                              
                                              27,893Commitments
      and Contingencies (Note 21)STOCKHOLDERS'
      EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued and outstanding
      at December 31, 2009 and 2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized; 76,185,988
      and 69,379,259 shares issued and outstanding at December 31, 2009 and
      December 31, 2008, respectively.
                                              
                                              
                                              76
                                              
                                              
                                              
                                              69Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 33,613,412
      and 34,413,682 shares issued and outstanding at December 31, 2009 and
      December 31, 2008, respectively; convertible into Class A shares on a
      one-for-one basis
                                              
                                              
                                              34
                                              
                                              
                                              
                                              34Additional
      paid-in capital
                                              
                                              
                                              40,856
                                              
                                              
                                              
                                              38,843Accumulated
      other comprehensive income (loss)
                                              
                                              
                                              10
                                              
                                              
                                              
                                              (70
                                              )Retained
      earnings (deficit)
                                              
                                              
                                              (33,541
                                              )
                                              
                                              
                                              (23,683
                                              )Treasury
      stock, at cost, 25,404 and 0 shares at December 31, 2009 and 2008,
      respectively
                                              
                                              
                                              (22
                                              )
                                              
                                              
                                              -TOTAL
      STOCKHOLDERS' EQUITY
                                              
                                              
                                              7,413
                                              
                                              
                                              
                                              15,193TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                              
                                              $
                                              21,616
                                              
                                              
                                              $
                                              43,086





See
accompanying notes to consolidated financial statements.


F2


YTB
INTERNATIONAL, INC.


Consolidated
Statements of Operations


Years
Ended December 31, 2009 and 2008





Dollars
      in thousands, except share and per share data
                  
                  2009
                  
                  
                  2008NET
      REVENUESInternet
      business center sales and monthly fees
                  
                  $
                  51,792
                  
                  
                  $
                  122,361Travel
      commissions and services
                  
                  
                  12,201
                  
                  
                  
                  25,175Training
      programs and marketing materials
                  
                  
                  2,191
                  
                  
                  
                  9,621Other
                  
                  
                  1,137
                  
                  
                  
                  2,297Total
      net revenues
                  
                  
                  67,321
                  
                  
                  
                  159,454OPERATING
      EXPENSESMarketing
      commissions
                  
                  
                  24,903
                  
                  
                  
                  80,172Travel
      commissions
                  
                  
                  7,363
                  
                  
                  
                  17,649Depreciation
      and amortization
                  
                  
                  2,673
                  
                  
                  
                  2,531Training
      programs and marketing materials
                  
                  
                  1,449
                  
                  
                  
                  8,283Impairment
      of goodwill
                  
                  
                  450
                  
                  
                  
                  149Impairment
      of assets other than goodwill
                  
                  
                  7,443
                  
                  
                  
                  3,390General
      and administrative
                  
                  
                  30,708
                  
                  
                  
                  50,616Total
      operating expenses
                  
                  
                  74,989
                  
                  
                  
                  162,790OPERATING
      LOSS
                  
                  
                  (7,668
                  )
                  
                  
                  (3,336
                  )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                  
                  
                  154
                  
                  
                  
                  201Interest
      expense
                  
                  
                  (113
                  )
                  
                  
                  (75
                  )Foreign
      currency translation loss
                  
                  
                  (5
                  )
                  
                  
                  (58
                  )Total
      other income (expense)
                  
                  
                  36
                  
                  
                  
                  68LOSS
      FROM CONTINUING OPERATIONS BEFOREINCOME
      TAX (BENEFIT) PROVISION
                  
                  
                  (7,632
                  )
                  
                  
                  (3,268
                  )INCOME
      TAX (BENEFIT) PROVISION
                  
                  
                  (853
                  )
                  
                  
                  445LOSS
      FROM CONTINUING OPERATIONS
                  
                  
                  (6,779
                  )
                  
                  
                  (3,713
                  )LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                  
                  
                  (3,079
                  )
                  
                  
                  (762
                  )NET
      LOSS
                  
                  $
                  (9,858
                  )
                  
                  $
                  (4,475
                  )NET
      LOSS PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B shares
                  
                  
                  106,823,299
                  
                  
                  
                  103,280,897Weighted
      average shares outstanding - diluted for Class A and Class B shares
                  
                  
                  106,823,299
                  
                  
                  
                  103,280,897Loss
      per share from continuing operations - basic*
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.04
                  )Loss
      per share from discontinued operations - basic*
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.01
                  )Net
      loss per share - basic*
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.04
                  )Loss
      per share from continuing operations - diluted*
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.04
                  )Loss
      per share from discontinued operations - diluted*
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.01
                  )Net
      loss per share - diluted*
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.04
                  )





*  Amounts
for Class A and Class B shares are the same under the two-class
method.  See Note 3.




See
accompanying notes to consolidated financial statements.




F3


YTB
INTERNATIONAL, INC.


Consolidated
Statements of Changes in Stockholders’ Equity


Years
Ended December 31, 2009 and 2008





AccumulatedDollars
      in thousands, except share and
                          
                          Preferred
                          
                          
                          Common Stock
                          
                          
                          Additional
                          
                          
                          Other
                          
                          
                          Retained
                          
                          
                          Treasury
                          
                          
                          Totalper
      share data
                          
                          Stock
                          
                          
                          Class
      A
                          
                          
                          Class
      B
                          
                          
                          Paid-in
                          
                          
                          Comprehensive
                          
                          
                          Earnings
                          
                          
                          Stock
                          
                          
                          Stockholders'Shares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Income(Loss)
                          
                          
                          (Deficit)
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          EquityBalance
      at January 1, 2008
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          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
                          )
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          15,193Exchange
      Class B Shares for Class A shares
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,336,526
                          
                          
                          
                          2
                          
                          
                          
                          (2,336,526
                          )
                          
                          
                          (2
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      shares issued for restricted stock grant
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,546,799
                          
                          
                          
                          3
                          
                          
                          
                          1,024,600
                          
                          
                          
                          1
                          
                          
                          
                          (4
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Common shares issued under employment
                            severance
      agreement
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,411,748
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          109
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          110Amortization
      of restricted stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,395
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,395Shares
      sold under TSO Stock Purchase Plan
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          511,656
                          
                          
                          
                          1
                          
                          
                          
                          511,656
                          
                          
                          
                          1
                          
                          
                          
                          142
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          144Shares surrendered to treasury in payment of
                            outstanding
      note receivable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (25,404
                          )
                          
                          
                          (22
                          )
                          
                          
                          (22
                          )Stock
      option compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          371
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          371Net
      Loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (9,858
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (9,858
                          )Foreign
      currency translation adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          80
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          80Total
      comprehensive loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (9,778
                          )Balance
      at December 31, 2009
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          76,185,988
                          
                          
                          $
                          76
                          
                          
                          
                          33,613,412
                          
                          
                          $
                          34
                          
                          
                          $
                          40,856
                          
                          
                          $
                          10
                          
                          
                          $
                          (33,541
                          )
                          
                          
                          (25,404
                          )
                          
                          $
                          (22
                          )
                          
                          $
                          7,413





See
accompanying notes to consolidated financial statements.


F4


YTB
INTERNATIONAL, INC.


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2009 and 2008





Dollars
      in thousands
                    
                    2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Loss
                    
                    $
                    (9,858
                    )
                    
                    $
                    (4,475
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    2,673
                    
                    
                    
                    2,531Write-off
      of uncollectible notes and advances
                    
                    
                    22
                    
                    
                    
                    274Loss
      on disposal of property and equipment
                    
                    
                    122
                    
                    
                    
                    408Recognition
      of deferred gain on sale of land
                    
                    
                    (5
                    )
                    
                    
                    -Impairment
      loss on property and equipment
                    
                    
                    4,471
                    
                    
                    
                    366Reserve
      against inventory
                    
                    
                    724
                    
                    
                    
                    3,024Reserve
      against earnest money deposit and other prepaid expenses
                    
                    
                    (18
                    )
                    
                    
                    534Impairment
      of goodwill and intangible assets
                    
                    
                    2,698
                    
                    
                    
                    149Deferred
      income taxes
                    
                    
                    (755
                    )
                    
                    
                    -Loss
      on disposal of discontinued operations, net of tax
                    
                    
                    2,615
                    
                    
                    
                    -Write-off
      of deposit on acquisition of business
                    
                    
                    -
                    
                    
                    
                    311Provision
      for uncollectible notes and advances
                    
                    
                    (117
                    )
                    
                    
                    856Interest
      income on notes receivable
                    
                    
                    (46
                    )
                    
                    
                    (113
                    )Provision
      for uncollectible interest on notes receivable
                    
                    
                    24
                    
                    
                    
                    109Provision
      for uncollectible accounts receivable
                    
                    
                    110
                    
                    
                    
                    -Shares
      issued for services
                    
                    
                    -
                    
                    
                    
                    510Amortization
      of restricted stock
                    
                    
                    1,395
                    
                    
                    
                    739Stock
      option expense
                    
                    
                    263
                    
                    
                    
                    407Compensation
      expense (credit)
                    
                    
                    (271
                    )
                    
                    
                    422Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card processing
                    
                    
                    (1,039
                    )
                    
                    
                    198Restricted
      cash-Canadian operations
                    
                    
                    121
                    
                    
                    
                    (147
                    )Accounts
      receivable, net
                    
                    
                    1,829
                    
                    
                    
                    35Notes
      receivable
                    
                    
                    129
                    
                    
                    
                    1,244Inventory
                    
                    
                    486
                    
                    
                    
                    544Prepaid
      marketing commissions and advances
                    
                    
                    7,474
                    
                    
                    
                    15,738Other
      operating assets
                    
                    
                    62
                    
                    
                    
                    1,124Accounts
      payable
                    
                    
                    (1,176
                    )
                    
                    
                    1,891Accrued
      expenses
                    
                    
                    (2,794
                    )
                    
                    
                    (2,634
                    )Deferred
      revenue
                    
                    
                    (10,302
                    )
                    
                    
                    (17,637
                    )Other
      operating liabilities
                    
                    
                    (36
                    )
                    
                    
                    1,014NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                    
                    
                    (1,199
                    )
                    
                    
                    7,422CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                    
                    
                    (100
                    )
                    
                    
                    (9,337
                    )Proceeds
      from sale of property and equipment
                    
                    
                    15
                    
                    
                    
                    701Proceeds
      from asset held for sale
                    
                    
                    872
                    
                    
                    
                    -Cash
      paid to prepare asset for sale
                    
                    
                    (28
                    )
                    
                    
                    -Acquisition
      of business
                    
                    
                    -
                    
                    
                    
                    (149
                    )Proceeds
      from sale of available-for-sale securities
                    
                    
                    -
                    
                    
                    
                    1,021Proceeds
      from redemption of short-term investments
                    
                    
                    329
                    
                    
                    
                    -Purchases
      of short-term investments
                    
                    
                    (106
                    )
                    
                    
                    (251
                    )Cash
      relinquished in disposal of discontinued operations
                    
                    
                    (129
                    )
                    
                    
                    -Deposit
      received on business expansion
                    
                    
                    -
                    
                    
                    
                    100NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
                    
                    
                    853
                    
                    
                    
                    (7,915
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Principal
      repayments of debt
                    
                    
                    (386
                    )
                    
                    
                    (242
                    )Repayment
      of short-term debt
                    
                    
                    -
                    
                    
                    
                    (527
                    )Cash
      collateral for standby letter of credit
                    
                    
                    -
                    
                    
                    
                    (1,910
                    )Reduction
      in cash collateral for standby letter of credit
                    
                    
                    -
                    
                    
                    
                    1,910Reduction
      in restricted cash-collateral for outstanding note
                    
                    
                    -
                    
                    
                    
                    500Proceeds
      received under TSO stock purchase plan
                    
                    
                    144
                    
                    
                    
                    -Proceeds
      from exercise of common stock options
                    
                    
                    -
                    
                    
                    
                    2Proceeds
      from exercise of common stock warrants
                    
                    
                    -
                    
                    
                    
                    254NET
      CASH USED IN FINANCING ACTIVITIES
                    
                    
                    (242
                    )
                    
                    
                    (13
                    )EFFECT
      OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
                    
                    
                    63
                    
                    
                    
                    (22
                    )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (525
                    )
                    
                    
                    (528
                    )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                    
                    
                    1,203
                    
                    
                    
                    1,731CASH
      AND CASH EQUIVALENTS, END OF YEAR
                    
                    $
                    678
                    
                    
                    $
                    1,203




F5




YTB
INTERNATIONAL, INC.


Consolidated
Statements of Cash Flows (continued)


Years
Ended December 31, 2009 and 2008




Dollars
      in thousands
                
                2009
                
                
                2008SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                
                $
                112
                
                
                $
                75Income
      taxes paid
                
                
                227
                
                
                
                282SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Reclass
      of property and equipment to assets held for sale
                
                $
                5,248
                
                
                $
                844Notes
      receivable issued for sale of property and equipment
                
                
                -
                
                
                
                1,760Reclass
      of long-term investments to available-for-sale securities
                
                
                -
                
                
                
                1,000Reclass
      of note receivable from other assets to notes receivable
                
                
                1,200
                
                
                
                -Stock
      option compensation
                
                
                108
                
                
                
                518Property
      and equipment included in accounts payable
                
                
                5
                
                
                
                488Shares
      issued for severance liability
                
                
                110
                
                
                
                -Reclass
      of accrued marketing commission to notes receivable
                
                
                100
                
                
                
                -Reclass
      of notes receivable to other current assets / other assets
                
                
                -
                
                
                
                65Reclass
      of notes receivable reserve to acquisition of business reserve
                
                
                -
                
                
                
                45Shares
      surrendered in repayment of note receivable
                
                
                22
                
                
                
                -Reclass
      of commission advances to notes receivable
                
                
                -
                
                
                
                21Shares
      issued for restricted stock grant
                
                
                4
                
                
                
                5Transfer
      of Class B common stock shares to Class A common stock shares
                
                
                2
                
                
                
                16





See
accompanying notes to consolidated financial statements.




F6





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: YTB Marketing, Inc. (formerly YourTravelBiz.com,
Inc.) and its subsidiaries (collectively “ YTB Marketing”); YTB
Travel Network, Inc. and its subsidiaries (collectively “ YTB Travel”); and
YTB Franchise Services, Inc. (“ YTB Franchise”).  The Company, together with its subsidiaries, is hereafter
collectively referred to as the “Company” unless noted
otherwise.  During the second quarter of 2009, as described in Note 17
– “Discontinued Operations,” the Company’s Board of Directors made a strategic
decision to sell its subsidiary, REZconnect Technologies, Inc. (“ REZconnect”), on
June 30, 2009.




The
Company markets and provides internet-based travel-related services and is also
a full-service provider of travel products and services to the leisure and small
business traveler and offers other general products and services to the
consumer.  Each of the three aforementioned operating subsidiaries was
formed to divide the Company’s operations into three basic divisions.





YTB
Marketing establishes and sells Internet Business Centers (“ IBC” or “ IBCs”), formerly
referred to as Internet Travel Centers or internet travel websites, and
compensates its Independent Marketing Representatives (“ Reps”) (independent
contractors).  Reps sell IBCs through a direct sales model and are
compensated via a multilevel marketing commission structure.  YTB
Marketing conducts business through marketing, training and support of its Rep
sales force which is responsible for marketing and selling IBCs to Site Owners,
formerly known as Travel Site Owners (“ TSO” or “ TSOs”) or Referring
Travel Agents (Referring Travel Affiliates in Canada), most of whom work from
their homes.





YTB
Travel provides customer access to the travel vendor, supports online booking
transactions, supplies personal fulfillment services, collects travel
commissions from vendors and pays travel sales commissions.  YTB
Travel is the travel management subsidiary that processes travel sales
from online vendors, processes and handles bookings (reservations)
from IBCs, negotiates deals with preferred vendors, and receives incentives
based on the volume of business produced through the Company’s IBCs. The
fulfillment services are offered through interactive, real-time
booking engines and include access to preferred deals with leading travel
industry suppliers.





YTB
Franchise was formed in March 2009, to serve as the corporate entity to offer
the proposed/contemplated franchise offerings in the future for the
Company.  There has been no activity by YTB Franchise other than an
initial capital contribution by YTB International, Inc. All intercompany
transactions have been eliminated in consolidation.





The
Company operates under various trade names, including “ZamZuuTM,”
“YourTravelBizTM,” “YTB Travel and CruisesTM,” “Travel NetworkTM,” “Global Travel
NetworkTM,” “YTB Travel Network ®,”
“Travel Network Vacation CentralTM,” “Vacation CentralTM” and “Sunrise Travel
ServicesTM,” as well as Internet websites “ZamZuu.comTM,” “ZamZuu.bizTM,”
“YTB.comTM,” “YourTravelBiz.com ®,”
“YTBnet.comTM” and “Bookmytravel.comTM.”  The Company provides services
to customers located primarily in the United States, but also provides services
to customers in Canada, Bermuda, and the Bahamas and maintains its corporate
headquarters in the State of Illinois.




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, Site Owners
living in these countries can now refer customers to book travel and purchase
products and services through IBCs that Site Owners 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.





See Note
22 – “Subsequent Events” for a discussion of recent operational developments.


F7


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





The
Company follows accounting standards set by the Financial Accounting Standards
Board (“ FASB”) as well as rules promulgated by the Securities and Exchange Commission
(the “ SEC”).  The FASB sets generally accepted accounting principles (“
GAAP”) that
the Company follows to ensure its financial condition, results of operations,
and cash flows are reported consistently.  Over the years, the FASB
and other designated GAAP-setting bodies, have issued GAAP guidance in the form
of Statements of Financial Accounting Standards (“ SFASs”), FASB
Interpretations, FASB Staff Positions (“ FSPs”), Emerging
Issues Task Force (“ EITF”) consensuses
on issues, Accounting Standards Executive Committee Statements of Position (“
SOPs”),
etc.  The FASB recognized the complexity of its standard-setting
process and embarked on a revised process in 2004 that culminated in the release
on July 1, 2009, of the FASB Accounting Standards CodificationTM (the “ Codification”).  The Codification is the single source of authoritative
United States GAAP (“ US GAAP”) recognized
by the FASB to be applied by nongovernmental entities.  In addition,
rules and interpretive releases of the SEC under authority of federal securities
laws are also sources of authoritative US GAAP for SEC
registrants.  The Codification does not change how the Company
accounts for transactions or the nature of related required
disclosures.  What the Codification changes is how the Company
references guidance issued by the FASB.  Codification topics are
referenced rather than SFAS 165, FSP 157-2, EITF 06-3, SOP 98-1,
etc.  This change was made effective by the FASB for periods ending on
or after September 15, 2009.  Going forward, the FASB will not issue
new standards in the form of SFASs, FSPs, or
Interpretations.  Instead, the FASB will issue Accounting Standards
Updates (“ ASUs”), which will serve only to: (a) update the Codification; (b) provide
background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification.  The references to
GAAP have been updated in this Annual Report on Form 10-K to reflect the
guidance in the Codification.





Principles of consolidation





The
accompanying consolidated financial statements include the accounts of YTB, and
its wholly-owned subsidiaries, YTB Marketing, YTB Travel, and YTB Franchise and
have been prepared in accordance with U.S. generally accepted accounting
principles, under the rules and regulations of the U.S. Securities and Exchange
Commission (SEC).  All intercompany accounts and transactions are
eliminated in consolidation.





Subsequent Events





In
connection with the preparation of the consolidated financial statements, the
Company evaluated subsequent events after the balance sheet date of December 31,
2009 through the date of issuance of the Company’s consolidated financial
statements. See Note 22 - “Subsequent Events.”




Reclassifications





Certain
reclassifications have been made to the 2008 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 Site Owner life and average commissions per
enrollment which impacts revenue recognition and related marketing
commissions/bonuses, sales incentive accruals, impairment of goodwill and
indefinite lived intangibles, realization of deferred tax assets, the
recoverability of capitalized software development costs and long-lived assets,
assumptions used in share-based payment transactions, and allowance for doubtful
accounts. Actual results could differ from those estimates.





Cash and cash equivalents




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


F8


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Investments




In
general, investments in certificates of deposit 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.





Investments
designated as available-for-sale 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.




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 maturities 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 maturities of
greater than one year in other assets on the consolidated balance sheet.





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.  If the collection of interest on notes is not probable, a
100% reserve is established with a corresponding offset to bad debt expense,
when the interest is accrued.  Bad debt expense is reversed if the
interest payment is subsequently received.  Interest receivable is
written off when the related note is deemed uncollectible.


F9


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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 determines the fair value of financial instruments in accordance with
standards pertaining to fair value measurements.  Such standards
define fair value and establish a framework for measuring fair value in
GAAP.  Under fair value measurement accounting standards, fair value
is considered to be the exchange price in an orderly transaction between market
participants to sell an asset or transfer a liability at the measurement
date.  The Company reports the fair value of financial assets and
liabilities based on the fair value hierarchy prescribed by accounting standards
for fair value measurements, which prioritizes the inputs to valuation
techniques used to measure fair value into three levels.  See Note 13
– “Fair Value Disclosures” for additional information on the Company fair value
measurements.
  Cash and
cash equivalents, accounts receivable, accounts payable, and accrued expenses
are reflected in the consolidated balance sheet at cost, which approximates fair
value due to the short-term nature of these 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, 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.




Property
and equipment includes amounts related to the capitalization of certain costs
incurred in connection with developing or obtaining software for internal use.




F10


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Long-lived asset
recoverability





Whenever
facts and circumstances indicate that the carrying value of a long-lived asset
may not be recoverable, the carrying value is reviewed.  If this
review indicates that the carrying value of the asset will not be recovered, as
determined based on projected undiscounted cash flows related to the asset over
its remaining life, the carrying value of the asset is reduced to its estimated
fair value.  See Note 7 – “Assets Held for Sale,” Note 8 –
“Property and Equipment” and Note 9 – “Goodwill and Intangible Assets, Net”
for further discussion regarding the impairment of long-lived assets.
  The
calculation of fair value requires multiple assumptions regarding our future
operations to determine future cash flows, including but not limited to, sales
volume, margin rates and discount rates. If different assumptions were used in
the analysis, it is possible that the amount of the impairment charge may have
been significantly different than what was recorded.





Goodwill and Intangible
Assets, Net
 
 Goodwill
and other intangible assets with infinite lives are not amortized, but tested
for impairment annually or more frequently if circumstances indicate that
impairment may exist.  Intangible assets with finite useful lives are
amortized on a straight-line basis over their estimated period of benefit,
ranging from one to 10 years. The
Company has not historically incurred significant costs to renew or extend the
term of recognized intangible assets.
 
 As
required by accounting standards, we perform annual goodwill and intangible
impairment tests in the fourth quarter and update the tests between annual tests
if events or circumstances occur that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.  A significant
amount of judgment is involved in determining if an indicator of impairment has
occurred.  Such indicators may include, among others: a significant
decline in our expected future cash flows; a sustained, significant decline in
our stock price and market capitalization; a significant adverse change in legal
factors or in the business climate; unanticipated competition; and the testing
for recoverability of a significant asset group within a reporting
unit.  Any adverse change in these factors could have a significant
impact on the fair value of a reporting unit and/or the recoverability of
individual assets and could have a material impact on our consolidated financial
statements.
 
 Goodwill
Impairment Assessments
 
 The
Company’s goodwill resides in multiple reporting units.  The goodwill
impairment test involves a two-step process.  The first step is a
comparison of each reporting unit’s fair value to its carrying
value.  The fair value of each reporting unit is estimated using the
best information available through the use of different valuation techniques,
including the income approach (2009) and/or market approach (both income and
market approaches utilized in 2008).  Determining the fair value of a
reporting unit is a matter of judgment and often involves the use of significant
estimates and assumptions.  If there is no calculated fair value for a
reporting unit, the goodwill is deemed fully impaired and written
off.  If the carrying value of the reporting unit is higher than its
fair value, there is an indication that impairment may exist and the second step
must be performed to measure the amount of impairment loss.  The
amount of impairment is determined by comparing the implied fair value of
reporting unit goodwill after allocating value to the Company’s tangible and
intangible assets and liabilities as of the valuation date to the carrying value
of the goodwill.  If the implied fair value of goodwill is less than
the recorded goodwill, the Company would record an impairment charge for the
difference.  As a result of this evaluation, the Company recorded
an impairment of $450,000 and $149,000, respectively, at December 31, 2009 and
2008.  Significant and unanticipated changes to these assumptions
could require an additional provision for impairment in a future
period.  See Note 9 – “Goodwill and Intangible Asset, Net” for
further information regarding goodwill and related impairment charges recorded
during fiscal 2009 and 2008.
 
 Intangible
Asset Impairment Assessments
 Definite
and indefinite-lived intangible assets are reviewed for impairment by comparing
the carrying amount of each asset to the sum of undiscounted cash flows expected
to be generated by the asset.  The Company considers both the market
approach (2008) and income approach (2009) when testing intangible assets with
indefinite lives for impairment on an annual basis or when a change in
circumstances may indicate an impairment is present.  As a result of
this evaluation, the Company recorded impairment charges totaling $2.2
million at December 31, 2009.  At December 31, 2008, no impairment was
deemed necessary.  See Note 9 – “Goodwill and Intangible Asset,
Net” for further information regarding intangible assets and related impairment
charges recorded during fiscal 2009.


F11


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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





Other
revenue





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


F12


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Accounting for Taxes
Collected from Customers and Remitted to Governmental Authorities





The
Company excludes taxes collected from customers and remitted to governmental
authorities from revenues and presents the taxes on a net basis in the
consolidated statements of operations.




Expense recognition of
commission costs




The
Company capitalizes commission costs that are directly related to the
origination of new IBC sales, monthly web hosting fees and travel sales and
charges 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 Site
Owner.  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 Site Owners 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 Site Owner 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




The
Company expenses advertising costs as incurred. Advertising expense was $2,000
in 2009 and $50,000 in 2008.


F13




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 2003 remain subject
to examination (2004 and 2005 remain 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, 2009.




Discontinued Operations





The
Company reclassifies material results of operations that have been disposed or
classified as held for sale during the period and gains or losses on disposal of
these operations to discontinued operations.  In the second quarter of
2009, the Board of Directors of the Company approved the sale of
REZconnect.  As such, REZconnect operations have been presented as
discontinued operations for all periods presented.  See Note 17 –
“Discontinued Operations” for additional information.





Share-based compensation





The
Company measures compensation cost for all share-based awards at the fair value
on the date of grant and recognizes compensation expense over the service period
for awards expected to vest. The Company measures the fair value of restricted
stock awards based on the number of shares granted and the quoted price of the
Company’s common stock on the date of the grant as defined in the
Codification.  The Company measures the fair value of stock options
using the Black-Scholes valuation model. These fair values are recognized as
compensation expense over the service period, net of estimated forfeitures.


Earnings Per Share





The
Company uses 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.


F14




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





New
Accounting Guidance





Recently
Adopted Accounting Guidance





Effective
January 1, 2009, the Company adopted the authoritative guidance issued by the
FASB that applies to all entities and requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk related contingent features in derivative
agreements. The Company applied the requirements on a prospective basis.
Accordingly, disclosures related to interim periods prior to the date of
adoption have not been presented. Adoption of the guidance had no impact on the
Company's disclosures and no material impact on the Company’s financial position
or results of operations as of or for the year ended December 31, 2009.





Effective
January 1, 2009, the Company adopted the revised authoritative guidance on
business combinations issued by the FASB for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree; how the
acquirer recognizes and measures the goodwill acquired in a business
combination; and how the acquirer determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  The revised guidance will be
effective for any future acquisitions made by the Company.  Adoption
of the guidance had no impact on the Company’s financial position or results of
operations as of or for the year ended December 31, 2009.





In April
2008, the FASB issued amended authoritative guidance on determining the useful
life of intangible assets.  The guidance amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset.  The
intent of the amended guidance is to improve the consistency between the useful
life of a recognized asset and the period of expected cash flows used to measure
the fair value of the asset. In addition, the amended guidance 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. The
amended guidance is effective for fiscal years beginning after December 15,
2008, and interim periods within those years.  The
Company adopted the amended guidance on January 1, 2009. The adoption
had no impact on the Company’s financial position or results of operations as of
or for the year ended December 31, 2009.





In April
2009, the FASB issued authoritative guidance on interim disclosures about the
fair value of financial instruments which requires public entities to disclose
in their interim financial statements the fair value of all financial
instruments within the scope of the guidance as well as the methods and
significant assumptions used to estimate the fair value of those financial
instruments. The Company adopted the guidance during the quarter ended June 30,
2009. The adoption had no impact on the Company’s financial position or results
of operations as of or for the year ended December 31, 2009.





In April
2009, the FASB issued authoritative guidance on the recognition and presentation
of other-than-temporary impairments for debt securities to change the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of an impairment charge to be recorded in earnings.
The guidance also requires enhanced disclosures, including the Company’s
methodology and key inputs used for determining the amount of credit losses
recorded in earnings. The Company adopted the guidance during the quarter ended
June 30, 2009.  The adoption had no impact on the Company’s financial
position or results of operations as of or for the year ended December 31, 2009.





In April
2009, the FASB issued additional authoritative guidance to highlight and expand
on the factors that should be considered in estimating fair value when there has
been a significant decrease in market activity for a financial asset. The
additional guidance also requires new disclosures relating to fair value
measurement inputs and valuation techniques (including changes in inputs and
valuation techniques). The Company adopted the guidance during the quarter ended
June 30, 2009.  The adoption had no impact on the Company’s financial
position or results of operations as of or for the year ended December 31, 2009.


F15


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





In May
2009, the FASB issued authoritative guidance to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In
particular, this guidance sets forth: (a) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (b) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (c) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. In accordance
with the guidance, an entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The Company adopted guidance in
the second quarter of 2009 and the adoption did not have a material impact on
its consolidated financial statements. In
February 2010, the FASB amended this guidance concerning certain disclosure
requirements.  This amended guidance was effective immediately and the
Company’s adoption did not have a material impact on the Company’s consolidated
financial statements.




In August
2009, the FASB issued guidance
clarifying that previously issued guidance regarding the presentation of
redeemable preferred stock in financial statementspertains to preferred
stocks and other redeemable securities including common stock, derivative
instruments, non-controlling interest, securities held by an employee stock
ownership plan and share-based payment arrangements with
employees.   The Company adopted this guidance during
the quarter ended September 30, 2009. The adoption of this
guidance had no impact on the Company’s financial position or results of
operations as of or for the year ended December 31, 2009.




In August
2009, the FASB issued guidance to provide clarification concerning fair value
measurements and disclosures for liabilities and, in particular, for
circumstances in which a quoted price in an active market for an identical
liability is not available.  For the Company, this guidance was
effective October 1, 2009.  The Company’s adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.


In
January 2010, the FASB issued guidance to clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend. This
guidance is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis.  The Company
adopted this guidance during the quarter ended December 31, 2009.  The
adoption of this guidance had no impact on the Company’s financial position or
results of operations as of or for the year ended December 31, 2009.


F16


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Recently
Issued Accounting Guidance





In June
2009, the FASB issued amended guidance on the accounting for transfers of
financial assets.  The amended guidance removes the concept of a
qualifying special-purpose entity, establishes a new “participating interest”
definition that must be met for transfers of portions of financial assets to be
eligible for sale accounting, clarifies and amends the derecognition criteria
for a transfer to be accounted for as a sale, and changes the amount that can be
recognized as a gain or loss on a transfer accounted for as a sale when
beneficial interests are received by the transferor.  Enhanced
disclosures are also required to provide information about transfers of
financial assets and a transferor’s continuing involvement with transferred
financial assets.  This amended guidance must be applied as of the
beginning of an entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited.  The Company does not expect the adoption
to have a material impact on its consolidated financial statements.





In June
2009, the FASB issued amended guidance on the consolidation of variable interest
entities which requires an enterprise to qualitatively assess the determination
of the primary beneficiary of a variable interest entity (“ VIE”) based on
whether the entity (1) has the power to direct the activities of a VIE that
most significantly impact the entity’s economic performance and (2) has the
obligation to absorb losses of the entity or the right to receive benefits from
the entity that could potentially be significant to the VIE. Also, the amended
guidance requires an ongoing reconsideration of the primary beneficiary, and
amends the events that trigger a reassessment of whether an entity is a VIE.
Enhanced disclosures are also required to provide information about an
enterprise’s involvement in a VIE. This amended guidance must be applied as of
the beginning of an entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited.  The Company is currently evaluating this
new statement.




F17


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




In
October 2009, the FASB issued guidance concerning multiple-deliverable
arrangements which would enable vendors to account for products and services
separately rather than as a combined unit.  This guidance is effective
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010.  The Company is currently
evaluating the impact of this guidance on its consolidated financial statements.


In
October 2009, the FASB issued guidance amending the accounting and reporting for
own-share lending arrangements issued in contemplation of a convertible debt
issuance.  The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009.  We currently
have no plans to issue convertible debt and, therefore, do not expect the update
to have a material impact on our consolidated financial statements.
 
 In
January 2010, the FASB issued guidance requiring new disclosures and clarifying
existing disclosure requirements about fair value measurement. The FASB’s
objective is to improve these disclosures and, thus, increase the transparency
in financial reporting.  Specifically, the amendments now require a
reporting entity to:
 
 •
              Disclose
      separately the amounts of significant transfers in and out of Level 1 and
      Level 2 fair value measurements and describe the reasons for the
      transfers; and
 •
              Present
      separately information about purchases, sales, issuances, and settlements
      in the reconciliation for fair value measurements using significant
      unobservable inputs.
 
 In
addition, the guidance clarifies the requirements of the following existing
disclosures:
 
 •
              For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities; and
 •
              A
      reporting entity is to provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.
 
 The
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
application is permitted.  The Company will adopt the revised
disclosure requirements during the first quarter of 2010.




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.


F18


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 3 - NET INCOME (LOSS)
PER SHARE





The
Company has two classes of common stock: Class A Common Stock and Class B Common
Stock.  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).  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.  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.  The Company has computed the earnings per
share using the “two-class” method.  Because both classes share the
same rights with respect to dividends, basic and diluted earnings per share are
the same for both classes.


F19


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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) for the years ended December 31, 2009 and 2008 is presented in the
table below:





Dollars
      in thousands, except share and per share data
                                        
                                        2009
                                        
                                        
                                        2008Numerator:Loss
      from continuing operations
                                        
                                        $
                                        (6,779
                                        )
                                        
                                        $
                                        (3,713
                                        )Loss
      from discontinued operations
                                        
                                        
                                        (3,079
                                        )
                                        
                                        
                                        (762
                                        )Net
      loss
                                        
                                        
                                        (9,858
                                        )
                                        
                                        
                                        (4,475
                                        )Denominator:Weighted
      average common shares and denominator for basic calculation:
                                        
                                        
                                        106,823,299
                                        
                                        
                                        
                                        103,280,897Weighted
      average effects of dilutive equity based compensation awards:Stock
      options
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Stock
      warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Restricted
      stock awards
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Denominator
      for diluted calculation
                                        
                                        
                                        106,823,299
                                        
                                        
                                        
                                        103,280,897Loss
      per share from continuing operations - basic*
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.04
                                        )Loss
      per share from discontinued operations - basic*
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.01
                                        )Net
      loss per share - basic*
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        (0.04
                                        )Loss
      per share from continuing operations - diluted*
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.04
                                        )Loss
      per share from discontinued operations - diluted*
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.01
                                        )Net
      loss per share - diluted*
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        (0.04
                                        )*
      For Class A and Class B





An
aggregate of 3,828,314 shares (of both Class A Common Stock and Class B Common
Stock) for the year ended December 31, 2008 was excluded from the computation of
diluted earnings per share as the inclusion of such shares would have had an
anti-dilutive effect.  There were no shares excluded in the diluted
calculation for the year ended December 31, 2009 due to the decline in the
Company’s average stock price during this period.




F20


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 4 - RESTRICTED CASH





Restricted
cash as of December 31, 2009 and 2008 was $2.6 million and $1.7 million,
respectively, primarily representing reserves with the Company’s domestic credit
card processors of $2.6 million and $1.6 million, respectively, and $27,000 and
$97,000, respectively, of reserves with an additional credit card processor used
for the Company’s Canadian operations.





On March
23, 2009, the Company’s primary domestic credit card processor (the “ processor”)
increased the reserve requirement from 3% of the average rolling six-month
transaction volume to a flat $3.0 million.  Subsequently on May 29,
2009, the processor agreed to discontinue withholding additional reserves once a
$2.7 million balance was attained.  As of the end of the second
quarter of 2009, the full amount of the $2.7 million reserve requirement was
funded.  On December 18, 2009, the processor released $250,000 of
restricted funds to the Company.





NOTE 5 - 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, 2009 and 2008,
reserves of $0 and $562,000, respectively, have been recorded against the
respective note balances of $24,000 and $622,000.  The following table
provides a summary of the notes receivable reserve activity for the years ended
December 31, 2009 and 2008:





Dollars in thousands2009
                  
                  
                  2008Reserve,
      beginning of year
                  
                  $
                  562
                  
                  
                  $
                  -(Reversal)
      addition charged to expense
                  
                  
                  (100
                  )
                  
                  
                  562Write-offs
                  
                  
                  (371
                  )Recoveries
                  
                  
                  (91
                  )
                  
                  
                  -Reserve,
      end of year
                  
                  $
                  -
                  
                  
                  $
                  562




F21




Additional
Notes Receivable
 
 9.9 Acres of Land.  Also included in notes receivable as of December 31, 2009 and
2008 is a non-interest bearing note received as proceeds for the sale of land on
November 24, 2008.  The Company did not impute interest on the note as
it was not material.  Principal under the note, collateralized by the
related land sold, was due and payable March 24, 2009 (the “Maturity
Date”).  The Company recorded a deferred gain in 2008 on the
sale of land based upon the percentage of total profit to total sales value, and
included the deferred gain as a reduction of the related note receivable. See
Note 20 – “Real Estate Transactions.”  On May 6, 2009, the Company
initiated foreclosure proceedings under the terms of the promissory note and
mortgage.  On June 2, 2009, a notice of foreclosure was recorded
against the land.
 
 Under the
terms of the note, interest at the rate of 1.5% per month shall accrue from the
Maturity Date until fully paid.  Due to the uncertainty associated
with the collection of interest, the Company wrote off the interest receivable
of $45,000 as of December 31, 2009.
 
 On
November 3, 2009, the Company entered into a settlement and release agreement
(the “ Settlement
Agreement”) with a principal of the original buyer (the “ New Buyer”) in which
the New Buyer agreed to purchase the mortgage and related note from the
Company.  A payment of $28,000 was paid upon execution of the
Settlement Agreement, consisting of $25,000 in principal and $3,000 in interest,
resulting in the
recognition of $5,000 of the deferred gain.The remaining
principal amount of $475,000 will be paid upon sale or exchange of any parcel of
the secured property or within sixty (60) days of the New Buyer receiving
approval of the designation of an enterprise zone for the property.
 
 If the
New Buyer’s zoning designation is denied, any party to the Settlement Agreement
can cause the New Buyer to pay to the Company $75,000 for termination and
cancellation of the Settlement Agreement.  Upon termination under
these circumstances, the New Buyer may initiate negotiations with the Company
regarding the remaining amount due under the note, and the Company shall retain
its interest in the note, mortgage and foreclosure action and be able to proceed
with all rights under these agreements.
 
 Under the
terms of the Settlement Agreement, interest at the rate of 8% per annum shall
accrue from October 1, 2009 until all interest and principal are paid in
full.  The Company recognized interest income of $3,000 for the year
ended December 31, 2009 for the interest portion of the payment received upon
the execution of the Settlement Agreement.
 
 As of
December 31, 2009 and 2008, the balance of the note is $475,000 and $500,000,
respectively, and the balance of the offsetting deferred gain is $97,000 and
$102,000, respectively.
 
 Administrative Facility.  In addition, included in notes receivable as of December 31,
2009 and other assets 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 were received 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 20 – “Real
Estate Transactions” and Note 22 – “Subsequent Events.”


F22


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 6 – INVENTORY




Inventory,
net of reserves, consists of the following materials available for sale to Reps
as of December 31, 2009 and 2008:





Dollars in thousands
                        
                        2009
                        
                        
                        2008Audio
      / video marketing
                        
                        $
                        29
                        
                        
                        $
                        4Printed
      marketing materials
                        
                        
                        78
                        
                        
                        
                        931Apparel
                        
                        
                        18
                        
                        
                        
                        400Inventory,
      net
                        
                        $
                        125
                        
                        
                        $
                        1,335




The
Company recorded a net reserve against slow-moving and obsolete magazines,
audio/video and printed marketing materials of $724,000 and $3.0 million for the
years ended December 31, 2009 and 2008, respectively.  The following
table provides a summary of the inventory reserve activity for the years ended
December 31, 2009 and 2008:





Dollars in thousands
                      
                      2009
                      
                      
                      2008Reserve,
      beginning of year
                      
                      $
                      3,024
                      
                      
                      $
                      -Additional
      reserve
                      
                      
                      1,007
                      
                      
                      
                      3,024Recoveries
                      
                      
                      (283
                      )
                      
                      
                      -Disposals
                      
                      
                      (2,747
                      )
                      
                      
                      -Reserve,
      end of year
                      
                      $
                      1,001
                      
                      
                      $
                      3,024




F23


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 7 – ASSETS HELD
FOR SALE





On
February 29, 2008, the Company acquired a business jet for the purchase price of
$1.3 million.  The Company utilized the jet for the transport of its
employees, officers, directors, business guests, and property for
business-related purposes.  The Company 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 (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.




During
the fourth quarter of 2009, the Company made the decision to sell its corporate
headquarters property within the next 12 months in a proposed
sale-leaseback transaction, selling the entire land and building and leasing
back the portion of the land and building used in operations.  The
Company recorded a pre-tax impairment loss of $3.9 million on the portion of the
land and building not used in operations to write down the carrying value
to its estimated realizable value less costs to sell of $5.2 million and
reclassified it to assets held for sale on the Company’s consolidated balance
sheet as of December 31, 2009 in the parent segment.  The estimated
realizable value was based upon evaluation of appraisals received.




NOTE 8 - PROPERTY AND
EQUIPMENT




Property
and equipment at December 31, 2009 and 2008 consists of the following:





Dollars in thousands
                        
                        2009
                        
                        
                        2008Equipment
                        
                        $
                        2,713
                        
                        
                        $
                        3,131Furniture
      and fixtures
                        
                        
                        710
                        
                        
                        
                        751Capitalized
      software
                        
                        
                        3,163
                        
                        
                        
                        5,296Vehicles
                        
                        
                        64
                        
                        
                        
                        64Buildings
      and improvements
                        
                        
                        2,767
                        
                        
                        
                        4,216Land
                        
                        
                        2,311
                        
                        
                        
                        3,341Construction
      in progress and deposits
                        
                        
                        -
                        
                        
                        
                        6,676Leasehold
      improvements
                        
                        
                        115
                        
                        
                        
                        14211,843
                        
                        
                        
                        23,617Less:  Accumulated
      depreciation
                        
                        
                        (5,411
                        )
                        
                        
                        (4,889
                        )Property
      and equipment, net
                        
                        $
                        6,432
                        
                        
                        $
                        18,728





Total
depreciation and amortization expense on property and equipment was $2.6 million
and $2.5 million for the years ended December 31, 2009 and 2008, respectively.





As of
December 31, 2009 and 2008, capitalized software development costs, net of
accumulated amortization, totaled $257,000 and $507,000, respectively. For the
years ended December 31, 2009 and 2008, the Company recorded amortization of
capitalized software development costs of $250,000 and $198,000, respectively,
which is included in total depreciation and amortization expense above.


F24


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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. Cost, net of accumulated
amortization was $678,000 and $1.3 million as of December 31, 2009 and 2008,
respectively. Depreciation for the years ended December 31, 2009 and 2008 was
$573,000 and $491,000, respectively, 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 for the year ended
December 31, 2008. During January 2009, construction on the new corporate
headquarters was suspended.




During
2009, the Company recorded pre-tax impairment charges of $4.5 million consisting
of a $3.9 million impairment of the Company’s headquarters land and building and
$564,000 of purchased software that was no longer used in operations. See
Note 7 – “Assets Held for Sale” for a discussion of the headquarters land
and building.




During
2008, the Company recorded pre-tax impairment charges of $366,000 to write down
the Company’s business jet to its estimated realizable value less costs to sell.
See Note 7 – “Assets Held for Sale.”




F25




NOTE 9 – GOODWILL AND
INTANGIBLE ASSETS, NET
 
 The
following table summarizes the components of the Company ’s intangible assets as of December 31, 2009 and 2008:
 
 Dollars
      in thousands
                      
                      2009
                      
                      
                      2008Accumulated
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      AccumulatedCost
                      
                      
                      Amortization
                      
                      
                      Impairment
                      
                      
                      Net
                      
                      
                      Cost
                      
                      
                      Amortization
                      
                      
                      NetAmortized
      intangible assets (1)Non-compete
      agreement
                      
                      $
                      360
                      
                      
                      $
                      261
                      
                      
                      $
                      99
                      
                      
                      $
                      -
                      
                      
                      $
                      360
                      
                      
                      $
                      209
                      
                      
                      $
                      151Site
      owner agreements
                      
                      
                      56
                      
                      
                      
                      56
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      690
                      
                      
                      
                      690
                      
                      
                      
                      -Vendor
      agreements
                      
                      
                      220
                      
                      
                      
                      111
                      
                      
                      
                      109
                      
                      
                      
                      -
                      
                      
                      
                      220
                      
                      
                      
                      89
                      
                      
                      
                      131Total
      amortized intangible assets
                      
                      
                      636
                      
                      
                      
                      428
                      
                      
                      
                      208
                      
                      
                      
                      -
                      
                      
                      
                      1,270
                      
                      
                      
                      988
                      
                      
                      
                      282Unamortized
      intangible assetsTrade
      and domain names
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040Total
      unamortized intangible assets
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040
                      
                      
                      
                      -
                      
                      
                      
                      2,040Total
                      
                      $
                      2,676
                      
                      
                      $
                      428
                      
                      
                      $
                      2,248
                      
                      
                      $
                      -
                      
                      
                      $
                      3,310
                      
                      
                      $
                      988
                      
                      
                      $
                      2,322
 
 (1)
              The
      estimated useful lives of non-compete agreements, Site Owner agreements
      and vendor agreements are seven years, one year and 10 years respectively.
 The
Company recorded aggregate amortization expense of $74,000 and $73,000 for the
years ended December 31, 2009 and 2008, respectively.  There is no
estimated amortization expense for subsequent years as the intangible assets are
either fully amortized or fully impaired as of December 31, 2009.
 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 2008 and 2009 are as
follows:
 
 Dollars
      in thousands
                    
                    Marketing
                    
                    
                    Travel
                    
                    
                    Parent
                    
                    
                    TotalBalance
      as of January 1, 2008
                    
                    $
                    2,529
                    
                    
                    $
                    450
                    
                    
                    $
                    -
                    
                    
                    $
                    2,979Acquisition
      of Sunrise Travel Service
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    149
                    
                    
                    
                    149Impairment
      of Sunrise Travel Service
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (149
                    )
                    
                    
                    (149
                    )Balance
      as of December 31, 2008
                    
                    $
                    2,529
                    
                    
                    $
                    450
                    
                    
                    $
                    -
                    
                    
                    $
                    2,979Impairment
      of Travel goodwill
                    
                    
                    -
                    
                    
                    
                    (450
                    )
                    
                    
                    -
                    
                    
                    
                    (450
                    )Balance
      as of December 31, 2009
                    
                    $
                    2,529
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,529
 
 In
accordance with accounting standards for goodwill and other intangible assets,
goodwill is not amortized but requires testing for potential impairment, at a
minimum on an annual basis, or when indications of impairment
exist.  The impairment test for goodwill utilizes a fair value
approach.  The impairment test for identifiable intangible assets not
subject to amortization is also performed annually or when impairment
indications exist, and consist of a comparison of the fair value of the
intangible asset with its carrying amount.  Identifiable intangible
assets that are subject to amortization are evaluated for impairment using a
process similar to that used to evaluate other long-lived assets.  The
Company has elected to perform the annual impairment test on goodwill and
intangible assets during the fourth quarter of each year, unless circumstances
arise that require more frequent testing.
 
 F26




Impairment
Assessments
 
 Goodwill
 
 During
the fourth quarters of 2009 and 2008, the Company completed the annual
impairment test of goodwill.  The goodwill impairment test involves a
two-step process as described in the “Summary of Significant Accounting
Policies” in Note 2 above.  The first step is a comparison of
each reporting unit’s fair value to its carrying value.  If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment loss.
 
 As a
result of the evaluation 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.
 
 As part
of our December 31, 2009 assessment, the Company identified the following
reporting units:  Marketing, Travel, ZamZuu (became operational in
2010 – launched in January 2010), and Parent.  The Company considered
ZamZuu because costs were incurred during the fourth quarter of 2009 towards its
development.  Prior to any assessed impairment, goodwill of $2.5
million and $450,000, respectively, resided in Marketing and Travel (synonymous
with our operating segments as of December 31, 2009).  Marketing and
Travel were the only units in existence in the year that the original goodwill
was recorded.
 
 The first
step in the assessment process is a comparison of each reporting unit’s fair
value to its carrying value.  Certain assets not previously allocated
to the reporting units were allocated based on sales.  The assets and
liabilities remaining at the Parent level consisted of the fair value of our
headquarters property held for sale and not used in operations, non-operating
land, the mortgage attributable to the headquarters property not used in
operations and legacy liabilities attributable to discontinued operations.
 
 The
Company estimated the fair value of the reporting units using a discounted cash
flow model (“ DCF”) of the income approach.  The Company received assistance
from consultants who were experts in the area of business, goodwill, intangible
asset and long-lived asset valuations.  The Company concluded that the
use of only the discounted cash flow approach was appropriate due to the lack of
suitable companies from which to develop a market multiples
approach.  The DCF approach uses a reporting unit’s projection of
estimated cash flows that is discounted using a weighted-average cost of capital
reflecting current market conditions.  The projection uses
management’s best estimates of economic and market conditions over the projected
period, including growth rates in sales, costs, estimates of future expected
changes in operating margins and capital expenditures.  Other
significant estimates and assumptions include terminal value growth rates and
changes in future working capital requirements.  The projections used
in the discounted cash flow approach were based on the Company’s most likely
forecast of 2010 results.  As the Company had not previously prepared
a complete forecast for the periods subsequent to 2010, reasonable assumptions
were made to forecast the expected future cash flows in the subsequent periods.
 
 The fair
values as determined by the discounted cash flows for the Marketing and Travel
units were compared to the recorded book value of each reporting
unit.  For Marketing, the fair value of equity attributable to that
reporting unit exceeded the recorded book value.  Accordingly, Step 2
was not required and the recorded value of goodwill attributable to the
Marketing unit was considered unimpaired.  The Company determined that
the Travel unit had no calculated fair value.  Accordingly, the
Company determined that Step 2 testing was not necessary as the goodwill of
$450,000 attributable to the Travel unit was considered fully impaired and
written off.
  F27
  Intangible
Assets
 
 Definite-Lived Intangible
Assets
 
 Non-compete agreements.The results of the cash flow analysis performed related to these
agreements indicated that the agreements had no remaining value and the balance
as of December 31, 2009 of $99,000 was considered impaired and written off.
 
 Site owner agreements.  This asset is fully amortized as of December 31,
2009.  However, the Company determined that the prorate portion of the
asset related to those site owners no longer with the Company should be written
off.  Accordingly, a reduction in cost and related accumulated
amortization of $634,000 was recorded as of December 31, 2009.
  Vendor agreements.Due to a change in the terms of these agreements and the Company’s
forecasted revenues, the Company determined that any future benefit from these
agreements was unlikely.  Accordingly, the remaining balance of
$109,000 was considered impaired and written off at December 31, 2009.
  Indefinite-Lived Intangible
Assets
 
 Trade and Domain Names.Prior to any impairment, the Trade and Domain Name intangible resided in
the Marketing unit.  During the fourth quarter of 2009, the Company
was making plans to launch a new business model, ZamZuu, in early January
2010.  As part of that process, the legal entity, YTB Marketing, Inc.
was renamed ZamZuu, Inc.  The trade and domain names associated with
YTB Marketing, Inc. would no longer be used and therefore were considered
worthless as of December 31, 2009.  The Company concluded that based
on the planned discontinuance of the YTB Marketing/yourtravelbiz.com trade and
domain names effective the first part of January 2010, future cash flows
generated by this asset, which would be $0, did not support its
value.  In addition, due to recent negative publicity associated with
these trade and domain names, the Company concluded that they would also have no
value to market participants.  Accordingly, at December 31, 2009, the
entire recorded value was written off by recording a $2.0 million impairment
charge.


F28




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 10 - ACCRUED EXPENSES




Accrued
expenses on the consolidated balance sheets consist of the following as of
December 31, 2009 and 2008:





Dollars in thousands
                  
                  2009
                  
                  
                  2008Marketing
      commissions
                  
                  $
                  1,874
                  
                  
                  $
                  2,797Travel
      commissions
                  
                  
                  866
                  
                  
                  
                  1,811Severance
                  
                  
                  945
                  
                  
                  
                  570Other
      accrued expenses
                  
                  
                  1,479
                  
                  
                  
                  2,537$
                  5,164
                  
                  
                  $
                  7,715





Sales Director Bonus Plan. The share-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.  Awards are made in the form of company
stock.  Bonus expense, net of forfeitures, included in marketing
commissions expense for the year ended December 31, 2008 was $422,000. A bonus
credit of $271,000, due to the forfeiture of previously issued awards, was
included in marketing commissions expense for the year ended December 31,
2009.  Accrued marketing commissions under this plan as of December
31, 2009 and 2008 totaled $73,000 and $452,000, respectively.  See
Note 14 – “Share-Based Payments” for additional information.


F29


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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, 2009 and 2008 was $299,000 and $322,000, respectively, and is
included in the accompanying consolidated statements of operations in general
and administrative expense.





NOTE 11 - 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 bore interest at the rate of Prime plus
1.0%, floating daily, and was collateralized by the first mortgage on the
Property.  Principal and interest payments of $14,000 were due monthly
based upon a 20-year amortization for the first year of the Note after which the
entire principal was to be paid or the Note was to be refinanced.





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 were contractually agreed to in the promissory note with the failed
institution.





On
February 13, 2009, an unrelated third party, FirstCity Servicing Corporation as
Servicer for FH Partners LLC (“ FH Partners”),
Owner, purchased the Note Renewal.  The terms of the Note Renewal
did not change as a result of the purchase.





On July
26, 2009, the $1.9 million balloon payment on the Note Renewal came
due.  On September 29, 2009, the Company executed a Loan Modification,
Renewal, and Extension Agreement (the “ Agreement”) effective July 26, 2009,
with FH Partners.  The Agreement renews the note executed by the
Company in connection with the Loan and the Note Renewal in the new amount of
$1.9 million (the “ Note”) and
extends the maturity of the Note Renewal and Loan to April 30,
2010.  The amount due under the Note bears interest at a rate of 8%
annually. A principal installment in the amount of $300,000 was due and payable
on September 30, 2009, which the Company paid timely. A second
additional principal installment in the amount of $200,000, originally due and
payable on December 31, 2009, was extended to January 31, 2010.  To
date, the Company has not made the $200,000 payment.  FH Partners has
not given the Company notice of its intention to accelerate the debt as a result
of the Company’s failure to make the $200,000 payment that was due January 31,
2010.  In the event of default, as defined in the Note, FH Partners
has the right to declare the entire unpaid balance of principal and interest on
the Note due and payable.  All other terms of the Note Renewal and the
Loan, including the representations and warranties, remain unchanged.


F30


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





In
connection with the execution of the Agreement, the Company granted FH Partners
a mortgage on approximately nine acres of unencumbered raw land adjacent to the
Company’s headquarters (the “ Property”) as additional security for the Note, as evidenced by a Mortgage
executed by the Company on September 29, 2009 (the “ Mortgage”).  The carrying value
of the Property as of December 31, 2009 is $1.0 million. Under
the Mortgage, the Company assigned and conveyed to FH Partners all rights, title
and interest in existing or future leases for use of the Property and all rents
and profits that pertain to the use of the Property.  In the event of
default, as defined in the Mortgage, FH Partners has the right to foreclose on
the Property and take possession or declare all payments immediately due and
payable.





The
outstanding balance of the Note as of December 31, 2009 was $1.6 million and the
outstanding balance of the Note Renewal as of December 31, 2008 was $2.0
million.  See Note 16 – “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 loan was paid off during the fourth quarter of 2008.




NOTE 12– 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.  During 2008, the Company reached an agreement on the
termination of the proposed acquisition and wrote off the deposit.





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 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 of $149,000 during the fourth quarter of 2008 to write
off the goodwill previously recorded.  Travel commission revenues
generated by Sunrise totaled $110,000 and $105,000 for the years ended December
31, 2009 and 2008, respectively.


F31


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements




NOTE 13 – FAIR VALUE
DISCLOSURES
 
 Fair
Value Measurements
  The
Company determines the fair value of financial assets and liabilities based on
the following fair value hierarchy, which prioritizes the inputs to valuation
techniques used to measure fair value into three levels:
  Level 1 inputs—unadjusted
quoted prices in active markets for identical assets or liabilities that we have
the ability to access. An active market for the asset or liability is one in
which transactions for the asset or liability occur with sufficient frequency
and volume to provide ongoing pricing information.
  Level 2 inputs—inputs other
than quoted market prices included in Level 1 that are observable, either
directly or indirectly, for the asset or liability. Level 2 inputs include, but
are not limited to, quoted prices for similar assets or liabilities in an active
market, quoted prices for identical or similar assets or liabilities in markets
that are not active and inputs other than quoted market prices that are
observable for the asset or liability, such as interest rate curves and yield
curves observable at commonly quoted intervals, volatilities, credit risk and
default rates.
  Level 3 inputs—unobservable
inputs for the asset or liability.
  Cash and
cash equivalents, accounts receivable, accounts payable, and accrued expenses
are reflected in the consolidated balance sheet at cost, which approximates fair
value due to the short-term nature of these 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.  The Company
has no other financial assets or liabilities required to be reported at fair
value as of December 31, 2009 or 2008.
  Assets
Measured at Fair Value on a Recurring Basis
 
 As of
December 31, 2009 and 2008, the Company has no assets carried at fair value on a
recurring basis.
 
 Assets
Measured at Fair Value on a Nonrecurring Basis
 
 Dollars in thousands
                    
                    
                    
                    
                    FairValueMeasurementsUsingDescription
                    
                    
                    Year
                      Ended
                      December 31
                    
                    Quoted Prices in
                      Active Markets
                      forIdenticalAssets
                      (Level1)
                    
                    
                    Significant Other
                      Observable
                      Inputs(Level2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level3)
                    
                    
                    TotalGains
                      (Losses)2008:Long-lived
      assets held for sale
                    
                    $
                    844
                    
                    $
                    -
                    
                    
                    $
                    844
                    
                    
                    $
                    -
                    
                    
                    $
                    (366
                    )Goodwill
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (149
                    )Total
                    
                    $
                    844
                    
                    $
                    -
                    
                    
                    $
                    844
                    
                    
                    $
                    -
                    
                    
                    $
                    (515
                    )2009:Long-lived
      assets held and used
                    
                    $
                    -
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (564
                    )Long-lived
      assets held for sale
                    
                    
                    5,248
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,248
                    
                    
                    
                    (3,907
                    )Definite-lived
      intangible assets
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (208
                    )Indefinite-lived
      intangible asset
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,040
                    )Goodwill
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (450
                    )Total
                    
                    $
                    5,248
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,248
                    
                    
                    $
                    (7,169
                    )
 During
2008, in accordance with the authoritative guidance on the Impairment or
Disposal of Long-Lived Assets, long-lived assets held for sale with a carrying
amount of $1.2 million were written down to their fair value less cost to sell
of $844,000, resulting in an impairment charge of $366,00.  In
accordance with the authoritative guidance on Intangibles – Goodwill and Other,
goodwill with a carrying amount of $149,000 was written down to its implied fair
value of $0, resulting in an impairment charge of $149,000.  These
impairment charges were included in earnings for the period ended December 31,
2008.
 F32




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements


During
2009, in accordance with the authoritative guidance on the Impairment or
Disposal of Long-Lived Assets, long-lived assets held and used with a carrying
amount of $564,000 were written down to their fair value of $0, resulting in an
impairment charge of $564,000.  Also in accordance with the
authoritative guidance on the Impairment or Disposal of Long-Lived Assets,
long-lived assets held for sale with a carrying amount of $9.1 million were
written down to their fair value of $5.2 million, resulting in an impairment
charge of $3.9 million.  In accordance with the authoritative guidance
on Intangibles – Goodwill and Other, impairment charges were recorded on
definite-lived intangibles, indefinite-lived intangibles and
goodwill:  definite-lived intangible assets with a carrying amount of
$208,000 were written down to their fair value of $0, resulting in an impairment
charge of $208,000; indefinite-lived intangible assets with a carrying amount of
$2.0 million were written down to their fair value of $0, resulting in an
impairment charge of $2.0 million; and goodwill with a carrying amount of
$450,000 was written down to its implied fair value of $0, resulting in an
impairment charge of $450,000.  These impairment charges were included
in earnings for the period ended December 31, 2009.


NOTE 14 - SHARE-BASED
PAYMENTS




As of
December 31, 2009, the Company had a share-based employee compensation plan, a
share-based Sales Director bonus plan and a TSO Stock Purchase Plan (the “ TSO SPP”).





2004 Stock Option
and Restricted Stock Plan.





On
September 22, 2008, the Company’s Board of Directors approved a new incentive
compensation program that specifically would incentivize known leaders in the
network marketing business to enlist 10,000 Reps in a one-year
period.  The program was adopted under the 2004 Plan and would be
achieved with the issuance of nonqualified stock options under the 2004
Plan.  There were no awards granted under this new program as of
December 31, 2009.





Stock
Options





The
Company’s share-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.  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 under the 2004
plan shall consist of Class A Common Stock. As of December 31, 2009, 3,655,382
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 and 150,000 of which were unexercised and forfeited
during 2006 and 2009, respectively. 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.


F33


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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.





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.  One
hundred thousand of the incentive stock options were unexercised and forfeited
during 2009.  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.




On
October 15, 2007, the Company’s Board of Directors approved an Employee Stock
Option Program (the “ Program”)
as a means of providing equity incentive awards pursuant to the 2004 Plan to
qualifying employees of the Company who achieve a certain duration of service
for the Company.  Implementation of the Program was delayed until
2009.  On June 30, 2009, the Company’s Board of Directors granted
incentive stock options to purchase 925,000 shares of the Company’s Class A
Common Stock to eligible employees of the Company under the Program, 40,000 of
which were unexercised and forfeited during 2009.  These stock options
vest immediately on the date of grant and expire five 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
1.38%; expected life of 2.5 years; dividend yield of 0% and expected volatility
of 126.82%.  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.


F34


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company recognized $255,000 and $407,000 in compensation expense for stock
options granted under the 2004 Plan for the years ended December 31, 2009 and
2008, respectively.  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.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 share-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, 2009 and
2008 is $201,000 and $459,000, 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 (“ Compensation Policy”).  Under the Compensation 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) $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 did 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 293,908 and 116,466  shares were forfeited in 2009 and 2008,
respectively.  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 vested entirely on the first
anniversary of the grant date; and the Catch-up Award consisted of 507,320
shares, half of which vested in six months and the remainder vested 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.





On May
29, 2009, the Company’s Board of Directors granted the 2009 annual Board of
Directors restricted stock award under the Company’s non-employee director
compensation policy to four members of the Company’s Board of
Directors.  Each award consisted of the calculated number of shares of
the Company’s Class A Common Stock valued at $30,000 on the grant date, which
represented the annual compensation under the policy.  The 800,000
shares granted, of which 400,000 shares were forfeited in 2009, vest entirely on
the first anniversary of the grant date.  The cost of the award
included an estimate of shares that will not vest due to forfeitures.





On June
22, 2009, the Company’s Board of Directors granted a restricted stock award
under the Company’s non-employee director compensation policy to the three new
members of the Company’s Board of Directors in connection with their
appointments to the Board of Directors.  Each award consisted of the
calculated number of shares of the Company’s Class A Common Stock valued at
$40,000 on the grant date, which represented the compensation under the
policy.  The 999,999 shares granted vest ratably over a period of four
years beginning on the first grant date anniversary.  The cost of the
award included an estimate of shares that will not vest due to forfeitures.


F35


YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 The
Company calculated the number of shares issued under the non-employee director
restricted stock grants by using the total amount of compensation to be received
under the Compensation 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.
 
 On
February 11, 2008, the Company’s Board of Directors granted restricted stock
awards to each of two Site Owners of the Company for prior provision of
services.  The first Site Owner accepted the award on July 11, 2008
(the “ Measurement
Date One”).  The second Site Owner 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.
 
 On
January 26, 2009 (the “ Grant Date”), the
Company’s Board of Directors approved the issuance of restricted stock awards to
certain Sales Directors in replacement of previously issued restricted stock and
option awards (the “ 2009 Replacement Awards”).  The Sales Directors were notified of the 2009 Replacement
Awards on February 13, 2009 (the “ Measurement Date”).  The 2009 Replacement Awards consisted of 1,235,846 shares
of the Company’s Class A Common Stock and 2,015,328 of the Company’s Class B
Common Stock of which 50% vested on the Grant Date and 50% will vest on the
first anniversary of the Grant Date. During
2009, 221,208 of the Company’s Class A restricted stock and 347,179 of the
Company’s Class B restricted stock were forfeited.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, the number of shares
issued and an estimate of shares that will not vest due to forfeitures.
 
 On June
15, 2009, the Company’s Board of Directors approved and granted the issuance of
restricted stock awards to certain Sales Directors for their past commitment to
the Company and for their future retention.  The awards consisted of
3,400,000 shares of the Company’s Class A Common Stock, of which 50% vested on
the grant date and 50% will vest on January 1, 2010. During
2009, 350,000 of the shares were forfeited.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 grant date, the number of shares issued
and the actual number of shares forfeited as of December 31, 2009.
 
 For the
year ended December 31, 2009 and 2008, the Company recorded $1.4 million and
$739,000, respectively, as net compensation expense related to the amortization
of the restricted stock awards issued under the 2004 Plan. 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.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 share-based
compensation expense could be significantly different than what was recorded in
the current period.  As of December 31, 2009, there was approximately
$190,000 of unrecognized compensation expense related to the 3,959,664 shares of
unvested restricted stock.  The weighted-average period over which the
total unrecognized compensation expense related to these nonvested awards is
expected to be recognized is 0.5 years.
  F36
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 2007 Sales Director Bonus Plan.
 
 The 2007
Sales Director Bonus Plan is a share-based Sales Director 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.
 
 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 a total of 211,266 options to purchase shares of Class
A Common Stock based upon the defined level of achievement measured as of June
30, 2007, 23,472 and 46,947 of which were unexercised and thus forfeited in 2009
and 2008, respectively, 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%-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 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 2009 and 2008, accrued bonuses
and marketing commissions expense were reduced by $24,000 and $46,000,
respectively, 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 effect of
forfeiture adjustments in 2009 and 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 balance sheet as of
December 31, 2007 with a corresponding expense recorded as marketing
commissions.
  F37
  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.
The two qualifying Sales Directors received a total of 482,759 options to
purchase shares of Class A Common Stock based upon the defined level of
achievement measured as of June 30, 2008, 229,885 of which were unexercised and
thus forfeited in 2009 due to sales director status termination.  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 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.  During 2009, accrued bonuses and marketing
commissions expense were reduced by $247,000 for actual forfeitures incurred
during the year.
 
 The Company recorded a
reduction in accrued bonuses of $651,000 and $518,000 during the years ended
December 31, 2009 and 2008, 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 2009
and 2008, accrued bonuses and marketing commissions expense were reduced by
$271,000 and $46,000, respectively, for actual forfeitures incurred during the
year. 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 sales director turnover.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 share-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, 2009
and 2008, respectively, are $73,000 and $452,000 of accrued bonuses that relate
to the options that are exercisable in the future.
 
 TSO Stock Purchase Plan.
 
 The TSO SPPwas approved by the Company’s Board of
Directors on January 26, 2009 and is administered by the Company’s Board of
Directors or any committee appointed by the Board.  The TSO SPP
authorizes the issuance of 7,500,000 shares of the Company’s Class A Common
Stock and 7,500,000 shares of the Company’s Class B Common Stock and expires ten
years from the date of approval.  The purpose of the TSO SPP is to
attract, retain and motivate Site Owners of the Company and to assist them in
acquiring a stock ownership interest in the Company so as to align their
interests with those of the Company’s other stockholders.  Under the
terms of the TSO SPP, eligible participants can purchase equity units for the
defined purchase price on the last business day of each calendar month (each, an
“ Offering Date”).  Each equity unit is comprised of one share of the
Company’s Class A Common Stock, one share of the Company’s Class B Common Stock,
and one nonqualified stock option to purchase one share of Class A Common Stock
and one share of Class B Common Stock.  The purchase price is defined
as two times the closing price of the Company’s Class A Common Stock on the
trading date previous to the relevant Offering Date.  The term of each
option is ten years from the relevant Offering Date and the options vest at the
rate of 20% on each of the first five anniversaries of the relevant Offering
Date.
  F38
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 The fair
value of the Common Stock A and Common Stock B equity unit options purchased
under the TSO SPP were estimated on the respective Offering Dates using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for these purchases:
 
 Offering
                      Date
                    
                    Equity
                      Units
                    
                    
                    A
                      Options
                    
                    
                    B
                      Options
                    
                    
                    Risk Free
                      Interest Rate
                    
                    
                    Expected
                      Life
                    
                    
                    Dividend
                      Yield
                    
                    
                    Expected
                      Volatility4/30/2009
                    
                    
                    140,050
                    
                    
                    
                    140,050
                    
                    
                    
                    140,050
                    
                    
                    
                    1.91
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    107.39
                    %5/29/2009
                    
                    
                    151,660
                    
                    
                    
                    151,660
                    
                    
                    
                    151,660
                    
                    
                    
                    2.18
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    107.93
                    %6/30/2009
                    
                    
                    26,817
                    
                    
                    
                    26,817
                    
                    
                    
                    26,817
                    
                    
                    
                    2.38
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    108.92
                    %7/31/2009
                    
                    
                    95,453
                    
                    
                    
                    95,453
                    
                    
                    
                    95,453
                    
                    
                    
                    2.37
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    110.33
                    %8/31/2009
                    
                    
                    76,250
                    
                    
                    
                    76,250
                    
                    
                    
                    76,250
                    
                    
                    
                    2.23
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    111.35
                    %9/30/2009
                    
                    
                    21,426
                    
                    
                    
                    21,426
                    
                    
                    
                    21,426
                    
                    
                    
                    2.16
                    %
                    
                    
                    4.65
                    
                    
                    
                    0.00
                    %
                    
                    
                    111.24
                    %
 
 The
expected average life represents the period of time that options granted are
expected to be outstanding giving consideration to vesting schedules, projected
exercise behavior and projected forfeiture behavior. 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 recognized $8,000 as a reduction in revenues for equity unit options
purchased under the TSO SPP for the year ended December 31, 2009.  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 Site Owner turnover.  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 equity unit options purchased under the TSO SPP as of December 31, 2009
was $53,000.
 
 During
September 2009, management temporarily suspended the offer of sales of stock
under the TSO SPP.
 
 Option
Summary.
 
 The
following table provides additional information with respect to the aggregate
stock option plan activity during 2009 under the Company’s 2004 Plan, the 2007
Sales Director Bonus Plan, and the TSO SPP, taken as a whole:
 
 Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        AverageFair
                        Value
                      
                      
                      Weighted
                        Average
                        Remaining
                        Life(Years)Options
      outstanding at beginning of 2009
                      
                      
                      2,453,227
                      
                      
                      $
                      0.85
                      
                      
                      $
                      0.68Granted
                      
                      
                      1,948,312
                      
                      
                      
                      0.13
                      
                      
                      
                      0.09Forfeited
                      
                      
                      (548,357
                      )
                      
                      
                      0.76
                      
                      
                      
                      0.77Expired
                      
                      
                      (291,671
                      )
                      
                      
                      0.57
                      
                      
                      
                      0.77Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      outstanding at December 31, 2009
                      
                      
                      3,561,511
                      
                      
                      $
                      0.49
                      
                      
                      $
                      0.33
                      
                      
                      
                      5.69Options
      exercisable at December 31, 2009
                      
                      
                      1,695,000
                      
                      
                      $
                      0.50
                      
                      
                      $
                      0.29
                      
                      
                      
                      4.16
  F39
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 The total
number of options outstanding at December 31, 2008 as disclosed in Note 19 –
“Share-Based Payments” of the notes to consolidated financial statements
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008 was 2,819,827, which incorrectly included 366,600 options that expired
in December 2008.  The total number of options outstanding at the
beginning of 2009 as shown above has been adjusted to exclude these expired
options.
 
 The
weighted average grant date fair value of options granted during the years 2009
and 2008 was $0.09 and $0.80, respectively.  The total intrinsic value
of options exercised during the year ended December 31, 2008 was
$101,000.  There were no options exercised during the year ended
December 31, 2009.
 
 A summary
of stock options outstanding and exercisable as of December 31, 2009 is as
follows:
 
 Options Outstanding
                        
                        
                        Options ExercisableRange of Exercise Prices
                        
                        Number
                          Outstanding
                        
                        
                        Weighted
                          Average
                          Remaining
                          Life (Years)
                        
                        
                        Weighted
                          Average
                          Exercise Price
                        
                        
                        Number
                          Outstanding
                        
                        
                        Weighted
                          Average
                          Exercise Price$0.07
      - $1.00
                        
                        
                        2,661,511
                        
                        
                        
                        5.65
                        
                        
                        $
                        0.22
                        
                        
                        
                        1,255,000
                        
                        
                        $
                        0.20$1.01
      - $1.67
                        
                        
                        900,000
                        
                        
                        
                        5.82
                        
                        
                        
                        1.28
                        
                        
                        
                        440,000
                        
                        
                        
                        1.35Total
                        
                        
                        3,561,511
                        
                        
                        
                        5.69
                        
                        
                        $
                        0.49
                        
                        
                        
                        1,695,000
                        
                        
                        $
                        0.50
 
 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 (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, two are members of
the Company’s Board of Directors, one is a former member of the Company’s Board
of Directors, and one is the President of a former operating
subsidiary.  See Note 17 – “Discontinued Operations.”  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.  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, 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 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, 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.
  F40
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 As of
December 31, 2009 and 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, 2010 and 2009, respectively.  As such, the
applicable shares were forfeited on January 2, 2010 and 2009. As of December 31,
2009, there was approximately $3.5 million of unrecognized compensation expense
related to 3,404,034 shares scheduled to vest on January 2, 2011. The
Company does not expect the performance-related vesting conditions to be
satisfied related to the shares scheduled to vest on January 2, 2011.
 
 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 19, 2010 (the “ 2010 Replacement Award”) and January
26, 2009 (the “ 2009 Replacement Award”).  See Restricted Stock under the 2004 Stock Option and
Restricted Stock Plan section for a discussion of the 2009 Replacement
Awards.  See Note 22 - “Subsequent Events” for a discussion of the
2010 Replacement Awards.
 
 Summary
 
 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, 2009:
 
 Restricted
                        shares
                      
                      
                      Weighted
                        Average
                        grant-date
                        fair valueNon-vested
      at beginning of 2009
                      
                      
                      15,299,058
                      
                      
                      $
                      1.05Granted
                      
                      
                      8,451,173
                      
                      
                      
                      0.20Vested
                      
                      
                      3,545,991
                      
                      
                      
                      0.29Forfeited
                      
                      
                      9,436,508
                      
                      
                      
                      0.94Non-vested
      at December 31, 2009
                      
                      
                      10,767,732
                      
                      
                      $
                      0.73
 
 As of
December 31, 2009, there was approximately $7.2 million of unrecognized
compensation expense related to the 10,767,732 shares of non-vested restricted
stock under the Company’s 2004 Plan and the One-Time Restricted Stock Award,
which includes $3.5 million of unrecognized compensation expense related to the
3,404,034 shares forfeited on January 2, 2010 due to the failure of
meeting performance-related vesting conditions and $3.5 million of unrecognized
compensation expense related to the 3,404,034 shares expected to be forfeited on
January 2, 2011 due to the expected failure of
meeting  performance-related vesting conditions.The Company
expects to recognize the remaining $190,000 of total compensation expense not
yet recognized related to the remaining non-vested awards over a weighted
average period of 0.5 years.
 
 Total
compensation cost recognized in the consolidated statement of operations for all
stock option and restricted stock plans for the years ended December 31, 2009
and 2008 was $1.4 million and $1.6 million, respectively.
 
 NOTE 15 - STOCKHOLDERS’
EQUITY
  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, 2009 and 2008, 41.93 of the 64 warrant units (each unit
consisting of 56,250 common stock purchase warrants) remain unexercised.
  F41
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 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.
 
 On
January 26, 2009, the Company’s Board of Directors approved the TSO
SPP.  On February 23, 2009, the Company filed a registration statement
on Form S-8 relating to the TSO SPP, however, the plan did not become
operational until April 2009.  Pursuant to the terms of the plan, the
minimum investment is $1,000 to purchase equity units at a price equal to two
times the closing price of the Company’s Class A Common Stock on the trading
date previous to the Offering Date.  An equity unit consists of (a)
one share of the Company’s Class A Common Stock, (b) one share of the Company’s
Class B Common Stock, and (c) one nonqualified stock option.  Each
stock option is exercisable to purchase one share of Class A Common Stock and
one share of Class B Common Stock.  See Note 14 – “Share-Based
Payments” for further details.
 
 During
2009, the Company issued 511,656 shares of Class A Common Stock and 511,656
shares of Class B Common Stock, with a combined fair value of $144,000, in
conjunction with the sale of 511,656 equity units under the TSO
SPP.  The Company recorded the $144,000 in proceeds from the sale of
the equity units with a corresponding entry of $1,000 to Class A Common Stock,
$1,000 to Class B Common Stock and $142,000 to additional paid-in capital.
 
 During
the second quarter of 2009, 25,404 shares of common stock, with a fair value of
$22,000, were surrendered by a sales director in repayment of a note receivable
previously reserved by the Company.  The Company recorded a reduction
in notes receivable for $22,000 with a corresponding increase to treasury stock
and recorded a reduction of $22,000 to bad debt expense with a corresponding
decrease to the reserve on notes receivable.
 
 During
the third and fourth quarters of 2009, the Company issued 1,411,748 shares of
common stock, with a fair value of $110,000, to Michael Brent under the terms of
the Employment Severance Agreement.  See Note 17 – “Discontinued
Operations.”
 
 The
accumulated other comprehensive loss balance of $10,000 represents an
accumulated foreign currency revaluation adjustment.
  NOTE 16 - 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. During 2009 and 2008, the Company expended
$182,000 and $3.4 million, respectively, for these services.  Included in
accounts payable on the consolidated balance sheet at December 31, 2009 and
2008, is $8,000 and $35,000, respectively, for amounts due by the Company for
these services.  In addition, 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 for future
services.  There was no receivable as of December 31, 2009.
 
 The
Company leased approximately 5,000 square feet of office space (which served as
part of the Company’s 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 Company, Inc. (“
Meridian Land”), as lessor, and the Company, as lessee, which is to expire on October
31, 2010.
  F42
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 In
January 2008, the Company exercised its 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 was due at the closing of the acquisition of the Building
Two Property, originally scheduled to close by the end of June
2008.  Given the downturn in the credit and real estate markets, the
Company extended the contract in 2008 to occur on or before December 31, 2009
and made other net deposits of $34,000 in order to preserve its interest in
purchasing the building or assigning its rights to purchase the building to a
third party.  As of December 31, 2008, the Company was not able to
provide assurance that it would be able to obtain proper financing to exercise
its right to purchase the property, or that the Company would be able to assign
its rights to purchase the property to a third party.  Therefore, the
$500,000 non-refundable earnest money deposit and the $34,000 other net deposits
were fully reserved as of December 31, 2008 and the expense was included in
general and administrative expenses in the accompanying statement of operations
for the year ended December 31, 2008.  The purchase contract expired
and the $500,000 non-refundable earnest money deposit was written off as of
December 31, 2009.  Also during 2009, the Company reversed the $34,000
reserve on other net deposits established during 2008 and made additional net
deposits of $2,000.  As of December 31, 2009, total net deposits of
$36,000 are included in other prepaid expenses and current assets in the
consolidated balance sheet and will be recognized as rent expense under the
Building Two Lease in 2010.
 
 The
Company’s rental expense under the Building Two Lease was approximately $8,000
per month.  Rental expense was $101,000 for the years ended December
31, 2009 and 2008.  In addition to monthly rental payments, the
Company is responsible for reimbursement of insurance premiums and repairs and
maintenance during the term of the Building Two Lease.  During 2009
and 2008, insurance and repairs and maintenance expense totaled $11,000 and
$6,000, respectively.  Included in accounts payable at December 31,
2008 are amounts due under the Building Two Lease of $3,000.
 
 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 first quarter of 2008, the Company made payments for the
use of the business jet to Meridian/Silver of $35,000.  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 the
third quarter of 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 $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 business jet
to its estimated realizable value of $844,000.  The business jet is
included in assets held for sale on the Company’s consolidated balance
sheet as of December 31, 2008.
  F43
  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 served as additional office space for
the Company.  The Magnolia Lease had 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 extended until August 15, 2009. Rent
under the Magnolia Lease was  $8,000 per month. In addition to monthly
rental payments, the Company was responsible for reimbursement of tenant
build-out costs, utilities and maintenance, insurance and all real estate taxes
assessed on the property on which the Magnolia Leased Premises was located
during the term of the Magnolia Lease.  In addition, the Company was
responsible for all costs of maintaining any common areas (“ CAM”) used by the
Company in conjunction with the Magnolia Leased Premises.  The
following is a summary of the costs incurred for the Magnolia Leased Premises
for the years ended December 31, 2009 and 2008:
 
 Dollars in thousands
                    
                    2009
                    
                    
                    2008Rental
      expense
                    
                    $
                    59,000
                    
                    
                    $
                    92,000Tenant
      build-out costs
                    
                    
                    -
                    
                    
                    
                    19,000Insurance
      / repairs / CAM
                    
                    
                    3,000
                    
                    
                    
                    5,000Real
      estate taxes
                    
                    
                    19,000
                    
                    
                    
                    7,000
 
 Included
in other accrued expenses and accounts payable at December 31, 2008 are amounts
due under the Magnolia Lease of $7,000 and $1,000, respectively.
 
 Meridian
Land is controlled by its principals, Timothy Kaiser, M.D. and Clay Winfield,
each of whom were members of the Company’s Board of Directors until June 16,
2009 and April 30, 2009, respectively.  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 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 Meridian
Bank, Timothy Kaiser, M.D., and another director and principal shareholder of
Meridian Bank, Clay Winfield, were also directors of the Company until June 16,
2009 and April 30, 2009, respectively.  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 included an interest rate of prime, plus 1.00% floating daily and a
scheduled balloon principal payment due July 26, 2009.  Interest and
principal were due monthly based upon a 20-year amortization and the Note
Renewal was collateralized by the first mortgage on the corporate headquarters
property.  There were no other restrictive covenants included in the
Note Renewal.
  In
October 2008, the Illinois Department of Financial and Professional Regulation,
Division of Banking closed Meridian Bank.  Subsequently, the FDIC was
named Receiver.  The outstanding balance of the note as of December
31, 2008 was $2.0 million.  Interest paid to Meridian Bank for
the year ended December 31, 2008 was $85,000. On February 13, 2009, an
unrelated third party, FH Partners, purchased the Note Renewal.  The
terms of the Company’s note did not change as a result of the purchase. 
See Note 11 – “Financing Arrangements.”
  F44
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 Pursuant
to the terms of the development contract with Winfield Development for its new
corporate headquarters in Wood River, Illinois (the “ Contract”), the
Company made aggregate payments of $449,000 and $4.2 million for the years ended
December 31, 2009 and 2008, respectively.  In addition, at December
31, 2008, the Company’s accounts payable included $414,000 of amounts due under
the Contract.  The Contract was approved by the independent members of
the Company’s Board of Directors.  The Company also paid $9,000 during
the year ended December 31, 2009 to Winfield Development for miscellaneous
capital projects and repairs to the corporate headquarters.  Clay
Winfield, who was a member of the Company’s Board of Directors until April 30,
2009, controls Winfield Development.
 
 During
2008, REZconnect paid approximately $8,000 in legal fees for work performed by
Harold Kestenbaum, a member of the Company's Board of Directors until
November 5, 2009.  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 until November 5, 2009.  The
liability, included in other accrued expenses on the consolidated balance
sheet as of December 31, 2008, was paid in the 2009 along with an additional
amount of $16,000 in fees for work performed by Andrew Wilder during the first
two quarters of 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.
 
 During
2008, the Company paid $60,000 for commissions earned on a vacant Rep position
to Major League Travel, a limited partnership which Louis Brock, a member of the
Company’s Board of Directors, is a general partner.
 
 During
2009, the Company expended $6,000 in book royalty fees to J. Lloyd “Coach”
Tomer, former director and Chairman of the Board of the Company.  Book
royalty fees of $1,000 were included in accounts payable in the consolidated
balance sheet as of December 31, 2009.
 
 Included in accounts
payable at December 31, 2009, are legal fees of $2,000 for work performed
by Jack Humes, a member of the Company's Board of Directors. 
The
fees covered services performed by Jack Humes related to the corporate
headquarters building asset held for sale.
 
 NOTE17– DISCONTINUED OPERATIONS
 
 During
the second quarter of 2009, the Company’s Board of Directors made a strategic
decision to sell its wholly-owned subsidiary, REZconnect on June 30,
2009.  REZconnect was formerly included in the Company’s Travel
segment.  The Board determined that the REZconnect business model,
serving primarily brick and mortar travel agencies, was not compatible with our
current and future plans.  As such, effective June 30, 2009, the
Company entered into an Employment Severance Agreement (the “ Employment Severance Agreement”) by
and between REZconnect and Michael and Derek Brent (the “ Brents”), Chief Executive Officer and
President of REZconnect, respectively.  In connection with their
separation from the Company, the Brents’ employment agreements were terminated,
as more fully discussed in Note 22 – “Commitments and Contingencies”.
 
 As
consideration for termination of their employment agreements, the Company sold
all of its REZconnect stock to the Brents, thereby transferring ownership of
REZconnect.  Effective as of June 30, 2009, the Company entered into
the Agreement of Purchase and Sale (the “ REZconnect Sales Contract”) with the
Brents and REZconnect pursuant to which the Company sold the common stock of
REZconnect to the Brents for $1.  As a result, REZconnect is no longer
a wholly-owned subsidiary of the Company.
  F45
 
 YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 As set
forth in the REZconnect Sales Contract, the Brents received all assets and
assumed all liabilities of REZconnect as a result of the transfer of
ownership.  The Brents agreed to transfer back to the Company a
certificate of deposit in the amount of $275,000 owned by REZconnect.
 
 Additionally,
under the terms of the Employment Severance Agreement, the Brents agreed to
indemnify the Company from any and all claims, losses and liabilities arising
out of or in any way relating to the operations and business of REZconnect.
 
 The gross
contract termination costs associated with the separation of Michael and Derek
Brent totaled approximately $1.4 million and $1.4 million, respectively, or
approximately $2.8 million in the aggregate.  These amounts will be
paid over the 5.5 years in common stock of the Company and cash payments of
approximately $631,000 in the aggregate due to each of Michael and Derek Brent
pursuant to the terms of the Employment Severance Agreement.  The
Company recorded the fair value of the contract termination costs of $2.6
million in the second quarter of 2009 as a component of the loss on disposal of
REZconnect of $2.6 million by discounting the future common stock and cash
outflows of $2.8 million using the Company’s credit-adjusted risk free
rate.  A non-cash accretion adjustment of $23,000 is included in the
loss on disposal of REZconnect for the six months ended December 31,
2009.  Pursuant to the terms of the Employment Severance Agreement,
the monthly values to be paid in cash and stock are fixed.  The number
of shares of common stock of the Company issued monthly as partial satisfaction
of the contract termination costs is determined based on the average stock price
of the Company’s Class A Common Stock for the prior three months. Upon each
issuance of common stock, the Company will measure the fair value of the
settlement using the fair value of the Company’s Class A Common Stock on the
issuance date and a true-up adjustment will be recognized and included in the
loss on disposal of REZconnect equal to the difference between the closing stock
price on the date immediately preceding the measurement date and the average
stock price of the Company’s Class A Common Stock for the prior three
months.  For the six months ended December 31, 2009, a true-up
adjustment of $35,000 is included in the loss on disposal of REZconnect.
 
 In
addition, pursuant to the REZconnect Sales Contract, during the third quarter of
2009, the Company paid REZconnect $26,000 representing reimbursement of payroll
related costs which is included in the loss on disposal of REZconnect for the
six months ended December 31, 2009.
 
 The loss
on disposition of the REZconnect subsidiary, net of tax, consists of the
following for the year ended December 31, 2009:
 
 Dollars
      in thousandsContract
      termination costs
                        
                        $
                        2,634Assets
      sold to purchaser, net of liabilities assumed
                        
                        
                        267Proceeds
                        
                        
                        (275
                        )True-up
      of contract termination costs settled in stock
                        
                        
                        (34
                        )Non-cash
      accretion of contract termination liability
                        
                        
                        23Loss
      on disposal, net of tax
                        
                        $
                        2,615
  F46
  YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements
 
 The
following table summarizes the net revenues and operating results for the
REZconnect operations for the years ended December 31, 2009 and 2008 included in
discontinued operations:
  Dollars
      in thousands2009
                                  
                                  
                                  2008Net
      revenues
                                  
                                  $
                                  869
                                  
                                  
                                  $
                                  3,093Loss
      from operations before income tax provision
                                  
                                  $
                                  (463
                                  )
                                  
                                  $
                                  (762
                                  )Income
      tax provision
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  -Loss
      on disposal, net of tax
                                  
                                  
                                  (2,615
                                  )
                                  
                                  
                                  -Loss
      from discontinued operations, net of tax
                                  
                                  $
                                  (3,079
                                  )
                                  
                                  $
                                  (762
                                  )
 
 The
following table summarizes the activity in the accrued exit cost liability for
the REZconnect subsidiary for the six months ended December 31, 2009:
 
 Dollars in thousands
                          
                          Fair Value at
                            June 30, 2009
                          
                          
                          Common
                            stock
                            settlements
                          
                          
                          Cash
                            payments
                          
                          
                          Non-cash
                            accretion
                          
                          
                          Fair Value at
                            December 31,
                            2009Contract
      termination costs
                          
                          $
                          2,634
                          
                          
                          $
                          (145
                          )
                          
                          $
                          (157
                          )
                          
                          $
                          23
                          
                          
                          $
                          2,355Total
      exit costs
                          
                          $
                          2,634
                          
                          
                          $
                          (145
                          )
                          
                          $
                          (157
                          )
                          
                          $
                          23
                          
                          
                          $
                          2,355
  In the
Company’s consolidated balance sheet as of December 31, 2009, the current
portion of the $2.4 million liability balance is $624,000 and is included in
accrued expenses and the long-term portion is $1.7 million and is included in
accrued severance.
 
 Included
in the consolidated balance sheet as of December 31, 2008 are the following
balances of the REZconnect subsidiary:
 Dollars
      in thousandsCurrent
      assets
                    
                    $
                    456Long-term
      assets
                    
                    
                    6Current
      liabilities
                    
                    
                    42Long-term
      liabilities
                    
                    
                    26
  F47




YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 18 - 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, Bermuda and the Bahamas and are structured for
potential additional international growth.




The
following tables summarize the financial information concerning the Company's
reportable segments.  As previously discussed, we have sold our
REZconnect subsidiary, formerly included in our Travel segment, and as such, the
results of these operations are presented as discontinued operations and are not
included in the segment data presented.  The “Parent” column includes
corporate items not specifically allocated to the segments.




Dollars
      in thousandsYear
      Ended December 31, 2009
                                  
                                  Marketing
                                  
                                  
                                  Travel
                                  
                                  
                                  Parent
                                  
                                  
                                  TotalExternal
      and inter-segment revenue
                                  
                                  $
                                  54,599
                                  
                                  
                                  $
                                  12,718
                                  
                                  
                                  $
                                  4
                                  
                                  
                                  $
                                  67,321Income
      (loss) from continuing operations
                                  
                                  
                                  3,715
                                  
                                  
                                  
                                  (4,375
                                  )
                                  
                                  
                                  (6,119
                                  )
                                  
                                  
                                  (6,779
                                  )Assets
                                  
                                  
                                  8,519
                                  
                                  
                                  
                                  775
                                  
                                  
                                  
                                  12,322
                                  
                                  
                                  
                                  21,616Depreciation
      and amortization
                                  
                                  
                                  1,419
                                  
                                  
                                  
                                  471
                                  
                                  
                                  
                                  783
                                  
                                  
                                  
                                  2,673Capital
      expenditures
                                  
                                  
                                  38
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  67
                                  
                                  
                                  
                                  105Year
      Ended December 31, 2008
                                  
                                  Marketing
                                  
                                  
                                  Travel
                                  
                                  
                                  Parent
                                  
                                  
                                  TotalExternal
      and inter-segment revenue
                                  
                                  $
                                  133,635
                                  
                                  
                                  $
                                  25,747
                                  
                                  
                                  $
                                  72
                                  
                                  
                                  $
                                  159,454Income
      (loss) from continuing operations
                                  
                                  
                                  4,392
                                  
                                  
                                  
                                  (3,657
                                  )
                                  
                                  
                                  (4,448
                                  )
                                  
                                  
                                  (3,713
                                  )Assets
      (1)
                                  
                                  
                                  21,056
                                  
                                  
                                  
                                  4,266
                                  
                                  
                                  
                                  17,764
                                  
                                  
                                  
                                  43,086Depreciation
      and amortization
                                  
                                  
                                  1,430
                                  
                                  
                                  
                                  276
                                  
                                  
                                  
                                  825
                                  
                                  
                                  
                                  2,531Capital
      expenditures
                                  
                                  
                                  1,190
                                  
                                  
                                  
                                  939
                                  
                                  
                                  
                                  7,696
                                  
                                  
                                  
                                  9,825





GEOGRAPHICAL
FINANCIAL INFORMATION


Net
      revenues for the years ended December 31, 2009 and 2008 consist of:Dollars
      in thousands
                                                                            
                                                                            2009
                                                                            
                                                                            
                                                                            2008United
      States
                                                                            
                                                                            $
                                                                            65,191
                                                                            
                                                                            
                                                                            $
                                                                            155,410Canada
                                                                            
                                                                            
                                                                            2,130
                                                                            
                                                                            
                                                                            
                                                                            4,044Total
      net revenues
                                                                            
                                                                            $
                                                                            67,321
                                                                            
                                                                            
                                                                            $
                                                                            159,454Long-lived
      assets as of December 31, 2009 and 2008 were:Dollars
      in thousands
                                                                            
                                                                            2009
                                                                            
                                                                            
                                                                            2008United
      States
                                                                            
                                                                            $
                                                                            14,209
                                                                            
                                                                            
                                                                            $
                                                                            24,606
                                                                            (2)Canada
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            267Total
      long-lived assets
                                                                            
                                                                            $
                                                                            14,209
                                                                            
                                                                            
                                                                            $
                                                                            24,873




(1)
            Travel Segment
      includes $462,000 in assets of discontinued REZconnect subsidiary.




(2)
            Includes $6,000 in
      assets of discontinued REZconnect subsidiary.




F48


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 19 - INCOME TAXES





For the
years ended December 31, 2009 and 2008, the loss from continuing operations
before income tax (benefit) provision consists of the following:





Dollars
      in thousands2009
                              
                              
                              2008US
      operations
                              
                              $
                              (6,971
                              )
                              
                              $
                              (3,519
                              )Foreign
      operations
                              
                              
                              (661
                              )
                              
                              
                              251Total
                              
                              $
                              (7,632
                              )
                              
                              $
                              (3,268
                              )




The
(benefit) provision for income taxes from continuing operations for the years
ended December 31, 2009 and 2008 consists of the following:





Dollars
      in thousands2009
                                      
                                      
                                      2008Current:Federal
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      12State
      and local
                                      
                                      
                                      150
                                      
                                      
                                      
                                      180Foreign
                                      
                                      
                                      (248
                                      )
                                      
                                      
                                      253Total
      current
                                      
                                      
                                      (98
                                      )
                                      
                                      
                                      445Deferred:Federal
                                      
                                      
                                      (714
                                      )
                                      
                                      
                                      -State
      and local
                                      
                                      
                                      (41
                                      )
                                      
                                      
                                      -Foreign
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      deferred
                                      
                                      
                                      (755
                                      )
                                      
                                      
                                      -Total
      income tax provision
                                      
                                      $
                                      (853
                                      )
                                      
                                      $
                                      445




A
reconciliation of income tax (benefit) provision from continuing operations for
the years ended December 31, 2009 and 2008, with the amounts computed at the
statutory federal rate, is as follows:





Dollars in thousands2009
                              
                              
                              2008Computed
      tax at federal statutory rate at 34%
                              
                              $
                              (2,595
                              )
                              
                              $
                              (1,370
                              )Alternative
      minimum tax
                              
                              
                              -
                              
                              
                              
                              12Computed
      state tax net of federal benefit of 34%
                              
                              
                              104
                              
                              
                              
                              135Foreign
      taxes
                              
                              
                              (248
                              )
                              
                              
                              253Non-deductible
      meals and entertainment
                              
                              
                              37
                              
                              
                              
                              66Non-deductible
      write-down of goodwill
                              
                              
                              153
                              
                              
                              
                              -Other,
      net
                              
                              
                              (50
                              )
                              
                              
                              32Change
      in valuation allowance
                              
                              
                              1,746
                              
                              
                              
                              1,317Total
                              
                              $
                              (853
                              )
                              
                              $
                              445




F49


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Deferred
tax assets and liabilities consist of the following as of December 31, 2009 and
2008:




Dollars
      in thousands
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Deferred
      tax assetsAllowance
      for doubtful accounts
                                                      
                                                      $
                                                      41
                                                      
                                                      
                                                      $
                                                      210Depreciation
                                                      
                                                      
                                                      211
                                                      
                                                      
                                                      
                                                      -Accrued
      severance
                                                      
                                                      
                                                      961Accrued
      vacation
                                                      
                                                      
                                                      93
                                                      
                                                      
                                                      
                                                      153Accrued
      expenses
                                                      
                                                      
                                                      65
                                                      
                                                      
                                                      
                                                      284Interest
      receivable reserve
                                                      
                                                      
                                                      6
                                                      
                                                      
                                                      
                                                      80Capital
      losses
                                                      
                                                      
                                                      49
                                                      
                                                      
                                                      
                                                      107Accrued
      compensation
                                                      
                                                      
                                                      339
                                                      
                                                      
                                                      
                                                      589Impairment
      loss
                                                      
                                                      
                                                      1,658
                                                      
                                                      
                                                      
                                                      333Inventory
      reserve
                                                      
                                                      
                                                      380
                                                      
                                                      
                                                      
                                                      844Contributions
      carryover
                                                      
                                                      
                                                      12
                                                      
                                                      
                                                      
                                                      10Alternative
      minimum tax deposit
                                                      
                                                      
                                                      62
                                                      
                                                      
                                                      
                                                      62Share-based
      payments
                                                      
                                                      
                                                      888
                                                      
                                                      
                                                      
                                                      472Capital
      organizational costs
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      47Foreign
      tax credit carryforward
                                                      
                                                      
                                                      5
                                                      
                                                      
                                                      
                                                      253Net
      operating loss carryforward
                                                      
                                                      
                                                      6,345
                                                      
                                                      
                                                      
                                                      5,41311,155
                                                      
                                                      
                                                      
                                                      8,857Deferred
      tax liabilitiesIntangible
      assets
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,262
                                                      )Depreciation
      and amortization
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (187
                                                      )-
                                                      
                                                      
                                                      
                                                      (1,449
                                                      )Net
      deferred tax assetbefore
      valuation allowance
                                                      
                                                      
                                                      11,155
                                                      
                                                      
                                                      
                                                      7,408Less
      valuation allowance
                                                      
                                                      
                                                      (11,155
                                                      )
                                                      
                                                      
                                                      (8,163
                                                      )Net
      deferred tax liability
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      (755
                                                      )Federal
      deferred tax liability
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      (662
                                                      )State
      deferred tax liability
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (93
                                                      )Net
      deferred tax liability
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      (755
                                                      )





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.




F50


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company’s tax benefit for the years ended December 31, 2009 and 2008 consists of
alternative minimum tax, state and foreign income taxes. The Company has a
federal tax loss for the years ended December 31, 2009 and 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 $13,000 and state income tax receivable of
$12,000 and $0 are included in other prepaid expenses and current assets, net at
December 31, 2009 and 2008, respectively.  Foreign income tax payable
of $5,000 and $253,000, and state income tax payable of $0 and $73,000 are
included in other current liabilities at December 31, 2009 and 2008,
respectively.





The
Company has provided for a full valuation allowance against its deferred tax
assets at December 31, 2009 and December 31, 2008. Fluctuations in the actual
outcome of these future tax consequences could materially impact our financial
position or our results of operations.





At
December 31, 2009 and 2008 the Company had approximately $18.0 million and $15.5
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 2021 to 2029 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.





Accounting
for Uncertainties in Income Taxes




On
December 31, 2009 and 2008, the Company had $1.4 million of unrecognized tax
benefits. 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
federal and state tax uncertainties identified as of December 31, 2009 and 2008,
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, 2009 and 2008, $183,000 and
$185,000, respectively, if recognized, would impact the Company’s effective
income tax rate. For the year ended December 31, 2009 and 2008, taxes in the
amount of $12,000 and $48,000 for unrecognized tax liabilities, respectively,
were included in the tax provision.




F51


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
                            
                            Year Ended December 312009
                            
                            
                            2008Balance
      at January 1,
                            
                            $
                            1,402
                            
                            
                            $
                            1,398Tax
      positions related to the current period:Gross
      increases
                            
                            
                            12
                            
                            
                            
                            19Gross
      decreases
                            
                            
                            -
                            
                            
                            
                            -Tax
      positions related to prior periods:Gross
      increases
                            
                            
                            -
                            
                            
                            
                            29Gross
      decreases
                            
                            
                            (15
                            )
                            
                            
                            -Settlements
                            
                            
                            -
                            
                            
                            
                            (44
                            )Lapse
      of statute of limitations
                            
                            
                            -
                            
                            
                            
                            -Balance
      at December 31,
                            
                            $
                            1,399
                            
                            
                            $
                            1,402




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, 2009 and 2008, was $4,000 and $9,000, respectively. Accrued
interest of $20,000 and $16,000 related to income tax uncertainties was
recognized as a component of other non-current income tax liabilities at
December 31, 2009 and 2008, respectively.  No penalties have been
recognized as of December 31, 2009 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 2003 remain subject to examination (2004 and 2005 remain 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 20 – 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 buyer failed to pay
the amount due under the note, and as a result, a notice of foreclosure was
recorded against the land on June 2, 2009.


On November 3, 2009, we
entered into a settlement and release agreement in which the new buyer agreed to
purchase the mortgage and related note from the Company.  See Note 5 –
“Notes Receivable”.  A principal payment of $25,000, along with $3,000
in interest, was paid upon execution of the agreementand the Company
recognized $5,000 of the deferred gain.  On the accompanying balance
sheet as of December 31, 2009 and 2008, the deferred gain of $97,000 and
$102,000 is deducted from the related note receivable.  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.




F52


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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.





The
Company did not have any gains or losses on sales of real estate assets during
2009




NOTE 21 – 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 16 – “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 served as additional office space
for the Company.  See Note 16 – “Related Party Transactions” for
additional information.





The
Magnolia Lease ran for an initial term of 18 months, commencing on February 15,
2008 and expiring on August 15, 2009. Rent under the Magnolia Lease was set at
$8,000 per month. In addition to monthly rental payments, the
Company was responsible for utilities and maintenance and was required to
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.





On July
1, 2008, the Company entered into a Commercial Lease Agreement (the “ Sunrise Lease”),
with 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 utilizes the Sunrise Leased Premises as a
retail travel agency.





The
Sunrise Lease, which commenced on July 1, 2008 for initial term of 12 months,
was renewed on July 1, 2009 for an additional 12 month term expiring June 30,
2010. Rent under the Sunrise Lease is $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 entered into a Commercial Lease Agreement (the “ British Columbia Lease”), on February 1, 2008, with Janz & Assoc. Distribution Inc., as
lessor, and the Company, as lessee, covering the premise located at 91 stAvenue,
Surrey, British Columbia, Canada (the “ British Columbia Premises”). YTB Marketing utilized the British Columbia Premises as additional
office space.





The
British Columbia Lease, commencing on February 1, 2008, ran for an initial
term of 12 months, expiring on January 31, 2009.  It included an
option to renew the lease for one year after expiration of the original term,
but the Company did not exercise the renewal option.  The Company
rented the British Columbia Premises on a month-to-month basis from February 1,
2009 through July 31, 2009.  Rent under the British Columbia Lease was
set at $1000 per month and included common areas, utilities and
taxes.  The lease also called for the Company to pay a monthly
cleaning service and Goods and Services Tax.




F53


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Company entered into a Commercial Lease Agreement (the “ Langley Lease”), on
July 8, 2009, with Rycroft Holdings Ltd., as lessor, and the Company, as lessee,
covering the premise located at 20187 56 thAvenue,
Rycroft Centre, Langley, British Columbia/ Canada (the “ Langley Premises”).  The Company utilizes the Langley Premises as additional
office space.





The
Langley Lease, commencing on August 1, 2009, runs for an initial term of 15
months, expiring on October 31, 2010.  The Company has an option to
renew the lease for one to three years after expiration of the original term,
with rent equal to or exceeding rent under the original term.  Rent
under the Langley Lease is $1000 per month.  In addition to monthly
rental payments, the Company is responsible for utilities and Goods and Services
Tax.





The
Company, as lessee, entered into a services agreement (the “ Nova Scotia Agreement”), on July 28, 2008, with 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 rental
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.  The Nova Scotia
Agreement was renewed effective July 8, 2009, with a term of 12 months ending on
July 7, 2010.  There was no change to the monthly rental fee.





The
Company also leases certain office equipment under non-cancellable operating
lease agreements with initial terms in excess of one year and expiring at
various dates through fiscal year 2013.





Rental
expense from continuing operations for all locations for the years ended
December 31, 2009 and 2008 are $308,000 and $368,000, respectively.





Minimum
future rental payments under non-cancelable operating leases as of December 31,
2009 are as follows:


Dollars in thousands


Canadian
                                
                                
                                Office
                                
                                
                                RentalIL Office
                                
                                
                                Locations
                                
                                
                                Equipment
                                
                                
                                Expense2010
                                
                                $
                                84
                                
                                
                                $
                                21
                                
                                
                                $
                                44
                                
                                
                                $
                                1492011
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                12
                                
                                
                                
                                122012
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                7
                                
                                
                                
                                72013
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2
                                
                                
                                
                                22014
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -2015
      and beyond
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Total
                                
                                $
                                84
                                
                                
                                $
                                21
                                
                                
                                $
                                65
                                
                                
                                $
                                170




F54


YTB
INTERNATIONAL, INC.
 Notes to
Consolidated Financial Statements


Purchase Commitments
 
 As of
December 31, 2009, the Company had outstanding purchase commitments for future
goods and services of $1.0 million.  Of these commitments, $821,000 is
unconditional purchase obligations which include $722,000 related to the
Company’s annual convention and $99,000 related to various travel services and
technologies.
 
 Future
payments under these unconditional purchase obligations at December 31, 2009 are
as follows:
 
 Dollars
in thousands
  2010
                        
                        $
                        3032011
                        
                        
                        2682012
                        
                        
                        250Total
                        
                        $
                        821
  Severance and Contract
Termination Cost Commitments
 
 As of
December 31, 2009, the Company had outstanding severance and contract
termination cost commitments of $321,000 and $2.4 million,
respectively.  As discussed in Note 17 – “Discontinued Operations,”
the contract termination costs will be paid in cash and common stock of the
Company.
 
 Future
cash payments under the severance and contract termination cost commitments at
December 31, 2009 are as follows:
 
 Dollars
in thousands
  2010
                        
                        $
                        6122011
                        
                        
                        183Total
                        
                        $
                        795


F55


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Employment agreements




Effective
January 1, 2008, the Company entered into long-term employment agreements with
each of Mr. J. Scott Tomer (Chairman of the Board and Chief Executive Officer of
YTB Marketing), Mr. J. Kim Sorensen (Vice Chairman), and Mr. J. Lloyd Tomer
(Founding Rep of YTB Marketing), Mr. John D. Clagg (Chief Financial Officer and
Treasurer), and Mr. Andrew Cauthen (President, Chief Operating Officer and
Secretary).  See Note 22 – “Subsequent Events”.  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 and J. Kim Sorensen
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, and J. Lloyd Tomer





Under
their employment agreements with the Company, each of Messrs. J. Scott Tomer, J.
Kim Sorensen, and J. Lloyd Tomer 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, and J. Lloyd Tomer 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 $1.5
million; (ii) 2.25%, if net pre-tax income is at least $1.5 million but
less than $3.0 million; and (iii) 2.5%, if net pre-tax income is at least
$3.0 million.





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




In
addition to earning the override commission bonuses, as sales directors for the
Company, Messrs. J. Lloyd Tomer, J. Scott Tomer, and J. Kim Sorensen also earn
sales director bonuses and Messrs. J. Lloyd Tomer earns a sales and retention
bonus.  The table below summarizes the compensation earned under these
sales director programs for the years ended December 31, 2009 and 2008:
  Name
                      
                      2009
                      
                      
                      2008J.
      Lloyd Tomer
                      
                      $
                      184,000
                      
                      
                      $
                      2,666,000J.
      Scott Tomer
                      
                      
                      169,000
                      
                      
                      
                      718,000J.
      Kim Sorensen
                      
                      
                      169,000
                      
                      
                      
                      718,000
  Amounts
due under the sales director programs to Messrs. J. Lloyd Tomer, J. Scott Tomer,
and J. Kim Sorensen as of December 31, 2009 and 2008 are $124,000 and $240,000,
respectively, included in accounts payable and $510,000 and $843,000,
respectively, included in accrued expenses.
 
 Effective
January 1, 2009, the Company’s Board of Directors eliminated the sales and
retention bonus program with Messr. J. Lloyd Tomer.


Each of
Messrs. J. Scott Tomer, J. Kim Sorensen, and J. Lloyd Tomer 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, and J. Lloyd Tomer 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, and J. Lloyd Tomer
receive term life insurance coverage payable to beneficiaries designated by
each.




F56


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





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.





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.





See Note
22 – “Subsequent Events.”





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 and January 1, 2009, have been deferred
until further notice.





Employment
Agreement with Robert M. Van Patten





Effective
October 6, 2009, the Company entered into an employment agreement with Robert M.
Van Patten (Chief Executive Officer and President) for a term of twelve months
expiring October 4, 2010.  Under the employment agreement, Messr. Van
Patten will receive an annual base salary of $300,000 and will be eligible for
an annual performance bonus equal to a percentage of the Company’s net pre-tax
income which surpasses certain thresholds, in the following percentages:
(i) 2.0%, if net pre-tax income is at least $500,000, but less than $1.5
million; (ii) 2.25%, if net pre-tax income is at least $1.5 million but
less than $3.0 million; and (iii) 2.5%, if net pre-tax income is at least
$3.0 million.  The Company has also agreed to provide Mr. Van Patten
with a monthly car allowance of $1,000, and he will be eligible to receive
management-level employee benefits.  Either party can terminate the
agreement at any time without recourse.





Termination
of Employment Agreements





Employment
Agreements with Michael Y. Brent and Derek J. Brent





Effective
June 30, 2009, the Company entered into an Employment Severance Agreement by and
between REZconnect, formerly a wholly-owned subsidiary of the Company, and the
Brents.  In connection with their separation from the Company, the
Brents’ employment agreements were terminated.  Under the original
terms of their employment agreements, Michael Brent’s agreement was to terminate
on December 31, 2012, and Derek Brent’s agreement was to terminate on December
31, 2009, with an automatic 5-year extension to December 31, 2014 if Derek Brent
failed to give notice of non-renewal within 90 days of its original termination
date.  The Company has determined the liability associated with the
termination of these contracts to be $2.6 million and has recorded the cost in
the second quarter of 2009 as a component of the loss on disposal of its former
REZconnect subsidiary.  See Note 17 – “Discontinued Operations”.




F57


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





Per the
Employment Severance Agreement, the Brents are subject to confidentiality and
two-year non-solicitation obligations.  Any dispute arising under the
Employment Severance Agreement is subject to binding arbitration.





In
addition, the Employment Severance Agreement provides for the
following:  (i) termination of the Brents’ prior non-compete
obligations; (ii) payments to Michael Brent of $60,000 annually until July 14,
2011; (iii) issuance of the Company’s common stock to Michael Brent, the number
of shares to be determined based on the difference between what Michael Brent
would have received under his former employment agreement and cash received
pursuant to the Employment Severance Agreement from the period beginning July 1,
2009 and ending December 31, 2012; (iv) continuance of Michael Brent’s ownership
rights and participation in the Company’s commission and bonus structure as an
independent sales representative; (v) payments to Derek Brent of $254,400
annually, payments to be made in cash until June 30, 2011 and thereafter in the
Company’s common stock until December 31, 2014; (vi) a lift on the contractual
restrictions on the number of shares of the Company’s common stock that may be
sold by the Brents; and (vii) indemnification of the Brents by the Company of
any claims, losses and liabilities arising out of or in any way relating to the
operations and business of the Company. Amounts
due Michael Brent under his ownership rights and participation in the Company’s
commission and bonus structure as an independent sales representative as of
December 31, 2009 and 2008 are $10,000 and $18,000, respectively, and are
included in accrued expenses on the consolidated balance sheet.




Pursuant
to Michael Brent’s former employment agreement, he served as Chief Executive
Officer of REZconnect for a base salary of $325,000, which increased by $25,000
annually after December 31, 2008.  Michael Brent was also entitled to
an annual cash bonus equal to a percentage of the Company’s net pre-tax income
equal to (i) 2% if the net pre-tax income was at least $500,000 but less than
$1,500,000; (ii) 2.25% if the net pre-tax income was at least $1,500,000 but
less than $3,000,000; and (iii) 2.5% if the net pre-tax income was at least
$3,000,000.  If Michael Brent was terminated without cause, he was
entitled to severance payments equal to his then-current base salary through the
term of the employment agreement.  In addition to base salary and
bonus, Michael Brent was eligible for the Company’s insurance, health and
medical benefits and participation in the Company’s profit-sharing, incentive
bonus and pension plans.  Michael Brent was subject to
confidentiality, non-competition and non-solicitation obligations.





Pursuant
to Derek Brent’s employment agreement, he served as President of REZconnect for
a base salary of $180,000, which increased by $30,000 annually in each of 2007
and 2008, and increased by 6% of the 2008 base salary in 2009.  Derek
Brent was also entitled to an annual cash bonus on the same terms as Michael
Brent, as described above, and was eligible for the Company’s insurance, health
and medical benefits as well as participation in the Company’s profit-sharing,
incentive bonus and pension plans.  Derek Brent was subject to
confidentiality, non-competition and non-solicitation obligations.





Legal Proceedings





On August
4, 2008, a civil action was filed against three subsidiaries of theCompany and
certain of itsexecutive officers in the Superior Court of California, County of Los
Angeles, by the California Attorney General. The complaint alleged that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws.  The California Attorney General sought 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.





On May
14, 2009, YTB International, Inc., YourTravelBiz.com, Inc., YTB Travel Network,
Inc., and YTB Travel Network of Illinois, Inc. (collectively, the “ YTB Parties”) and J.
Lloyd Tomer, J. Scott Tomer, J. Kim Sorensen and Andrew Cauthen (collectively, “
Certain Executive
Officers”) stipulated  to a  Proposed Final Judgment
and Permanent Injunction (“ Stipulated Judgment”) with the California Attorney General related to the civil action filed
against the YTB Parties and Certain Executive Officers in August
2008.  In addition, on May 14, 2009, the Los Angeles Superior Court
entered the Stipulated Judgment that reflected the agreement the YTB Parties and
Certain Executive Officers reached with the California Attorney
General.  The Stipulated Judgment is not evidence of any wrongdoing or
an admission on the part of the YTB Parties or the Certain Executive Officers
and does not represent any findings by the court as to any matter of law or
fact.  By entering into the Stipulated Judgment, each defendant waived
the right to appeal, challenge or vacate the Stipulated Judgment.




F58


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





The
Stipulated Judgment applies to all defendants, subsidiaries, affiliates,
employees, agents and others who act in concert with the Company in connection
with the operation of the YTB Parties in California only.





The
Stipulated Judgment defines Website Owners as those who own a website from the
YTB Parties through which they sell travel or other goods.  Website
Owners include those persons who are or become a franchise under the YTB
Parties’ proposed franchise business model.  Website Sellers are those
who sell the Website Owner opportunity or recruit others to sell the Website
Owner opportunity and will include those who are or become franchise brokers
under the YTB Parties’ proposed franchise business model.





The
Stipulated Judgment provides, in part, for the following:





·
            The
      YTB Parties must provide consumers with certain information in a
      clear and conspicuous manner about the number and compensation of Website
      Owners and Website Sellers, including the typical income earned by Website
      Owners and Website Sellers, the typical cost of operations, the
      number of Website Owners who are deactivated, and the number of Website
      Owners and Website Sellers who have not earned
      compensation.  The YTB Parties must clearly explain their
      compensation calculations and any requirements a consumer must meet before
      he or she can participate in the YTB Parties.  It also requires
      the YTB Parties to establish a free demonstration website that must be
      used when recruiting others.


·
            The YTB
      Parties are prohibited from issuing travel credentials in California and
      advertising or representing that travel discounts, other perks or tax
      write-offs are available by purchasing a website.


·
            The
      YTB Parties must modify the practices and separate the functions of
      Website Owner and Website Seller, including the training, marketing and
      promotional information pertaining to each of them.  The YTB
      Parties must also revise its Website Owner and Website Seller compensation
      programs and may not compensate them unless certain conditions have been
      met.  The YTB Parties are prohibited from offering incentives to
      Website Owners to become Website Sellers, and vice versa.


·
            The
      YTB Parties have agreed to periodically provide the California Attorney
      General's Office status reports and certain information regarding the YTB
      Parties’ Website Owners and Website Sellers and give access to all YTB
      Parties marketing materials, events, meetings, gatherings and
      presentations to ensure the YTB Parties are complying with the Stipulated
      Judgment and California law.   In addition, the YTB Parties
      have agreed to seek the approval of the California Department of
      Corporations and make their best efforts to obtain approval from the
      California Department of Corporations to sell franchises on or before June
      15, 2009.  The registration application documents were timely
      submitted to the California Department of Corporations.  As of
      the date of this report, the application submitted by the Company has not
      been rejected or accepted.





Finally,
the YTB Parties agreed to pay a fine in the amount of $400,000, attorneys’ fees
and costs in the amount of $475,000 to the California Attorney General and
restitution to California residents in an amount not to exceed $125,000. In
accordance with the terms of the settlement, the Company made payments
totalling $1.0 million as of December 31, 2009.




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.




F59


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





On June
5, 2009, the Court granted the Company’s motions and dismissed the class action
complaint, but granted the plaintiffs leave to file an amended complaint that
conformed with the Court’s ruling.  On July 15, 2009, the plaintiffs
filed an amended complaint that purported to conform to the Court’s
ruling.  The amended complaint asserts claims similar to those
contained in the dismissed complaint.  On July 20, 2009, the Court, acting
on its own motion, struck the plaintiffs’ amended complaint in its entirety
based on the Court’s belief that the amended complaint does not pass muster
under the applicable federal pleading standards. As of July 27, 2009, the
plaintiffs filed motions for leave with the Court to amend their
complaints.  The Court granted their motions and a second amended
complaint was filed on December 24, 2009.  On February 12, 2010, the
Company filed motions to dismiss the amended consolidated
complaint.  To date, the Court has not ruled on these
motions.  Management believes the Company has meritorious defenses and
intends to vigorously defend these cases.





On May 14, 2009, a civil
action was filed against the Company, three of its subsidiaries and certain
executive officers of the Company in the Superior Court of Illinois,
Champaign County, by the Illinois Attorney General.  The
complaint alleges that the defendants violated Illinois’ unfair competition and
advertising laws.  The Company believes it has meritorious defenses to
the claims and intends to vigorously defend the case. The
Company is in the process of exchanging information with the Office of the
Illinois Attorney General and exploring possible resolution alternatives.





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.




F60


YTB
INTERNATIONAL, INC.


Notes to
Consolidated Financial Statements





NOTE 22 - SUBSEQUENT EVENTS




On
January 15, 2010, the Company renamed its YTB Marketing subsidiary to ZamZuu,
Inc. and simultaneously launched ZamZuu, an e-commerce business solution
opportunity.  ZamZuu is strategically positioned in the world of
e-commerce to not only continue to capture online travel sales but to also take
advantage of the growing trend of online retail sales.  ZamZuu is
specifically designed for the individual who is interested in all facets of
online retail. In
conjunction with the launch of ZamZuu, the Company no longer operates under the
trade name “YourTravelBizTM” or the website “YourTravelBiz.com ®.”





On
January 19, 2010, the Company’s Board of Directors approved the issuance of
restricted stock awards to certain Sales Directors in replacement of previously
issued restricted stock and option awards (the “ 2010 Replacement Awards”).  The 2010 Replacement Awards consisted of 825,173 shares of
the Company’s Class A Common Stock and 1,320,972 of the Company’s Class B Common
Stock.





On
January 20, 2010 the Company executed a commercial promissory note (the “ Note”) with Normandy Corporation (“
Normandy”) in the amount of
$650,000 with a maturity date of September 15, 2010.  In connection
with the execution of the Note, the Company granted a security interest to
Normandy in the promissory note made by Prestige Management Services, LLC (“
Prestige”) dated December 16,
2008, and payable to the Company in the amount of $1.2 million (the “ Prestige Note”).  As
additional security for the Note, the Company assigned to Normandy the real
estate mortgage dated December 16, 2008 made by Prestige to secure repayment of
the Prestige Note to the Company.





Effective
February 2, 2010, John D. Clagg resigned as the Chief Financial Officer of the
Company.  Robert M. Van Patten, the Chief Executive Officer, was
appointed by the Board of Directors of the Company to serve as interim Chief
Financial Officer.





Effective
February 23, 2010, Andrew F. Cauthen resigned from the positions of Corporate
Secretary of the Company and President and Chief Operating Officer of one of its
subsidiaries, ZamZuu, Inc. (formerly YTB Marketing, Inc.).





Effective
March 2, 2010, the Board of Directors of the Company appointed Burt L. Saunders,
Esq. to the Board pursuant to the Board’s authority set forth in the
Company’s Amended and Restated By-Laws. In addition, Mr. Saunders was named
to the Investment Committee of the Board.  Mr. Saunders will receive a
one-time restricted stock award in connection with his appointment to the Board
to consist of 24,391 shares of the Company’s Class A Common Stock (“ at-election award”),
subject to ratification by the full Board.





On March
2, 2010, the Board approved the payment of additional monthly compensation of
$12,000 to Mr. Robert M. Van Patten for his duties as interim Chief
Financial Officer.


On April
6, 2010, the Board of Directors of the Company adopted a resolution to (i)
terminate the existing employment agreement effective January 1, 2008 between
the Company and J. Lloyd Tomer, former Chairman of the Board of the Company and
(ii) enter into a compensation plan (the “ Plan”) between the
Company and J. Lloyd Tomer.  Under the Plan, Mr. J. L. Tomer will earn
commissions and overrides generated by the Director 5 position occupied by a
former sales director in lieu of his current salary subject to certain salary
reduction limitations.  In addition, Mr. J. L. Tomer will receive a
monthly marketing stipend as well as reimbursement for business related expenses
as defined in the Plan.
 
 Also on
April 6, 2010, the Board of Directors adopted a resolution to modify paragraph
3.3 of the existing employment agreement effective January 1, 2008 between the
Company and J. Scott Tomer, Chairman of the Board (the “ Modification”).  Under the Modification, J. Scott Tomer will earn
commissions and overrides generated by the Director 4 position occupied by a
former sales director in lieu of earning commissions and overrides generated by
Representative position #2.  All other terms and conditions of his
existing employment agreement remain unchanged.




F61