UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x    QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
quarterly period ended:  September 30, 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





YTB
International, 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, IL  62095


(Address
of principal executive offices)       (Zip
Code)


(618)
655-9477


(Registrant's
telephone number, including area code)





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.


Yesx                                                 No ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes ̈                                                 No ̈





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.  (Check one):


Large
      accelerated filer   ̈
              Accelerated
      filer  x
              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 ̈                                                 Nox





As of
November 2, 2009, there were 75,386,059 shares of the registrant’s Class A
Common Stock, $0.001 par value, outstanding and 33,759,796 shares of the
registrant’s Class B Common Stock, $0.001 par value, outstanding. *





*
Excludes 2,895,970 restricted shares of Class A Common Stock and 5,791,940
restricted shares of Class B Common Stock that have been granted but are being
held in escrow, as they have not yet vested and are therefore not treated as
outstanding.





YTB
INTERNATIONAL, INC.


Index
to Quarterly Report on Form 10-Q


Three
and nine months ended September 30, 2009





PART
      I
                                    FINANCIAL
      INFORMATIONItem
      1.
                                    Financial
      Statements.Condensed
      Consolidated Balance Sheets, September 30, 2009 (Unaudited) and December
      31, 2008
                                    
                                    3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended September 30, 2009 and 2008
                                    
                                    4Condensed
      Consolidated Statements of Operations (Unaudited)Nine
      months ended September 30, 2009 and 2008
                                    
                                    5Condensed
      Consolidated Statement of Change in Stockholders’ Equity
      (Unaudited)Nine
      months ended September 30, 2009
                                    
                                    6Condensed
      Consolidated Statements of Cash Flows (Unaudited)Nine
      months ended September 30, 2009 and 2008
                                    
                                    7Notes
      To Condensed Consolidated Financial Statements (Unaudited)
                                    
                                    9Item
      2.
                                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                    
                                    38Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk.
                                    
                                    63Item
      4.
                                    Controls
      and Procedures.
                                    
                                    63PART
      II
                                    OTHER
      INFORMATIONItem
      1.
                                    Legal
      Proceedings.
                                    
                                    64Item
      1A.
                                    Risk
      Factors.
                                    
                                    65Item
      2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                    
                                    65Item
      3.
                                    Defaults
      Upon Senior Securities.
                                    
                                    65Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders.
                                    
                                    65Item
      5.
                                    Other
      Information.
                                    
                                    65Item
      6.
                                    Exhibits.
                                    
                                    66Signatures


2


PART I – FINANCIAL
INFORMATION


Item 1.  Financial Statements.


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Balance Sheets


Dollars
      in thousands, except share and per share data
                        
                        (Unaudited)
                          September30,
                          2009
                        
                        
                        December31,
                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        800
                        
                        
                        $
                        1,203Restricted
      cash
                        
                        
                        2,898
                        
                        
                        
                        1,667Short-term
      investments
                        
                        
                        28
                        
                        
                        
                        251Accounts
      receivable (less allowance for doubtful accounts of $0 in 2009 and $7 in
      2008)
                        
                        
                        1,015
                        
                        
                        
                        2,680Notes
      receivable (less allowance for uncollectible notes of $436 in 2009 and
      $562 in 2008)
                        
                        
                        1,601
                        
                        
                        
                        458Inventory,
      net
                        
                        
                        392
                        
                        
                        
                        1,335Prepaid
      marketing commissions and advances (less allowance for uncollectible
      advances of $238 in 2009 and $162 in 2008)
                        
                        
                        2,078
                        
                        
                        
                        8,991Assets
      held for sale
                        
                        
                        -
                        
                        
                        
                        844Other
      prepaid expenses and current assets, net
                        
                        
                        387
                        
                        
                        
                        350Total
      current assets
                        
                        
                        9,199
                        
                        
                        
                        17,779Property
      and equipment, net
                        
                        
                        16,835
                        
                        
                        
                        18,728Intangible
      assets, net
                        
                        
                        2,267
                        
                        
                        
                        2,322Goodwill
                        
                        
                        2,979
                        
                        
                        
                        2,979Other
      assets
                        
                        
                        49
                        
                        
                        
                        1,278TOTAL
      ASSETS
                        
                        $
                        31,329
                        
                        
                        $
                        43,086LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,278
                        
                        
                        $
                        2,446Accrued
      marketing commissions
                        
                        
                        1,826
                        
                        
                        
                        2,797Accrued
      travel commissions
                        
                        
                        920
                        
                        
                        
                        1,810Other
      accrued expenses
                        
                        
                        3,275
                        
                        
                        
                        3,108Deferred
      revenue
                        
                        
                        4,523
                        
                        
                        
                        13,505Short-term
      debt
                        
                        
                        1,613
                        
                        
                        
                        1,973Other
      current liabilities
                        
                        
                        1,263
                        
                        
                        
                        1,303Total
      current liabilities
                        
                        
                        14,698
                        
                        
                        
                        26,942Other
      long-term liabilities:Deferred
      tax liability
                        
                        
                        755
                        
                        
                        
                        755Other
      income tax liabilities
                        
                        
                        179
                        
                        
                        
                        185Other
      liabilities
                        
                        
                        1,885
                        
                        
                        
                        11Total
      other long-term liabilities
                        
                        
                        2,819
                        
                        
                        
                        951TOTAL
      LIABILITIES
                        
                        
                        17,517
                        
                        
                        
                        27,893Commitments
      and Contingencies (Notes 2 and 16)STOCKHOLDERS' EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued and outstanding
      at September 30, 2009 and December 31, 2008
                        
                        
                        -
                        
                        
                        
                        -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized; 74,987,867
      and 69,379,259 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
                        
                        
                        75
                        
                        
                        
                        69Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 33,854,315
      and 34,413,682 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively; convertible into Class A shares on a
      one-for-one basis
                        
                        
                        34
                        
                        
                        
                        34Additional
      paid-in capital
                        
                        
                        40,552
                        
                        
                        
                        38,843Accumulated
      other comprehensive loss
                        
                        
                        (4
                        )
                        
                        
                        (70
                        )Retained
      earnings (deficit)
                        
                        
                        (26,823
                        )
                        
                        
                        (23,683
                        )Treasury
      stock, at cost, 25,404 shares at September 30, 2009
                        
                        
                        (22
                        )
                        
                        
                        -TOTAL
      STOCKHOLDERS' EQUITY
                        
                        
                        13,812
                        
                        
                        
                        15,193TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        31,329
                        
                        
                        $
                        43,086





See
accompanying notes to unaudited condensed consolidated financial
statements.


3


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Operations


(Unaudited)





Three months endedDollars
      in thousands, except share and per share data
                            
                            September30,
                              2009
                            
                            
                            September30,
                              2008NET
      REVENUESInternet
      business center sales and monthly fees
                            
                            $
                            10,740
                            
                            
                            $
                            30,474Travel
      commissions and services
                            
                            
                            3,642
                            
                            
                            
                            7,360Training
      programs and marketing materials
                            
                            
                            822
                            
                            
                            
                            2,677Other
                            
                            
                            707
                            
                            
                            
                            1,642Total
      net revenues
                            
                            
                            15,911
                            
                            
                            
                            42,153OPERATING
      EXPENSESMarketing
      commissions
                            
                            
                            5,144
                            
                            
                            
                            16,765Travel
      commissions
                            
                            
                            2,069
                            
                            
                            
                            4,587Depreciation
      and amortization
                            
                            
                            684
                            
                            
                            
                            678Training
      programs and marketing materials
                            
                            
                            592
                            
                            
                            
                            2,945General
      and administrative
                            
                            
                            7,071
                            
                            
                            
                            16,538Total
      operating expenses
                            
                            
                            15,560
                            
                            
                            
                            41,513OPERATING
      INCOME
                            
                            
                            351
                            
                            
                            
                            640OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                            
                            
                            55
                            
                            
                            
                            30Interest
      expense
                            
                            
                            (30
                            )
                            
                            
                            (10
                            )Foreign
      currency translation loss
                            
                            
                            (14
                            )
                            
                            
                            (101
                            )Total
      other income (expense)
                            
                            
                            11
                            
                            
                            
                            (81
                            )INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT
                            
                            
                            362
                            
                            
                            
                            559INCOME
      TAX BENEFIT
                            
                            
                            (14
                            )
                            
                            
                            (36
                            )INCOME
      FROM CONTINUING OPERATIONS
                            
                            
                            376
                            
                            
                            
                            595LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                            
                            
                            (14
                            )
                            
                            
                            (307
                            )NET
      INCOME
                            
                            $
                            362
                            
                            
                            $
                            288NET
      INCOME PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                            
                            
                            108,409,604
                            
                            
                            
                            103,438,235Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                            
                            
                            108,409,604
                            
                            
                            
                            110,080,692Income
      per share from continuing operations - basic*
                            
                            $
                            0.00
                            
                            
                            $
                            0.01Loss
      per share from discontinued operations - basic*
                            
                            $
                            (0.00
                            )
                            
                            $
                            (0.00
                            )Net
      income per share - basic*
                            
                            $
                            0.00
                            
                            
                            $
                            0.00Income
      per share from continuing operations - diluted*
                            
                            $
                            0.00
                            
                            
                            $
                            0.01Loss
      per share from discontinued operations - diluted*
                            
                            $
                            (0.00
                            )
                            
                            $
                            (0.00
                            )Net
      income per share - diluted*
                            
                            $
                            0.00
                            
                            
                            $
                            0.00





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





See
accompanying notes to unaudited condensed consolidated financial
statements.


4


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Operations


(Unaudited)





Nine months endedDollars in thousands, except share and per share data
                        
                        September30,
                          2009
                        
                        
                        September30,
                          2008NET
      REVENUESInternet
      business center sales and monthly fees
                        
                        $
                        43,147
                        
                        
                        $
                        97,737Travel
      commissions and services
                        
                        
                        9,611
                        
                        
                        
                        19,861Training
      programs and marketing materials
                        
                        
                        1,591
                        
                        
                        
                        8,004Other
                        
                        
                        982
                        
                        
                        
                        2,206Total
      net revenues
                        
                        
                        55,331
                        
                        
                        
                        127,808OPERATING
      EXPENSESMarketing
      commissions
                        
                        
                        21,157
                        
                        
                        
                        66,310Travel
      commissions
                        
                        
                        5,694
                        
                        
                        
                        14,349Depreciation
      and amortization
                        
                        
                        2,020
                        
                        
                        
                        1,890Training
      programs and marketing materials
                        
                        
                        1,564
                        
                        
                        
                        8,012General
      and administrative
                        
                        
                        25,103
                        
                        
                        
                        40,102Total
      operating expenses
                        
                        
                        55,538
                        
                        
                        
                        130,663OPERATING
      LOSS
                        
                        
                        (207
                        )
                        
                        
                        (2,855
                        )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                        
                        
                        126
                        
                        
                        
                        161Interest
      expense
                        
                        
                        (78
                        )
                        
                        
                        (61
                        )Foreign
      currency translation gain (loss)
                        
                        
                        1
                        
                        
                        
                        (119
                        )Total
      other income (expense)
                        
                        
                        49
                        
                        
                        
                        (19
                        )LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX (BENEFIT)
      PROVISION
                        
                        
                        (158
                        )
                        
                        
                        (2,874
                        )INCOME
      TAX (BENEFIT) PROVISION
                        
                        
                        (96
                        )
                        
                        
                        83LOSS
      FROM CONTINUING OPERATIONS
                        
                        
                        (62
                        )
                        
                        
                        (2,957
                        )LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                        
                        
                        (3,078
                        )
                        
                        
                        (472
                        )NET
      LOSS
                        
                        $
                        (3,140
                        )
                        
                        $
                        (3,429
                        )NET
      LOSS PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                        
                        
                        105,960,112
                        
                        
                        
                        103,283,879Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                        
                        
                        105,960,112
                        
                        
                        
                        103,283,879Loss
      per share from continuing operations - basic*
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.03
                        )Loss
      per share from discontinued operations - basic*
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.00
                        )Net
      loss per share - basic*
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.03
                        )Loss
      per share from continuing operations - diluted*
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.03
                        )Loss
      per share from discontued operations - diluted*
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.00
                        )Net
      loss per share - diluted*
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.03
                        )





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





See
accompanying notes to unaudited condensed consolidated financial
statements.


5


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statement of Changes in Stockholders’ Equity


(Unaudited)





Dollars in thousands,
                  
                  Preferred
                  
                  
                  Common Stock
                  
                  
                  
                  
                  
                  Accumulated
                  
                  
                  
                  
                  
                  Treasury
                  
                  
                  Totalexcept share data
                  
                  Stock
                  
                  
                  Class A
                  
                  
                  Class B
                  
                  
                  Additional
                  
                  
                  Other
                  
                  
                  Retained
                  
                  
                  Stock
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Paid-in
                    Capital
                  
                  
                  Comprehensive
                    Income (Loss)
                  
                  
                  Earnings
                    (Deficit)
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Equity
                    (Deficit)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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,074,197
                  
                  
                  
                  2
                  
                  
                  
                  (2,074,197
                  )
                  
                  
                  (2
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Common
      shares issued for restricted stock grant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,514,177
                  
                  
                  
                  3
                  
                  
                  
                  1,024,600
                  
                  
                  
                  1
                  
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Common
      shares issued under employment severance agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  530,004
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  49Amortization
      of restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,245
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,245Shares
      sold under TSO Stock Purchase Plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  490,230
                  
                  
                  
                  -
                  
                  
                  
                  490,230
                  
                  
                  
                  -
                  
                  
                  
                  141
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  141Shares
      surrendered to treasury in payment of oustanding note
      receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (25,404
                  )
                  
                  
                  (22
                  )
                  
                  
                  (22
                  )Stock
      option compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  280
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  280Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,140
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,140
                  )Foreign
      currency translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  66
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  66Total
      comprehensive loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,074
                  )Rounding
      difference
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      at September 30, 2009
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  74,987,867
                  
                  
                  $
                  75
                  
                  
                  
                  33,854,315
                  
                  
                  $
                  34
                  
                  
                  $
                  40,552
                  
                  
                  $
                  (4
                  )
                  
                  $
                  (26,823
                  )
                  
                  
                  (25,404
                  )
                  
                  $
                  (22
                  )
                  
                  $
                  13,812





See
accompanying notes to unaudited condensed consolidated financial
statements.


6


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


Dollars in thousands
                
                Nine months endedSeptember 30,
                  2009
                
                
                September 30,
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (3,140
                )
                
                $
                (3,429
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                2,020
                
                
                
                1,890Provision
      for uncollectible notes and advances
                
                
                19
                
                
                
                472Loss
      on disposal of property and equipment
                
                
                40
                
                
                
                12Impairment
      loss on property and equipment
                
                
                -
                
                
                
                310Loss
      on disposal of discontinued operations, net of tax
                
                
                2,614
                
                
                
                -Reserve
      against inventory
                
                
                359
                
                
                
                1,392Reserve
      against earnest money deposit
                
                
                10
                
                
                
                -Write-off
      of deposit on acquisition of business
                
                
                -
                
                
                
                311Interest
      income on notes receivable
                
                
                (46
                )
                
                
                (100
                )Provision
      for uncollectible interest on notes receivable
                
                
                46
                
                
                
                77Shares
      issued for services
                
                
                -
                
                
                
                510Amortization
      of restricted stock
                
                
                1,245
                
                
                
                400Stock
      option expense
                
                
                212
                
                
                
                165Compensation
      expense (credit)
                
                
                (271
                )
                
                
                422Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card
processing
                
                
                (1,289
                )
                
                
                (114
                )Restricted
      cash-Canadian operations
                
                
                109
                
                
                
                (24
                )Accounts
      receivable, net
                
                
                1,599
                
                
                
                357Notes
      receivable
                
                
                92
                
                
                
                1,072Inventory
                
                
                599
                
                
                
                122Prepaid
      marketing commissions and advances
                
                
                6,673
                
                
                
                10,000Other
      prepaid expenses and current assets
                
                
                (62
                )
                
                
                967Other
      assets
                
                
                26
                
                
                
                (73
                )Accounts
      payable
                
                
                (1,168
                )
                
                
                2,836Accrued
      marketing commissions
                
                
                (637
                )
                
                
                (506
                )Accrued
      travel commissions
                
                
                (859
                )
                
                
                141Other
      accrued expenses
                
                
                (483
                )
                
                
                (1,174
                )Other
      current liabilities
                
                
                (60
                )
                
                
                620Deferred
      revenue
                
                
                (8,766
                )
                
                
                (10,494
                )Other
      income tax liabilities
                
                
                9
                
                
                
                (19
                )Other
      liabilities
                
                
                (2
                )
                
                
                -NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                
                
                (1,111
                )
                
                
                6,143CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (85
                )
                
                
                (7,843
                )Proceeds
      from sale of property and equipment
                
                
                14
                
                
                
                10Proceeds
      from asset held for sale
                
                
                872
                
                
                
                -Cash
      paid to prepare asset for sale
                
                
                (28
                )
                
                
                -Acquisition
      of business
                
                
                -
                
                
                
                (149
                )Proceeds
      from redemption of short-term investments
                
                
                329
                
                
                
                -Purchases
      of short-term investments
                
                
                (106
                )
                
                
                27Cash
      relinquished in disposal of discontinued operations
                
                
                (129
                )
                
                
                -NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
                
                
                867
                
                
                
                (7,955
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
                
                
                -
                
                
                
                434Principal
      repayments of debt
                
                
                -
                
                
                
                (16
                )Repayment
      of short-term debt
                
                
                (360
                )
                
                
                (504
                )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
      from exercise of common stock options
                
                
                -
                
                
                
                2Proceeds
      received under TSO stock purchase plan
                
                
                144
                
                
                
                -Proceeds
      from exercise of common stock warrants
                
                
                -
                
                
                
                254NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
                
                
                (216
                )
                
                
                670EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                
                
                57
                
                
                
                -NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (403
                )
                
                
                (1,142
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,203
                
                
                
                1,731CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                800
                
                
                $
                589




7


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows (continued)


(Unaudited)





Nine months endedSeptember
                  30, 2009
                
                
                September
                  30, 2008SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid (net of capitalized interest)
                
                $
                89
                
                
                $
                61Income
      taxes paid
                
                
                206
                
                
                
                233SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Property
      and equipment included in accounts payable and accrued
      expenses
                
                $
                -
                
                
                $
                1,203Reclass
      of notes receivable from other assets to notes receivable
                
                
                1,200
                
                
                
                -Reclass
      of long-term investments to available-for-sale securities
                
                
                -
                
                
                
                1,000Reclass
      of property and equipment to assets held for sale
                
                
                -
                
                
                
                900Shares
      issued for severance liability
                
                
                49
                
                
                
                -Shares
      surrendered in repayment of note receivable
                
                
                22
                
                
                
                -Stock
      option compensation
                
                
                68
                
                
                
                425Shares
      issued for restricted stock grant
                
                
                4
                
                
                
                5Transfer
      of Class B common stock shares to Class A common stock
    shares
                
                
                2
                
                
                
                15Reclass
      of notes receivable to other current assets / other assets
                
                
                -
                
                
                
                65Notes
      receivable issued for sale of property and equipment
                
                
                -
                
                
                
                60Reclass
      of notes receivable reserve to acquisition of business
    reserve
                
                
                -
                
                
                
                45Reclass
      of commission advances to notes receivable
                
                
                -
                
                
                
                21





See
accompanying notes to unaudited condensed consolidated financial
statements.


8


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed 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 13 – “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 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 business models and 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 is offered through interactive, real-time booking engines and 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.  The condensed
consolidated balance sheet as of September 30, 2009 reflects the cash and
stockholder position of this entity.  All intercompany transactions
have been eliminated in consolidation.





The
Company operates under various trade names, including “YourTravelBiz.comTM,”
“YourTravelBizTM,” “YTB Travel and CruisesTM,” “YTBnet.comTM,” “Travel NetworkTM,”
“YTB Travel NetworkTM,” “Sunrise Travel ServiceTM,” and “YTB.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., the Bahamas, Bermuda and Canada.


9


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 2 – BASIS OF
PRESENTATION





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
Quarterly Report on Form 10-Q to reflect the guidance in the
Codification.





The
accompanying condensed consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the
SEC.  Certain information and disclosures included in the financial
statements prepared in accordance with US GAAP have been condensed or omitted
pursuant to such rules and regulations.





The
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring accruals), which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented.  The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008.





The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.  The condensed
consolidated balance sheet as of December 31, 2008 was derived from the audited
financial statements for the year then ended included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008.  The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.





In
connection with the preparation of the condensed consolidated financial
statements, the Company evaluated subsequent events after the balance sheet date
of September 30, 2009 through November 6, 2009, the date of issuance of the
Company’s condensed consolidated financial statements. See Note 17 - “Subsequent
Events.”





Certain
reclassifications have been made to the 2008 financial statements to conform to
the current year presentation as of and for the periods ended September 30,
2009.  In the second quarter of 2009, our Board of Directors approved
the sale of REZconnect.  As such, REZconnect operations have been
presented as discontinued operations for all periods presented. Refer to Note 13
– “Discontinued Operations” for additional information.


10


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





As shown
in the accompanying financial statements, the Company has incurred operating
losses for the first nine months of 2009 and 2008 of $207,000 and $2.9 million,
respectively.  In addition, negative current economic conditions and
other factors have led to a falloff in the number of active Site Owners’ IBCs in
the Company.  The number of active Site Owner IBC sites has declined
during the nine months ended September 30, 2009 by a net of 41,962 to 50,421
active Site Owners’ IBCs from the 92,383 reported as of December 31, 2008. 
In addition, from August 2008 through May 14, 2009, the Company was defending
against a case brought by the California Attorney General challenging the
legality of its network marketing program.  The Company settled
this case on May 14, 2009.  Also in May 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.  The Company believes that it
has meritorious defenses against this action as well as the legal proceedings
discussed in Note 16 – “Commitments and Contingencies,” and intends to
vigorously defend the cases.  Litigation claims can be expensive and
time consuming to bring and defend against and could result in settlements or
damages that could significantly affect financial results.  The
Company’s year-to-date losses from continuing operations, working capital
deficiency and uncertainties surrounding the Company’s pending litigation may
raise substantial doubt about the Company’s ability to continue as a going
concern.





As part
of the continual efforts to improve the operating efficiency of the Company and
in response to these challenges, management and the Board of Directors have
taken several actions and continue to evaluate other areas of opportunity to
ensure that the Company will continue as a going concern.  In April
2009, the Board of Directors appointed a consultant 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 the
Company.  See Note 17 – “Subsequent Events”.  Management has
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.  The reductions in labor and
fringe costs were approximately $1.1 million for the full year 2008 results and
approximately $1.5 million and $3.5 million for the three and nine months ended
September 30, 2009, respectively.  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
and generated $144,000 in proceeds as of September 30, 2009.  See Note
10 – “Share-Based Payments” and Note 11 – “Stockholders’ Equity”.  The
Company is also evaluating the sale of certain non-core assets and additional
programs to raise new capital for future operations.





In
addition, during the second quarter ended June 30, 2009 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.  As previously discussed, 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 fines, restitution and the reimbursement of legal fees of which $750,000 has
been paid as of September 30, 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.





Management
believes these factors will contribute toward reducing the Company’s operating
losses and working capital deficiency.  However, there can be no
assurance that the Company will be successful in achieving its
objectives.





The
accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.  The Company’s ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions
referred to above, on the timeline contemplated by our plan.  The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and reclassification of assets or the
amounts and classifications of liabilities that may result should the Company be
unable to continue as a going concern.


11


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed 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 three and nine months ended September
30, 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 three and nine months ended September 30,
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 three and nine months ended September 30, 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 three and nine months ended September 30,
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 three and nine months ended
September 30, 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 three and nine months ended
September 30, 2009.


12


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed 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 condensed consolidated financial statements.





In June
2009, the FASB issued ASU 2009-01, “Topic 105—Generally Accepted Accounting
Principles - Amendments Based on Statement of Financial Accounting Standards No.
168—The FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles” (“ASU
2009-01”).  ASU 2009-01 amends the Codification for the
issuance of FASB 168.  ASU 2009-01 includes FASB 168 in its entirety,
including the accounting standards update instructions contained in Appendix B
of FASB 168.  The Company adopted ASU 2009-01 during the quarter ended
September 30, 2009. The adoption of ASU 2009-01 had no impact on the Company’s
financial position or results of operations as of or for the three and nine
months ended September 30, 2009.





In August
2009, the FASB issued ASU 2009-04, “Accounting for Redeemable Equity Instruments
- Amendment to Section 480-10-S99” (“ASU
2009-04”).  ASU 2009-04 updates Section 480-10-S99,
"Distinguishing Liabilities from Equity," reflecting the SEC staff’s views
regarding the application of SEC Accounting Series Release No. 268,
“Presentation in Financial Statements of Redeemable Preferred Stock” (“ASR 268”), and
clarifies that ASR 268 pertains 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 ASU
2009-04 during the quarter ended September 30, 2009. The adoption of ASU 2009-04
had no impact on the Company’s financial position or results of operations as of
or for the three and nine months ended September 30, 2009.




In
September 2009, the FASB issued ASU 2009-06, “Income Taxes (Topic 740) –
Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure – Amendments for Nonpublic Entities” (“ASU
2009-06”).  ASU 2009-06 provides additional implementation
guidance on accounting for uncertainty in income taxes and eliminates disclosure
required by paragraph 740-10-50-15(a) through (b) for nonpublic
entities.  The Company adopted ASU 2009-06 during the quarter ended
September 30, 2009. The adoption of ASU 2009-06 had no impact on the Company’s
financial position or results of operations as of or for the three and nine
months ended September 30, 2009.




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.


13


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





In August
2009, the FASB issued ASU 2009-05, “Fair Value Measurements and Disclosures
(Topic 820) - Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU
2009-05 provides clarification for circumstances in which a quoted price in an
active market for the identical liability is not available. In such
circumstances, a reporting entity is required to measure fair value using one or
more of the following techniques: (1) a valuation technique that uses: (a) the
quoted price of the identical liability when traded as an asset; or (b) quoted
prices for similar liabilities or similar liabilities when traded as assets; or
(2) another valuation technique that is consistent with the principles of Topic
820 such as an income approach or a market approach.  The guidance
provided in ASU 2009-05 is effective for the first reporting period (including
interim periods) beginning after issuance.  The Company has evaluated
this update and has determined that it will not have a significant impact on its
financial position or results of operations.





In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force” (“ASU
2009-13”).  ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined
unit.  The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010.  Early adoption is
permitted.  The Company is currently evaluating this
update.





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).  The Company has
computed the earnings per share using the “two-class” method.  Under
the Company’s Amended and Restated Certificate of Incorporation, each share of Class A
Common Stock and each share of Class B Common Stock are equal with respect to
the right to receive dividends declared by the Company’s Board of Directors in
its discretion, from time to time, from funds legally available, whether in
cash, stock or property.  Because both classes share the same rights
with respect to dividends, basic and diluted earnings per share are the same for
both classes.


14


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed 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) is presented in the table
below.  For purposes of determining net income (loss) per share
attributable to the Company, income (loss) from continuing operationsand the loss from
discontinued operations, net of tax, are as follows:





Three
      months ended
                          
                          
                          Nine
      months endedSeptember 30,
                          
                          
                          September 30,Dollars
      in thousands, except share and per share data
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Numerator:Income
      (loss) from continuing operations
                          
                          $
                          376
                          
                          
                          $
                          595
                          
                          
                          $
                          (62
                          )
                          
                          $
                          (2,957
                          )Loss
      from discontinued operations
                          
                          
                          (14
                          )
                          
                          
                          (307
                          )
                          
                          
                          (3,078
                          )
                          
                          
                          (472
                          )Net
      income (loss)
                          
                          $
                          362
                          
                          
                          $
                          288
                          
                          
                          $
                          (3,140
                          )
                          
                          $
                          (3,429
                          )Denominator:Weighted
      average common shares and denominator for basic
    calculation:
                          
                          
                          108,409,604
                          
                          
                          
                          103,438,235
                          
                          
                          
                          105,960,112
                          
                          
                          
                          103,283,879Weighted
      average effects of dilutive equity based compensation
    awards:Stock
      options
                          
                          
                          -
                          
                          
                          
                          1,358,176
                          
                          
                          
                          -
                          
                          
                          
                          -Stock
      warrants
                          
                          
                          -
                          
                          
                          
                          1,868,627
                          
                          
                          
                          -
                          
                          
                          
                          -Restricted
      stock awards
                          
                          
                          -
                          
                          
                          
                          3,415,654
                          
                          
                          
                          -
                          
                          
                          
                          -Denominator
      for diluted calculation
                          
                          
                          108,409,604
                          
                          
                          
                          110,080,692
                          
                          
                          
                          105,960,112
                          
                          
                          
                          103,283,879Income
      (loss) per share from continuing operations - basic*
                          
                          $
                          0.00
                          
                          
                          $
                          0.01
                          
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.03
                          )Loss
      per share from discontinued operations - basic*
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.00
                          )Net
      income (loss) per share - basic*
                          
                          $
                          0.00
                          
                          
                          $
                          0.00
                          
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )Income
      (loss) per share from continuing operations - diluted*
                          
                          $
                          0.00
                          
                          
                          $
                          0.01
                          
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.03
                          )Loss
      per share from discontinued operations - diluted*
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.00
                          )Net
      income (loss) per share - diluted*
                          
                          $
                          0.00
                          
                          
                          $
                          0.00
                          
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.03
                          )





*  For
Class A and Class B





An
aggregate of 8,021,479 shares (of both Class A Common Stock and Class B Common
Stock) for the nine months ended September 30, 2008 were 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 included in
the diluted calculation for the three months ended September 30, 2009 or
excluded for the nine months ended September 30, 2009 due to the decline in the
Company’s average stock price during those periods.


15


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 4 – RESTRICTED
CASH





Restricted
cash as of September 30, 2009 and December 31, 2008 was $2.9 million and $1.7
million, respectively, primarily representing reserves with the Company’s
domestic credit card processors of $2.8 million and $1.6 million, respectively,
and $39,000 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 and
remained outstanding as of September 30, 2009.





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 sales organization,
against future earnings of those Sales Directors.  As of September 30,
2009 and December 31, 2008, reserves of $436,000 and $562,000, respectively,
have been recorded against the respective note balances of $440,000 and
$622,000.




Also
included in notes receivable as of September 30, 2009 and December 31, 2008 is a
$500,000 non-interest bearing note received as proceeds for the sale of land on
November 24, 2008.  Principal under the note, collateralized by the
related land sold, was due and payable March 24, 2009 (the “Maturity
Date”).  Under the terms of the note, interest at the rate of
1.5% per month shall accrue from the Maturity Date until fully
paid.  As of September 30, 2009, the $500,000 note and the accrued
interest of $45,000 remained outstanding.  Due to the uncertainty
associated with the collection of interest, the Company recorded a reserve of
$45,000 during the three and nine months ended September 30, 2009.  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. See Note 16 – “Commitments and
Contingencies.” The Company did not impute interest on the note as it was
not material.  A deferred gain of $102,000 recorded by the Company
during the fourth quarter of 2008 is included as a reduction to the note
receivable as of September 30, 2009 and December 31, 2008.




In
addition, included in notes receivable as of September 30, 2009 is a $1.2
million, 8% note received as proceeds for the sale of property and equipment on
December 16, 2008.  The note was included in other assets as of
December 31, 2008.  Interest only payments of $8,000 are due monthly
beginning January 16, 2009.  The principal of $1.2 million along with
the final interest payment of $8,000 is due June 16, 2010.  The note
is collateralized by the related property sold.




NOTE 6 – INVENTORY,
NET




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





Dollars
      in thousands
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Audio
      / video marketing
                  
                  $
                  29
                  
                  
                  $
                  66Printed
      marketing materials
                  
                  
                  177
                  
                  
                  
                  869Apparel
                  
                  
                  186
                  
                  
                  
                  400Inventory,
      net
                  
                  $
                  392
                  
                  
                  $
                  1,335


16


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
following table provides a summary of the inventory reserve activity for the
three and nine months ended September 30, 2009 and 2008:




Dollars
      in thousands
                  
                  Three months ended September
      30,
                  
                  
                  Nine months ended September
    30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Reserve,
      beginning of period
                  
                  $
                  3,049
                  
                  
                  $
                  524
                  
                  
                  $
                  3,024
                  
                  
                  $
                  -Additional
      reserve
                  
                  
                  76
                  
                  
                  
                  868
                  
                  
                  
                  625
                  
                  
                  
                  1,392Recoveries
                  
                  
                  (139
                  )
                  
                  
                  -
                  
                  
                  
                  (281
                  )
                  
                  
                  -Disposals
                  
                  
                  (1,934
                  )
                  
                  
                  -
                  
                  
                  
                  (2,316
                  )
                  
                  
                  -Reserve,
      end of period
                  
                  $
                  1,052
                  
                  
                  $
                  1,392
                  
                  
                  $
                  1,052
                  
                  
                  $
                  1,392




Inventory
reserves recorded at September 30, 2009 and December 31, 2008 are $1.1 and $3.0
million, respectively.




NOTE 7 – ASSETS HELD FOR
SALE




On
January 12, 2009, the Company sold its business jet for proceeds of
$872,000.  In addition, the Company incurred costs of $28,000 to
prepare the jet for sale.  At December 31, 2008, the estimated
realizable value of the jet of $844,000 was included in assets held for
sale.  The Company ceased depreciating the jet at the time it was
classified as held for sale.  Depreciation for the three and nine
months ended September 30, 2008 was $28,000 and $90,000, respectively, which is
included in total depreciation and amortization expense.




NOTE 8 – PROPERTY AND
EQUIPMENT, NET




Property
and equipment consists of the following:





Dollars in thousands
                  
                  September30,
                    2009
                  
                  
                  December31, 2008Equipment
                  
                  $
                  2,924
                  
                  
                  $
                  3,131Furniture
      and fixtures
                  
                  
                  710
                  
                  
                  
                  751Capitalized
      software
                  
                  
                  4,223
                  
                  
                  
                  5,296Vehicles
                  
                  
                  64
                  
                  
                  
                  64Buildings
      and improvements
                  
                  
                  4,232
                  
                  
                  
                  4,216Land
                  
                  
                  3,341
                  
                  
                  
                  3,341Construction
      in progress and deposits
                  
                  
                  6,643
                  
                  
                  
                  6,676Leasehold
      improvements
                  
                  
                  115
                  
                  
                  
                  14222,252
                  
                  
                  
                  23,617Less:  Accumulated
      depreciation
                  
                  
                  (5,417
                  )
                  
                  
                  (4,889
                  )Property
      and equipment, net
                  
                  $
                  16,835
                  
                  
                  $
                  18,728





Total
depreciation and amortization expense on property and equipment was $654,000 and
$660,000 for the three months ended September 30, 2009 and 2008, respectively
and $2.0 million and $1.8 million, respectively, for the nine months ended
September 30, 2009 and 2008.


17


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





As of
September 30, 2009 and December 31, 2008, capitalized software development
costs, net of accumulated amortization, totaled $173,000 and $305,000,
respectively.  For the three months ended September 30, 2009 and 2008,
the Company recorded amortization of capitalized software development costs of
$44,000 and $46,000, respectively, and $132,000 and $123,000, for the nine
months ended September 30, 2009 and 2008, respectively, which is included in
total depreciation and amortization expense above.





On
February 1, 2008, SAP®, the Company’s new enterprise resource planning software
application, was implemented.  The cost of approximately $1.7 million
was recorded as an addition to software during the first nine months of
2008. Cost, net of accumulated amortization was $823,000 and $1.3 million as of
September 30, 2009 and December 31, 2008, respectively.  Depreciation
for the three months ended September 30, 2009 and 2008 was $137,000 and
$134,000, respectively, and $428,000 and $357,000 for the nine months ended
September 30, 2009 and 2008, respectively, which is included in total
depreciation and amortization expense above.





The
Company capitalized interest related to the construction of its new corporate
headquarters in Wood River, Illinois of $30,000 and $85,000, respectively, for
the three and nine months ended September 30, 2008.  During January
2009, construction on the new corporate headquarters was
suspended.


18


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements




NOTE 9 – SHORT-TERM
DEBT




As more
fully described in Note 15 – “Financing Arrangements,” and Note 21 – “Related
Party Transactions,” 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, the Company purchased its headquarters property located in Wood
River, Illinois in 2006 and obtained financing for the purchase through a loan
from Meridian Bank (the “Loan”) which was
subsequently renewed and extended in July 2008 (the “Note
Renewal”).  See Note 12 – “Related Party
Transactions.”  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.  An
additional 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 is due and payable on December
31, 2009.  The amount due under the Note bears interest at a rate of
8.0% annually or, in the alternative at the Company’s option, prime plus 4%
subject to the Company’s timely payments and the additional payment of
$200,000.  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 September 30, 2009 was $1.6 million and
the outstanding balance of the Note Renewal as of December 31, 2008 was $2.0
million.


19


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 10 – SHARE-BASED
PAYMENTS




As of
September 30, 2009, the Company had a share-based employee compensation plan, a
share-based Sales Director bonus plan and TSO Stock Purchase Plan (the “TSO
SPP”).  The share-based employee compensation plan (the 2004
Stock Option and Restricted Stock Plan (the “2004 Plan”)) and the
share-based Sales Director bonus plan (the “2007 Sales Director Bonus
Plan”) are more fully described 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.  The TSO SPP
was 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.





2004
Stock Option and Restricted Stock Plan.





Stock
Options





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.  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.  The
Company recognized $0 and $70,000, respectively, in compensation expense for the
three and nine months ended September 30, 2009 for stock options issued under
this grant.





The
Company recognized $28,000 and $84,000 in compensation expense for all stock
options issued under the 2004 Plan for the three months ended September 30, 2009
and 2008, respectively, and $207,000 and $165,000 for the nine months ended
September 30, 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 stock-based
compensation expense could be significantly different than what was recorded in
the current period.  Unrecognized expense related to future service on
existing stock options granted under the 2004 Plan as of September 30, 2009 and
2008 was $249,000 and $701,000, respectively.


20


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Restricted
Stock Awards





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 “Replacement
Awards”).  The Sales Directors were notified of the Replacement
Awards on February 13, 2009 (the “Measurement
Date”).  The 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.  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.  The Company
recognized compensation expense for the amortization of the Replacement Awards
of $126,000 and $788,000, respectively, for the three and nine months ended
September 30, 2009.





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 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. See Note 17 – “Subsequent
Events.”
The Company recognized $5,000 and $25,000, respectively, in compensation expense
for the three and nine months ended September 30, 2009 for the amortization of
the restricted stock awards issued under this grant.





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.  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, the actual number of shares forfeited as of September 30, 2009
and an estimate of shares that will not vest due to future
forfeitures.  The Company recognized $78,000 and $327,000,
respectively, in compensation expense for the three and nine months ended
September 30, 2009 for the amortization of the restricted stock awards issued
under this grant.





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 impact of
forfeitures on this award was not significant. The Company recognized
compensation expense of $8,000 and $10,000, respectively, for the three and nine
months ended September 30, 2009 for the amortization of the restricted stock
awards issued under this grant.





The
Company recorded $158,000 and $265,000 as net compensation expense related to
the amortization of all restricted stock awards issued under the 2004 Plan for
the three months ended September 30, 2009 and 2008, respectively, and $1.2
million and $400,000 for the nine months ended September 30, 2009 and 2008,
respectively.  If the Company’s actual forfeiture rate is materially
different from its estimate, or if the Company re-evaluates the forfeiture rate
in the future, the stock-based compensation expense could be significantly
different than what was recorded in the current period.  As of
September 30, 2009, there was $458,000 of unrecognized compensation expense
related to the 5,189,101 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 1.0
years.


21


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





2007
Sales Director Bonus Plan





As more
fully described 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, the fair value for two awards of $467,000,
granted as of July 15, 2008 under the 2007 Sales Director Bonus Plan, was
recorded as accrued bonuses and included in other current liabilities on the
Company’s balance sheet as of June 30, 2008 with a corresponding expense
recorded as marketing commissions.  There were no awards granted
during the third quarter of 2008 or the first three quarters of
2009.





The Company recorded a net
reduction in accrued bonuses with an offset to additional paid-in capital of
$51,000 and $192,000 during the three months ended September 30, 2009 and 2008,
respectively, and $68,000 and $425,000 for the nine months ended September 30,
2009 and 2008, respectively, associated with the fair value of the exercisable
portion of the grants issued under the 2007 Sales Director Bonus Plan which were
net of forfeitures of previously exercisable portions of the
grants.  In addition, during the third quarter of 2008 and the
first quarter of 2009, accrued bonuses and marketing commissions expense were
reduced by $46,000 and $271,000, respectively, for actual forfeitures incurred
during the respective quarters.  No forfeitures were incurred during
the second or third quarters of 2009 or the first six months of 2008.If the
Company’s actual forfeiture rate is materially different from its estimate, or
if the Company re-evaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different than what was recorded in
the current period.  Included in other accrued marketing commissions
on the condensed consolidated balance sheets as of September 30, 2009
and December 31, 2008, respectively, are $113,000 and $452,000 of accrued
bonuses that relate to options that are exercisable in the
future.





TSO
Stock Purchase Plan





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
                      
                      Equity
                      
                      
                      A
                      
                      
                      B
                      
                      
                      Risk Free
                      
                      
                      Expected
                      
                      
                      Dividend
                      
                      
                      ExpectedDate
                      
                      Units
                      
                      
                      Options
                      
                      
                      Options
                      
                      
                      Interest Rate
                      
                      
                      Life
                      
                      
                      Yield
                      
                      
                      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 $3,000 and $5,000 as a reduction in revenues for equity unit
options purchased under the TSO SPP for the three and nine months ended
September 30, 2009, 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 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 September 30, 2009 was
$54,000.





During
September 2009, management temporarily suspended the offer of sales of stock
under the TSO SPP.




22


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
following table provides additional information with respect to the aggregate
stock option plan activity for the first nine months of 2009 under the Company’s
2004 Plan, 2007 Sales Director Bonus Plan, and the TSO SPP, taken as a
whole:





Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted-
                    Average Fair
                    Value
                  
                  
                  Weighted-
                    Average
                    Remaining
                    Life (Years)Options
      outstanding at beginning of 2009
                  
                  
                  2,453,227
                  
                  
                  $
                  0.85
                  
                  
                  $
                  0.68For
      the period from January 1, 2009 to September 30, 2009:Granted
                  
                  
                  1,948,312
                  
                  
                  
                  0.13
                  
                  
                  
                  0.09Forfeited
                  
                  
                  (433,357
                  )
                  
                  
                  0.87
                  
                  
                  
                  0.91Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding September 30, 2009
                  
                  
                  3,968,182
                  
                  
                  $
                  0.49
                  
                  
                  $
                  0.36
                  
                  
                  
                  5.44Options
      exercisable at September 30, 2009
                  
                  
                  1,720,000
                  
                  
                  $
                  0.49
                  
                  
                  $
                  0.29
                  
                  
                  
                  4.42




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 nine months
ended September 30, 2009 and 2008, respectively, was $0.09 and
$0.80.  The total intrinsic value of options exercised during the nine
months ended September 30, 2008 was $101,000.  There were no options
exercised during the nine months ended September 30, 2009.





A summary
of stock options outstanding and exercisable as of September 30, 2009 is as
follows:





Options Outstanding
                  
                  
                  Options ExercisableWeighted-Average
                  
                  
                  Weighted-
                  
                  
                  
                  
                  
                  Weighted-Number
                  
                  
                  Remaining
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  AverageRange of Exercise Prices
                  
                  Outstanding
                  
                  
                  Life (Years)
                  
                  
                  Exercise Price
                  
                  
                  Outstanding
                  
                  
                  Exercise Price$0.07
      - $1.00
                  
                  
                  3,068,182
                  
                  
                  
                  5.25
                  
                  
                  $
                  0.26
                  
                  
                  
                  1,280,000
                  
                  
                  $
                  0.19$1.01
      - $1.67
                  
                  
                  900,000
                  
                  
                  
                  6.07
                  
                  
                  
                  1.28
                  
                  
                  
                  440,000
                  
                  
                  
                  1.35Total
                  
                  
                  3,968,182
                  
                  
                  
                  5.44
                  
                  
                  $
                  0.49
                  
                  
                  
                  1,720,000
                  
                  
                  $
                  0.49




One-Time
Restricted Stock Award





During
the third quarter of 2008, the Company determined that it was probable that the
performance-related vesting conditions specified in the applicable restricted
stock award agreements would not be met for all shares scheduled to vest on
January 2, 2009.  As such, during the three and nine months ended
September 30, 2008, the Company recorded a net reduction of $2.4 million and $0,
respectively, of marketing commission expense related to the amortization of the
unvested portion of these shares. The third quarter 2008 impact is the net of
$1.2 million originally recorded as the third quarter 2008 amortization expense
and the forfeiture estimate of $3.6 million, representing the year-to-date
amortization as of September 30, 2008.  On January 2, 2009, all shares
scheduled to vest on such date were forfeited, as the performance-related
vesting conditions specified in the applicable restricted stock award agreements
were not met.


23


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





As of
September 30, 2009, the Company expects that the performance-related vesting
conditions specified in the applicable restricted stock award agreements will
not be met for all shares scheduled to vest on January 2, 2010.  As
such, no marketing commission expense was recorded for the three and nine months
ended September 30, 2009 related to the amortization of the unvested portion of
the award shares scheduled to vest on January 2, 2010.





As of
September 30, 2009, there was approximately $4.5 million of unrecognized
compensation expense related to the 4.3 million shares scheduled to vest on
January 2, 2010.  As of September 30, 2009, there was approximately
$4.5 million of unrecognized compensation expense related to 4.3 million shares
scheduled to vest on January 2, 2011 which the Company expects to recognize
ratably throughout 2010 to the extent the performance-related vesting conditions
are expected to be satisfied.




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 nine months ended
September 30, 2009:


Weighted-averageRestricted
                  
                  
                  grant-dateshares
                  
                  
                  fair valueNon-vested
      at beginning of 2009
                  
                  
                  15,299,058
                  
                  
                  $
                  1.05For
      the period from January 1, 2009 to September 30, 2009:Granted
                  
                  
                  8,451,173
                  
                  
                  
                  0.20Vested
                  
                  
                  3,513,368
                  
                  
                  
                  0.28Forfeited
                  
                  
                  6,359,852
                  
                  
                  
                  1.01Non-vested
      at September 30, 2009
                  
                  
                  13,877,011
                  
                  
                  $
                  0.74





As of
September 30, 2009, there was approximately $9.4 million of unrecognized
compensation expense related to the 13.9 million shares of unvested restricted
stock under the Company’s 2004 Plan and the One-Time Restricted Stock Award,
which includes $4.5 million of unrecognized compensation expense related to the
4.3 million shares expected to be forfeited on January 2, 2010 due to the
failure to meet performance-related conditions.  The Company expects
to recognize the remaining $4.9 million of total compensation expense not yet
recognized related to the remaining nonvested awards over a
weighted-average period of 1.1 years.





Total
compensation cost recognized in the condensed consolidated statement of
operations for all stock option and restricted stock plans for the three months
ended September 30, 2009 and 2008 was $189,000 and a credit of $2.1 million,
respectively, and $1.2 million and $987,000 for the nine months ended September
30, 2009 and 2008, respectively.





NOTE 11 – STOCKHOLDERS’
EQUITY





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 10 – “Share Based
Payments” for further details.





During
the second and third quarters of 2009, the Company issued 490,230 shares of
Class A Common Stock and 490,230 shares of Class B Common Stock, with a combined
fair value of $141,000, in conjunction with the sale of 490,230 equity units
under the TSO SPP.  The Company recorded the $141,000 in proceeds from
the sale of the common stock and a corresponding entry to common stock in the
amount of $1,000 and additional paid-in capital in the amount of
$140,000.  Included in the Company’s other current liabilities is
$3,000 for the future purchase of equity units per the terms of the
plan.


24


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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 quarter of 2009, the Company issued 530,004 shares of common stock,
with a fair value of $49,000, to Michael Brent under the terms of the Employment
Severance Agreement.  See Note 13 – “Discontinued
Operations.”





The
accumulated other comprehensive loss balance of $6,000 represents an accumulated
foreign currency revaluation adjustment.





NOTE 12 – 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 the three months ended September 30,
2009 and 2008, the Company expended $16,000 and $1.3 million, respectively, for
these services and $173,000 and $3.0 million for the nine months ended September
30, 2009 and 2008, respectively.  Included in accounts payable on the
condensed consolidated balance sheet at September 30, 2009 and December 31,
2008, is $4,000 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 condensed
consolidated balance sheet for an advance made to the printing company for
future services.  There was no receivable as of September 30,
2009.





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.  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 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 during
the three and nine months ended September 30, 2008 was $30,000 and $85,000,
respectively. 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 9 – “Short-Term
Debt.”





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 $3,000 and $1.1 million during the three months ended September 30,
2009 and 2008, respectively, and $449,000 and $3.0 million for the nine months
ended September 30, 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.  In addition,
the Company expended $0 and $9,000, respectively, during the three and nine
months ended September 30, 2009 to Winfield Development for miscellaneous
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.


25


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
Company leases 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.  In January 2008, the Company exercised its purchase option
under the Building Two Lease to acquire the Building Two
Property.  Subsequently, the Company entered into a purchase contract
with Meridian Land for $2.5 million.  The Company paid $500,000 of the
$2.5 million purchase price as a non-refundable earnest money deposit as of the
execution of the purchase contract, and the remaining $2.0 million is due at the
closing of the acquisition of the Building Two Property, originally scheduled to
close by the end of June 2008, which has been extended to occur on or before
December 31, 2009.  Given the current downturn in the credit and real
estate markets, the Company extended the contract in order to preserve its
interest in purchasing the building or assigning its rights to purchase the
building.  There can be no assurances made that the Company will be
able to obtain proper financing to close on the acquisition or, even if it does
obtain financing, the Company may also elect not to exercise its right to
purchase the building, or assign its rights to purchase the property to a third
party.  Therefore, the non-refundable earnest money deposit was fully
reserved as of December 31, 2008.  During the three and nine months
ended September 30, 2009, additional net payments of $6,000 and $10,000 were
made and classified as deposits to preserve the Company’s future interest in the
property.  These amounts were reserved as of September 30,
2009.





The
Company’s rental expense under the Building Two Lease was approximately $8,000
per month or $25,000 and $76,000, respectively, for the three and nine months
ended September 30, 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 the three months ended September 30, 2009 and 2008,
insurance and repairs and maintenance expense totaled $2,000 and $0,
respectively, and $11,000 and $3,000 for the nine months ended September 30,
2009 and 2008, respectively.  Included in accounts payable at December
31, 2008 are amounts due under the Building Two Lease of
$3,000.  Included in other prepaid expenses and current assets, net,
at September 30, 2009 is $17,000 in prepaid rent under the Building Two
Lease.  See Note 17 – “Subsequent Events.”





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 business jet, which was held
free and clear of any and all liens and encumbrances. Meridian/Silver is not
subject to any material liabilities or contractual obligations. The Company
utilized the business 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 business 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 its business jet for net proceeds of $872,000 and
incurred costs of $28,000 to prepare the jet for sale.  As of December
31, 2008, the Company had recorded an impairment to write down the business jet
to its estimated realizable value of $844,000.  The business jet is
included in assets held for sale on the Company’s condensed
consolidated balance sheet as of December 31, 2008.


26


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed 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 three and nine months ended September 30, 2009 and 2008:





Dollars
      in thousands
                  
                  Three months ended September 30,
                  
                  
                  Nine months ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Rental
      expense
                  
                  $
                  9,000
                  
                  
                  $
                  25,000
                  
                  
                  $
                  59,000
                  
                  
                  $
                  67,000Tenant
      build-out costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,000Insurance
      / repairs / CAM
                  
                  
                  1,000
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000
                  
                  
                  
                  5,000Real
      estate taxes
                  
                  
                  16,000
                  
                  
                  
                  -
                  
                  
                  
                  20,000
                  
                  
                  
                  -





Included
in other accrued expenses at September 30, 2009 and December 31, 2008 are
amounts due under the Magnolia Lease of $21,000 and $7,000,
respectively.  Included in accounts payable at December 31, 2008 are
amounts due under the Magnolia Lease of $1,000.





Its
principals, Timothy Kaiser, M.D. and Clay Winfield, who were members of the
Company’s Board of Directors until June 15, 2009 and April 30, 2009,
respectively, control Meridian Land.  The independent members of the
Company’s Board of Directors considered and approved 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).





During
the first and second quarters of 2008, REZconnect paid $8,000 in legal fees for
work performed by Harold Kestenbaum, a member of the Company’s Board of
Directors.  The independent members of the Company’s Board of
Directors approved the fees.





During
the first quarter of 2009, the Company expended $16,000 in fees to Israeloff,
Trattner & Co. for work performed by Andrew Wilder, a member of the
Company’s Board of Directors.  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 independent members of the Company’s Board of
Directors approved the fees.  As of December 31, 2008, accrued fees of
$11,000 were included in other accrued expenses on the condensed consolidated
balance sheets.





During
the first quarter of 2008, the Company paid $60,000 for commissions earned on a
vacant Rep position to Major League Travel, a limited partnership of which Lou
Brock, a member of the Company’s Board of Directors, is a general
partner.





During
the third quarter of 2009, the Company expended $5,000 in book royalty fees to
J. Lloyd “Coach” Tomer, former director and Chairman of the Board of the
Company.  The book royalty fees were included in other accrued
expenses on the condensed consolidated balance sheet as of September 30,
2009.


27


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 13 – 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 16 – “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.





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 next 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 $12,000 is included in the
loss on disposal of REZconnect for the three and nine months ended September 30,
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 three and nine months ended September 30, 2009, a
true-up adjustment of $24,000 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
three and nine months ended September 30, 2009.


28


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The loss
on disposition of the REZconnect subsidiary, net of tax, consists of the
following:


Dollars in thousands
                  
                  Three months
                    ended
                  
                  
                  Nine months
                    endedSeptember 30,
                    2009
                  
                  
                  September 30,
                    2009Contract
      termination costs
                  
                  $
                  -
                  
                  
                  $
                  2,634Assets
      sold to purchaser, net of liabilities assumed
                  
                  
                  26
                  
                  
                  
                  267Proceeds
                  
                  
                  -
                  
                  
                  
                  (275
                  )True-up
      of contract termination costs settled in stock
                  
                  
                  (24
                  )
                  
                  
                  (24
                  )Non-cash
      accretion of contract termination liability
                  
                  
                  12
                  
                  
                  
                  12Loss
      on disposal, net of tax
                  
                  $
                  14
                  
                  
                  $
                  2,614





The
following table summarizes the net revenues and operating results for the
REZconnect operations included in discontinued operations:





Dollars in thousands
                          
                          Three months ended
                          
                          
                          Nine months endedSeptember 30,
                            2009
                          
                          
                          September 30,
                            2008
                          
                          
                          September 30,
                            2009
                          
                          
                          September 30,
                            2008Discontinued
      operations:Net
      revenues
                          
                          $
                          -
                          
                          
                          $
                          723
                          
                          
                          $
                          869
                          
                          
                          $
                          2,570Loss
      from operations before income tax provision
                          
                          $
                          -
                          
                          
                          $
                          (307
                          )
                          
                          $
                          (463
                          )
                          
                          $
                          (471
                          )Income
      tax provision
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1
                          )
                          
                          
                          (1
                          )Loss
      on disposal, net of tax
                          
                          
                          (14
                          )
                          
                          
                          -
                          
                          
                          
                          (2,614
                          )
                          
                          
                          -Loss
      from discontinued operations, net of tax
                          
                          $
                          (14
                          )
                          
                          $
                          (307
                          )
                          
                          $
                          (3,078
                          )
                          
                          $
                          (472
                          )





The
following table summarizes the activity in the accrued exit cost liability for
the REZconnect subsidiary for the three months ended September 30,
2009:





Dollars in thousands
                    
                    Fair Value at
                      June 30, 2009
                    
                    
                    Common
                      stock
                      settlements
                    
                    
                    Cash
                      payments
                    
                    
                    Non-cash
                      accretion
                    
                    
                    Fair Value at
                      September 30,
                      2009Contract
      termination costs
                    
                    $
                    2,634
                    
                    
                    $
                    (73
                    )
                    
                    $
                    (73
                    )
                    
                    $
                    12
                    
                    
                    $
                    2,500Total
      exit costs
                    
                    $
                    2,634
                    
                    
                    $
                    (73
                    )
                    
                    $
                    (73
                    )
                    
                    $
                    12
                    
                    
                    $
                    2,500


29


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





In the
Company’s condensed consolidated balance sheet as of September 30, 2009, the
current portion of the $2.5 million liability balance is $616,000 and is
included in other accrued expenses and the long-term portion is $1.9 million and
is included in other liabilities.





Included
in the condensed 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


30


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 14 – 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.  The “Parent” column includes corporate items not
specifically allocated to the 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.





Dollars
      in thousandsThree months ended September 30, 2009
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            12,170
                                            
                                            
                                            $
                                            3,741
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            15,911Income
      (loss) from continuing operations
                                            
                                            
                                            967
                                            
                                            
                                            
                                            (55
                                            )
                                            
                                            
                                            (561
                                            )
                                            
                                            
                                            351Assets
                                            
                                            
                                            7,986
                                            
                                            
                                            
                                            1,697
                                            
                                            
                                            
                                            21,646
                                            
                                            
                                            
                                            31,329Depreciation
      and amortization
                                            
                                            
                                            348
                                            
                                            
                                            
                                            121
                                            
                                            
                                            
                                            215
                                            
                                            
                                            
                                            684Capital
      expenditures
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            11Three months ended September 30, 2008
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            34,676
                                            
                                            
                                            $
                                            7,407
                                            
                                            
                                            $
                                            70
                                            
                                            
                                            $
                                            42,153Income
      (loss) from continuing operations
                                            
                                            
                                            2,324
                                            
                                            
                                            
                                            (913
                                            )
                                            
                                            
                                            (771
                                            )
                                            
                                            
                                            640Assets
      (1) (2)
                                            
                                            
                                            16,359
                                            
                                            
                                            
                                            3,662
                                            
                                            
                                            
                                            23,065
                                            
                                            
                                            
                                            43,086Depreciation
      and amortization
                                            
                                            
                                            376
                                            
                                            
                                            
                                            60
                                            
                                            
                                            
                                            242
                                            
                                            
                                            
                                            678Capital
      expenditures
                                            
                                            
                                            160
                                            
                                            
                                            
                                            480
                                            
                                            
                                            
                                            1,854
                                            
                                            
                                            
                                            2,494Nine months ended September 30, 2009
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            45,357
                                            
                                            
                                            $
                                            9,974
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            55,331Income
      (loss) from continuing operations
                                            
                                            
                                            4,246
                                            
                                            
                                            
                                            (1,556
                                            )
                                            
                                            
                                            (2,897
                                            )
                                            
                                            
                                            (207
                                            )Assets
                                            
                                            
                                            7,986
                                            
                                            
                                            
                                            1,697
                                            
                                            
                                            
                                            21,646
                                            
                                            
                                            
                                            31,329Depreciation
      and amortization
                                            
                                            
                                            1,045
                                            
                                            
                                            
                                            331
                                            
                                            
                                            
                                            644
                                            
                                            
                                            
                                            2,020Capital
      expenditures
                                            
                                            
                                            35
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            50
                                            
                                            
                                            
                                            85Nine months ended September 30, 2008
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            107,400
                                            
                                            
                                            $
                                            20,338
                                            
                                            
                                            $
                                            70
                                            
                                            
                                            $
                                            127,808Income
      (loss) from continuing operations
                                            
                                            
                                            2,775
                                            
                                            
                                            
                                            (3,002
                                            )
                                            
                                            
                                            (2,628
                                            )
                                            
                                            
                                            (2,855
                                            )Assets
      (1) (2)
                                            
                                            
                                            16,359
                                            
                                            
                                            
                                            3,662
                                            
                                            
                                            
                                            23,065
                                            
                                            
                                            
                                            43,086Depreciation
      and amortization
                                            
                                            
                                            1,036
                                            
                                            
                                            
                                            169
                                            
                                            
                                            
                                            685
                                            
                                            
                                            
                                            1,890Capital
      expenditures
                                            
                                            
                                            1,182
                                            
                                            
                                            
                                            938
                                            
                                            
                                            
                                            6,926
                                            
                                            
                                            
                                            9,046
  (1)  Segment
totals represent assets as of December 31, 2008.
 (2)  Travel
segment includes $462,000 in assets of discontinued REZconnect
subsidiary.


31


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





GEOGRAPHICAL
FINANCIAL INFORMATION:




Dollars
      in thousands
                          
                          Three months ended September 30,
                          
                          
                          Nine months ended September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008NET
      REVENUES:United
      States
                          
                          $
                          15,523
                          
                          
                          $
                          41,234
                          
                          
                          $
                          53,521
                          
                          
                          $
                          124,332Canada
                          
                          
                          388
                          
                          
                          
                          919
                          
                          
                          
                          1,810
                          
                          
                          
                          3,476Total
      net revenues
                          
                          $
                          15,911
                          
                          
                          $
                          42,153
                          
                          
                          $
                          55,331
                          
                          
                          $
                          127,808




Dollars
      in thousandsSeptember 30,2009
                    
                    
                    December 31,2008LONG-LIVED
      ASSETS:United
      States
                    
                    $
                    21,876
                    
                    
                    $
                    23,762
                    (1)Canada
                    
                    
                    205
                    
                    
                    
                    267Total
      long-lived assets
                    
                    $
                    22,081
                    
                    
                    $
                    24,029
 
 (1)  Includes
$6,000 in assets of discontinued REZconnect subsidiary.




NOTE 15 – INCOME
TAXES





In June
2006, the FASB issued authoritative guidance that clarifies the accounting for
uncertainty in income taxes and provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.





As of
September 30, 2009 and December 31, 2008, the Company had approximately $1.4
million of unrecognized tax benefits.  Of the unrecognized tax
benefits at September 30, 2009, $179,000, if recognized, would impact the
Company’s effective income tax rate.





The
Company classifies interest expense and any related penalties related to income
tax uncertainties as a component of income tax expense.  As of
September 30, 2009 and December 31, 2008, the Company had approximately $18,000
and $16,000, respectively, of accrued interest related to uncertain positions
included as a component of other non-current income tax
liabilities.





The sale
of REZconnect resulted in a net decrease in unrecognized tax benefits at June
30, 2009 of $15,000.





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





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 provided for foreign income tax expense in its annual financial
statements as of and for the year ended December 31, 2008.  The actual
expense varied from those estimates and the tax provision for the nine months
ended September 30, 2009 was adjusted to reflect the difference.


The
Company’s tax provision for the three and nine months ended September 30, 2009
consists of state and foreign income taxes.  The Company has a federal
tax loss for the nine months ended September 30, 2009, 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 is included in other prepaid expenses and
current assets, net at September 30, 2009 and December 31,
2008.  Foreign income tax payable of $8,000 and $242,000 and state
income tax payable of $14,000 and $73,000 is included in other current
liabilities at September 30, 2009 and December 31, 2008,
respectively.


32


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 16 – COMMITMENTS AND
CONTINGENCIES





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.





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.




33


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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.  These payments are not dischargeable in
bankruptcy.  During the first nine months of 2009, the Company
recorded a $1,000,000 accrual related to these payments, of which $750,000 had
been paid as of September 30, 2009, resulting in a balance of
$250,000.  The remaining balance will be paid in one installment of
$250,000, due December 31, 2009, according to the terms of the
settlement.





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 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, as well as claims against the Company for
alleged violations of Missouri Merchandising Practices Act, the Utah Consumer
Sales Practices Act, and the Georgia Sale of Business Opportunities Act. 
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.  To date, the
Court has not ruled on these motions.  Management believes the Company
has meritorious defenses and intends to vigorously defend these
cases.




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





On
January 29, 2009, the California Attorney General sent a letter to the Company’sdefense counsel, with a copy to Illinois National and three excess
insurance carriers, stating that California Insurance Code section 533.5
provides that there shall be no duty for any insurance carrier to defend
lawsuits alleging violations of Business and Professional Code Sections 17200 or
17500 in which the Attorney General seeks recovery of a fine, penalty, or
restitution. After receipt of this letter, counsel for the Company and the
individual insureds informed Illinois National's counsel that their position was
that the Illinois National policy is governed by Illinois law, and therefore
California Insurance Code Section 533.5 does not apply. Counsel for the Company
sought Illinois National's assurances that it agreed with this position but did
not receive such assurances.





On
February 6, 2009, the individual insureds filed a declaratory judgment action in
circuit court in Madison County, Illinois, in order to protect their rights
under the Illinois National policy. The action seeks a declaration from the
court that Illinois National's obligation to advance and reimburse their defense
costs in connection with the California Attorney General's lawsuit is not
limited by California Insurance Code Section 533.5.  On March 30,
2009, the Company reached a tentative agreement with Illinois National regarding
the California Insurance Code issue, conditional on a final settlement with the
State of California and certain other conditions that have not yet been
met.  The State of California has not objected to the payments made
through August 2009.  In addition, an agreed motion
to dismiss the declaratory judgment action between the individual insureds
and Illinois National has been sent to Illinois National’s counsel for
review.  The agreed motion will be filed as soon as the separate
counsels work out the details.  All issues raised in the complaint
have been successfully resolved.  In addition, through September 30,
2009, the insurance carriers have made all reimbursements due to the individual
insureds.


34


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





On April
1, 2009, a Second Amended Complaint was filed in the Circuit Court for the Third
Judicial Circuit of Madison County, Illinois against a certain executive
officer, other entities, and added as a defendant, YourTravelBiz.com, Inc., now
known as YTB Marketing, Inc.  The complaint alleges violation of an
oral contract for certain services, but contains no apparent valid claims
against YourTravelBiz.com, Inc. or the Company.  The Company filed an
initial motion to dismiss which was granted in part.  The discovery
process in this case is ongoing.  The Company anticipates filing a
motion for summary judgment once the discovery process is
completed.





In
addition to other consideration, the Company received a $500,000 promissory note
dated November 24, 2008 as proceeds for the sale of land situated in Madison
County, Illinois, which was non-interest bearing so long as there was no event
of default thereunder.  Principal and other amounts under the note,
collateralized by the related land sold, were due and payable on March 24,
2009.  On April 22, 2009, the Company sent a notice of default under the
promissory note and mortgage to the purchaser because the purchaser failed to
satisfy all obligations under the note within the agreed upon 120 days. 
The notice required the purchaser to cure such non-payment within five business
days of receipt of the notice, as required by the mortgage.  On May 6,
2009, the Company filed a complaint for foreclosure in Madison County, Illinois
Circuit Court under the terms of the promissory note and mortgage because the
purchaser failed to cure the non-payment within the required five business
days.  On June 2, 2009, a notice of foreclosure was recorded against
the land.  As of September 30, 2009, settlement negotiations are
on-going.





On May 7,
2009, YTB Marketing and YTB Travel Network of Illinois Inc. (“YTB Travel Network”)
filed in the Circuit Court of Madison County, Illinois a Complaint for
Injunctive Relief and Motion for Temporary Restraining Order against certain
former Sales Directors of YTB Marketing (“Defendant
Directors”), each of whom became affiliated with another network
marketing company and violated their respective contract terms.  The
Complaint for Injunctive Relief requests, among other things, that the Court
enjoin the Defendant Directors from soliciting or recruiting any of the
Company’s Reps or Site Owners to any other network marketing company, other than
Reps whom the defendants personally sponsored.  YTB Marketing and YTB
Travel Network are also seeking to recover their costs, expenses and attorneys’
fees.  The Court held a hearing on the matter on May 14, 2009 and
granted a temporary injunction.  The Defendant Directors filed
counterclaims seeking payments not received by them from the date of their
termination for violation of their contracts.  The Company considers
these claims to be without merit.  The Company is seeking from the
Defendant Directors payment of the Company’s costs and attorneys’
fees.  It is anticipated that this litigation will be resolved
favorably for the Company.





On or
about May 8, 2009, YTB Marketing filed in the Circuit Court of Madison County,
Illinois a Complaint for Monies Due Under Promissory Notes against certain
former Sales Directors of YTB Marketing seeking recovery of all sums due from
defendants under certain promissory notes, together with costs and attorneys'
fees.The former
Sales Directors filed a counter claim against YTB Marketing claiming unspecified
damages.  The Company believes the counter claim has no merit and
intends to vigorously defend its position.





Also 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 office of the Illinois Attorney General has agreed to
extend indefinitely the date by which the Company must respond to their
complaint, while the parties exchange information and explore 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.


35


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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.





Termination
of Employment Agreements





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 13 – “Discontinued
Operations”.





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.





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.


36


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 17 – SUBSEQUENT
EVENTS





At the
meeting of the Board of Directors of the Company on October 6, 2009, the
following Board of Directors and management changes became
effective:





·
            J.
      Scott Tomer resigned as the Chief Executive Officer of the
      Company.  Mr. Tomer will remain a member of the Board and was
      appointed to serve as the Chairman of the Board.  In addition,
      Mr. Tomer will continue to serve as Chief Executive Officer of the
      Company’s wholly-owned subsidiary, YTB
  Marketing.





·
            J.
      Lloyd “Coach” Tomer resigned as a director and as Chairman of the Board of
      the Company.  Coach Tomer’s resignation will allow him to
      continue to focus on mentoring the leaders of the Company’s sales force
      and to devote more time to the Company’s philanthropic division to raise
      funds for associations and groups.





·
            The
      Board appointed Robert Van Patten, age 64, Chief Executive Officer and
      President of the Company, effective immediately.  As Chief
      Executive Officer, Mr. Van Patten will serve as the Company’s principal
      executive officer.  Prior to this appointment, Mr. Van Patten
      served in a consulting capacity to the Company for the last six
      months.  The Board also appointed Mr. Van Patten to serve as a
      member of the Board.  Mr. Van Patten brings over 25 years of
      senior management experience to these positions.  Since 1999,
      Mr. Van Patten has been the majority owner of North American Logistic
      Services, Inc., an organization that provides services by trans-loading
      commodities from one mode of transportation to another
      mode.  The operations of this company are exclusively provided
      in Canada.  Mr. Van Patten currently resides in Edwardsville,
      Illinois and is a graduate of DePaul University in Chicago,
      Illinois.  Mr. Van Patten has no family relationships with any
      of our directors or executive officers.  There have been no
      related party transactions between the Company or any subsidiary of the
      Company and Mr. Van Patten reportable under Item 404(a) of Regulation
      S-K.  The Company and Mr. Van Patten have executed an employment
      agreement with a term of twelve months, beginning October 6, 2009 and
      expiring October 4, 2010.  The Company has agreed to pay Mr. Van
      Patten an annual base salary of $300,000.  Mr. Van Patten will
      be eligible to receive an annual performance bonus equal to 2% of the
      Company’s annual earnings before taxes if the earnings are greater than
      $500,000 but less than $1.5 million, 2.25% if the earnings before taxes
      are greater than $1.5 million but less than $3.0 million, or 2.5% if the
      earnings before taxes are greater than $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.





·
            Andrew
      F. Cauthen resigned as the Chief Operating Officer and President of the
      Company.  Mr. Cauthen will retain his position as Secretary of
      the Company and serve as Chief Operating Officer and President of YTB
      Marketing.




On
November 5, 2009, Andrew Wilder, CPA and Harold Kestenbaum, Esq. resigned from
their positions as members of the Board of Directors of the
Company.




37


Item 2.Management’s Discussion and
Analysis of Financial Condition and Results of Operations.





STATEMENT
REGARDING FORWARD-LOOKING INFORMATION





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.  These factors, risks and
uncertainties can be found in Item 1A of the Company’s Annual Report filed on
Form 10-K for the year ended December 31, 2008 as may be updated from time to
time in the Company’s filings with the SEC.





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 Quarterly Report on Form 10-Q 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.





Overview




YTB
International, Inc. and its subsidiaries may be referred to as the “Company” or
in the first person notation of “we,” “us,” and “our” in the following
discussion.





We are a
leading marketer and provider of internet-based travel-related services,
offering other general products and services to the consumer as well, and
operate through our three wholly-owned subsidiaries and their respective
subsidiaries: YTB Marketing, Inc. (formerly YourTravelBiz.com, Inc., “YTB Marketing”), YTB
Travel Network, Inc. (“YTB Travel”), and YTB
Franchise Services, Inc.  (“YTB
Franchise”).





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 business models and 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 is
offered through interactive, real time booking engines and 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 our
Company.  There has been no activity by YTB Franchise other than an
initial capital contribution by YTB International, Inc.  The condensed
consolidated balance sheet as of September 30, 2009 reflects the cash and
stockholder position of this entity.  All intercompany transactions
have been eliminated in consolidation.


38


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 bases for conclusions on the change(s)
in the Codification.  We have updated our references to GAAP in this
Quarterly Report on Form 10-Q to reflect the guidance in the
Codification.





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 of $14,000 and $2.6
million, respectively, for the three and nine months ended September 30, 2009.
See Note 13 – “Discountinued
Operations”
to the condensed consolidated financial statements for further
discussion.





The
emerging market shift to the internet for 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 through the Site
Owner’s IBC, thereby creating a significant advantage for our sales force over
the major online travel companies. 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.





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





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 sites are available for use 24 hours, 7 days
a week.  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 track the aggregate retail
value of all travel services that are booked by our Site Owners (which directly
impacts our commission revenues).  On June 25, 2009, we issued a press
release announcing once again that we were named one of the country’s leading
travel agencies in Travel Weekly’s 2009 Power List.  In the 2009
Travel Weekly Power List, we were ranked 25thamong
all travel agencies, advancing from our ranking of 26th in the
previous year with a $9 million increase in travel sales, based on retail travel
sales of $424 million.  These sales figures are not included in the
financial results of the Company, as the Company is not the merchant of record
for these transactions.  The Company receives a commission from the
travel vendors for these retail sales.





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 years’ experience, adjusted for current year
volumes.  Management believes these estimates to be
reasonable.  Revenue from IBC sales is deferred and recognized ratably
as revenue over a twelve-month period.





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. Each Site Owner pays a monthly web
hosting fee of $49.95 to us, and earns transactional compensation from travel
purchased from his or her IBC.  During the past several years, leisure
vendors (including tour operators, cruise lines and hotel and car packagers)
have not reduced their commission levels but in fact have offered YTB Travel
incentive commissions above the standard compensation for its volume business.
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.


39





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 shopYTB going into
the holiday shopping season, we believe that we will see a stabilization of
sales coupled with slower declines in attrition over the next eighteen months..
In addition, in late April 2009, the World Health Organization acknowledged an
outbreak of H1N1 flu.  We are unable to predict the scope or duration
of the H1N1 outbreak or its impact on the travel industry generally, or our
business in particular.  However, concerns relating to the health-risk
posed by the H1N1 flu could result in a decrease and/or delay in demand for our
travel services.  This decrease and/or delay in demand, depending on
its scope and duration, could materially adversely affect our business and
financial performance.





About Our
Industry




We
believe that the shift to the internet 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.




We offer
our customers a reliable source of travel products and services through our
relationships with selected travel providers, including major airlines, cruise
lines, hotels and car rental agencies, as well as wholesale travel providers. We
offer our customers the ability to make reservations on over 400 airlines, at
more than 80,000 hotels and with most major car rental companies, cruise lines
and tour package operators.





Our
multi-segment operating model provides us with a competitive advantage because
few travel related companies have expertise in both travel and marketing. We
have been able to obtain more favorable pricing terms with our vendors as a
result of economies of scale. In addition, more favorable commission rates are
able to be realized based on the larger volume.  As a multi-level
marketing company, we offer opportunities for entrepreneurs who desire to
capitalize on the growing trend of online travel bookings and retail
purchases.





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.


40


Results of
Operations





The
following tables set forth, for the three and nine months ended September, 2009
and 2008, as indicated, the percentage relationship of certain items from the
Company’s condensed consolidated statement of operations to total net
revenues.  A summary of consolidated results follows.





Dollars in thousands
                                        
                                        Three months ended
                                        
                                        
                                        Three months ended
                                        
                                        
                                        VarianceSeptember 30,
                                          2009
                                        
                                        
                                        % of Net
                                          Revenues
                                        
                                        
                                        September 30,
                                          2008
                                        
                                        
                                        % of Net
                                          Revenues
                                        
                                        
                                        Increase
                                          (Decrease)
                                        
                                        
                                        % Increase
                                          (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                                        
                                        $
                                        10,740
                                        
                                        
                                        
                                        67.5
                                        %
                                        
                                        $
                                        30,474
                                        
                                        
                                        
                                        72.3
                                        %
                                        
                                        $
                                        (19,734
                                        )
                                        
                                        
                                        (64.8
                                        )%Travel
      commissions and services
                                        
                                        
                                        3,642
                                        
                                        
                                        
                                        22.9
                                        %
                                        
                                        
                                        7,360
                                        
                                        
                                        
                                        17.5
                                        %
                                        
                                        
                                        (3,718
                                        )
                                        
                                        
                                        (50.5
                                        )%Training
      programs and marketing materials
                                        
                                        
                                        822
                                        
                                        
                                        
                                        5.2
                                        %
                                        
                                        
                                        2,677
                                        
                                        
                                        
                                        6.4
                                        %
                                        
                                        
                                        (1,855
                                        )
                                        
                                        
                                        (69.3
                                        )%Other
                                        
                                        
                                        707
                                        
                                        
                                        
                                        4.4
                                        %
                                        
                                        
                                        1,642
                                        
                                        
                                        
                                        3.8
                                        %
                                        
                                        
                                        (935
                                        )
                                        
                                        
                                        (56.9
                                        )%Total
      net revenues
                                        
                                        
                                        15,911
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        
                                        42,153
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        
                                        (26,242
                                        )
                                        
                                        
                                        (62.3
                                        )%OPERATING
      EXPENSESMarketing
      commissions
                                        
                                        
                                        5,144
                                        
                                        
                                        
                                        32.3
                                        %
                                        
                                        
                                        16,765
                                        
                                        
                                        
                                        39.8
                                        %
                                        
                                        
                                        (11,621
                                        )
                                        
                                        
                                        (69.3
                                        )%Travel
      commissions
                                        
                                        
                                        2,069
                                        
                                        
                                        
                                        13.0
                                        %
                                        
                                        
                                        4,587
                                        
                                        
                                        
                                        10.9
                                        %
                                        
                                        
                                        (2,518
                                        )
                                        
                                        
                                        (54.9
                                        )%Depreciation
      and amortization
                                        
                                        
                                        684
                                        
                                        
                                        
                                        4.3
                                        %
                                        
                                        
                                        678
                                        
                                        
                                        
                                        1.6
                                        %
                                        
                                        
                                        6
                                        
                                        
                                        
                                        0.9
                                        %Training
      programs and marketing materials
                                        
                                        
                                        592
                                        
                                        
                                        
                                        3.7
                                        %
                                        
                                        
                                        2,945
                                        
                                        
                                        
                                        7.0
                                        %
                                        
                                        
                                        (2,353
                                        )
                                        
                                        
                                        (79.9
                                        )%General
      and administrative
                                        
                                        
                                        7,071
                                        
                                        
                                        
                                        44.5
                                        %
                                        
                                        
                                        16,538
                                        
                                        
                                        
                                        39.2
                                        %
                                        
                                        
                                        (9,467
                                        )
                                        
                                        
                                        (57.2
                                        )%Total
      operating expenses
                                        
                                        
                                        15,560
                                        
                                        
                                        
                                        97.8
                                        %
                                        
                                        
                                        41,513
                                        
                                        
                                        
                                        98.5
                                        %
                                        
                                        
                                        (25,953
                                        )
                                        
                                        
                                        (62.5
                                        )%OPERATING
      INCOME
                                        
                                        
                                        351
                                        
                                        
                                        
                                        2.2
                                        %
                                        
                                        
                                        640
                                        
                                        
                                        
                                        1.5
                                        %
                                        
                                        
                                        (289
                                        )
                                        
                                        
                                        (45.2
                                        )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                                        
                                        
                                        55
                                        
                                        
                                        
                                        0.3
                                        %
                                        
                                        
                                        30
                                        
                                        
                                        
                                        0.0
                                        %
                                        
                                        
                                        25
                                        
                                        
                                        
                                        83.3
                                        %Interest
      expense
                                        
                                        
                                        (30
                                        )
                                        
                                        
                                        (0.2
                                        )%
                                        
                                        
                                        (10
                                        )
                                        
                                        
                                        0.0
                                        %
                                        
                                        
                                        (20
                                        )
                                        
                                        
                                        200.0
                                        %Foreign
      currency translation loss
                                        
                                        
                                        (14
                                        )
                                        
                                        
                                        0.0
                                        %
                                        
                                        
                                        (101
                                        )
                                        
                                        
                                        (0.2
                                        )%
                                        
                                        
                                        87
                                        
                                        
                                        
                                        (86.1
                                        )%Total
      other income (expense)
                                        
                                        
                                        11
                                        
                                        
                                        
                                        0.1
                                        %
                                        
                                        
                                        (81
                                        )
                                        
                                        
                                        (0.2
                                        )%
                                        
                                        
                                        92
                                        
                                        
                                        
                                        (113.6
                                        )%INCOME
      FROM CONTINUING OPERATIONSBEFORE
      INCOME TAX BENEFIT
                                        
                                        
                                        362
                                        
                                        
                                        
                                        2.3
                                        %
                                        
                                        
                                        559
                                        
                                        
                                        
                                        1.3
                                        %
                                        
                                        
                                        (197
                                        )
                                        
                                        
                                        (35.2
                                        )%INCOME
      TAX BENEFIT
                                        
                                        
                                        (14
                                        )
                                        
                                        
                                        (0.1
                                        )%
                                        
                                        
                                        (36
                                        )
                                        
                                        
                                        (0.1
                                        )%
                                        
                                        
                                        22
                                        
                                        
                                        
                                        (61.1
                                        )%INCOME
      FROM CONTINUING OPERATIONS
                                        
                                        
                                        376
                                        
                                        
                                        
                                        2.4
                                        %
                                        
                                        
                                        595
                                        
                                        
                                        
                                        1.4
                                        %
                                        
                                        
                                        (219
                                        )
                                        
                                        
                                        (36.8
                                        )%LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                                        
                                        
                                        (14
                                        )
                                        
                                        
                                        (0.1
                                        )%
                                        
                                        
                                        (307
                                        )
                                        
                                        
                                        (0.7
                                        )%
                                        
                                        
                                        293
                                        
                                        
                                        
                                        (95.4
                                        )%NET
      INCOME
                                        
                                        $
                                        362
                                        
                                        
                                        
                                        2.3
                                        %
                                        
                                        $
                                        288
                                        
                                        
                                        
                                        0.7
                                        %
                                        
                                        $
                                        74
                                        
                                        
                                        
                                        25.7
                                        %




41




Dollars in thousands
                              
                              Nine months ended
                              
                              
                              Nine months ended
                              
                              
                              VarianceSeptember 30,
                                2009
                              
                              
                              % of Net
                                Revenues
                              
                              
                              September 30,
                                2008
                              
                              
                              % of Net
                                Revenues
                              
                              
                              Increase
                                (Decrease)
                              
                              
                              % Increase
                                (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                              
                              $
                              43,147
                              
                              
                              
                              78.0
                              %
                              
                              $
                              97,737
                              
                              
                              
                              76.5
                              %
                              
                              $
                              (54,590
                              )
                              
                              
                              (55.9
                              )%Travel
      commissions and services
                              
                              
                              9,611
                              
                              
                              
                              17.4
                              %
                              
                              
                              19,861
                              
                              
                              
                              15.5
                              %
                              
                              
                              (10,250
                              )
                              
                              
                              (51.6
                              )%Training
      programs and marketing materials
                              
                              
                              1,591
                              
                              
                              
                              2.9
                              %
                              
                              
                              8,004
                              
                              
                              
                              6.3
                              %
                              
                              
                              (6,413
                              )
                              
                              
                              (80.1
                              )%Other
                              
                              
                              982
                              
                              
                              
                              1.7
                              %
                              
                              
                              2,206
                              
                              
                              
                              1.7
                              %
                              
                              
                              (1,224
                              )
                              
                              
                              (55.5
                              )%Total
      net revenues
                              
                              
                              55,331
                              
                              
                              
                              100.0
                              %
                              
                              
                              127,808
                              
                              
                              
                              100.0
                              %
                              
                              
                              (72,477
                              )
                              
                              
                              (56.7
                              )%OPERATING
      EXPENSESMarketing
      commissions
                              
                              
                              21,157
                              
                              
                              
                              38.2
                              %
                              
                              
                              66,310
                              
                              
                              
                              51.9
                              %
                              
                              
                              (45,153
                              )
                              
                              
                              (68.1
                              )%Travel
      commissions
                              
                              
                              5,694
                              
                              
                              
                              10.3
                              %
                              
                              
                              14,349
                              
                              
                              
                              11.2
                              %
                              
                              
                              (8,655
                              )
                              
                              
                              (60.3
                              )%Depreciation
      and amortization
                              
                              
                              2,020
                              
                              
                              
                              3.7
                              %
                              
                              
                              1,890
                              
                              
                              
                              1.5
                              %
                              
                              
                              130
                              
                              
                              
                              6.9
                              %Training
      programs and marketing materials
                              
                              
                              1,564
                              
                              
                              
                              2.8
                              %
                              
                              
                              8,012
                              
                              
                              
                              6.3
                              %
                              
                              
                              (6,448
                              )
                              
                              
                              (80.5
                              )%General
      and administrative
                              
                              
                              25,103
                              
                              
                              
                              45.4
                              %
                              
                              
                              40,102
                              
                              
                              
                              31.3
                              %
                              
                              
                              (14,999
                              )
                              
                              
                              (37.4
                              )%Total
      operating expenses
                              
                              
                              55,538
                              
                              
                              
                              100.4
                              %
                              
                              
                              130,663
                              
                              
                              
                              102.2
                              %
                              
                              
                              (75,125
                              )
                              
                              
                              (57.5
                              )%OPERATING
      LOSS
                              
                              
                              (207
                              )
                              
                              
                              (0.4
                              )%
                              
                              
                              (2,855
                              )
                              
                              
                              (2.2
                              )%
                              
                              
                              2,648
                              
                              
                              
                              (92.7
                              )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                              
                              
                              126
                              
                              
                              
                              0.2
                              %
                              
                              
                              161
                              
                              
                              
                              0.1
                              %
                              
                              
                              (35
                              )
                              
                              
                              (21.7
                              )%Interest
      expense
                              
                              
                              (78
                              )
                              
                              
                              (0.1
                              )%
                              
                              
                              (61
                              )
                              
                              
                              0.0
                              %
                              
                              
                              (17
                              )
                              
                              
                              27.9
                              %Foreign
      currency translation gain (loss)
                              
                              
                              1
                              
                              
                              
                              0.0
                              %
                              
                              
                              (119
                              )
                              
                              
                              (0.1
                              )%
                              
                              
                              120
                              
                              
                              
                              (100.8
                              )%Total
      other income (expense)
                              
                              
                              49
                              
                              
                              
                              0.1
                              %
                              
                              
                              (19
                              )
                              
                              
                              0.0
                              %
                              
                              
                              68
                              
                              
                              
                              (357.9
                              )%LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX (BENEFIT)
      PROVISION
                              
                              
                              (158
                              )
                              
                              
                              (0.3
                              )%
                              
                              
                              (2,874
                              )
                              
                              
                              (2.2
                              )%
                              
                              
                              2,716
                              
                              
                              
                              (94.5
                              )%INCOME
      TAX (BENEFIT) PROVISION
                              
                              
                              (96
                              )
                              
                              
                              (0.2
                              )%
                              
                              
                              83
                              
                              
                              
                              0.1
                              %
                              
                              
                              (179
                              )
                              
                              
                              (215.7
                              )%LOSS
      FROM CONTINUING OPERATIONS
                              
                              
                              (62
                              )
                              
                              
                              (0.1
                              )%
                              
                              
                              (2,957
                              )
                              
                              
                              (2.3
                              )%
                              
                              
                              2,895
                              
                              
                              
                              (97.9
                              )%LOSS
      FROM DISCONTINUED OPERATIONS (NET OF TAX)
                              
                              
                              (3,078
                              )
                              
                              
                              (5.6
                              )%
                              
                              
                              (472
                              )
                              
                              
                              (0.4
                              )%
                              
                              
                              (2,606
                              )
                              
                              
                              552.1
                              %NET
      LOSS
                              
                              $
                              (3,140
                              )
                              
                              
                              (5.7
                              )%
                              
                              $
                              (3,429
                              )
                              
                              
                              (2.7
                              )%
                              
                              $
                              289
                              
                              
                              
                              (8.4
                              )%




42


The
following tables set 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 each of the three and nine months ended
September 30, 2009 and 2008, and (ii) the weighted average number of active Site
Owners during each such period:





2009
                  
                  BeginningBalance
                    ActiveSOs
                  
                  
                  New SOs
                  
                  
                  Deactivations
                  
                  
                  Ending Balance
                    Active SOs
                  
                  
                  WeightedAverage
                    ActiveSOsThree
      months ended September 30, 2009
                  
                  
                  60,414
                  
                  
                  
                  2,964
                  
                  
                  
                  12,957
                  
                  
                  
                  50,421
                  
                  
                  
                  53,668Nine
      months ended September 30, 2009
                  
                  
                  92,383
                  
                  
                  
                  14,410
                  
                  
                  
                  56,372
                  
                  
                  
                  50,421
                  
                  
                  
                  65,6752008
                  
                  Beginning
      Balance
                    Active
      SOs
                  
                  
                  New
      SOs
                  
                  
                  Deactivations
                  
                  
                  Ending
      Balance
                    Active
      SOs
                  
                  
                  Weighted
      Average
                    Active
      SOsThree
      months ended September 30, 2008
                  
                  
                  131,572
                  
                  
                  
                  14,919
                  
                  
                  
                  31,877
                  
                  
                  
                  114,614
                  
                  
                  
                  121,101Nine
      months ended September 30, 2008
                  
                  
                  131,802
                  
                  
                  
                  67,901
                  
                  
                  
                  85,089
                  
                  
                  
                  114,614
                  
                  
                  
                  130,690




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 periods. 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 three and nine months ended
September 30, 2009, we sold 14 and 2,558, IBC sites, respectively, at a rate of
$250.00 per IBC site as part of an extended special promotional
program.  This program ended during the third quarter of
2009.  During the third quarter of 2009, the Company initiated a new
payment plan alternative for new Site Owners, allowing them to pay $99.95 per
month over seven months.  During the three months ended September 30,
2009, we sold 1,366 IBC sites through this new payment
plan.   Likewise, each recurring monthly IBC web hosting fee paid
results in marketing commissions paid to our Reps. As the number of active Site
Owners declines, the amount of our travel commission revenue decreases as well.
Correspondingly, our travel commission expense follows suit.





A Site
Owner 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 Site
Owner 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 where the IBC is deactivated at the
time the request is made.  Site Owners may be reactivated by simply
resuming payment of monthly web hosting fees from that point
forward.  We reserve the right to deactivate any Site Owner which we
believe may have fraudulent activity associated with it or with its
owner.





Deactivations
of Site Owners in relation to the number of new Site Owners during a specified
period, is 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 vice
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
decline on a year-to-year basis of our organization that is evidenced by the
above numbers directly impacts our financial results, both in terms of revenue
and expense recognition. As fewer sites are sold and maintained, 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 as well as other discretionary
expenditures.


43


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 “shopYTB” 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.


·
            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.








Three months ended September
30, 2009 compared to three months ended September 30, 2008





We
reported net income for the quarter ended September 30, 2009 of $362,000 or
$0.00 per diluted share compared to net income of $288,000 or $0.00 per diluted
share for the comparable quarter of 2008.  The net loss from
discontinued operations for the quarter ended September 30, 2009 was $14,000 or
$0.00 per diluted share compared to net loss of $307,000 or $0.00 per diluted
share for the comparable quarter of 2008.





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 three
months ended September 30, 2009 and 2008.  See Note 13 – “Discontinued
Operations” to the condensed consolidated financial statements for further
discussion.





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





Net
Revenues





Net
revenues totaled $15.9 million and $42.2 million in the third quarter of 2009
and 2008, respectively.





·
            IBC
      sales and monthly fees decreased $19.7 million, or 64.8%, to $10.7 million
      in the third quarter of 2009 compared to $30.5 million in the comparable
      prior year quarter.  This decrease is attributable to the
      following:





§
            IBC
      sales revenue decreased $9.9 million, or 80.4%, in the third quarter of
      2009 to $2.4 million from the $12.3 million reported in the comparable
      prior year quarter.  We have experienced a decrease in the
      actual number of IBCs sold for the three months ended September 30, 2009
      to 2,964 from 14,919 in the prior year period.   As a
      result, the average number of IBC sales for which we were able to
      recognize revenue decreased to 2,010 in the third quarter of 2009 from
      8,775 for the same period in 2008.  In addition, the average
      amount of recognized revenue from each IBC sale decreased to $413.13 in
      the third quarter of 2009 from $449.95 in the comparable quarter in 2008
      due to a new program that allows IBC sites to be paid in
      installments.  We believe the decline in the number of new IBC
      sales is attributable to the current economic downturn present in the
      United States and Canada.  However, due to new marketing
      initiatives, enhanced/expanded services and the new focus on shopYTB, we
      believe that we will see a stabilization of sales coupled with slower
      declines in attrition over the next eighteen
  months.





§
            Monthly
      renewal fees revenue decreased $9.7 million, or 53.9%, in the third
      quarter of 2009 to $8.3 million from the $18.1 million reported in the
      comparable prior year quarter. The decrease is in direct relation to the
      number of active paying Site Owners.  The weighted average of
      paying Site Owners per month decreased from 121,101 for the three months
      ended September 30, 2008 to 53,668 for the same period in
      2009.  We anticipate a continued decline in the number of active
      paying Site Owners in the coming months due to the general economic
      conditions in the United States and Canada.  However, due to new
      marketing initiatives, enhanced/expanded services and the new focus on
      shopYTB, we believe that we will see a stabilization of sales coupled with
      slower declines in attrition over the next eighteen
  months.





§
            Partially
      contributing to the decline in IBC sales and monthly fees in the third
      quarter of 2009 is the $135,000 decrease in Enhanced Rep Site fees
      revenue, a new program 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.


44




·
            Travel
      commissions and services revenue for the third quarter of 2009 decreased
      $3.7 million, or 50.5%, to $3.6 million from the $7.4 million reported in
      the comparable prior year quarter.  The decrease in travel
      commissions is attributable to the decrease in the number of active IBCs
      affecting the gross travel retail bookings which are driven by the number
      of customers utilizing us as their travel sale provider in
      2009.  In addition, general economic conditions have lowered the
      overall demand for travel.  Some travel providers pay a
      preferred travel bonus, or override.  In 2008, a portion of the
      anticipated bonus was recorded with an offsetting
      receivable.  Due to the current trends, resulting in a decline
      in the amount of travel being sold, we do not anticipate earning these
      bonuses in 2009 and thus have not recorded any revenue or receivable in
      the current period.  This change amounts for $339,000, or 9.1%,
      of the change between periods.





·
            Training
      programs and marketing materials revenue decreased $1.9 million, or 69.3%,
      in the third quarter of 2009 to $822,000 from $2.7 million in the
      comparable prior year quarter.  The decrease was primarily due
      to a reduction in sales of magazines and sales aids partially as a result
      of the elimination of the sales of magazines.  Also contributing
      to the decline was a reduction in the number of training events that the
      Company held.  These reductions in sales are primarily due to a
      decrease in the number of new IBC sales compared to what we have
      experienced in the past.  We expect this trend to stabilize in
      the coming months, due to the release of the new Regional Product
      Marketing training program (“RPM”), which
      was released late in the third quarter of 2009, as well as new marketing
      initiatives aimed at the stabilization of our sales
      force.  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.





·
            Other
      revenue decreased $935,000, or 56.9%, to $707,000 from $1.6 million in the
      comparable prior year quarter.  This decrease primarily results
      from the reduction in revenue of $984,000 due to the decline in the number
      of paying attendees at the annual convention held in August 2009. This
      decrease is offset by revenues of $115,000 generated by the shopYTB
      program introduced in the second quarter of
  2009.





Operating
Expenses





·
            Marketing
      commissions decreased $11.6 million, or 69.3%, in the third quarter of
      2009 to $5.1 million from $16.8 million in the third quarter of
      2008.  Commission expense related to new IBC sales declined $6.8
      million directly related to the decline in the number of new IBC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new IBC sale, which is
      directly correlated to a decrease in commission bonuses
      paid.  As our new sales decline, the amount of leadership and
      dream bonuses paid also decreases which are included in the calculation to
      determine the average commission expense recognized on each new
      sale.  We also experienced a decrease of $2.7 million in
      commission expense relating to Site Owner monthly renewal
      fees.  This is a direct result of the decline in the number of
      average active Site Owners for the third quarter of 2009 compared to the
      same period in 2008.  Also contributing to the reduction is $2.3
      million of commission expense relating to the restructuring
      of our Directors’ Pool.  During the fourth quarter of 2008, the
      Company revised its Directors’ Pool program, which restructured the
      program to only pay out the amounts contributed to the pool, essentially
      putting a cap on the amount the Company expensed.   These
      revisions also included the elimination of certain achievement levels that
      previously resulted in the highest levels of bonus payout from the
      pool.   During the third quarter of 2009, the Company did
      another restructuring of the pool, eliminating the cap imposed
      previously.  At the same time, the Company limited the
      individuals being paid from the pool by imposing more stringent
      performance standards. The decreases discussed above are partially
      offset by a $2.4 million variance relating to the one-time restricted
      stock award to certain Sales Directors scheduled to vest on January 2,
      2009.  During the third quarter of 2008, it was our belief that
      the performance-related vesting conditions specified in the agreement
      would not be met for the shares scheduled to vest on January 2,
      2009.  As such, during the third quarter of 2008, we recorded a
      net reduction of $2.4 million representing a reversal of the year-to-date
      amortization of $3.6 million offset by the third quarter amortization of
      $1.2 million associated with January 2, 2009 vesting.  The
      shares were in fact forfeited in January 2009.  We expect that
      the performance-related vesting conditions specified in the agreement for
      the shares scheduled to vest on January 2, 2010 will not be met for all
      such shares.  As such, we did not record the restricted stock
      amortization associated with this vesting in the third quarter of
      2009.





·
            Travel
      commissions and other costs for the third quarter of 2009 decreased $2.5
      million, or 54.9%, to $2.1 million from $4.6 million reported in the third
      quarter of 2008.  The decrease in travel commissions is
      primarily attributable to the decrease in the number of active Site Owners
      and the decrease in commissions paid for gross travel retail bookings
      which are driven by the number of customers utilizing us as their travel
      sale provider in 2009, in addition to an overall decline in the volume of
      travel due to current economic
conditions.








45





·
            Training
      programs and marketing materials expense decreased $2.4 million, or 79.9%,
      to $592,000 from $2.9 million reported in the third quarter of
      2008.   The Company experienced a decrease in training
      material sales of $622,000 as a result of the elimination of the sales of
      magazines and a reduction in the number of new IBC sales compared to what
      we have experienced in the past.  The inventory reserve
      decreased $532,000 in the third quarter of 2009 compared to the same
      period in 2008, net of additions and
      disposals.   Fulfillment labor and freight decreased
      $369,000 in the third quarter of 2009 compared to the same period in 2008,
      directly related to the reduction of sales of magazines and sales
      aids.  Meeting expenses decreased $370,000 in the third quarter
      of 2009 compared to the corresponding quarter of 2008 due to a decrease in
      the number of marketing events the Company hosted.  Company
      management decided to hold fewer marketing events with larger numbers of
      attendees rather than smaller, more frequent meetings.  Expenses
      for the annual travel trade show held in Orlando, Florida decreased
      $263,000 due to management cost cutting
  measures.





·
            General
      and administrative expenses decreased $9.5 million, or 57.2%, to $7.1
      million in the third quarter of 2009 from $16.5 million in the same
      quarter of 2008.  As a percentage of total net revenues, these
      expenses were 44.5% in the third quarter of 2009 and 39.2% in the third
      quarter of 2008.  The decrease in general and administrative
      expense in 2009 is primarily attributable to the costs associated with the
      reduction of IBC sales and active Site Owners.  The decreases
      year over year relate primarily to:





§
            Jet
      maintenance decreased $125,000 due to the sale of the Company jet in
      January 2009.


§
            Restricted
      stock amortization and stock option expense decreased $162,000 primarily
      due to second and third quarter forfeitures associated with restricted
      stock and stock option awards granted during 2008 and the second quarter
      of 2009.


§
            Consulting
      fees decreased $168,000 due to a number of marketing initiatives which
      required consulting resources in 2008 that were eliminated in
      2009.


§
            Contract
      labor decreased $300,000 due to the elimination of some consulting
      contracts and the conversion of consultants to full time
      employees.


§
            Asset
      impairment decreased $310,000 due to an initial impairment recorded in
      2008 as a result of the then-pending sale of the Company
    jet.


§
            Merchant
      processing fees decreased $507,000 directly related to the number of
      outbound checks being processed.


§
            Bad
      debt expense related to advances and notes receivables to the Company’s
      independent sales contractors decreased approximately $359,000 in 2009
      compared to 2008.


§
            Legal
      fees decreased $932,000 directly related to the reduction in defense costs
      associated with the suit filed by the California Attorney General’s
      office.


§
            Payroll
      and related benefits decreased $1.6 million due to the reduction in the
      home office staff.


§
              Convention
      costs decreased $4.4 million due to a decrease in the number of attendees
      and cost cutting measures implemented by management.§
              Printing
      and postage decreased $265,000 directly related to the decrease in the
      number of new IBC sales and the number of active Site
    Owners.





BUSINESS
SEGMENTS





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
                                
                                Three months endedSept. 30,
                                  2009
                                
                                
                                Sept. 30,
                                  2008
                                
                                
                                Incr (decr)
                                
                                
                                %changeNET
      REVENUESInternet
      business center sales and monthly fees
                                
                                $
                                10,740
                                
                                
                                $
                                30,474
                                
                                
                                $
                                (19,734
                                )
                                
                                
                                (64.8
                                )%Training
      programs and marketing materials
                                
                                
                                813
                                
                                
                                
                                2,592
                                
                                
                                
                                (1,779
                                )
                                
                                
                                (68.6
                                )%Other
                                
                                
                                617
                                
                                
                                
                                1,610
                                
                                
                                
                                (993
                                )
                                
                                
                                (61.7
                                )%Total
      net revenues
                                
                                
                                12,170
                                
                                
                                
                                34,676
                                
                                
                                
                                (22,506
                                )
                                
                                
                                (64.9
                                )%OPERATING
      EXPENSESMarketing
      commissions
                                
                                
                                5,144
                                
                                
                                
                                16,765
                                
                                
                                
                                (11,621
                                )
                                
                                
                                (69.3
                                )%Depreciation
      and amortization
                                
                                
                                348
                                
                                
                                
                                376
                                
                                
                                
                                (28
                                )
                                
                                
                                (7.4
                                )%Training
      programs and marketing materials
                                
                                
                                510
                                
                                
                                
                                2,412
                                
                                
                                
                                (1,902
                                )
                                
                                
                                (78.9
                                )%General
      and administrative
                                
                                
                                5,201
                                
                                
                                
                                12,799
                                
                                
                                
                                (7,598
                                )
                                
                                
                                (59.4
                                )%Total
      operating expenses
                                
                                
                                11,203
                                
                                
                                
                                32,352
                                
                                
                                
                                (21,149
                                )
                                
                                
                                (65.4
                                )%OPERATING
      INCOME
                                
                                $
                                967
                                
                                
                                $
                                2,324
                                
                                
                                $
                                (1,357
                                )
                                
                                
                                (58.4
                                )%




46


Net
Revenues





·
            IBC
      sales and monthly fees decreased $19.7 million, or 64.8%, to $10.7 million
      in the third quarter of 2009 compared to $30.5 million in the comparable
      prior year quarter.  This decrease is attributable to the
      following:





§
            IBC
      sales revenue decreased $9.9 million, or 80.4%, in the third quarter of
      2009 to $2.4 million from the $12.3 million reported in the comparable
      prior year quarter.  We have experienced a decrease in the
      actual number of IBCs sold for the three months ended September 30, 2009
      to 2,964 from 14,919 in the prior year period.   As a
      result, the average number of IBC sales for which we were able to
      recognize revenue decreased to 2,010 in the third quarter of 2009 from
      8,775 for the same period in 2008.  In addition, the average
      amount of recognized revenue from each IBC sale decreased to $413.13 in
      the third quarter of 2009 from $449.95 in the comparable quarter in
      2008.  We believe the decline in the number of new IBC sales is
      attributable to the current economic downturn present in the United States
      and Canada.  However, due to new marketing initiatives,
      enhanced/expanded services and the new focus on shopYTB, we believe that
      we will see a stabilization of sales coupled with slower declines in
      attrition over the next eighteen
months.





§
            Monthly
      renewal fees revenue decreased $9.7 million, or 53.9%, in the third
      quarter of 2009 to $8.3 million from the $18.1 million reported in the
      comparable prior year quarter. The decrease is in direct relation to the
      number of active paying Site Owners.  The weighted average of
      paying Site Owners per month decreased from 121,101 for the three months
      ended September 30, 2008 to 53,668 for the same period in
      2009.  We anticipate a continued decline in the number of active
      paying Site Owners in the coming months due to the general economic
      conditions in the United States and Canada.  However, due to new
      marketing initiatives, enhanced/expanded services and the new focus on
      shopYTB, we believe that we will see a stabilization of sales coupled with
      slower declines in attrition over the next eighteen
  months.





§
            Partially
      contributing to the decline in IBC sales and monthly fees in the third
      quarter of 2009 is the $135,000 decrease in Enhanced Rep Site fees
      revenue, a new program 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 decreased $1.8 million, or 68.6%,
      in the third quarter of 2009 to $813,000 from $2.6 million in the
      comparable prior year quarter.  The decrease was primarily due
      to a reduction of $1.4 million in the sales of magazines, sales aids, and
      related shipping revenue, along with a reduction in the number of training
      events that the Company held resulting in a decrease of $372,000 in
      revenue.  These reductions in sales are primarily due to a
      decrease in the number of new IBC sales compared to what we have
      experienced in the past.   We expect this trend to
      stabilize in the coming months, due to the release of a new training
      program, RPM, which was released late in the third quarter of 2009, as
      well as new marketing initiatives aimed at the stabilization of our sales
      force.   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.





·
            Other
      revenue decreased $993,000, or 61.7%, to $617,000 from $1.6 million in the
      comparable prior year quarter.  This decrease primarily results
      from the reduction in revenue of $984,000 due to the decline in the number
      of paying attendees at the annual convention held in August
      2009.





Operating
Expenses





·
            Marketing
      commissions decreased $11.6 million, or 69.3%, in the third quarter of
      2009 to $5.1 million from $16.8 million in the third quarter of
      2008.  Commission expense related to new IBC sales declined $6.8
      million directly related to the decline in the number of new IBC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new IBC sale, which is
      directly correlated to a decrease in commission bonuses
      paid.  As our new sales decline, the amount of leadership and
      dream bonuses paid also decreases which are included in the calculation to
      determine the average commission expense recognized on each new
      sale.  We also experienced a decrease of $2.7 million in
      commission expense relating to Site Owner monthly renewal
      fees.  This is a direct result of the decline in the number of
      average active Site Owners for the third quarter of 2009 compared to the
      same period in 2008.  Also contributing to the reduction is $2.3
      million of commission expense relating to the restructuring
      of our Directors’ Pool.  During the fourth quarter of 2008, the
      Company revised its Directors’ Pool program, which restructured the
      program to only pay out the amounts contributed to the pool, essentially
      putting a cap on the amount the Company expensed.   These
      revisions also included the elimination of certain achievement levels that
      previously resulted in the highest levels of bonus payout from the
      pool.   During the third quarter of 2009, the Company did
      another restructuring of the pool, eliminating the cap imposed
      previously.  At the same time, the Company limited the
      individuals being paid from the pool by imposing more stringent
      performance standards. The decreases discussed above are partially offset
      by a $2.4 million variance relating to the one-time restricted stock award
      to certain Sales Directors scheduled to vest on January 2,
      2009.  During the third quarter of 2008, it was our belief that
      the performance-related vesting conditions specified in the agreement
      would not be met for the shares scheduled to vest on January 2,
      2009.  As such, during the third quarter of 2008, we recorded a
      net reduction of $2.4 million representing a reversal of the year-to-date
      amortization of $3.6 million offset by the third quarter amortization of
      $1.2 million associated with January 2, 2009 vesting.  The
      shares were in fact forfeited in January 2009.  We expect that
      the performance-related vesting conditions specified in the agreement for
      the shares scheduled to vest on January 2, 2010 will not be met for all
      such shares.  As such, we did not record the restricted stock
      amortization associated with this vesting in the third quarter of
      2009.


47




·
            Depreciation
      and amortization decreased $28,000, or 7.4%, to $348,000 in the third
      quarter of 2009 from $376,000 in the third quarter of
  2008.





·
            Training
      programs and marketing materials expense decreased $1.9 million, or 78.9%,
      to $510,000 from $2.4 million reported in the third quarter of
      2008.  The Company experienced a decrease in training material
      sales of $622,000 directly affected by the elimination of the sales of
      magazines and a reduction in the number of new IBC sales compared to what
      we have experienced in the past.  The inventory reserve
      decreased $532,000 in the third quarter of 2009 compared to the same
      period in 2008, net of additions and disposals.  Fulfillment
      labor and freight decreased $369,000 in the third quarter of 2009 compared
      to the same period in 2008, directly related to the reduction of sales
      aids and magazine sales.   Meeting expenses decreased
      $373,000 in the third quarter of 2009 compared to the third quarter of
      2008 due to the introduction of online training, along with a decrease in
      the number of marketing events the Company hosted.  Company
      management decided to hold fewer marketing events with larger numbers of
      attendees rather than smaller, more frequent
  meetings.





·
            General
      and administrative expenses decreased $7.6 million, or 59.4%, to $5.2
      million in the third quarter of 2009 from $12.8 million in the third
      quarter of 2008.  As a percentage of total marketing net
      revenues, these expenses were 42.7% in the third quarter of 2009 and 36.9%
      in the third quarter of 2008. The decrease in general and administrative
      expense in 2009 is primarily attributable to the costs associated with the
      reduction of IBC sales and active Site Owners.  The decreases
      year over year relate primarily to:





§
            Printing
      and postage costs decreased $260,000 directly related to the decrease in
      the number of new IBC sales and the number of active Site
      Owners.


§
            Bad
      debt related to advances and notes receivables to the Company’s
      independent sales contractors decreased approximately $365,000 in 2009
      compared to 2008.


§
            Payroll
      and related benefits decreased $632,000 due to the reduction in the home
      office staff.


§
              Merchant
      processing fees decreased $504,000 directly related to the number of
      outbound checks being processed.§
              Convention
      costs decreased $4.4 million due to a decrease in the number of attendees
      and cost cutting measures implemented by
  management.


§
            Corporate
      allocation from the parent decreased $900,000 due to the variances in the
      following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.





Travel
Segment


Dollars in thousands
                                
                                Three
      months endedSept. 30,
                                  2009
                                
                                
                                Sept. 30,
                                  2008
                                
                                
                                Incr (decr)
                                
                                
                                % changeNET
      REVENUESTravel
      commissions and services
                                
                                $
                                3,642
                                
                                
                                $
                                7,360
                                
                                
                                $
                                (3,718
                                )
                                
                                
                                (50.5
                                )%Training
      programs and marketing materials
                                
                                
                                9
                                
                                
                                
                                85
                                
                                
                                
                                (76
                                )
                                
                                
                                (89.4
                                )%Other
                                
                                
                                90
                                
                                
                                
                                (38
                                )
                                
                                
                                128
                                
                                
                                
                                (336.8
                                )%Total
      net revenues
                                
                                
                                3,741
                                
                                
                                
                                7,407
                                
                                
                                
                                (3,666
                                )
                                
                                
                                (49.5
                                )%OPERATING
      EXPENSESTravel
      commissions
                                
                                
                                2,069
                                
                                
                                
                                4,587
                                
                                
                                
                                (2,518
                                )
                                
                                
                                (54.9
                                )%Depreciation
      and amortization
                                
                                
                                121
                                
                                
                                
                                60
                                
                                
                                
                                61
                                
                                
                                
                                101.7
                                %Training
      programs and marketing materials
                                
                                
                                81
                                
                                
                                
                                533
                                
                                
                                
                                (452
                                )
                                
                                
                                (84.8
                                )%General
      and administrative
                                
                                
                                1,525
                                
                                
                                
                                3,140
                                
                                
                                
                                (1,615
                                )
                                
                                
                                (51.4
                                )%Total
      operating expenses
                                
                                
                                3,796
                                
                                
                                
                                8,320
                                
                                
                                
                                (4,524
                                )
                                
                                
                                (54.4
                                )%OPERATING
      LOSS
                                
                                $
                                (55
                                )
                                
                                $
                                (913
                                )
                                
                                $
                                858
                                
                                
                                
                                (94.0
                                )%




48




Net
Revenues




·
            Travel
      commissions and services revenue for the third quarter of 2009 decreased
      $3.7 million, or 50.5%, to $3.6 million from the $7.4 million reported in
      the comparable prior year quarter.  The decrease in travel
      commissions is attributable to the decrease in the number of active IBCs
      affecting the gross travel retail bookings which are driven by the number
      of customers utilizing us as their travel sale provider in
      2009.  In addition, general economic conditions have lowered the
      overall demand for travel.  Some travel providers pay a
      preferred travel bonus, or override.  In 2008, a portion of the
      anticipated bonus was recorded with an offsetting
      receivable.  Due to the current trends, resulting in a decline
      in the amount of travel being sold, we do not anticipate earning these
      bonuses in 2009 and thus have not recorded any revenue or receivable in
      the current period.  This change amounts for $339,000, or 9.1%,
      of the change between periods.





·
            Training
      programs and marketing materials revenue decreased $76,000 or 89.4%, to
      $9,000 from $85,000 reported in the third quarter of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain non-profit organizations which eliminated the requirement for
      training.





·
            Other revenue increased in the
      third quarter of 2009 by $128,000, or 336.8%, to $90,000 from $38,000
      of negative net revenue reported in the comparable prior year quarter.
      This
      increase primarily results from the introduction of the shopYTB program in
      the second quarter of 2009 which generated revenue of $115,000 during the
      third quarter of 2009.  Additionally, the negative
      revenue reported during the third quarter of 2008 is due to a
      significant amount of returns and allowances which did not repeat during
      the third quarter of
2009.





Operating
Expenses




·
            Travel
      commissions and other costs for the third quarter of 2009 decreased $2.5
      million, or 54.9%, to $2.1 million from $4.6 million reported in the third
      quarter of 2008.  The decrease in travel commissions is
      primarily attributable to the decrease in the number of active Site Owners
      and the decrease in commissions paid for gross travel retail bookings
      which are driven by the number of customers utilizing us as their travel
      sale provider in 2009, in addition to an overall decline in the volume of
      travel due to current economic
conditions.





·
            Depreciation
      and amortization was $121,000 in the third quarter of 2009, compared to
      $60,000 in the corresponding quarter of 2008. The increase of $61,000, or
      101.7%, in depreciation and amortization is primarily attributable to the
      addition of computer software related to our expansion into Canada, and
      the strengthening of our
infrastructure.





·
            Training
      programs and marketing material expense decreased $452,000, or 84.8%, to
      $81,000 from $533,000 reported in the third quarter of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain non-profit organizations which eliminated the requirement for
      training.





·
            General
      and administrative expenses decreased $1.6 million, or 51.4%, to $1.5
      million in the third quarter of 2009 from $3.1 million in the third
      quarter of 2008.  As a percentage of total travel net revenues,
      these expenses were 40.8% in 2009 and 42.4% in 2008. The increase year
      over year relates primarily to:







§
            Payroll
      and related benefits decreased $667,000 due to the reduction in the home
      office staff.


§
            Corporate
      allocation from the parent decreased $921,000 due to the variances in the
      following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.




49




Parent




Dollars
      in thousands
              
              Three
      months endedSept.
      30,
                2009
              
              
              Sept.
      30,
                2008
              
              
              Incr
      (decr)
              
              
              %
      changeNET
      REVENUESOther
              
              $
              -
              
              
              $
              70
              
              
              
              (70
              )
              
              
              (100.0
              )%Total
      net revenues
              
              
              -
              
              
              
              70
              
              
              
              (70
              )
              
              
              (100.0
              )%OPERATING
      EXPENSESDepreciation
      and amortization
              
              
              215
              
              
              
              242
              
              
              
              (27
              )
              
              
              (11.2
              )%General
      and administrative
              
              
              345
              
              
              
              599
              
              
              
              (254
              )
              
              
              (42.4
              )%Total
      operating expenses
              
              
              561
              
              
              
              841
              
              
              
              (280
              )
              
              
              (33.3
              )%OPERATING
      LOSS
              
              $
              (561
              )
              
              $
              (771
              )
              
              $
              210
              
              
              
              (27.2
              )%




Net
Revenues





Other
revenue decreased $70,000, or 100%, in the third quarter of 2009 to $0 from
$70,000 in the third quarter of 2008.  With the sale of the Company
jet in January 2009 no income was generated as compared to rental income of the
Company jet in 2008.





Operating
Expenses





·
            Depreciation
      and amortization was $215,000 in the third quarter of 2009, compared to
      $242,000 in the corresponding quarter of 2008. The decrease in
      depreciation and amortization of $27,000, or 11.2%, is primarily
      attributable to the sale of the Company jet in January
    2009.





·
            General
      and administrative expenses, net of corporate allocation, decreased
      $254,000, or 42.4%, to $345,000 in the third quarter of 2009 from $599,000
      in the third quarter of 2008. The decreases year over year relate
      primarily to:





§
            Due
      to the overall decrease in allocable expenses as individually discussed
      below, the corporate allocation to the segments decreased $1.8
      million.  Allocable expenses include contract labor, legal fees,
      accounting fees, consulting fees, restricted stock amortization and stock
      option expense.


§
            Jet
      maintenance decreased $125,000 due to the sale of the Company
      jet.


§
            Restricted
      stock amortization and stock option expense decreased $162,000 primarily
      due to second and third quarter forfeitures associated with restricted
      stock and stock option awards granted during 2008 and the second quarter
      of 2009.


§
            Consulting
      fees decreased $180,000 due to the completion of marketing initiatives
      which required consulting resources in
2008.


§
            Contract
      labor decreased $289,000 primarily due to the elimination of numerous
      consultants and the conversion of consultants to full time
      employees.


§
            Payroll
      and related benefits decreased $297,000 due to an initial impairment
      recorded in 2008 as a result of the then-pending sale of the Company
      jet..


§
            Asset
      impairment decrease of $310,000 due to an initial impairment recorded in
      2008 as a result of the then-pending sale of the Company
    jet.


§
            Legal
      fees decreased $939,000 directly related to the reduction in defense costs
      associated with the suit filed by the California Attorney General’s
      office.





Nine months ended September
30, 2009 compared to nine months ended September 30, 2008





We
reported a net loss for the nine months ended September 30, 2009 of $3.1 million
or $0.03 per diluted share compared to a net loss of $3.4 million or $0.03 per
diluted share for the comparable period of 2008.  The overall
results of the first nine months of 2009 were significantly impacted by the
recording of the sale and related exit costs of our REZconnect
subsidiary.  The net loss from discontinued operations for the nine
months ended September 30, 2009 was $3.1 million or $0.03 per diluted share
compared to $472,000 or $0.00 per diluted share for the comparable period of
2008.





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 nine
months ended September 30, 2009 and 2008.  See Note 13 – “Discontinued
Operations” to the condensed consolidated financial statements for further
discussion.


50




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





Net
Revenues





Net
revenues totaled $55.3 million and $127.8 million in the first nine months of
2009 and 2008, respectively.





·
            IBC
      sales and monthly fees decreased $54.6 million, or 55.9%, to $43.1 million
      in the first nine months of 2009 compared to $97.7 million in the
      comparable prior year period.  This decrease is attributable to
      the following:





§
            IBC
      sales revenue decreased $27.0 million, or 67.6%, in the first nine months
      of 2009 to $12.9 million from the $39.9 million reported in the comparable
      period in 2008.  We have experienced a decrease in the actual
      number of IBCs sold for the nine months ended September 30, 2009 to 14,410
      from 67,901 in the prior year period.   As a result, the
      average number of IBC sales for which we were able to recognize revenue
      decreased to 3,540 in the first nine months of 2009 from 10,629 for the
      same period in 2008.  In addition, the average amount of
      recognized revenue from each IBC sale decreased to $436.58 for the nine
      months ended in 2009 from $449.95 in the comparable period in
      2008.  We believe the decline in the number of new IBC sales is
      attributable to the current economic downturn present in the United States
      and Canada.  However, due to new marketing initiatives,
      enhanced/expanded services and the new focus on shopYTB, we believe that
      we will see a stabilization of sales coupled with slower declines in
      attrition over the next eighteen
months.





§
            Monthly
      renewal fees revenue decreased $27.9 million, or 48.2%, in the first nine
      months of 2009 to $29.9 million from the $57.7 million reported in the
      comparable period in 2008.  The decrease is in direct relation
      to the number of active paying Site Owners.  The weighted
      average of paying Site Owners per month decreased from 130,690 for the
      nine months ended September 30, 2008 to 65,675 for the same period in
      2009.  We anticipate a continued decline in the number of active
      paying Site Owners in the coming months due to the general economic
      conditions in the United States and Canada.  However, due to new
      marketing initiatives, enhanced/expanded services and the new focus on
      shopYTB, we believe that we will see a stabilization of sales coupled with
      slower declines in attrition over the next eighteen
  months.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the first nine
      months of 2009 is an increase of $225,000 in Enhanced Rep Site fees
      revenue, a new program 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 Reps’ 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 for the first nine months of 2009
      decreased $10.3 million, or 51.6%, to $9.6 million from the $19.9 million
      reported in the comparable period in 2008.  The decrease in
      travel commissions is attributable to the decrease in the number of active
      IBCs affecting the gross travel retail bookings which are driven by the
      number of customers utilizing us as their travel sale provider in
      2009.  In addition, general economic conditions have lowered the
      overall demand for travel.  Some travel providers pay a
      preferred travel bonus, or override.  In the first nine months
      of 2008, a portion of the anticipated bonus was recorded with an
      offsetting receivable.  Due to the current trends, resulting in
      a decline in the amount of travel being sold, we do not anticipate earning
      these bonuses in 2009 and thus have not recorded any revenue or receivable
      in the current period.  This change amounts for $531,000 or 5.2%
      of the change between periods.





·
            Training
      programs and marketing materials revenue decreased $6.4 million, or 80.1%,
      in the first nine months of 2009 to $1.6 million from $8.0 million in the
      comparable period in 2008.  The decrease was primarily due to a
      reduction in sales of magazines and sales aids of $3.9 million, along with
      a reduction of $2.4 million relating to the number of training events that
      the Company held.  These reductions in sales are primarily due
      to a decrease in the number of new IBC sales compared to what we have
      experienced in the past.   We expect this trend to
      stabilize in the coming months, due to the release of a new training
      program, RPM, which was released late in the third quarter of 2009, as
      well as new marketing initiatives aimed at the stabilization of our sales
      force.  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.





·
            Other
      revenue for the first nine months of 2009 decreased $1.2 million, or
      55.5%, to $982,000 from $2.2 million reported in the comparable prior year
      period.  This decrease primarily results from the reduction in
      revenue of $984,000 due to the decline in the number of paying attendees
      at the annual convention held in August 2009.   In
      addition, payment processing fees decreased $345,000 due to the reduction
      in the number of checks processed.  These decreases were
      partially offset by revenues of $212,000 generated by the shopYTB
      program introduced in the second quarter of
  2009.


51




Operating
Expenses





·
            Marketing
      commissions decreased $45.2 million, or 68.1%, in the first nine months of
      2009 to $21.2 million from $66.3 million compared to the first nine months
      of 2008.  Commission expense related to new IBC sales declined
      $26.0 million directly related to the decline in the number of new IBC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new IBC sale which is
      directly correlated to a decrease in commission bonuses
      paid.  As our new sales decline, the amount of leadership and
      dream bonuses paid also decreases which are included in the calculation to
      determine the average commission expense recognized on each new
      sale.  We also experienced a decrease of $10.0 million in
      commission expense relating to Site Owner monthly renewal
      fees.  This is a direct result of the decline in the number of
      average active Site Owners for the first nine months of 2009 compared to
      the same period in 2008.  Also contributing to the reduction in
      commission expense for the first nine months of 2009 was the restructuring
      of our Directors’ Pool.  This change resulted in an $8.7 million
      decrease in marketing commission expenses during the first nine months of
      2009 when compared to the same period in 2008.  During the
      fourth quarter of 2008, the Company revised its Directors’ Pool program,
      which restructured the program to only pay out the amounts contributed to
      the pool, essentially putting a cap on the amount the Company
      expensed.   These revisions also included the elimination
      of certain achievement levels that previously resulted in the highest
      levels of bonus payout from the pool.   During the third
      quarter of 2009, the Company did another restructuring of the pool,
      eliminating the cap imposed previously.  At the same time, the
      Company limited the individuals being paid from the pool by imposing more
      stringent performance standards. Also contributing to the reduction in
      commission expense is $693,000 related to the 2007 Sales Director Bonus
      Plan.  During the first nine months of 2009 and 2008, we
      incurred actual forfeitures greater than our estimated forfeitures of
      $271,000 and $45,000, respectively.  In addition, during the
      first nine months of 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 the first nine months of
      2009.





·
            Travel
      commissions and other costs for the first nine months of 2009 decreased
      $8.7 million, or 60.3%, to $5.7 million from $14.3 million reported in the
      first nine months of 2008. Approximately $7.2 million of the decrease in
      travel commissions is primarily attributable to the decrease in the number
      of active Site Owners and the decrease in commissions paid for gross
      travel retail bookings which are driven by the number of customers
      utilizing us as their travel sale provider in 2009, in addition to an
      overall decline in the volume of travel due to current economic
      conditions.  A portion of this decrease, $1.5 million, is
      attributable to expense recorded in the first nine months of 2008 related
      to unsold cabins on a cruise that was not repeated in
  2009.





·
            Depreciation
      and amortization was $2.0 million in the first nine months of 2009
      compared to $1.9 million in the corresponding period of 2008, reflecting
      an increase of $130,000, or 6.9%.  The increase in depreciation
      and amortization is primarily attributable to software additions designed
      to help facilitate the strength of our
  infrastructure.





·
            Training
      programs and marketing materials expense decreased $6.4 million, or 80.5%
      to $1.6 million from $8.0 million reported in the first nine months of
      2008.  A decrease of $1.8 million relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active Site Owners.  The inventory reserve decreased
      $669,000 in the first nine months of 2009 compared to the same
      period in 2008, net of additions and disposals.  In addition,
      fulfillment labor and freight decreased $1.4 million in the first nine
      months of 2009 compared to the same period in 2008, directly related to
      the reduction of sales aids and magazine sales.   Meeting
      expenses decreased $1.7 million in 2009 compared to 2008 due to the
      introduction of online training, along with a decrease in the number of
      marketing events the Company hosted.  Company management decided
      to hold fewer marketing events with larger numbers of attendees rather
      than smaller, more frequent meetings. A decrease of $330,000 related to
      cost cutting efforts by management for the annual travel trade
      show.





·
            General
      and administrative expenses decreased $15.0 million, or 37.4%, to $25.1
      million in the first nine months of 2009 from $40.1 million in the first
      nine months of 2008.  As a percentage of total net revenues,
      these expenses were 45.4% in 2009 and 31.3% in 2008.  The
      decrease in general and administrative expense in 2009 is primarily
      attributable to the costs associated with the reduction of IBC sales and
      active Site Owners.  The decreases year over year relate
      primarily to:





§
            Asset
      impairment decreased $310,000 due to an initial impairment recorded in
      2008 as a result of the then-pending sale of the Company jet. The Company
      sold the jet in January 2009.


§
            Rep
      recognition awards decreased $540,000 directly related to the number of
      awards given for achieving milestones in the
  business.


§
            Accounting
      fees decreased $617,000.  This decrease is primarily related to
      the costs associated with the Company’s Sarbanes–Oxley compliance efforts
      for which the Company utilized external consulting services during the
      first nine months of 2008.  The majority of the on-going
      Sarbanes-Oxley compliance work was performed internally during the first
      nine months of 2009.


52




§
            Sales
      tax expense decreased $730,000 due to payments made to various states in
      2008 that are now collected as part of sales in 2009 and remitted to the
      states.


§
            Consulting
      fees decreased $757,000 due to the completion of the SAP® software
      implementation and a number of other IT initiatives which required
      consulting resources in 2008.


§
            Marketing
      event costs for top Sales Directors in our Company decreased $832,000 due
      to the discontinuance of the annual performance-based contest for our top
      sales producers of travel and
marketing.


§
            Bad
      debt expense related to advances and notes receivable to the Company’s
      independent sales contractors decreased
  $787,000.


§
            Legal
      fees decreased $1.1 million due to additional expense in 2008 related to
      general legal matters and the start-up of operations in Canada, the
      Bahamas and Bermuda as well as our insurance carrier’s reimbursement in
      2009 of $250,000 of defense costs associated with the settled California
      Attorney General suit.


§
            Contract
      labor decreased $1.2 million due to the elimination of some consulting
      contracts and the conversion of consultants to full time
      employees.


§
            Printing
      and postage costs decreased $1.5 million directly related to the decrease
      in the number of new IBC sales and the number of active Site
      Owners.


§
            Merchant
      processing fees decreased $1.6 million directly related to the number of
      outbound checks being processed.


§
            Payroll
      and related benefits decreased $1.9 million due to the reduction in the
      home office staff.


§
            Convention
      costs decreased $4.4 million due to a decrease in the number of attendees
      and cost cutting measures implemented by
  management.


§
            Website
      user fees increased $227,000 relating to the Company’s travel booking
      platform.


§
            Insurance
      costs increased $354,000 due to the increase in premiums associated with
      the risk involved with past and pending
  lawsuits.


§
            Restricted
      stock amortization and stock option expense increased $887,000 in 2009
      primarily due to amortization associated with restricted stock and stock
      option awards granted during the first and second quarters of
      2009.


§
            Legal
      settlement costs increased $1.0 million related to the California Attorney
      General lawsuit, offset by a $170,000 decrease in other legal
      expenses.





BUSINESS SEGMENTS





Marketing
Segment




Dollars
      in thousands
                          
                          Nine
      months endedSept.
      30,
                            2009
                          
                          
                          Sept.
      30,
                            2008
                          
                          
                          Incr
      (decr)
                          
                          
                          %
      changeNET
      REVENUESInternet
      business center sales and monthly fees
                          
                          $
                          43,147
                          
                          
                          $
                          97,737
                          
                          
                          $
                          (54,590
                          )
                          
                          
                          (55.9
                          )%Training
      programs and marketing materials
                          
                          
                          1,523
                          
                          
                          
                          7,770
                          
                          
                          
                          (6,247
                          )
                          
                          
                          (80.4
                          )%Other
                          
                          
                          687
                          
                          
                          
                          1,893
                          
                          
                          
                          (1,206
                          )
                          
                          
                          (63.7
                          )%Total
      net revenues
                          
                          
                          45,357
                          
                          
                          
                          107,400
                          
                          
                          
                          (62,043
                          )
                          
                          
                          (57.8
                          )%OPERATING
      EXPENSESMarketing
      commissions
                          
                          
                          21,157
                          
                          
                          
                          66,310
                          
                          
                          
                          (45,153
                          )
                          
                          
                          (68.1
                          )%Depreciation
      and amortization
                          
                          
                          1,045
                          
                          
                          
                          1,036
                          
                          
                          
                          9
                          
                          
                          
                          0.9
                          %Training
      programs and marketing materials
                          
                          
                          1,446
                          
                          
                          
                          7,095
                          
                          
                          
                          (5,649
                          )
                          
                          
                          (79.6
                          )%General
      and administrative
                          
                          
                          17,463
                          
                          
                          
                          30,184
                          
                          
                          
                          (12,721
                          )
                          
                          
                          (42.1
                          )%Total
      operating expenses
                          
                          
                          41,111
                          
                          
                          
                          104,625
                          
                          
                          
                          (63,514
                          )
                          
                          
                          (60.7
                          )%OPERATING
      INCOME
                          
                          $
                          4,246
                          
                          
                          $
                          2,775
                          
                          
                          $
                          1,471
                          
                          
                          
                          53.0
                          %




Net
Revenues





·
            IBC
      sales and monthly fees decreased $54.6 million, or 55.9%, to $43.1 million
      in the first nine months of 2009 compared to $97.7 million in the
      comparable prior year period.  This decrease is attributable to
      the following:


53




§
            IBC
      sales revenue decreased $27.0 million, or 67.6%, in the first nine months
      of 2009 to $12.9 million from the $39.9 million reported in the comparable
      period in 2008.  We have experienced a decrease in the actual
      number of IBCs sold for the nine months ended September 30, 2009 to 14,410
      from 67,901 in the prior year period.   As a result, the
      average number of IBC sales for which we were able to recognize revenue
      decreased to 3,540 in the first nine months of 2009 from 10,629 for the
      same period in 2008.  In addition, the average amount of
      recognized revenue from each IBC sale decreased to $436.58 for the nine
      months ended in 2009 from $449.95 in the comparable period in
      2008.  We believe the decline in the number of new IBC sales is
      attributable to the current economic downturn present in the United States
      and Canada.  However, due to new marketing initiatives,
      enhanced/expanded services and the new focus on shopYTB, we believe that
      we will see a stabilization of sales coupled with slower declines in
      attrition over the next eighteen
months.





§
            Monthly
      renewal fees revenue decreased $27.9 million, or 48.2%, in the first nine
      months of 2009 to $29.9 million from the $57.7 million reported in the
      comparable period in 2008.  The decrease is in direct relation
      to the number of active paying Site Owners.  The weighted
      average of paying Site Owners per month decreased from 130,690 for the
      nine months ended September 30, 2008 to 65,675 for the same period in
      2009.  We anticipate a continued decline in the number of active
      paying Site Owners in the coming months due to the general economic
      conditions in the United States and Canada.  However, due to new
      marketing initiatives, enhanced/expanded services and the new focus on
      shopYTB, we believe that we will see a stabilization of sales coupled with
      slower declines in attrition over the next eighteen
  months.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the first nine
      months of 2009 is an increase of $225,000 in Enhanced Rep Site fees
      revenue, a new program 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 Reps’ 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 decreased $6.2 million, or 80.4%,
      in the first nine months of 2009 to $1.5 million from $7.8 million in the
      comparable period in 2008.  The decrease was primarily due to a
      reduction in sales of magazines and sales aids of $3.9 million, along with
      a reduction of $2.4 million relating to the number of training events that
      the Company held.  These reductions in sales are mostly due to a
      decrease in the number of new IBC sales compared to what we have
      experienced in the past.  We expect this trend to stabilize in
      the coming months, due to the release of a new training program, RPM,
      which was released late in the third quarter of 2009, as well as new
      marketing initiatives aimed at the stabilization of our sales
      force.  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.





·
            Other
      revenue for the first nine months of 2009 decreased $1.2 million, or
      63.7%, to $687,000 from $1.9 million reported in the comparable prior year
      period.  This decrease primarily results from the reduction in
      revenue of $984,000 due to the decline in the number of paying attendees
      at the annual convention held in August 2009.   In
      addition, payment processing fees decreased $250,000 due to the reduction
      in the number of checks
processed.





Operating
Expenses





·
            Marketing
      commissions decreased $45.2 million, or 68.1%, in the first nine months of
      2009 to $21.2 million from $66.3 million compared to the first nine months
      of 2008.  Commission expense related to new IBC sales declined
      $26.0 million directly related to the decline in the number of new IBC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new IBC sale which is
      directly correlated to a decrease in commission bonuses
      paid.  As our new sales decline, the amount of leadership and
      dream bonuses paid also decreases which are included in the calculation to
      determine the average commission expense recognized on each new
      sale.  We also experienced a decrease of $10.0 million in
      commission expense relating to Site Owner monthly renewal
      fees.  This is a direct result of the decline in the number of
      average active Site Owners for the first nine months of 2009 compared to
      the same period in 2008.  Also contributing to the reduction in
      commission expense for the first nine months of 2009 was the restructuring
      of our Directors’ Pool.  This change resulted in an $8.7 million
      decrease in marketing commission expenses during the first nine months of
      2009 when compared to the same period in 2008.  During the
      fourth quarter of 2008, the Company revised its Directors’ Pool program,
      which restructured the program to only pay out the amounts contributed to
      the pool, essentially putting a cap on the amount the Company
      expensed.   These revisions also included the elimination
      of certain achievement levels that previously resulted in the highest
      levels of bonus payout from the pool.   During the third
      quarter of 2009, the Company did another restructuring of the pool,
      eliminating the cap imposed previously.  At the same time, the
      Company limited the individuals being paid from the pool by imposing more
      stringent performance standards. Also contributing to the reduction in
      commission expense is $693,000 related to the 2007 Sales Director Bonus
      Plan.  During the first nine months of 2009 and 2008, we
      incurred actual forfeitures greater than our estimated forfeitures of
      $271,000 and $45,000, respectively.  In addition, during the
      first nine months of 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 the first nine months of
      2009.


54




·
            Training
      programs and marketing materials expense decreased $5.6 million, or 79.6%,
      to $1.4 million from $7.1 million reported in the first nine months of
      2008.  A decrease of $1.8 million relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active Site Owners.  The inventory reserve decreased
      $669,000 in the first nine months of 2009 compared to the same
      period in 2008, net of additions and disposals.  In addition,
      fulfillment labor and freight decreased $1.4 million in the first nine
      months of 2009 compared to the same period in 2008, directly related to
      the reduction of sales aids and magazine sales.   Meeting
      expenses decreased $1.7 million, in the first nine months of 2009 compared
      to 2008 due to the introduction of online training, along with a decrease
      in the number of marketing events the Company hosted.  Company
      management decided to hold fewer marketing events with larger numbers of
      attendees rather than smaller, more frequent
  meetings.





·
            General
      and administrative expenses decreased $12.7 million, or 42.1%, to $17.5
      million in the first nine months of 2009 from $30.2 million in the first
      nine months of 2008.  As a percentage of total marketing net
      revenues, these expenses were 38.5% in 2009 and 28.1% in 2008. The
      decrease in general and administrative expense in 2009 is primarily
      attributable to the costs associated with the reduction of IBC sales and
      active Site Owners.  The decreases year over year relate
      primarily to:





§
            Office
      supplies decreased $218,000 due to reduction in office staff and cost
      cutting measures by management.


§
            Rep
      recognition awards decreased $385,000 directly related to the number of
      awards given for achieving milestones in the
  business.


§
            Bad
      debt expense related to advances and notes receivable to the Company’s
      independent sales contractors decreased
  $485,000.


§
            Sales
      tax expense decreased $732,000 due to payments made to various states in
      2008 that are now collected as part of the sale in 2009 and remitted to
      the states.


§
            Payroll
      and related payroll expenses decreased $796,000 due to the reduction in
      office staff.


§
            Marketing
      event costs for top Sales Directors in our Company decreased $832,000 due
      to the discontinuance of the annual performance-based contest for our top
      sales producers of travel and marketing in
2009.





§
            Printing
      and postage costs decreased $1.5 million directly related to the decrease
      in the number of new IBC sales and the number of active Site
      Owners.


§
            Merchant
      processing fees decreased $1.6 million directly related to the number of
      outbound checks being processed.


§
              Convention
      costs decreased $4.4 million due to a decrease in the number of attendees
      and cost cutting measures implemented by management.§
              Corporate
      allocation from the parent decreased $1.1 million due to the variances in
      the following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.





Travel
Segment




Dollars
      in thousands
                            
                            Nine
      months endedSept.
      30,
                              2009
                            
                            
                            Sept.
      30,
                              2008
                            
                            
                            Incr
      (decr)
                            
                            
                            %
      changeNET
      REVENUESTravel
      commissions and services
                            
                            $
                            9,611
                            
                            
                            $
                            19,861
                            
                            
                            $
                            (10,250
                            )
                            
                            
                            (51.6
                            )%Training
      programs and marketing materials
                            
                            
                            68
                            
                            
                            
                            234
                            
                            
                            
                            (166
                            )
                            
                            
                            (70.9
                            )%Other
                            
                            
                            295
                            
                            
                            
                            243
                            
                            
                            
                            52
                            
                            
                            
                            21.4
                            %Total
      net revenues
                            
                            
                            9,974
                            
                            
                            
                            20,338
                            
                            
                            
                            (10,364
                            )
                            
                            
                            (51.0
                            )%OPERATING
      EXPENSESTravel
      commissions
                            
                            
                            5,694
                            
                            
                            
                            14,349
                            
                            
                            
                            (8,655
                            )
                            
                            
                            (60.3
                            )%Depreciation
      and amortization
                            
                            
                            331
                            
                            
                            
                            169
                            
                            
                            
                            162
                            
                            
                            
                            95.9
                            %Training
      programs and marketing materials
                            
                            
                            117
                            
                            
                            
                            917
                            
                            
                            
                            (800
                            )
                            
                            
                            (87.2
                            )%General
      and administrative
                            
                            
                            5,388
                            
                            
                            
                            7,905
                            
                            
                            
                            (2,517
                            )
                            
                            
                            (31.8
                            )%Total
      operating expenses
                            
                            
                            11,530
                            
                            
                            
                            23,340
                            
                            
                            
                            (11,810
                            )
                            
                            
                            (50.6
                            )%OPERATING
      LOSS
                            
                            $
                            (1,556
                            )
                            
                            $
                            (3,002
                            )
                            
                            $
                            1,446
                            
                            
                            
                            (48.2
                            )%




55


Net
Revenues





·
            Travel
      commissions and services revenue for the first nine months of 2009
      decreased $10.3 million, or 51.6%, to $9.6 million from the $19.9 million
      reported in the comparable period in 2008.  The decrease in
      travel commissions is attributable to the decrease in the number of active
      IBCs affecting the gross travel retail bookings which are driven by the
      number of customers utilizing us as their travel sale provider in
      2009.  In addition, general economic conditions have lowered the
      overall demand for travel.  Some travel providers pay a
      preferred travel bonus, or override.  In the first nine months
      of 2008, a portion of the anticipated bonus was recorded with an
      offsetting receivable.  Due to the current trends, resulting in
      a decline in the amount of travel being sold, we do not anticipate earning
      these bonuses in 2009 and thus have not recorded any revenue or receivable
      in the current period.  This change amounts for $531,000 or 5.2%
      of the change between periods.





·
            Training
      programs and marketing materials revenue decreased $166,000, or 70.9%, to
      $68,000 from $234,000 reported in the first nine months of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain non-profit organizations which eliminated the requirement for
      training.





·
            Other
      revenue increased in the first nine months of 2009 compared to the first
      nine months of 2008 by $52,000, or 21.4%, to $295,000 from
      $243,000.  The increase primarily results from revenues of
      $212,000 generated by the shopYTB program introduced in the second quarter
      of 2009 partially offset by a reduction of $95,000 in payment processing
      fees due to the decline in the number of checks
  processed.





Operating
Expenses





·
            Travel
      commissions and other costs for the first nine months of 2009 decreased
      $8.7 million, or 60.3%, to $5.7 million from $14.3 million reported in the
      first nine months of 2008. Approximately $7.2 million of the decrease in
      travel commissions is primarily attributable to the decrease in the number
      of active Site Owners and the decrease in commissions paid for gross
      travel retail bookings which are driven by the number of customers
      utilizing us as their travel sale provider in 2009, in addition to an
      overall decline in the volume of travel due to current economic
      conditions.  A portion of this decrease, $1.5 million, is
      attributable to expense recorded in the first nine months of 2008 related
      to unsold cabins on a cruise that was not repeated in
  2009.





·
            Depreciation
      and amortization was $331,000 in the first nine months of 2009, compared
      to $169,000 in the corresponding nine months of 2008. The increase in
      depreciation and amortization of $162,000, or 95.9%, is primarily
      attributable to software additions designed to help facilitate the
      strength of our infrastructure.





·
            Training
      programs and marketing material expense decreased $800,000, or 87.2%, to
      $117,000 from $917,000 reported in the first nine months of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain non-profit organizations which eliminated the requirement for
      training resulting in a decrease of expenses of $332,000.  Also
      contributing to the decrease was the reduction of $265,000 in annual
      travel trade show expenses for 2009 compared to 2008 due to management
      cost cutting measures.





·
            General
      and administrative expenses decreased $2.5 million, or 31.8%, to $5.4
      million in the first nine months of 2009 from $7.9 million in the first
      nine months of 2008.  As a percentage of total travel net
      revenues, these expenses were 54.0% in the first nine months of 2009 and
      38.9% in the first nine months of 2008. The decreases year over year
      relate primarily to:




§
            Payroll
      decreased by $1.0 million due to the reduction in office
      staff.





§
            shopYTB
      expense, new in 2009, increased $136,000 for commissions to be
      paid.


§
              Website
      user fees increased $132,000 related to the Company’s travel booking
      platform.§
              Corporate
      allocation from the parent decreased $1.7 million due to the variances in
      the following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.




56


Parent




Dollars in thousands
                      
                      Nine months endedSept. 30,
                        2009
                      
                      
                      Sept. 30,
                        2008
                      
                      
                      Incr (decr)
                      
                      
                      % changeNET
      REVENUESOther
                      
                      $
                      -
                      
                      
                      $
                      70
                      
                      
                      $
                      (70
                      )
                      
                      
                      (100.0
                      )%Total
      net revenues
                      
                      
                      -
                      
                      
                      
                      70
                      
                      
                      
                      (70
                      )
                      
                      
                      (100.0
                      )%OPERATING
      EXPENSESDepreciation
      and amortization
                      
                      $
                      644
                      
                      
                      $
                      685
                      
                      
                      
                      (41
                      )
                      
                      
                      (6.0
                      )%Training
      programs and marketing materials
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      n/m
                      *General
      and administrative
                      
                      
                      2,252
                      
                      
                      
                      2,013
                      
                      
                      
                      239
                      
                      
                      
                      11.9
                      %Total
      operating expenses
                      
                      
                      2,897
                      
                      
                      
                      2,698
                      
                      
                      
                      199
                      
                      
                      
                      7.4
                      %OPERATING
      LOSS
                      
                      $
                      (2,897
                      )
                      
                      $
                      (2,628
                      )
                      
                      $
                      (269
                      )
                      
                      
                      10.2
                      %


* not
meaningful





Net
Revenues





Other
revenue decreased $70,000, or 100%, in the first nine months of 2009 to $0 from
$70,000 compared to the first nine months of 2008.  With the sale of
the Company jet in January 2009 no income was generated as compared to rental
income of the Company jet in 2008.





Operating
Expenses





·
            Depreciation
      and amortization was $644,000 in the first nine months of 2009, compared
      to $685,000 in the first nine months of 2008. The decrease in depreciation
      and amortization of $41,000, or 6.0%, is primarily attributable to the
      reduction of depreciation related to the sale of the Company jet in
      January 2009.





·
            General
      and administrative expenses, net of corporate allocation, increased
      $239,000, or 11.9%, to $2.3 million in the first nine months of 2009 from
      $2.0 million compared to the same period in 2008.  The increases
      year over year relate primarily to:





§
            Due
      to the overall decrease in allocable expenses as individually discussed
      below, the corporate allocation to the segments decreased $2.9
      million.  Allocable expenses include contract labor, accounting
      fees, legal fees, consulting fees, restricted stock amortization and stock
      option expense.


§
            Jet
      maintenance fees decreased $252,000 in 2009 due to the sale of the Company
      jet in January 2009.


§
            Asset
      impairment decreased $310,000 due to an initial impairment recorded in
      2008 as a result of the then-pending sale of the Company
    jet.


§
            Accounting
      fees decreased $622,000 primarily related to the costs associated with the
      Company’s Sarbanes–Oxley compliance efforts for which the Company utilized
      an external service during the first nine months of
      2008.  The majority of the on-going Sarbanes-Oxley compliance
      work was performed internally during the first nine months of
      2009.


§
            Consulting
      fees decreased $769,000 due to the completion of the SAP® software
      implementation and a number of other IT initiatives which required
      consulting resources in 2008.


§
            Legal
      fees decreased $1.1 million due to additional expense in 2008 related to
      general legal matters and the start-up of operations in Canada, the
      Bahamas and Bermuda as well as our insurance carrier’s reimbursement in
      2009 of $250,000 of defense costs associated with the settled California
      Attorney General suit.


§
            Contract
      labor decreased $1.2 million primarily due to the elimination of some
      consulting contracts and the conversion of consultants to full time
      employees.


§
            Insurance
      expense increased $428,000 due to the increase in premiums associated with
      the risk involved with past and pending
  lawsuits.


§
            Legal
      settlement costs increased $1.0 million related to the California Attorney
      General lawsuit offset by a $170,000 decrease in other legal
      accruals.


§
            Restricted
      stock amortization and stock option expense increased $887,000 in 2009
      primarily due to amortization associated with restricted stock and stock
      option awards granted during the first and second quarters of
      2009.




57


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
                    
                    Three
      months ended
                    
                    
                    Nine
      months endedSeptember
                      30,
      2009
                    
                    
                    September
                      30,
      2008
                    
                    
                    Incr
      (decr)
                    
                    
                    %
      change
                    
                    
                    September
                      30,
      2009
                    
                    
                    September
                      30,
      2008
                    
                    
                    Incr
      (decr)
                    
                    
                    %
      changeNET
      REVENUES
                    
                    $
                    -
                    
                    
                    $
                    723
                    
                    
                    $
                    (723
                    )
                    
                    
                    (100.0
                    )%
                    
                    $
                    869
                    
                    
                    $
                    2,570
                    
                    
                    $
                    (1,701
                    )
                    
                    
                    (66.2
                    )%OPERATING
      EXPENSESTravel
      commissions
                    
                    
                    -
                    
                    
                    
                    590
                    
                    
                    
                    (590
                    )
                    
                    
                    (100.0
                    )%
                    
                    
                    709
                    
                    
                    
                    1,885
                    
                    
                    
                    (1,176
                    )
                    
                    
                    (62.4
                    )%Training
      programs and marketing materials
                    
                    
                    -
                    
                    
                    
                    2
                    
                    
                    
                    (2
                    )
                    
                    
                    (100.0
                    )%
                    
                    
                    6
                    
                    
                    
                    15
                    
                    
                    
                    (9
                    )
                    
                    
                    (60.0
                    )%General
      and administrative
                    
                    
                    -
                    
                    
                    
                    446
                    
                    
                    
                    (446
                    )
                    
                    
                    (100.0
                    )%
                    
                    
                    621
                    
                    
                    
                    1,167
                    
                    
                    
                    (546
                    )
                    
                    
                    (46.8
                    )%Total
      operating expenses
                    
                    
                    -
                    
                    
                    
                    1,038
                    
                    
                    
                    (1,038
                    )
                    
                    
                    (100.0
                    )%
                    
                    
                    1,336
                    
                    
                    
                    3,067
                    
                    
                    
                    (1,731
                    )
                    
                    
                    (56.4
                    )%OPERATING
      LOSS
                    
                    
                    -
                    
                    
                    
                    (315
                    )
                    
                    
                    315
                    
                    
                    
                    (100.0
                    )%
                    
                    
                    (467
                    )
                    
                    
                    (497
                    )
                    
                    
                    30
                    
                    
                    
                    (6.0
                    )%OTHER
      INCOME (LOSS)
                    
                    
                    -
                    
                    
                    
                    8
                    
                    
                    
                    (8
                    )
                    
                    
                    (100.0
                    )%
                    
                    
                    4
                    
                    
                    
                    26
                    
                    
                    
                    (22
                    )
                    
                    
                    (84.6
                    )%LOSS
      FROM OPERATIONSBEFORE
      TAX PROVISION
                    
                    
                    -
                    
                    
                    
                    (307
                    )
                    
                    
                    307
                    
                    
                    
                    (200.0
                    )%
                    
                    
                    (463
                    )
                    
                    
                    (471
                    )
                    
                    
                    8
                    
                    
                    
                    (1.7
                    )%INCOME
      TAX PROVISION
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    n/m
                    *
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    0.0
                    %LOSS
      ON DISPOSAL, NET OF TAX
                    
                    
                    (14
                    )
                    
                    
                    -
                    
                    
                    
                    (14
                    )
                    
                    
                    n/m
                    *
                    
                    
                    (2,614
                    )
                    
                    
                    -
                    
                    
                    
                    (2,614
                    )
                    
                    
                    n/m
                    *NET
      LOSS FROMDISCONTINUED
      OPERATIONS
                    
                    $
                    (14
                    )
                    
                    $
                    (307
                    )
                    
                    $
                    293
                    
                    
                    
                    (95.4
                    )%
                    
                    $
                    (3,078
                    )
                    
                    $
                    (472
                    )
                    
                    $
                    (2,606
                    )
                    
                    
                    552.1
                    %





* not
meaningful





The
Company recorded a net loss from discontinued operations in the third quarter of
2009 of $14,000, a decrease in loss of $293,000 from a $307,000 loss recorded in
the third quarter of 2008.  This decrease in loss is due to the
disposal of the REZconnect subsidiary at the end of the second quarter of
2009.  The net loss from discontinued operations for the nine months
ended September 30, 2009 and 2008 was $3.1 million and $472,000,
respectively.  The increased loss is primarily due to the net loss on
disposal recorded during the second quarter of 2009.  The loss on
disposal included pre-tax exit costs of $2.6 million for the termination of
certain employment agreements.  See Note 13 – “Discontinued
Operations” to the condensed consolidated financial statements for further
discussion.





Liquidity
and Capital Resources





As of
September 30, 2009, we had $800,000 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.  Currently, we have suspended the ongoing construction costs of
our new corporate headquarters and our expansion project is on hold given the
decrease in the amount of cash generated by our operating activities and the
current economic climate in general.  We do not have, nor have we
pursued, any credit facilities at the current time 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 the first nine months of 2009 and 2008 of $62,000 and
$3.0 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 nine months ended September 30, 2009 by a net of 41,962
to 50,421 active Site Owner IBCs from the 92,383 reported as of December 31,
2008.  In addition, from August 2008 through May 14, 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 in May 2009.  See Note 16 – “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.  Consequently, the
independent auditor’s report for the year ended December 31, 2008, included an
explanatory paragraph to its audit opinion stating that our losses from
operations, deficiency in working capital, and substantial uncertainties
raise substantial doubt about our Company’s ability to continue as a going
concern.


58


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 continue as
a going concern.  In April 2009, our Board of Directors appointed a
consultant 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.  See Note 17 –
“Subsequent Events”.  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.  The reductions in labor and fringe costs were
approximately $1.1 million for the full year 2008 results and approximately $1.5
million and $3.5 million, respectively, for the three and nine months ended
September 30, 2009.  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 10 – “Share Based Payments” to the condensed consolidated financial
statements) and generated $144,000 in proceeds as of September 30,
2009.  Management has decided to temporarily suspend this
program.  Our Company is also evaluating the sale of certain non-core
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 fines, restitution and the reimbursement of legal fees of which $750,000 has
been paid as of September 30, 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 16 – “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 “shopYTB” 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.





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.





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 16 –
“Commitments and Contingencies” to the condensed 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.





The
accompanying financial statements have been prepared assuming that our
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.  Our Company’s ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions
referred to above, on the timeline contemplated by our plan.  The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and reclassification of assets or the
amounts and classifications of liabilities that may result should we be unable
to continue as a going concern.


59


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 condensed 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:





Nine months ended September
    30,Dollars
      in thousands
                                
                                2009
                                
                                
                                2008Net
      cash provided by (used in):Operating
      activitiesContinuing
                                
                                $
                                (766
                                )
                                
                                $
                                6,099Discontinued
                                
                                
                                (345
                                )
                                
                                
                                44Total
      operating activities
                                
                                
                                (1,111
                                )
                                
                                
                                6,143Investing
      activitiesContinuing
                                
                                
                                616
                                
                                
                                
                                (7,955
                                )Discontinued
                                
                                
                                251
                                
                                
                                
                                -Total
      investing activities
                                
                                
                                867
                                
                                
                                
                                (7,955
                                )Financing
      activitiesContinuing
                                
                                
                                (216
                                )
                                
                                
                                686Discontinued
                                
                                
                                -
                                
                                
                                
                                (16
                                )Total
      financing activities
                                
                                
                                (216
                                )
                                
                                
                                670Effect
      of exchange rate changes on cash
                                
                                
                                57
                                
                                
                                
                                -Net
      increase (decrease) in cash
                                
                                $
                                (403
                                )
                                
                                $
                                (1,142
                                )




Net cash
used in operating activities of our continuing operations in the first nine
months of 2009 was $766,000 compared to cash provided by operating activities of
$6.1 million in the first nine months of 2008.  In addition, the
operating activities of our discontinued operations used $345,000 of cash in the
nine months ended September 30, 2009 and provided $44,000 in the same period of
2008.





Net cash
provided by investing activities of our continuing operations was $616,000
during the first nine months of 2009 compared to $8.0 million used in the first
nine months of 2008. This $8.6 million decrease in cash consumed was primarily
related to a decrease in purchases of property and equipment of $7.8 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 the first nine months of 2009.  In
addition, the investing activities of our discontinued operations provided
$251,000 of cash in the nine months ended September 30, 2009, which represents
net proceeds from the sale of short term investments.





Net cash
used in financing activities of our continuing operations was $216,000 for the
nine months ended September 30, 2009 compared to net cash provided by financing
activities of $686,000 for the prior year period.  Net cash used in
financing activities during the first nine months of 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 the first nine
months of 2008 resulted primarily from proceeds received from the exercise of
common stock warrants and the bank overdraft of $434,000.  In
addition, during the first nine months of 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 the first nine months of 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.





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,
representing a use of funds of $1.3 million in the first nine months of
2009.





In
addition, the Company expended approximately $922,000 in legal defense costs
during the first nine months of 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.


60




The
Company recognized a loss of $2.6 million during the second quarter of 2009 as a
result of the decision to sell 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 during the second quarter of 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 the third quarter of 2009, the cash savings
recognized by the company was $73,000.





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. We purchased the headquarters
property in 2006 and obtained financing for the purchase through a loan from
Meridian Bank (the “Loan”).  In
2008, Meridian Bank was closed by the Illinois Department of Financial and
Professional Regulation, Division of Banking, and as a result, our Loan and
related documents were taken over by FH Partners.





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.  We paid an additional principal installment of $300,000 on
September, 30, 2009 and a second additional principal installment of $200,000 is
due and payable on December 31, 2009.  The amount due under the Note
bears an annual interest rate of 8.0% or, in the alternative at our option,
prime plus 4% subject to timely payments and the additional payment of
$200,000.  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.





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 three and nine months ended September
30, 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 three and nine months ended September 30,
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 three and nine months ended September 30, 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 three and nine months ended September 30,
2009.


61


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 three and nine months ended
September 30, 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 three and nine months ended
September 30, 2009.





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 condensed consolidated financial statements.





In June
2009, the FASB issued ASU 2009-01, “Topic 105—Generally Accepted Accounting
Principles - Amendments Based on Statement of Financial Accounting Standards No.
168—The FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles” (“ASU
2009-01”).  ASU 2009-01 amends the Codification for the
issuance of FASB 168.  ASU 2009-01 includes FASB 168 in its entirety,
including the accounting standards update instructions contained in Appendix B
of FASB 168.  The Company adopted ASU 2009-01 during the quarter ended
September 30, 2009. The adoption of ASU 2009-01 had no impact on the Company’s
financial position or results of operations as of or for the three and nine
months ended September 30, 2009.





In August
2009, the FASB issued ASU 2009-04, “Accounting for Redeemable Equity Instruments
- Amendment to Section 480-10-S99” (“ASU
2009-04”).  ASU 2009-04 updates Section 480-10-S99,
"Distinguishing Liabilities from Equity," reflecting the SEC staff’s views
regarding the application of SEC Accounting Series Release No. 268,
“Presentation in Financial Statements of Redeemable Preferred Stock” (“ASR
268”), and clarifies that ASR 268 pertains 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 ASU 2009-04 during the quarter ended September 30, 2009. The
adoption of ASU 2009-04 had no impact on the Company’s financial position or
results of operations as of or for the three and nine months ended September 30,
2009.




In
September 2009, the FASB issued ASU 2009-06, “Income Taxes (Topic 740) –
Implementation guidance on Accounting for Uncertainty in Income Taxes and
Disclosure – Amendments for Nonpublic Entities” (“ASU
2009-06”).  ASU 2009-06 provides additional implementation
guidance on accounting for uncertainty in income taxes and eliminates disclosure
required by paragraph 740-10-50-15(a) through (b) for nonpublic
entities.  The Company adopted ASU 2009-06 during the quarter ended
September 30, 2009. The adoption of ASU 2009-06 had no impact on the Company’s
financial position or results of operations as of or for the three and nine
months ended September 30, 2009.




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.


62


In August
2009, the FASB issued ASU 2009-05, “Fair Value Measurements and Disclosures
(Topic 820) - Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU
2009-05 provides clarification for circumstances in which a quoted price in an
active market for the identical liability is not available. In such
circumstances, a reporting entity is required to measure fair value using one or
more of the following techniques: (1) a valuation technique that uses: (a) the
quoted price of the identical liability when traded as an asset; or (b) quoted
prices for similar liabilities or similar liabilities when traded as assets; or
(2) another valuation technique that is consistent with the principles of Topic
820 such as an income approach or a market approach.  The guidance
provided in ASU 2009-05 is effective for the first reporting period (including
interim periods) beginning after issuance.  The Company has evaluated
this update and has determined that it will not have a significant impact on its
financial position or results of operations.





In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force” (“ASU
2009-13”).  ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined
unit.  The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010.  Early adoption is
permitted.  The Company is currently evaluating this
update.





Application
of Critical Accounting Policies





Our
significant accounting policies are discussed in the notes to the consolidated
financial statements that are included in our Annual Report on Form 10-K for the
year ended December 31, 2008 that is filed with the SEC.  In most cases,
the accounting policies utilized by us are the only ones permissible under U.S.
Generally Accepted Accounting Principles for businesses in our industry. 
However, the application of certain of these policies requires significant
judgments or a complex estimation process that can affect our results of
operations and financial position, as well as the related footnote
disclosures.  We base our estimates on historical experience and other
assumptions that we believe are reasonable. If actual amounts are ultimately
different from previous estimates, the revisions are included in our results of
operations for the period in which the actual amounts become known.  The
accounting policies and estimates that can have a significant impact on the
operating results, financial position and footnote disclosures of our Company
are described in the Management’s Discussion and Analysis of Financial Condition
and Results of Operations section of our Annual Report on Form 10-K for the year
ended December 31, 2008.





Item 3.   Quantitative and Qualitative Disclosures About Market
Risk.





Not
applicable.





Item
4.   Controls and Procedures.





As
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2008, our management concluded that our internal control over financial
reporting was not effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and presentation of
financial statements for external purposes in accordance with generally accepted
accounting principles as of December 31, 2008.  In connection with our
assessment of our internal control over financial reporting as of the end of the
fiscal year, we identified the following material weakness:





Entity-Level
Controls





As of
December 31, 2008, management concluded that our Company did not maintain a
control environment that fully emphasized the establishment of, adherence to, or
adequate communication regarding appropriate internal controls for all aspects
of its operations. Specifically, our Company’s tone at the top was not
sufficient to assure the directives of our 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 our Company’s
control structure. In addition, controls were not sufficient to prevent
management override of controls over approval of disbursements.





The
following actions were taken as part of our Company’s remediation plan to
correct this material weakness.  During 2008, an internal audit
function was established and staffed.  Early in 2009, this 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.


63


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.





Evaluation
of Disclosure Controls and Procedures





In
connection with our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, 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 defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended) as of the end of the period covered by this report. In
conducting this evaluation, our Chief Executive Officer and Chief Financial
Officer determined that, because the actions taken to correct the material
weakness in our internal control over financial reporting as of December 31,
2008 were recently implemented, further monitoring and testing was necessary to
evaluate the effects of such remedial actions.  As such, our Chief
Executive Officer and Chief Financial Officer concluded that as of September 30,
2009 our disclosure controls and procedures were not effective because of the
material weakness discussed above.  Notwithstanding the material
weakness in our internal control over financial reporting as of December 31,
2008, we believe that the consolidated financial statements contained in this
report accurately present our financial condition, results of operations, and
cash flows for the periods covered thereby in all material
respects.





Changes
in Internal Control over Financial Reporting





There
have been no changes to our internal control over financial reporting that
occurred during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our Company’s internal
control over financial reporting.





PART
II - OTHER INFORMATION





Item 1.   Legal Proceedings.





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 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, as well as claims against the Company for
alleged violations of Missouri Merchandising Practices Act, the Utah Consumer
Sales Practices Act, and the Georgia Sale of Business Opportunities Act. 
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.  To date, the
Court has not ruled on these motions.  Management believes the Company
has meritorious defenses and intends to vigorously defend these
cases.




64





On May 7,
2009, YTB Marketing and YTB Travel Network of Illinois Inc. (“YTB Travel Network”)
filed in the Circuit Court of Madison County, Illinois a Complaint for
Injunctive Relief and Motion for Temporary Restraining Order against certain
former Sales Directors of YTB Marketing (“Defendant
Directors”), each of whom became affiliated with another network
marketing company and violated their respective contract terms.  The
Complaint for Injunctive Relief requests, among other things, that the Court
enjoin the Defendant Directors from soliciting or recruiting any of the
Company’s Reps or Site Owners to any other network marketing company, other than
Reps whom the defendants personally sponsored.  YTB Marketing and YTB
Travel Network are also seeking to recover their costs, expenses and attorneys’
fees.  The Court held a hearing on the matter on May 14, 2009 and
granted a temporary injunction.  The Defendant Directors filed
counterclaims seeking payments not received by them from the date of their
termination for violation of their contracts.  The Company considers
these claims to be without merit.  The Company is seeking from the
Defendant Directors payment of the Company’s costs and attorneys’
fees.  It is anticipated that this litigation will be resolved
favorably for the Company.





Item 1A. Risk
Factors.





Not
applicable.





Item 2.   Unregistered Sales of Equity Securities and Use of
Proceeds.





None.





Item 3.   Defaults Upon Senior Securities.





None.





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





None.





Item
5.Other
Information.




a)
                    On
      November 5, 2009, Andrew Wilder, CPA and Harold Kestenbaum, Esq. resigned
      from their positions as members of the Board of Directors of the
      Company.  There were no disagreements between Messrs. Wilder and
      Kestenbaum and the Company on any matter relating to the Company’s
      operations, policies or practices which resulted in their
      resignations.  Mr. Wilder served as the Chairman of the Audit
      Committee of the Board and will be replaced in that capacity by Thomas B.
      Baker, Jr., a current member of the
Board.
  In
connection with the resignations, on November 5, 2009, the Company entered into
an Indemnification Agreement (together, the “Indemnification Agreements”) with each
of Messrs. Wilder and Kestenbaum (each, an “Indemnitee” and together, the “Indemnitees”).  Pursuant to
the Indemnification Agreements, the Company has agreed to indemnify the
Indemnitees against all expenses, judgments, fines and penalties incurred by
them in connection with the defense or settlement of any Proceeding (as defined
in the Indemnification Agreements) brought by a third party or the Company, but
only if the Indemnitee acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and, in
the case of a criminal Proceeding, had no reasonable cause to believe his
conduct was unlawful.  To the extent an Indemnitee has been successful
on the merits in defense of any Proceeding, including by a settlement, the
Company has agreed to indemnify him against all actual and reasonable expenses
incurred in connection with the defense.  If the Company advances any
expenses to an Indemnitee in connection with an ongoing Proceeding pursuant to
the Indemnification Agreements, other than a Proceeding brought on behalf of the
Company, the Company will be entitled to assume the defense of such Proceeding
and, except under certain circumstances, will not be liable to the Indemnitee in
connection with the defense of the Proceeding.
  The
Company is not obligated to indemnify or advance funds to the Indemnitee (i) if
the Proceedings are initiated voluntarily by the Indemnitee; (ii) for any
amounts for which payment is made to the Indemnitee under an insurance policy;
(iii) for any Proceeding relating to the accounting of profits made from the
purchase or sale by the Indemnity of securities of the Company in violation of
Section 16(b) of the Securities Exchange Act of 1934, as amended; (iv) for any
liabilities resulting from the Indemnitee’s conduct which has been found to have
been willful misconduct, knowingly fraudulent or deliberately dishonest; or (v)
if a court determines that such indemnification would be unlawful.
  65
  The
Company has agreed that as long as an Indemnitee may be subject to any
Proceeding, it will maintain directors’ and officers’ liability insurance
(“D&O Insurance”) for the
benefit of the Indemnitee in reasonable amounts and at the levels no less
favorable than that provided to any then-current director or officer of the
Company.  In all D&O Insurance policies, the Indemnitee shall be
named as an insured and be afforded the same rights and benefits as those
received by the Company’s directors and officers.  In addition,
coverage for the Indemnitee shall not exclude coverage for Indemnitee’s
negligence, or fraud or deliberate dishonesty unless there has been a final
adjudication of fraud or dishonesty by a court.  Coverage shall also
include punitive and exemplary damages and any expenses and amounts not
otherwise indemnifiable pursuant to the Indemnification Agreements, the
Company’s organizational documents or applicable law.
  The
foregoing summary of the Indemnification Agreements is qualified in its entirety
by reference to such agreements filed with this Form 10-Q as Exhibits 10.5 and
10.6, which are incorporated herein by reference.
 
 b)
                  There
      have been no material changes to the procedures by which stockholders may
      recommend nominees to the Company’s Board of Directors implemented since
      the filing of the Company’s Quarterly Report on Form 10-Q for the quarter
      ended June 30, 2009.


Item 6.Exhibits




10.1
            Loan
      Modification, Renewal, and Extension Agreement dated September 29, 2009 by
      and between YTB International, Inc. and FH Partners,
  LLC.




10.2
            Mortgage
      dated September 29, 2009 by and between YTB International, Inc. and FH
      Partners, LLC.





10.3
            Headquarters
      Property Note dated July 26, 2006 by and between YTB International, Inc.
      and Meridian Bank.




10.4
              Commercial
      Security Agreement dated July 26, 2006 by and between YTB International,
      Inc. and Meridian Bank.10.5
              Indemnification
      Agreement dated November 5, 2009 by and between YTB International, Inc.
      and Harold L. Kestenbaum.10.6
              Indemnification
      Agreement dated November 5, 2009 by and between YTB International, Inc.
      and Andrew J. Wilder.




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.




66




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.
 
 *
                  These certifications are attached
      as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q
      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. Signed originals of these written statements required
      by Section 906 have 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.




67




SIGNATURES





Pursuant
to the requirements 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./s/
      Robert M. Van PattenRobert
      M. Van PattenDirector
      and Chief Executive OfficerDated:   November
      6, 2009/s/
      John D. ClaggJohn
      D. ClaggChief
      Financial OfficerDated:   November
      6, 2009


68