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:  June 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.


Yes  x
            
            Noo


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  o
            
            Noo





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  o
            
            Nox





As of
August 3, 2009, there were 74,042,293 shares of the registrant’s Class A Common
Stock, $0.001 par value, outstanding and 34,065,929 shares of the registrant’s
Class B Common Stock, $0.001 par value, outstanding. *





*
Excludes 3,268,554 restricted shares of Class A Common Stock and 6,537,108
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 six months ended June 30, 2009





PART
      I
                
                FINANCIAL
      INFORMATIONItem
      1.
                
                Financial
      Statements.Condensed
      Consolidated Balance Sheets, June 30, 2009 (Unaudited) and December 31,
      2008
                3Condensed
      Consolidated Statements of Operations (Unaudited)Three months ended June
      30, 2009 and 2008
                4Condensed
      Consolidated Statements of Operations (Unaudited) Six months ended June
      30, 2009 and 2008
                5Condensed
      Consolidated Statement of Change in Stockholders’ Equity (Unaudited) Six
      months ended June 30, 2009
                6Condensed
      Consolidated Statements of Cash Flows (Unaudited) Six months ended June
      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.
                31Item
      3.
                
                Quantitative
      and Qualitative Disclosures About Market Risk.
                58Item
      4.
                
                Controls
      and Procedures.
                58PART
      II
                
                OTHER
      INFORMATIONItem
      1.
                
                Legal
      Proceedings.
                59Item
      1A.
                
                Risk
      Factors.
                61Item
      2.
                
                Unregistered
      Sales of Equity Securities and Use of Proceeds.
                61Item
      3.
                
                Defaults
      Upon Senior Securities.
                61Item
      4.
                
                Submission
      of Matters to a Vote of Security Holders.
                61Item
      5.
                
                Other
      Information.
                62Item
      6.
                
                Exhibits.
                62Signatures
                63





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)
                          June 30, 2009
                        
                        
                        December 31,2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        1,003
                        
                        
                        $
                        1,203Restricted
      cash
                        
                        
                        2,907
                        
                        
                        
                        1,667Short-term
      investments
                        
                        
                        -
                        
                        
                        
                        251Accounts
      receivable (less allowance for doubtful accounts of $0 in 2009 and $7 in
      2008)
                        
                        
                        1,246
                        
                        
                        
                        2,680Notes
      receivable (less allowance for uncollectible notes of $450 in 2009 and
      $562 in 2008)
                        
                        
                        1,598
                        
                        
                        
                        458Inventory,
      net
                        
                        
                        659
                        
                        
                        
                        1,335Prepaid
      marketing commissions and advances (less allowance for uncollectible
      advances of $241 in 2009 and $162 in 2008)
                        
                        
                        3,295
                        
                        
                        
                        8,991Assets
      held for sale
                        
                        
                        -
                        
                        
                        
                        844Other
      prepaid expenses and current assets, net
                        
                        
                        802
                        
                        
                        
                        350Total
      current assets
                        
                        
                        11,510
                        
                        
                        
                        17,779Property
      and equipment, net
                        
                        
                        17,471
                        
                        
                        
                        18,728Intangible
      assets, net
                        
                        
                        2,285
                        
                        
                        
                        2,322Goodwill
                        
                        
                        2,979
                        
                        
                        
                        2,979Other
      assets
                        
                        
                        72
                        
                        
                        
                        1,278TOTAL
      ASSETS
                        
                        $
                        34,317
                        
                        
                        $
                        43,086LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,216
                        
                        
                        $
                        2,446Accrued
      marketing commissions
                        
                        
                        1,369
                        
                        
                        
                        2,148Accrued
      travel commissions
                        
                        
                        1,297
                        
                        
                        
                        1,810Other
      accrued expenses
                        
                        
                        3,898
                        
                        
                        
                        3,757Deferred
      revenue
                        
                        
                        7,289
                        
                        
                        
                        13,505Short-term
      debt
                        
                        
                        1,926
                        
                        
                        
                        1,973Other
      current liabilities
                        
                        
                        1,294
                        
                        
                        
                        1,303Total
      current liabilities
                        
                        
                        18,289
                        
                        
                        
                        26,942Other
      long-term liabilities:Deferred
      tax liability
                        
                        
                        755
                        
                        
                        
                        755Other
      income tax liabilities
                        
                        
                        175
                        
                        
                        
                        185Other
      liabilities
                        
                        
                        2,025
                        
                        
                        
                        11Total
      other long-term liabilities
                        
                        
                        2,955
                        
                        
                        
                        951TOTAL
      LIABILITIES
                        
                        
                        21,244
                        
                        
                        
                        27,893Commitments
      and Contingencies (Notes 2 and 15)STOCKHOLDERS' EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued and outstanding
      at June 30, 2009 and December 31, 2008
                        
                        
                        -
                        
                        
                        
                        -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized; 73,374,723
      and 69,379,259 shares issued and outstanding at June 30, 2009 and December
      31, 2008, respectively
                        
                        
                        73
                        
                        
                        
                        69Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 34,540,415
      and 34,413,682 shares issued and outstanding at June 30, 2009 and December
      31, 2008, respectively; convertible into Class A shares on a one-for-one
      basis
                        
                        
                        35
                        
                        
                        
                        34Additional
      paid-in capital
                        
                        
                        40,225
                        
                        
                        
                        38,843Accumulated
      other comprehensive loss
                        
                        
                        (53
                        )
                        
                        
                        (70
                        )Retained
      earnings (deficit)
                        
                        
                        (27,185
                        )
                        
                        
                        (23,683
                        )Treasury
      stock, at cost, 25,404 shares at June 30, 2009
                        
                        
                        (22
                        )
                        
                        
                        -TOTAL
      STOCKHOLDERS' EQUITY
                        
                        
                        13,073
                        
                        
                        
                        15,193TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        34,317
                        
                        
                        $
                        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
                  
                  June 30, 2009
                  
                  
                  June 30, 2008NET
      REVENUESInternet
      business center sales and monthly fees
                  
                  $
                  13,799
                  
                  
                  $
                  33,352Travel
      commissions and services
                  
                  
                  3,809
                  
                  
                  
                  7,849Training
      programs and marketing materials
                  
                  
                  285
                  
                  
                  
                  2,269Other
                  
                  
                  155
                  
                  
                  
                  230Total
      net revenues
                  
                  
                  18,048
                  
                  
                  
                  43,700OPERATING
      EXPENSESMarketing
      commissions
                  
                  
                  6,646
                  
                  
                  
                  24,509Travel
      commissions
                  
                  
                  2,211
                  
                  
                  
                  6,452Depreciation
      and amortization
                  
                  
                  678
                  
                  
                  
                  676Training
      programs and marketing materials
                  
                  
                  349
                  
                  
                  
                  2,904General
      and administrative
                  
                  
                  7,110
                  
                  
                  
                  9,268Total
      operating expenses
                  
                  
                  16,994
                  
                  
                  
                  43,809INCOME
      (LOSS) FROM CONTINUING OPERATIONS
                  
                  
                  1,054
                  
                  
                  
                  (109
                  )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                  
                  
                  44
                  
                  
                  
                  76Interest
      expense
                  
                  
                  (22
                  )
                  
                  
                  (36
                  )Foreign
      currency translation gain (loss)
                  
                  
                  13
                  
                  
                  
                  (17
                  )Total
      other income (expense)
                  
                  
                  35
                  
                  
                  
                  23INCOME
      (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
    PROVISION
                  
                  
                  1,089
                  
                  
                  
                  (86
                  )INCOME
      TAX (CREDIT) PROVISION
                  
                  
                  (192
                  )
                  
                  
                  14NET
      INCOME (LOSS) FROM CONTINUING OPERATIONS
                  
                  
                  1,281
                  
                  
                  
                  (100
                  )NET
      LOSS FROM DISCONTINUED OPERATIONS (Note 12)
                  
                  
                  (2,871
                  )
                  
                  
                  (99
                  )NET
      LOSS
                  
                  $
                  (1,590
                  )
                  
                  $
                  (199
                  )NET
      INCOME (LOSS) PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                  
                  
                  105,627,059
                  
                  
                  
                  103,183,276Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                  
                  
                  105,627,059
                  
                  
                  
                  103,183,276Net
      income (loss) per share from continuing operations -
basic*
                  
                  $
                  0.01
                  
                  
                  $
                  (0.00
                  )Net
      loss per share from discontinued operations - basic*
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.00
                  )Net
      loss per share - basic*
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.00
                  )Net
      income (loss) per share from continuing operations -
    diluted*
                  
                  $
                  0.01
                  
                  
                  $
                  (0.00
                  )Net
      loss per share from discontinued operations - diluted*
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.00
                  )Net
      loss per share - diluted*
                  
                  $
                  (0.02
                  )
                  
                  $
                  (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)





Six months endedDollars in thousands, except share and per share data
                
                June 30, 2009
                
                
                June 30, 2008NET
      REVENUESInternet
      business center sales and monthly fees
                
                $
                32,407
                
                
                $
                67,263Travel
      commissions and services
                
                
                5,969
                
                
                
                12,501Training
      programs and marketing materials
                
                
                769
                
                
                
                5,327Other
                
                
                275
                
                
                
                564Total
      net revenues
                
                
                39,420
                
                
                
                85,655OPERATING
      EXPENSESMarketing
      commissions
                
                
                16,013
                
                
                
                49,545Travel
      commissions
                
                
                3,625
                
                
                
                9,762Depreciation
      and amortization
                
                
                1,336
                
                
                
                1,212Training
      programs and marketing materials
                
                
                972
                
                
                
                5,067General
      and administrative
                
                
                18,032
                
                
                
                23,564Total
      operating expenses
                
                
                39,978
                
                
                
                89,150LOSS
      FROM CONTINUING OPERATIONS
                
                
                (558
                )
                
                
                (3,495
                )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                
                
                71
                
                
                
                131Interest
      expense
                
                
                (48
                )
                
                
                (51
                )Foreign
      currency translation gain (loss)
                
                
                15
                
                
                
                (18
                )Total
      other income (expense)
                
                
                38
                
                
                
                62LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
                
                
                (520
                )
                
                
                (3,433
                )INCOME
      TAX (CREDIT) PROVISION
                
                
                (82
                )
                
                
                119NET
      LOSS FROM CONTINUING OPERATIONS
                
                
                (438
                )
                
                
                (3,552
                )NET
      LOSS FROM DISCONTINUED OPERATIONS (Note 12)
                
                
                (3,064
                )
                
                
                (165
                )NET
      LOSS
                
                $
                (3,502
                )
                
                $
                (3,717
                )NET
      LOSS PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                
                
                104,715,067
                
                
                
                103,020,872Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                
                
                104,715,067
                
                
                
                103,020,872Net
      loss per share from continuing operations - basic*
                
                $
                (0.00
                )
                
                $
                (0.03
                )Net
      loss per share from discontinued operations - basic*
                
                $
                (0.03
                )
                
                $
                (0.00
                )Net
      loss per share - basic*
                
                $
                (0.03
                )
                
                $
                (0.04
                )Net
      loss per share from continuing operations - diluted*
                
                $
                (0.00
                )
                
                $
                (0.03
                )Net
      loss per share from discontinued operations - diluted*
                
                $
                (0.03
                )
                
                $
                (0.00
                )Net
      loss per share - diluted*
                
                $
                (0.03
                )
                
                $
                (0.04
                )





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





See
accompanying notes to 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
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,189,577
                      
                      
                      
                      1
                      
                      
                      
                      (1,189,577
                      )
                      
                      
                      (1
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Common
      shares issued for restricted stock grant
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,514,177
                      
                      
                      
                      3
                      
                      
                      
                      1,024,600
                      
                      
                      
                      1
                      
                      
                      
                      (4
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Amortization
      of restricted stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,087
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,087Shares
      sold under TSO Stock Purchase Plan
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      291,710
                      
                      
                      
                      -
                      
                      
                      
                      291,710
                      
                      
                      
                      -
                      
                      
                      
                      101
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      101Shares
      surrendered to treasury in payment of oustanding note
      receivable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (25,404
                      )
                      
                      
                      (22
                      )
                      
                      
                      (22
                      )Stock
      option compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      199
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      199Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,502
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,502
                      )Foreign
      currency translation adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17Total
      comprehensive loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,485
                      )Rounding
      difference
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      (1
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at June 30, 2009
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      73,374,723
                      
                      
                      $
                      73
                      
                      
                      
                      34,540,415
                      
                      
                      $
                      35
                      
                      
                      $
                      40,225
                      
                      
                      $
                      (53
                      )
                      
                      $
                      (27,185
                      )
                      
                      
                      (25,404
                      )
                      
                      $
                      (22
                      )
                      
                      $
                      13,073





See
accompanying notes to unaudited condensed consolidated financial
statements.





6




YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


Dollars
      in thousands
                      
                      Six months endedJune 30, 2009
                      
                      
                      June 30, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (3,502
                      )
                      
                      $
                      (3,717
                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                      
                      
                      1,336
                      
                      
                      
                      1,212Write-off
      of uncollectible notes and advances
                      
                      
                      22
                      
                      
                      
                      100Loss
      on disposal of property and equipment
                      
                      
                      40
                      
                      
                      
                      12Loss
      on disposal of discontinued operations, net of tax
                      
                      
                      2,600
                      
                      
                      
                      -Reserve
      against inventory
                      
                      
                      407
                      
                      
                      
                      524Reserve
      against earnest money deposit
                      
                      
                      4
                      
                      
                      
                      -Write-off
      of deposit on acquisition of business
                      
                      
                      -
                      
                      
                      
                      311Provision
      for uncollectible notes and advances
                      
                      
                      13
                      
                      
                      
                      17Interest
      income on notes receivable
                      
                      
                      (16
                      )
                      
                      
                      (60
                      )Provision
      for uncollectible interest on notes receivable
                      
                      
                      16
                      
                      
                      
                      60Shares
      issued for services
                      
                      
                      -
                      
                      
                      
                      510Amortization
      of restricted stock
                      
                      
                      1,087
                      
                      
                      
                      2,579Stock
      option expense
                      
                      
                      181
                      
                      
                      
                      81Compensation
      expense (credit)
                      
                      
                      (270
                      )
                      
                      
                      -Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card
processing
                      
                      
                      (1,288
                      )
                      
                      
                      (123
                      )Restricted
      cash-Canadian operations
                      
                      
                      96
                      
                      
                      
                      (74
                      )Accounts
      receivable, net
                      
                      
                      1,364
                      
                      
                      
                      (469
                      )Notes
      receivable
                      
                      
                      82
                      
                      
                      
                      679Inventory
                      
                      
                      269
                      
                      
                      
                      558Prepaid
      marketing commissions and advances
                      
                      
                      5,418
                      
                      
                      
                      4,946Other
      prepaid expenses and current assets
                      
                      
                      (181
                      )
                      
                      
                      (704
                      )Other
      assets
                      
                      
                      3
                      
                      
                      
                      (95
                      )Accounts
      payable
                      
                      
                      (1,244
                      )
                      
                      
                      1,513Accrued
      marketing commissions
                      
                      
                      (767
                      )
                      
                      
                      (87
                      )Accrued
      travel commissions
                      
                      
                      (481
                      )
                      
                      
                      496Other
      accrued expenses
                      
                      
                      (138
                      )
                      
                      
                      (1,388
                      )Other
      current liabilities
                      
                      
                      (58
                      )
                      
                      
                      524Deferred
      revenue
                      
                      
                      (5,949
                      )
                      
                      
                      (2,688
                      )Other
      income tax liabilities
                      
                      
                      5
                      
                      
                      
                      (23
                      )Other
      liabilities
                      
                      
                      (2
                      )
                      
                      
                      -NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                      
                      
                      (953
                      )
                      
                      
                      4,694CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                      
                      
                      (59
                      )
                      
                      
                      (5,773
                      )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
                      
                      
                      357
                      
                      
                      
                      -Purchases
      of short-term investments
                      
                      
                      (106
                      )
                      
                      
                      27Cash
      relinquished in disposal of discontinued operations
                      
                      
                      (378
                      )
                      
                      
                      -NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
                      
                      
                      672
                      
                      
                      
                      (5,885
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Principal
      repayments of debt
                      
                      
                      -
                      
                      
                      
                      (11
                      )Repayment
      of short-term debt
                      
                      
                      (47
                      )
                      
                      
                      (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
      received under TSO stock purchase plan
                      
                      
                      117
                      
                      
                      
                      -Proceeds
      from exercise of common stock warrants
                      
                      
                      -
                      
                      
                      
                      107NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                      
                      
                      70
                      
                      
                      
                      92EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                      
                      
                      11
                      
                      
                      
                      -NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (200
                      )
                      
                      
                      (1,099
                      )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      
                      
                      1,203
                      
                      
                      
                      1,731CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                      
                      $
                      1,003
                      
                      
                      $
                      632





7




YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows (continued)


(Unaudited)





Six months endedJune 30, 2009
                        
                        
                        June 30, 2008SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid (net of capitalized interest)
                        
                        $
                        49
                        
                        
                        $
                        52Income
      taxes paid
                        
                        
                        145
                        
                        
                        
                        149SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Property
      and equipment included in accounts payable and accrued
      expenses
                        
                        $
                        15
                        
                        
                        $
                        779Reclass
      of notes receivable from other assets to notes receivable
                        
                        
                        1,200
                        
                        
                        
                        -Shares
      surrendered in repayment of note receivable
                        
                        
                        22
                        
                        
                        
                        -Stock
      option compensation
                        
                        
                        18
                        
                        
                        
                        234Shares
      issued for restricted stock grant
                        
                        
                        4
                        
                        
                        
                        5Transfer
      of Class B common stock shares to Class A common stock
    shares
                        
                        
                        1
                        
                        
                        
                        12Reclass
      of notes receivable to other current assets / other assets
                        
                        
                        -
                        
                        
                        
                        65Notes
      receivable issued for sale of property and equipment
                        
                        
                        -
                        
                        
                        
                        60Unrealized
      loss on securities
                        
                        
                        -
                        
                        
                        
                        50Reclass
      of notes receivable reserve to acquisition of business
    reserve
                        
                        
                        -
                        
                        
                        
                        45





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 12 – “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 provides internet-based travel-related services and is a full-service
provider of travel products and services to the leisure and small business
traveler. 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, formerly referred to as internet travel
websites, and compensates its Independent Marketing Representatives (“Reps”) (independent
contractors) who 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 (“SO” or “SOs”), formerly known
as Travel Site Owners (“TSO” or “TSOs”), formerly
known as Referring Travel Agents (Referring Travel Affiliates in Canada), most
of whom work from their homes.





YTB
Travel contracts with the customers of IBCs, supports online booking
transactions, supplies personal fulfillment services, collects travel
commissions 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 that it produces. 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 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 continental
United States, but also provides services to customers in Canada, Puerto Rico,
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, SOs living in
these countries can now refer customers to book travel through IBCs that SOs
acquire from the Company, and, similarly, Reps who are located there can market
IBCs to others in the continental U.S., Puerto Rico, the Bahamas, Bermuda and
Canada.





NOTE 2 – BASIS OF
PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”).  Certain
information and disclosures included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“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.





9




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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 and in accordance with the recently issued Statement of Financial
Accounting Standards (“SFAS”) No. 165,
“Subsequent Events” (“SFAS 165”), the
Company evaluated subsequent events after the balance sheet date of June 30,
2009 through August 7, 2009, the date of issuance of the Company’s condensed
consolidated financial statements. See Note 16 - “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 June 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 12
– “Discontinued Operations” for additional information.





As shown
in the accompanying financial statements, the Company has incurred losses from
continuing operations for the first six months of 2009 and 2008 of $558,000 and
$3.5 million, respectively.  In addition, negative current economic
conditions and other factors have led to a falloff in the number of active SO
IBCs in the Company.  The number of active SO IBC sites has declined
during the six months ended June 30, 2009 by a net of 31,969 to 60,414 active SO
IBCs from the 92,383 reported as of December 31, 2008.  In addition, from
August 2008 through May 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 in May
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 15 – “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.  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 $1.2
million and $2.0 million for the three and six months ended June 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 $117,000 in proceeds as of June 30, 2009.  See Note 9 –
“Share-Based Payments” and Note 10 – “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 $500,000 has
been paid as of June 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.


10




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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.





New
Accounting Pronouncements:





Recently
Adopted Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51” (“SFAS 160”). SFAS 160
amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements” and establishes accounting and reporting standards that require
non-controlling interests, previously referred to as minority interests, to be
reported as a component of equity. In addition, changes in a parent’s ownership
interest while the parent retains its controlling interest are accounted for as
equity transactions, and upon a gain or loss of control, retained ownership
interests are remeasured at fair value, with any gain or loss recognized in
earnings.  The adoption of SFAS 160 as of January 1, 2009 had no
impact on the Company’s financial position or results of operations as of or for
the three and six months ended June 30, 2009.





The
provisions of SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”) became
effective for the Company on January 1, 2009. SFAS 161 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 of SFAS 161 on a prospective basis. Accordingly, disclosures
related to interim periods prior to the date of adoption have not been
presented. SFAS 161 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 six months ended June 30, 2009.





Effective
January 1, 2009, the Company adopted SFAS No. 141(R), “Business
Combinations” (“SFAS
141(R)”) as amended by FASB Staff Position (“FSP”) FAS No.
141(R)-1 (“FSP
141(R)-1”) issued in April 2009.  SFAS 141(R) establishes
principles and requirements 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.  FSP 141(R)-1 addresses certain issues raised
upon the issuance of SFAS 141(R), with regard to initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination.  SFAS 141(R), as amended, will be effective for any
future acquisitions made by the Company.  The adoption of SFAS 141(R),
as amended, had no impact on the Company’s financial position or results of
operations as of or for the three and six months ended June 30,
2009.





In April
2008, the FASB finalized FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS
142”).  The intent of FSP 142-3 is to improve the consistency
between the useful life of a recognized asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141(R), and other U.S. generally accepted accounting principles. In addition,
FSP 142-3 requires additional disclosures concerning recognized intangible
assets. These additional disclosures would enable users of financial statements
to assess the extent to which the expected future cash flows associated with the
asset are affected by the entity’s intent and/or ability to renew or extend the
arrangement. FSP 142-3 is effective for fiscal years beginning after December
15, 2008, and interim periods within those years.  The
Company adopted FSP 142-3 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 six months ended June 30, 2009.





In
addition, in April 2009, the FASB issued FSP No. FAS 107-1 and Accounting
Principles Board Opinion (“APB”) 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”) which requires public entities to disclose in their interim
financial statements the fair value of all financial instruments within the
scope of SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments”, as well as the methods and significant assumptions used to
estimate the fair value of those financial instruments. The Company adopted FSP
FAS 107-1 and APB 28-1 during the quarter ended June 30, 2009. The adoption of
FSP FAS 107-1 and APB 28-1 had no impact on the Company’s financial position or
results of operations as of or for the three and six months ended June 30,
2009.





11




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Also in
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”)
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. FSP 115-2 and 124-2 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 FSP 115-2 and 124-2
during the quarter ended June 30, 2009.  The adoption of FSP 115-2 and
124-2 had no impact on the Company’s financial position or results of operations
as of or for the three and six months ended June 30, 2009.





The FASB
issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP 157-4”) during
April 2009. FSP 157-4 provides additional 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. FSP 157-4
also requires new disclosures relating to fair value measurement inputs and
valuation techniques (including changes in inputs and valuation techniques). The
Company adopted FSP 157-4 during the quarter ended June 30, 2009.  The
adoption of FSP 157-4 had no impact on the Company’s financial position or
results of operations as of or for the three and six months ended June 30,
2009.





In May
2009, the FASB issued SFAS 165. The objective of this statement is 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 statement 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 this statement, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009. The Company
adopted SFAS 165 in the second quarter of 2009 and the adoption did not have a
material impact on its condensed consolidated financial statements.





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140” (“SFAS
166”).  SFAS 166 removes the concept of a qualifying
special-purpose entity from SFAS 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” 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 statement 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 of SFAS 166 to have a material impact on its consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS
167”).  SFAS 167 amends FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities” to
require 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, SFAS 167 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 statement shall be effective as of the beginning of each reporting 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.





12




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles (“SFAS
168”).  SFAS 168 establishes the FASB Accounting Standards
CodificationTM(the
“Codification”)
as the single source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants.  When effective, the Codification will
supersede all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. Following SFAS 168, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates,
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.  SFAS 168 and the Codification are
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The Company has evaluated this new
statement and has determined that it will not have a significant impact on the
determination or reporting of its financial results.





13




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 3 – NET INCOME (LOSS)
PER SHARE





The
Company has two classes of common stock:  Class A Common Stock and
Class B Common Stock.  Shares of Class B Common Stock are convertible
into shares of Class A Common Stock at any time, on a one-for-one
basis.  Shares of Class B Common Stock automatically convert into
shares of Class A Common Stock upon sale or other disposition (except for
transfers among related entities, transfers to trusts for the benefit of the
transferring holder of the Class B Common Stock, bona fide pledges under
financing arrangements and similar transfers).  The Company has
computed the earnings per share in compliance with SFAS No. 128, “Earnings per
Share,” which requires companies that have multiple classes of equity securities
to use the “two-class” method in computing earnings per share.  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.





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
                                      
                                      
                                      Six months endedJune 30,
                                      
                                      
                                      June 30,Dollars in thousands, except share and per share data
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Numerator:Net
      income (loss) from continuing operations
                                      
                                      $
                                      1,281
                                      
                                      
                                      $
                                      (100
                                      )
                                      
                                      $
                                      (438
                                      )
                                      
                                      $
                                      (3,552
                                      )Net
      loss from discontinued operations
                                      
                                      
                                      (2,871
                                      )
                                      
                                      
                                      (99
                                      )
                                      
                                      
                                      (3,064
                                      )
                                      
                                      
                                      (165
                                      )Net
      loss
                                      
                                      $
                                      (1,590
                                      )
                                      
                                      $
                                      (199
                                      )
                                      
                                      $
                                      (3,502
                                      )
                                      
                                      $
                                      (3,717
                                      )Denominator:Weighted
      average common shares and denominator for basic
    calculation:
                                      
                                      
                                      105,627,059
                                      
                                      
                                      
                                      103,183,276
                                      
                                      
                                      
                                      104,715,067
                                      
                                      
                                      
                                      103,020,872Weighted
      average effects of dilutive equity based compensation
    awards:Stock
      options
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Stock
      warrants
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Restricted
      stock awards
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Denominator
      for diluted calculation
                                      
                                      
                                      105,627,059
                                      
                                      
                                      
                                      103,183,276
                                      
                                      
                                      
                                      104,715,067
                                      
                                      
                                      
                                      103,020,872Net
      income (loss) per share from continuing operations per share -
      basic*
                                      
                                      $
                                      0.01
                                      
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )Net
      loss per share from discontinued operations per share -
    basic*
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.00
                                      )Net
      loss per share - basic*
                                      
                                      $
                                      (0.02
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.04
                                      )Net
      income (loss) per share from continuing operations per share -
      diluted*
                                      
                                      $
                                      0.01
                                      
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )Net
      loss per share from discontinued operations per share -
      diluted*
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.00
                                      )Net
      loss per share - diluted*
                                      
                                      $
                                      (0.02
                                      )
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      (0.03
                                      )
                                      
                                      $
                                      (0.04
                                      )





*  For
Class A and Class B





An
aggregate of 9,549,488 and 7,763,772 shares (of both Class A Common Stock and
Class B Common Stock) for the three and six months ended June 30, 2008,
respectively, 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 excluded for the three and six months
ended June 30, 2009 due to the decline in the Company’s average stock price
during those periods.




14




YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 4 – RESTRICTED
CASH





Restricted
cash as of June 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 $48,000 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 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 June 30, 2009, the full amount of
the $2.7 million reserve requirement was funded.





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 June 30, 2009
and December 31, 2008, reserves of $450,000 and $562,000, respectively, have
been recorded against the respective note balances of $450,000 and
$622,000.




Also
included in notes receivable as of June 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, 120 days from the date of
the note.  As of June 30, 2009, the note remained
outstanding.  On May 6, 2009, the Company initiated foreclosure
proceedings under the terms of the promissory note and mortgage.  See
Note 15 – “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 June 30, 2009 and December 31,
2008.




In
addition, included in notes receivable as of June 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 at 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
                      
                      June 30, 2009
                      
                      
                      December 31,
                        2008Audio
      / video marketing
                      
                      $
                      20
                      
                      
                      $
                      66Printed
      marketing materials
                      
                      
                      292
                      
                      
                      
                      869Apparel
                      
                      
                      347
                      
                      
                      
                      400Inventory,
      net
                      
                      $
                      659
                      
                      
                      $
                      1,335





For the
three months ended June 30, 2009 and 2008, the Company recorded a reserve of
$144,000 and $524,000, respectively, against slow-moving magazines, audio /
video and printed marketing materials, net of previously reserved inventory sold
of $55,000 and $0, respectively.  For the six months ended June 30,
2009 and 2008, the Company recorded a reserve of $407,000 and $524,000,
respectively, net of previously reserved inventory sold of $141,000 and $0,
respectively.  Inventory reserves recorded at June 30, 2009 and
December 31, 2008 are $3.0 million.




15


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements




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 six
months ended June 30, 2008 was $46,000 and $62,000, 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
                      
                      June 30,
                        2009
                      
                      
                      December31,
                        2008Equipment
                      
                      $
                      2,927
                      
                      
                      $
                      3,131Furniture
      and fixtures
                      
                      
                      710
                      
                      
                      
                      751Capitalized
      software
                      
                      
                      4,193
                      
                      
                      
                      5,296Vehicles
                      
                      
                      64
                      
                      
                      
                      64Buildings
      and improvements
                      
                      
                      4,232
                      
                      
                      
                      4,216Land
                      
                      
                      3,341
                      
                      
                      
                      3,341Construction
      in progress and deposits
                      
                      
                      6,643
                      
                      
                      
                      6,676Leasehold
      improvements
                      
                      
                      115
                      
                      
                      
                      14222,225
                      
                      
                      
                      23,617Less:  Accumulated
      depreciation
                      
                      
                      (4,754
                      )
                      
                      
                      (4,889
                      )Property
      and equipment, net
                      
                      $
                      17,471
                      
                      
                      $
                      18,728





Total
depreciation and amortization expense on property and equipment was $671,000 and
$658,000 for the three months ended June 30, 2009 and 2008, respectively and
$1.3 million and $1.2 million, respectively, for the six months ended June 30,
2009 and 2008.





As of
June 30, 2009 and December 31, 2008, capitalized software development costs, net
of accumulated amortization, totaled $217,000 and $305,000,
respectively.  For the three months ended June 30, 2009 and 2008, the
Company recorded amortization of capitalized software development costs of
$44,000 and $40,000, respectively, and $88,000 and $77,000, for the six months
ended June 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 six months of 2008.
Cost, net of accumulated amortization was $961,000 and $1.3 million as of June
30, 2009 and December 31, 2008, respectively.  Depreciation for the
three months ended June 30, 2009 and 2008 was $156,000 and $145,000,
respectively, and $290,000 and $223,000 for the six months ended June 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 $24,000 and $55,000, respectively, for
the three and six months ended June 30, 2008.  During January 2009,
construction on the new corporate headquarters was suspended.


16


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 9 – SHARE-BASED
PAYMENTS




As of
June 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 SOs 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 (the “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 Offering Date.  The term of each option
is ten years from the Offering Date and the options vest at the rate of 20% on
each of the first five anniversaries of the 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 $70,000 in compensation expense for the three months ended
June 30, 2009 for stock options issued under this grant.





The
Company recognized $118,000 and $48,000 in compensation expense for all stock
options issued under the 2004 Plan for the three months ended June 30, 2009 and
2008, respectively, and $179,000 and $81,000 for the six months ended June 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 June 30, 2009 and 2008 was
$335,000 and $785,000, respectively.





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 $109,000 and $662,000, respectively, for the three and six months ended June
30, 2009.


17


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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 Company recognized $20,000 in compensation expense for the
three months ended June 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 and an estimate of shares that will not vest due to
forfeitures.  The Company recognized $249,000 in compensation expense
for the three months ended June 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 an at-election restricted
stock award under the Company’s non-employee director compensation policy to the
three new 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 $40,000 on the grant date which represented the at-election
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 Company recognized $3,000 in compensation expense
for the three months ended June 30, 2009 for the amortization of the restricted
stock awards issued under this grant.





The
Company recorded $343,000 and $136,000 as net compensation expense related to
the amortization of all restricted stock awards issued under the 2004 Plan for
the three months ended June 30, 2009 and 2008, respectively, and $1.1 million
and $136,000 for the six months ended June 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 June
30, 2009, there was $910,000 of unrecognized compensation expense related to the
5,414,908 shares of unvested restricted stock, which the Company expects to
recognize over the next 3.98 years.





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 first two quarters of 2009.




The Company recorded a net
reduction in accrued bonuses with an offset to additional paid-in capital of
$51,000 and $53,000 during the three months ended June 30, 2009 and 2008,
respectively, and $18,000 and $234,000 for the six months ended June 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 first quarter of 2009, accrued
bonuses and marketing commissions expense were reduced by $271,000 for actual
forfeitures incurred during the quarter.  No forfeitures were incurred
during the second quarter 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 expenses on the
condensed consolidated balance sheet as of June 30, 2009 and
December 31, 2008, respectively, are $164,000 and $452,000 of accrued bonuses
that relate to options that are exercisable in the
future.


18


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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 Offering Date 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
                  %





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 $2,000 as a reduction in revenues for equity unit
options purchased under the TSO SPP for the three and six months ended June 30,
2009.  The Company adjusts share-based compensation on a quarterly
basis for changes to the estimate of expected equity awarded for forfeitures
based on a review of recent forfeiture activity and expected future SO
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 June 30, 2009 was $40,000.





The
following table provides additional information with respect to the aggregate
stock option plan activity for the first six 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
                      AverageFair
                      Value
                    
                    
                    Weighted
                      Average
                      Remaining
                      Life(Years)Options
      outstanding, beginning of year
                    
                    
                    2,453,227
                    
                    
                    $
                    0.85
                    
                    
                    $
                    0.68Granted
                    
                    
                    1,562,054
                    
                    
                    
                    0.13
                    
                    
                    
                    0.10Forfeited
                    
                    
                    (313,357
                    )
                    
                    
                    0.66
                    
                    
                    
                    0.91Expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      outstanding, end of period
                    
                    
                    3,701,924
                    
                    
                    $
                    0.56
                    
                    
                    $
                    0.41
                    
                    
                    
                    5.13Options
      exercisable, end of period
                    
                    
                    1,801,667
                    
                    
                    $
                    0.53
                    
                    
                    $
                    0.32
                    
                    
                    
                    4.57





The total
number of options outstanding at December 31, 2008 as disclosed in the Annual
Report on Form 10-K 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 the year as shown above has been adjusted to
exclude these expired options.





The
weighted average grant date fair value of options granted during the six months
ended June 30, 2008 was $0.75.  The total intrinsic value of options
exercised during the six months ended June 30, 2008 was
$101,000.


19


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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





Options Outstanding
                  
                  
                  Options ExercisableWeightedAverage
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  Remaining
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  AverageRange of Exercise Prices
                  
                  Outstanding
                  
                  
                  Life(Years)
                  
                  
                  ExercisePrice
                  
                  
                  Outstanding
                  
                  
                  ExercisePrice$0.11 - $1.00
                  
                  
                  2,701,924
                  
                  
                  
                  4.84
                  
                  
                  $
                  0.28
                  
                  
                  
                  1,295,000
                  
                  
                  $
                  0.19$1.01
      - $1.67
                  
                  
                  1,000,000
                  
                  
                  
                  5.89
                  
                  
                  
                  1.32
                  
                  
                  
                  506,667
                  
                  
                  
                  1.40Total
                  
                  
                  3,701,924
                  
                  
                  
                  5.13
                  
                  
                  $
                  0.56
                  
                  
                  
                  1,801,667
                  
                  
                  $
                  0.53





One-Time
Restricted Stock Award





The
Company recorded $1.2 million and $2.4 million, respectively, for the three and
six months ended June 30, 2008, as marketing commission expense related to the
amortization of the unvested portion of the award shares scheduled to vest on
January 2, 2009 which included a forfeiture rate of 4.0%.  On January
2, 2009, all shares scheduled to vest on such date were forfeited, as the
performance-related vesting conditions specified in the restricted stock award
agreement were not met.





As of
June 30, 2009, the Company expects that the performance-related vesting
conditions specified in the restricted stock award agreement 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 six months ended
June 30, 2009 related to the amortization of the unvested portion of the award
shares scheduled to vest on January 2, 2010.  As of June 30, 2009,
there was approximately $4.6 million of unrecognized compensation expense
related to the 4.4 million shares scheduled to vest on January 2,
2010.  As of June 30, 2009, there was approximately $4.6 million of
unrecognized compensation expense related to 4.4 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.





The
following table summarizes the status of restricted shares under the Company’s
2004 Plan and the One-Time Restricted Stock Award during the six months ended
June 30, 2009:





WeightedaverageRestricted
                        
                        
                        grant-dateshares
                        
                        
                        fair valueNon-vested at beginning of 2009
                        
                        
                        15,299,058
                        
                        
                        $
                        1.05Granted
                        
                        
                        8,451,173
                        
                        
                        
                        0.20Vested
                        
                        
                        3,513,368
                        
                        
                        
                        0.28Forfeited
                        
                        
                        5,933,819
                        
                        
                        
                        1.05Non-vested
      at June 30, 2009
                        
                        
                        14,303,044
                        
                        
                        $
                        0.74





As of
June 30, 2009, there was approximately $10.1 million of unrecognized
compensation expense related to the 14.3 million shares of unvested restricted
stock under the Company’s 2004 Plan and the One-Time Restricted Stock Award
which includes $4.6 million of unrecognized compensation expense related to the
4.4 million shares expected to be forfeited on January 2, 2010 due to the
failure of meeting performance-related conditions.  The Company
expects to recognize the remaining $5.5 million over the next 3.98
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 June 30, 2009 and 2008 was $463,000 and $1.9 million, respectively, and
$996,000 and $3.1 million for the six months ended June 30, 2009 and 2008,
respectively.


20


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 10 – 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
9 – “Share Based Payments” for further details.





During
the second quarter of 2009, the Company issued 291,710 shares of Class A Common
Stock and 291,710 shares of Class B Common Stock, with a combined fair value of
$102,000, in conjunction with the sale of 291,710 equity units under the TSO
SPP.  The Company recorded the $102,000 in proceeds from the sale of
the common stock and a corresponding entry to common stock in the amount of $584
and additional paid-in capital in the amount of $101,000.  Included in
the Company’s other current liabilities is $16,000 for the future purchase of
equity units per the terms of the plan.





Also
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 also recorded a reduction of
$22,000 to bad debt expense with a corresponding decrease to the reserve on
notes receivable.





NOTE 11 – 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 June 30, 2009
and 2008, the Company expended $33,000 and $702,000, respectively, for these
services and $186,000 and $1.7 million for the six months ended June 30, 2009
and 2008, respectively.  Included in accounts payable on the
consolidated balance sheet at June 30, 2009 and December 31, 2008, is $6,000 and
$35,000, respectively, for amounts due by the Company for these
services.   In addition, at December 31, 2008, the Company had a
receivable of $14,000 included in accounts receivable on the consolidated
balance sheet for an advance made to the printing company for future
services.  There was no receivable as of June 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 April 30,
2009 and June 16, 2009, respectively.  This transaction was approved by the
independent members of the Company’s Board of Directors.  On January
8, 2008, the Company’s $500,000 certificate of deposit representing restricted
cash collateral for the Company’s outstanding indebtedness related to its
corporate headquarters property was surrendered in partial repayment of the
principal amount outstanding under such indebtedness.





On July
26, 2008, the Company renewed the note for the principal sum of $2.0 million,
the outstanding balance as of that date (the “Note Renewal”). The
Note Renewal bears an interest rate of prime, plus 1.00% floating
daily.  Interest and principal are due monthly based upon a 20-year
amortization for the first year of the note after which the entire principal
will be paid or the note will be refinanced. Although the scheduled balloon
principal payment is due July 26, 2009, the Note Renewal is payable upon demand
per the terms of the agreement; however, no demand has been made to date. See
Note 16 – “Subsequent Events.”  The Note Renewal is collateralized by
the first mortgage on the corporate headquarters property.  There are
no other restrictive covenants included in the Note
Renewal.




On
October 10, 2008, Meridian Bank, the holder of the Company’s mortgage on its
current headquarters, was closed by the Illinois Department of Financial and
Professional Regulation, Division of Banking.  Subsequently, the
Federal Deposit Insurance Corporation (“FDIC”) was named
Receiver.  On February 13, 2009, FirstCity Servicing Corporation as
Servicer for FH Partners LLC, Owner, purchased the note on the Company’s current
headquarters previously held by Meridian Bank and subsequently held by the FDIC
as receiver.  The terms of the Company’s note did not change as a
result of the purchase.  The outstanding balance of the note as of June 30,
2009 and December 31, 2008 was $1.9 million and $2.0 million,
respectively. Interest paid to FH Partners LLC, an unrelated third party,
during the three and six months ended June 30, 2009 was $21,000 and $40,000,
respectively.  Interest paid to Meridian Bank during the three and six
months ended June 30, 2008 was $24,000 and $55,000,
respectively.


21


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Pursuant
to the terms of the development contract for its new corporate headquarters in
Wood River, Illinois, the Company made aggregate payments of $19,000 and $1.5
million during the three months ended June 30, 2009 and 2008, respectively, and
$441,000 and $1.9 million for the six months ended June 30, 2009 and 2008,
respectively.  In addition, at December 31, 2008, the Company’s
accounts payable included $414,000 of amounts due under the development
contract.  The contract for the development of the real property on
which such headquarters are located, approved by the independent members of the
Company’s Board of Directors, was awarded to Winfield
Development.  Winfield Development is controlled by Clay Winfield who
was a member of the Company’s Board of Directors until April 30,
2009.





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 first and second
quarters of 2009, additional net payments of $4,000 were made and classified as
deposits to preserve the Company’s future interest in the
property.  These amounts were reserved as of June 30,
2009.





The
Company’s rental expense under the Building Two Lease was approximately $8,000
per month or $25,000 and $50,000, respectively, for the three and six months
ended June 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 June 30, 2009 and 2008, insurance and repairs and maintenance
expense totaled $9,000 and $2,000, respectively, and $3,000 for the six months
ended June 30, 2009 and 2008.  Included in accounts payable at June
30, 2009 and December 31, 2008 are amounts due under the Building Two Lease of
$2,000 and $3,000, respectively.  Included in accrued expenses at June
30, 2009 is rent due under the Building Two Lease of $8,000.  Included
in other prepaid expenses and current assets, net, at June 30, 2009 are amounts
prepaid under the Building Two Lease of $3,000.





The
Company had utilized a Learjet 35A business jet owned by Meridian/Silver, LC, a
Florida limited liability company (“Meridian/Silver”),
which had been owned 50% by Meridian Land and 50% by an unaffiliated third
party.  During the first quarter of 2008, the Company made payments
for the use of the business jet to Meridian/Silver in the amount 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 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 consolidated balance sheet as of December
31, 2008.


22


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 serve as additional office space
for the Company.  The Magnolia Lease has an initial term of 18 months,
originally scheduled to commence on November 1, 2007 and expire on April 30,
2009.  Due to delays in construction being performed with respect to
the Magnolia Leased Premises, the term of the Magnolia Lease was postponed such
that it commenced on February 15, 2008 and extends until August 15, 2009. Rent
under the Magnolia Lease has been set at $8,000 per month. In addition to
monthly rental payments, the Company is responsible for 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 is located during
the term of the Magnolia Lease.  In addition, the Company is
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 six months ended June 30, 2009 and 2008:





Dollars in thousands
                  
                  Three months ended June 30,
                  
                  
                  Six months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Rental
      expense
                  
                  $
                  25,000
                  
                  
                  $
                  25,000
                  
                  
                  $
                  50,000
                  
                  
                  $
                  42,000Tenant
      build-out costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,000Insurance
      / repairs / CAM
                  
                  
                  2,000
                  
                  
                  
                  1,000
                  
                  
                  
                  3,000
                  
                  
                  
                  1,000Real
      estate taxes
                  
                  
                  2,000
                  
                  
                  
                  -
                  
                  
                  
                  4,000
                  
                  
                  
                  -




Included
in accounts payable at December 31, 2008 are amounts due under the Magnolia
Lease of $1,000.





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





Meridian
Land is controlled by its principals, Timothy Kaiser, M.D. and Clay Winfield,
who were members of the Company’s Board of Directors until June 15, 2009 and
April 30, 2009, respectively. Each of the transactions entered into by the
Company with Meridian Land (including the Building Two Lease, the acquisition of
the Building Two Property, the acquisition of the membership interests of
Meridian/Silver and the Magnolia Lease) was considered and approved by the
independent members of the Company’s Board of Directors.





During
the three and six months ended June 30, 2008, REZconnect paid $3,000 and $8,000,
respectively, in legal fees for work performed by Harold Kestenbaum, a member of
the Company’s Board of Directors.  The fees were approved by the
independent members of the Company’s Board of Directors.





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 fees were approved by the independent members of the
Company’s Board of Directors.  As of December 31, 2008, accrued fees
of $11,000 were included in accrued expenses on the 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 which Lou
Brock, a member of the Company’s Board of Directors, is a general
partner.


23


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 12 – 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 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 15 – “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
contract termination costs associated with the separation of Michael and Derek
Brent totaled approximately $1.3 million and $1.3 million, respectively, or
approximately $2.6 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 $622,000 in the aggregate due to each of Michael and Derek Brent
pursuant to the terms of the Employment Severance Agreement.  The
Company recorded the $2.6 million in contract termination costs in the second
quarter of 2009 as a component of the loss on disposal of REZconnect of $2.6
million.





Sales and
operating results for the REZconnect operations included in discontinued
operations are presented in the following table:





Dollars in thousands
                  
                  Three months ended
                  
                  
                  Six months endedJune 30,
                    2009
                  
                  
                  June 30,
                    2008
                  
                  
                  June 30,
                    2009
                  
                  
                  June 30,
                    2008Discontinued
      operations:Net
      revenues
                  
                  $
                  452
                  
                  
                  $
                  1,074
                  
                  
                  $
                  869
                  
                  
                  $
                  1,847Loss
      from operations before income tax provision
                  
                  $
                  (271
                  )
                  
                  $
                  (99
                  )
                  
                  $
                  (463
                  )
                  
                  $
                  (164
                  )Income
      tax provision
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )Loss
      on disposal, net of tax
                  
                  
                  (2,600
                  )
                  
                  
                  -
                  
                  
                  
                  (2,600
                  )
                  
                  
                  -Net
      loss from discontinued operations
                  
                  $
                  (2,871
                  )
                  
                  $
                  (99
                  )
                  
                  $
                  (3,064
                  )
                  
                  $
                  (165
                  )




The loss
on disposition of the REZconnect subsidiary consists of the following exit
costs:





Dollars in thousands
                  
                  Total exitcosts
                  
                  
                  Commonstock
                    payments
                  
                  
                  Cashpayments
                  
                  
                  Liabilitybalance
                    atJune30, 2009Contract
      termination costs
                  
                  $
                  2,634
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,634Total
      exit costs
                  
                  $
                  2,634
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,634




In the
Company’s condensed consolidated balance sheet as of June 30, 2009, the current
portion of the $2.6 million liability balance is $608,000 and is
included in other accrued expenses and the long-term portion is $2.0 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




24





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 13 – 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.





Summarized
financial information concerning the Company's reportable segments is shown in
the following tables.  The “Parent” column includes corporate items
not specifically allocated to the segments.  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 June 30, 2009
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            14,095
                                            
                                            
                                            $
                                            3,953
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            18,048Income
      (loss) from continuing operations
                                            
                                            
                                            1,929
                                            
                                            
                                            
                                            (359
                                            )
                                            
                                            
                                            (516
                                            )
                                            
                                            
                                            1,054Assets
                                            
                                            
                                            10,363
                                            
                                            
                                            
                                            1,845
                                            
                                            
                                            
                                            22,109
                                            
                                            
                                            
                                            34,317Depreciation
      and amortization
                                            
                                            
                                            353
                                            
                                            
                                            
                                            99
                                            
                                            
                                            
                                            226
                                            
                                            
                                            
                                            678Capital
      expenditures
                                            
                                            
                                            3
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            28
                                            
                                            
                                            
                                            31Three
      months ended June 30, 2008
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            35,711
                                            
                                            
                                            $
                                            8,010
                                            
                                            
                                            $
                                            (21
                                            )
                                            
                                            $
                                            43,700Income
      (loss) from continuing operations
                                            
                                            
                                            158
                                            
                                            
                                            
                                            589
                                            
                                            
                                            
                                            (856
                                            )
                                            
                                            
                                            (109
                                            )Assets
      (1)
                                            
                                            
                                            34,019
                                            
                                            
                                            
                                            4,159
                                            
                                            
                                            
                                            22,838
                                            
                                            
                                            
                                            61,016Depreciation
      and amortization
                                            
                                            
                                            344
                                            
                                            
                                            
                                            60
                                            
                                            
                                            
                                            272
                                            
                                            
                                            
                                            676Capital
      expenditures
                                            
                                            
                                            465
                                            
                                            
                                            
                                            120
                                            
                                            
                                            
                                            1,859
                                            
                                            
                                            
                                            2,444Six
      months ended June 30, 2009
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            33,187
                                            
                                            
                                            $
                                            6,233
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            39,420Income
      (loss) from continuing operations
                                            
                                            
                                            3,279
                                            
                                            
                                            
                                            (1,501
                                            )
                                            
                                            
                                            (2,336
                                            )
                                            
                                            
                                            (558
                                            )Assets
                                            
                                            
                                            10,363
                                            
                                            
                                            
                                            1,845
                                            
                                            
                                            
                                            22,109
                                            
                                            
                                            
                                            34,317Depreciation
      and amortization
                                            
                                            
                                            697
                                            
                                            
                                            
                                            210
                                            
                                            
                                            
                                            429
                                            
                                            
                                            
                                            1,336Capital
      expenditures
                                            
                                            
                                            35
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            39
                                            
                                            
                                            
                                            74Six
      months ended June 30, 2008
                                            
                                            Marketing
                                            
                                            
                                            Travel
                                            
                                            
                                            Parent
                                            
                                            
                                            TotalExternal
      and inter-segment revenue
                                            
                                            $
                                            72,724
                                            
                                            
                                            $
                                            12,931
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            85,655Income
      (loss) from continuing operations
                                            
                                            
                                            451
                                            
                                            
                                            
                                            (2,089
                                            )
                                            
                                            
                                            (1,857
                                            )
                                            
                                            
                                            (3,495
                                            )Assets
      (1)
                                            
                                            
                                            34,019
                                            
                                            
                                            
                                            4,159
                                            
                                            
                                            
                                            22,838
                                            
                                            
                                            
                                            61,016Depreciation
      and amortization
                                            
                                            
                                            660
                                            
                                            
                                            
                                            109
                                            
                                            
                                            
                                            443
                                            
                                            
                                            
                                            1,212Capital
      expenditures
                                            
                                            
                                            1,022
                                            
                                            
                                            
                                            458
                                            
                                            
                                            
                                            5,072
                                            
                                            
                                            
                                            6,552





(1)  Travel
segment includes $1.4 million in assets of discontinued REZconnect
subsidiary.


25


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





GEOGRAPHICAL
FINANCIAL INFORMATION:





Dollars in thousands
                    
                    Three months ended June 30,
                    
                    
                    Six months ended June 30,NET
      REVENUES:
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008United
      States
                    
                    $
                    17,106
                    
                    
                    $
                    42,431
                    
                    
                    $
                    37,999
                    
                    
                    $
                    83,098Canada
                    
                    
                    942
                    
                    
                    
                    1,269
                    
                    
                    
                    1,421
                    
                    
                    
                    2,557$
                    18,048
                    
                    
                    $
                    43,700
                    
                    
                    $
                    39,420
                    
                    
                    $
                    85,655





Dollars
      in thousandsLONG-LIVED
      ASSETS:June
      30, 2009
                      
                      
                      December
      31, 2008United
      States
                      
                      $
                      22,482
                      
                      
                      $
                      23,762
                      (1)Canada
                      
                      
                      253
                      
                      
                      
                      267$
                      22,735
                      
                      
                      $
                      24,029





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





NOTE 14 – INCOME
TAXES





In June
2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty
in income taxes recognized in the financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.”  FIN 48 provides guidance on
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.





As of
June 30, 2009 and December 31, 2008, the Company had approximately $1.4 million
of unrecognized tax benefits.  Of the unrecognized tax benefits at
June 30, 2009, $175,000, 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 June
30, 2009 and December 31, 2008, the Company had approximately $16,000 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 current period tax provision was
adjusted to reflect the difference.




The
Company’s tax provision for the three and six months ended June 30, 2009
consists of state and foreign income taxes.  The Company has a federal
tax loss for the six months ended June 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 $6,000 and $13,000 is included in other prepaid
expenses and current assets, net at June 30, 2009 and December 31, 2008,
respectively.  Foreign income tax payable of $56,000 and $242,000 and
state income tax payable of $30,000 and $73,000 is included in other current
liabilities at June 30, 2009 and December 31, 2008,
respectively.


26


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 15 – COMMITMENTS AND
CONTINGENCIES





On August
4, 2008, a civil action was filed against three subsidiaries of the Company and
certain of its executive officers in the Superior Court of California, County of
Los Angeles, by the California Attorney General. The complaint alleged that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws. The complaint was filed after 18 months of dialogue, initiated
by the Company with the Attorney General to discuss the implementation of a new
California travel law and its potential effect on the Company’s business model.
Throughout these discussions, which broadened over time, the Company
consistently cooperated with the state’s information requests. On December 19,
2008, the California Attorney General amended its complaint to add YTB
International, Inc. as an additional defendant. This addition did not otherwise
change the nature of the allegations or claims asserted in the litigation. The
California Attorney General 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 April 6, 2009, the
Company reached a tentative settlement agreement with the State of
California.





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 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 alleging the following: the defendants operated a pyramid scheme in
violation of California law, utilized misleading marketing and other materials,
offered travel credentials and discounts to participants not meeting certain
requirements and operated a franchise without complying with applicable
franchise laws.  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 YTB Parties 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 pertinent 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 their 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 register as a franchise with the California Department of
      Corporations on or before June 15, 2009.  The registration
      application documents were submitted to the California Department of
      Corporations on June 10, 2009.


27


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Finally,
the Company 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 half of 2009, the Company recorded a
$1,000,000 accrual related to these payments, of which $500,000 had been paid as
of June 30, 2009, resulting in a balance of $500,000.  The remaining
balance will be paid in two installments of $250,000, due at the end of the next
two quarters of 2009.





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





On June
5, 2009, the Court granted the Company’s motions and dismissed the class action
Complaint, but granted the plaintiffs leave to file an amended complaint that
conformed with the Court’s ruling.  Management believes the Company
has meritorious defenses and intends to vigorously defend these
cases.  See Note 16 – “Subsequent Events.”





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’s
defense counsel, with a copy to Illinois National and three excess insurance
carriers, stating that California Insurance Code section 533.5 provides that
there shall be no duty for any insurance carrier to defend lawsuits alleging
violations of Business and Professional Code Sections 17200 or 17500 in which
the Attorney General seeks recovery of a fine, penalty, or restitution. 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. The individual insureds have
not yet served the complaint in this suit on Illinois National and have pursued
discussions with Illinois National about possible resolution of the
matter.  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.  Until Illinois National receives written
notice from the State of California, the individual insureds cannot withdraw
their case.  However, through June 30, 2009, all reimbursements due
from the insurance carriers have been made.





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, was 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 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.


28


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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, 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 defendants from soliciting or recruiting any of
the Company’s Reps or SOs 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 set a hearing on the matter for May 14,
2009.  As a result of the hearing, the temporary injunction is in
place.





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 their claim has no merit and
intends to vigorously defend its position.





Also on
May 14, 2009, a civil action was filed against three subsidiaries the Company
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 the date by which the Company must respond to their
complaint to August 26, 2009.




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





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





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





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 12 – “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.


29


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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.





NOTE 16 – SUBSEQUENT
EVENTS




On July
15, 2009, the plaintiffs for the Illinois class action suits filed an amended
complaint that, though frequently substantively similar to the dismissed
consolidated complaint, purported to conform with the Court’s ruling while also
adding 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 plaintiff’s amended complaint in its
entirety based on the Court’s belief that the amended complaint likely 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.
 
 On July
26, 2009, the $1.9 million balloon payment on the Company’s note on its
corporate headquarters came due.  Per the terms of the agreement, the
note is payable upon demand; however, no demand has been made to
date.  Currently, the Company is in negotiations with the lender to
extend the term of the note.  The Company will continue to make
payments under the original terms of the note.


30




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 provider of internet-based travel-related services 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, formerly referred to as internet travel
websites, and compensates its Independent Marketing Representatives (“Reps”) (independent
contractors) who 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 (“SO”or “SOs”), formerly known as Travel
Site Owners (“TSO” or “TSOs”) formerly known
as Referring Travel Agents (Referring Travel Affiliates in Canada), most of whom
work from their homes.





YTB
Travel contracts with the customers of IBCs, supports online booking
transactions, supplies personal fulfillment services, collects travel
commissions 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 that it produces. 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 reflects the cash and stockholder position of this
entity.  All intercompany transactions have been eliminated in
consolidation.





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 $2.3 million in
the second quarter of 2009 which included pre-tax exit costs of $2.3
million.


31


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 SO develops personal
relationships with his or her customers, who book travel through the SO’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 SO 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 39 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 SOs
will become more productive because of increased training
initiatives.   SO sites are available for use 24 hours, 7 days a
week.  It should be noted that while only the commissions arising from
our SOs’ 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 SOs (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 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 SO 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.





We
anticipate a continuing decline in revenues in the coming months due to the
general economic conditions.  However, with new marketing initiatives
and enhanced/expanded services being added, we believe that we will see a
stabilization of our sales and retention of our sales force.  In
addition, in late April 2009, the World Health Organization acknowledged an
outbreak of H1N1 flu, with reported cases in Mexico and eight other countries.
In response, travel advisories were issued by several countries against
non-essential travel, primarily to Mexico. 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 adversely affect our business and financial
performance.


32


About Our
Industry




We
believe that the shift to the internet for booking travel and our unique
programs for our SOs place us in a valuable and unique position to provide an
income stream for our SOs 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.





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 the first half of 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.


33


Results of
Operations





The
following tables set forth, for the three and six months ended June 30, 2009 and
2008, as indicated, the percentage relationship of certain items from the
Company’s consolidated statement of operations to total net
revenues.  A summary of consolidated results follows.





Dollars in thousands
                            
                            Three months ended
                            
                            
                            Three months ended
                            
                            
                            VarianceJune 30,
                              2009
                            
                            
                            % of Net
                              Revenues
                            
                            
                            June 30,
                              2008
                            
                            
                            % of Net
                              Revenues
                            
                            
                            Increase
                              (Decrease)
                            
                            
                            % Increase
                              (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                            
                            $
                            13,799
                            
                            
                            
                            76.4
                            %
                            
                            $
                            33,352
                            
                            
                            
                            76.3
                            %
                            
                            $
                            (19,553
                            )
                            
                            
                            -58.6
                            %Travel
      commissions and services
                            
                            
                            3,809
                            
                            
                            
                            21.1
                            %
                            
                            
                            7,849
                            
                            
                            
                            18.0
                            %
                            
                            
                            (4,040
                            )
                            
                            
                            -51.5
                            %Training
      programs and marketing materials
                            
                            
                            285
                            
                            
                            
                            1.6
                            %
                            
                            
                            2,269
                            
                            
                            
                            5.2
                            %
                            
                            
                            (1,984
                            )
                            
                            
                            -87.4
                            %Other
                            
                            
                            155
                            
                            
                            
                            0.9
                            %
                            
                            
                            230
                            
                            
                            
                            0.5
                            %
                            
                            
                            (75
                            )
                            
                            
                            -32.6
                            %Total
      net revenues
                            
                            
                            18,048
                            
                            
                            
                            100.0
                            %
                            
                            
                            43,700
                            
                            
                            
                            100.0
                            %
                            
                            
                            (25,652
                            )
                            
                            
                            -58.7
                            %OPERATING
      EXPENSESMarketing
      commissions
                            
                            
                            6,646
                            
                            
                            
                            36.8
                            %
                            
                            
                            24,509
                            
                            
                            
                            56.1
                            %
                            
                            
                            (17,863
                            )
                            
                            
                            -72.9
                            %Travel
      commissions
                            
                            
                            2,211
                            
                            
                            
                            12.3
                            %
                            
                            
                            6,452
                            
                            
                            
                            14.8
                            %
                            
                            
                            (4,241
                            )
                            
                            
                            -65.7
                            %Depreciation
      and amortization
                            
                            
                            678
                            
                            
                            
                            3.8
                            %
                            
                            
                            676
                            
                            
                            
                            1.5
                            %
                            
                            
                            2
                            
                            
                            
                            0.3
                            %Training
      programs and marketing materials
                            
                            
                            349
                            
                            
                            
                            1.9
                            %
                            
                            
                            2,904
                            
                            
                            
                            6.6
                            %
                            
                            
                            (2,555
                            )
                            
                            
                            -88.0
                            %General
      and administrative
                            
                            
                            7,110
                            
                            
                            
                            39.4
                            %
                            
                            
                            9,268
                            
                            
                            
                            21.2
                            %
                            
                            
                            (2,158
                            )
                            
                            
                            -23.3
                            %Total
      operating expenses
                            
                            
                            16,994
                            
                            
                            
                            94.2
                            %
                            
                            
                            43,809
                            
                            
                            
                            100.2
                            %
                            
                            
                            (26,815
                            )
                            
                            
                            -61.2
                            %INCOME
      (LOSS) FROM CONTINUING OPERATIONS
                            
                            
                            1,054
                            
                            
                            
                            5.8
                            %
                            
                            
                            (109
                            )
                            
                            
                            (0.2
                            )%
                            
                            
                            1,163
                            
                            
                            
                            n/m
                            *OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                            
                            
                            44
                            
                            
                            
                            0.2
                            %
                            
                            
                            76
                            
                            
                            
                            0.1
                            %
                            
                            
                            (32
                            )
                            
                            
                            -42.1
                            %Interest
      expense
                            
                            
                            (22
                            )
                            
                            
                            (0.1
                            )%
                            
                            
                            (36
                            )
                            
                            
                            (0.1
                            )%
                            
                            
                            14
                            
                            
                            
                            (38.9
                            )%Foreign
      currency translation gain (loss)
                            
                            
                            13
                            
                            
                            
                            0.1
                            %
                            
                            
                            (17
                            )
                            
                            
                            0.0
                            %
                            
                            
                            30
                            
                            
                            
                            (176.5
                            )%Total
      other income (expense)
                            
                            
                            35
                            
                            
                            
                            0.2
                            %
                            
                            
                            23
                            
                            
                            
                            0.0
                            %
                            
                            
                            12
                            
                            
                            
                            52.2
                            %INCOME
      (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
    PROVISION
                            
                            
                            1,089
                            
                            
                            
                            6.0
                            %
                            
                            
                            (86
                            )
                            
                            
                            (0.2
                            )%
                            
                            
                            1,175
                            
                            
                            
                            n/m
                            *INCOME
      TAX (CREDIT) PROVISION
                            
                            
                            (192
                            )
                            
                            
                            (1.1
                            )%
                            
                            
                            14
                            
                            
                            
                            0.0
                            %
                            
                            
                            (206
                            )
                            
                            
                            n/m
                            *NET
      INCOME (LOSS) FROM CONTINUING OPERATIONS
                            
                            
                            1,281
                            
                            
                            
                            7.1
                            %
                            
                            
                            (100
                            )
                            
                            
                            (0.2
                            )%
                            
                            
                            1,381
                            
                            
                            
                            n/m
                            *NET
      LOSS FROM DISCONTINUED OPERATIONS
                            
                            
                            (2,871
                            )
                            
                            
                            (15.9
                            )%
                            
                            
                            (99
                            )
                            
                            
                            (0.2
                            )%
                            
                            
                            (2,772
                            )
                            
                            
                            n/m
                            *NET LOSS
                            
                            $
                            (1,590
                            )
                            
                            
                            (8.8
                            )%
                            
                            $
                            (199
                            )
                            
                            
                            (4.0
                            )%
                            
                            $
                            (1,391
                            )
                            
                            
                            699.0
                            %




*not
meaningful


34





Dollars in thousands
                        
                        Six months ended
                        
                        
                        Six months ended
                        
                        
                        VarianceJune 30,
                          2009
                        
                        
                        % of Net
                          Revenues
                        
                        
                        June 30,
                          2008
                        
                        
                        % of Net
                          Revenues
                        
                        
                        Increase
                          (Decrease)
                        
                        
                        % Increase
                          (Decrease)NET
      REVENUESInternet
      business center sales and monthly fees
                        
                        $
                        32,407
                        
                        
                        
                        82.2
                        %
                        
                        $
                        67,263
                        
                        
                        
                        78.5
                        %
                        
                        $
                        (34,856
                        )
                        
                        
                        -51.8
                        %Travel
      commissions and services
                        
                        
                        5,969
                        
                        
                        
                        15.1
                        %
                        
                        
                        12,501
                        
                        
                        
                        14.6
                        %
                        
                        
                        (6,532
                        )
                        
                        
                        -52.3
                        %Training
      programs and marketing materials
                        
                        
                        769
                        
                        
                        
                        2.0
                        %
                        
                        
                        5,327
                        
                        
                        
                        6.2
                        %
                        
                        
                        (4,558
                        )
                        
                        
                        -85.6
                        %Other
                        
                        
                        275
                        
                        
                        
                        0.7
                        %
                        
                        
                        564
                        
                        
                        
                        0.7
                        %
                        
                        
                        (289
                        )
                        
                        
                        -51.2
                        %Total
      net revenues
                        
                        
                        39,420
                        
                        
                        
                        100.0
                        %
                        
                        
                        85,655
                        
                        
                        
                        100.0
                        %
                        
                        
                        (46,235
                        )
                        
                        
                        -54.0
                        %OPERATING
      EXPENSESMarketing
      commissions
                        
                        
                        16,013
                        
                        
                        
                        40.6
                        %
                        
                        
                        49,545
                        
                        
                        
                        57.8
                        %
                        
                        
                        (33,532
                        )
                        
                        
                        -67.7
                        %Travel
      commissions
                        
                        
                        3,625
                        
                        
                        
                        9.2
                        %
                        
                        
                        9,762
                        
                        
                        
                        11.4
                        %
                        
                        
                        (6,137
                        )
                        
                        
                        -62.9
                        %Depreciation
      and amortization
                        
                        
                        1,336
                        
                        
                        
                        3.4
                        %
                        
                        
                        1,212
                        
                        
                        
                        1.4
                        %
                        
                        
                        124
                        
                        
                        
                        10.2
                        %Training
      programs and marketing materials
                        
                        
                        972
                        
                        
                        
                        2.5
                        %
                        
                        
                        5,067
                        
                        
                        
                        5.9
                        %
                        
                        
                        (4,095
                        )
                        
                        
                        -80.8
                        %General
      and administrative
                        
                        
                        18,032
                        
                        
                        
                        45.7
                        %
                        
                        
                        23,564
                        
                        
                        
                        27.6
                        %
                        
                        
                        (5,532
                        )
                        
                        
                        -23.5
                        %Total
      operating expenses
                        
                        
                        39,978
                        
                        
                        
                        101.4
                        %
                        
                        
                        89,150
                        
                        
                        
                        104.1
                        %
                        
                        
                        (49,172
                        )
                        
                        
                        -55.2
                        %LOSS
      FROM CONTINUING OPERATIONS
                        
                        
                        (558
                        )
                        
                        
                        (1.4
                        )%
                        
                        
                        (3,495
                        )
                        
                        
                        (4.1
                        )%
                        
                        
                        2,937
                        
                        
                        
                        (84.0
                        )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                        
                        
                        71
                        
                        
                        
                        0.2
                        %
                        
                        
                        131
                        
                        
                        
                        0.2
                        %
                        
                        
                        (60
                        )
                        
                        
                        -45.8
                        %Interest
      expense
                        
                        
                        (48
                        )
                        
                        
                        (0.1
                        )%
                        
                        
                        (51
                        )
                        
                        
                        (0.1
                        )%
                        
                        
                        3
                        
                        
                        
                        -5.9
                        %Foreign
      currency translation gain (loss)
                        
                        
                        15
                        
                        
                        
                        0.0
                        %
                        
                        
                        (18
                        )
                        
                        
                        0.0
                        %
                        
                        
                        33
                        
                        
                        
                        (183.3
                        )%Total
      other income (expense)
                        
                        
                        38
                        
                        
                        
                        0.1
                        %
                        
                        
                        62
                        
                        
                        
                        0.1
                        %
                        
                        
                        (24
                        )
                        
                        
                        (38.7
                        )%LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
                        
                        
                        (520
                        )
                        
                        
                        (1.3
                        )%
                        
                        
                        (3,433
                        )
                        
                        
                        (4.0
                        )%
                        
                        
                        2,913
                        
                        
                        
                        (84.9
                        )%INCOME
      TAX (CREDIT) PROVISION
                        
                        
                        (82
                        )
                        
                        
                        (0.2
                        )%
                        
                        
                        119
                        
                        
                        
                        0.1
                        %
                        
                        
                        (201
                        )
                        
                        
                        (168.9
                        )%NET
      LOSS FROM CONTINUING OPERATIONS
                        
                        
                        (438
                        )
                        
                        
                        (1.1
                        )%
                        
                        
                        (3,552
                        )
                        
                        
                        (4.1
                        )%
                        
                        
                        3,114
                        
                        
                        
                        (87.7
                        )%NET
      LOSS FROM DISCONTINUED OPERATIONS
                        
                        
                        (3,064
                        )
                        
                        
                        (7.8
                        )%
                        
                        
                        (165
                        )
                        
                        
                        (0.2
                        )%
                        
                        
                        (2,899
                        )
                        
                        
                        n/m
                        *NET LOSS
                        
                        $
                        (3,502
                        )
                        
                        
                        (8.9
                        )%
                        
                        $
                        (3,717
                        )
                        
                        
                        (4.3
                        )%
                        
                        $
                        215
                        
                        
                        
                        (5.8
                        )%




*not
meaningful


35


The
following tables set forth information concerning (i) the number of SOs that
were added to, and those that were deactivated from (by non-payment or
cancellation), our organization during each of the three and six months ended
June 30, 2009 and 2008, and (ii) the weighted average number of active SOs
during each such period:





2009
                  
                  BeginningBalance
                    ActiveSOs
                  
                  
                  New SOs
                  
                  
                  Deactivations
                  
                  
                  Ending Balance
                    Active SOs
                  
                  
                  WeightedAverage
                    ActiveSOsThree
      months ended
                    June
      30, 2009
                  
                  
                  73,801
                  
                  
                  
                  4,019
                  
                  
                  
                  17,406
                  
                  
                  
                  60,414
                  
                  
                  
                  64,334Six
      months ended
                    June
      30, 2009
                  
                  
                  92,383
                  
                  
                  
                  11,446
                  
                  
                  
                  43,415
                  
                  
                  
                  60,414
                  
                  
                  
                  71,678





2008
                  
                  BeginningBalance
                    ActiveSOs
                  
                  
                  New SOs
                  
                  
                  Deactivations
                  
                  
                  Ending Balance
                    Active SOs
                  
                  
                  WeightedAverage
                    ActiveSOsThree
      months ended
                    June
      30, 2008
                  
                  
                  138,525
                  
                  
                  
                  22,682
                  
                  
                  
                  29,635
                  
                  
                  
                  131,572
                  
                  
                  
                  134,823Six
      months ended
                    June
      30, 2008
                  
                  
                  131,802
                  
                  
                  
                  52,982
                  
                  
                  
                  53,212
                  
                  
                  
                  131,572
                  
                  
                  
                  135,485





The above
SO figures represent the number of active SOs paying $49.95 per month for
monthly IBC web hosting fees. The new SOs represent 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 six months ended June 30, 2009, we sold 642 and
2,544, IBC sites, respectively, at a rate of $250.00 as part of an extended
Christmas special promotional program.  Likewise, each recurring
monthly IBC web hosting fee paid results in marketing commissions paid to our
Reps. As the number of active SOs declines, the amount of our travel commission
revenue decreases as well. Correspondingly, our travel commission expense
follows suit.





A SO 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 SO may fail to update this information.  If
the SO fails to provide payment for future months’ web hosting fees in advance
of the service being provided, the SO will be deactivated automatically after an
applicable grace period.  We also have a cancellation policy that
allows a SO to voluntarily discontinue his or her IBC where the IBC is
deactivated at the time the request is made.  SOs may be reactivated
by simply resuming payment of monthly web hosting fees from that point
forward.  We reserve the right to deactivate any SO which we believe
may have fraudulent activity associated with it or with its owner.





Deactivations
of SOs in relation to the number of new SOs during a specified period, is a key
component in the calculation performed to determine the average lifespan that a
SO remains with our Company.  If the proportion of SO deactivations
were to grow as a percentage of active paying SOs, the average lifespan of a SO
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 SO initial sign-up fees.  This
acceleration would have a positive impact on our bottom line, as the amount of
revenue deferred from a SO’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.


36


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





·
            Through
      our ongoing marketing we are balancing initiatives to attract new SOs and
      retain existing SOs.  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 “Shop
      YTB” where SOs 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 IBCs by offering a marketing
      system that enhances consistent marketing and tracking of the SO sales
      efforts via a systematic marketing
program.





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





We
reported a net loss for the quarter ended June 30, 2009 of $1.6 million or $0.02
per diluted share compared to a net loss of $199,000 or $0.00 per diluted share
for the comparable quarter of 2008.  The overall results of the second
quarter of 2009 were significantly impacted by the recording of the sale and
related exit costs of its REZconnect subsidiary.  The net loss from
discontinued operations for the quarter ended June 30, 2009 was $2.9 million or
$0.03 per diluted share compared to $99,000 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 June 30, 2009 and 2008.  See Note 12 – “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 $18.0 million and $43.7 million in the second quarter of 2009
and 2008, respectively.





·
            IBC
      sales and monthly fees decreased $19.6 million, or 58.6%, to
      $13.8 million in the second quarter of 2009 compared to $33.4 million in
      the comparable prior year quarter.  This decrease is
      attributable to the following:





§
            IBC
      sales revenue decreased $9.6 million, or 70.4%, in the second quarter of
      2009 to $4.0 million from the $13.6 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 June 30, 2009 to
      4,019 from 22,682 in the prior year period.   As a result,
      the average number of IBC sales for which we were able to recognize
      revenue decreased to 3,208 in the second quarter of 2009 from 10,302 for
      the same period in 2008.  In addition, the average amount of
      recognized revenue from each IBC sale decreased to $434.16 in the second
      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, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Monthly
      renewal fees revenue decreased $10.1 million, or 51.2%, in the second
      quarter of 2009 to $9.6 million from the $19.7 million reported in the
      comparable prior year quarter. The decrease is in direct relation to the
      number of active paying SOs.  The weighted average of paying SOs
      per month decreased from 134,823 for the three months ended June 30, 2008
      to 64,334 for the same period in 2009.   We anticipate a
      continued decline in the number of active paying SOs in the coming months
      due to the general economic conditions in the United States and
      Canada.  However, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the second quarter
      of 2009 is $145,000 in Enhanced Rep Site fees revenue, a new program in
      the third quarter of 2008.  The Enhanced Rep Site is a powerful
      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 drip campaign system and new
      contact management tools. This program was temporarily discontinued in
      June 2009.


37


·
            Travel
      commissions and services revenue for the second quarter of 2009 decreased
      $4.0 million, or 51.5%, to $3.8 million from the $7.8 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 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 $191,000 or 4.7% of the change between
  periods.





·
            Training
      programs and marketing materials revenue decreased $2.0 million, or 87.4%,
      in the second quarter of 2009 to $285,000 from $2.3 million in the
      comparable prior year quarter.  The decrease was primarily due
      to a reduction in sales of magazine and sales aids, along with 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 a
      restructuring of our training programs as well as new marketing
      initiatives aimed at the stabilization of our sales
  force.





·
            Other
      revenue decreased in the second quarter of 2009 as compared to 2008 by
      $75,000, or 32.6%, to $155,000 from $230,000 in the comparable prior year
      quarter.  The decrease is primarily attributed to the reduction
      of payment processing fees directly related to the reduction of outbound
      checks being processed.





Operating
Expenses





·
            Marketing
      commissions decreased by $17.9 million, or 72.9%, in the second quarter of
      2009 to $6.6 million from $24.5 million in the second quarter of
      2008.  Commission expense related to new IBC sales declined by
      $9.3 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 $3.6 million in
      commission expense relating to SO monthly renewal fees.  This is
      a direct result of the decline in the number of average active SOs for the
      second quarter of 2009 compared to the same period in
      2008.  Also contributing to the reduction in commission expense
      for the quarter was the restructuring of our Directors’ Pool, which is the
      bonus plan available to Sales Directors based on their level of
      achievement.  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.  This change resulted in a $3.3 million decrease in
      marketing commission expenses during the second quarter of 2009 when
      compared to the same period in 2008.  In addition, $1.2 million
      of the total variance relates to the one-time restricted stock award to
      certain Sales Directors scheduled to vest on January 2, 2010 and
      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 second quarter of 2009.  During the second quarter of 2008,
      it was our belief that the performance-related vesting conditions
      specified in the agreement would be met for the shares scheduled to vest
      on January 2, 2009.  As such, in the second quarter of 2008, we
      recorded $1.2 million of restricted stock amortization associated with
      this vesting.  This amortization was subsequently reversed in
      the third quarter of 2008 when we determined that the performance-related
      vesting conditions would not be met for the shares scheduled to vest on
      January 2, 2009, and the shares were in fact forfeited in January
      2009.  During the second quarter 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 second
      quarter of 2009.





·
            Travel
      commissions and other costs for the second quarter of 2009 decreased by
      $4.2 million, or 65.7%, to $2.2 million from $6.5 million reported in the
      second quarter of 2008.  Approximately $2.7 million of the
      decrease in travel commissions is primarily attributable to the decrease
      in the number of active SOs and the decrease in commissions paid for gross
      travel retail bookings which are driven by the number of customers
      utilizing us as their travel 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 related to unsold cabins on a cruise that was not
      repeated in 2009.





·
            Depreciation
      and amortization was $678,000 in the second quarter of 2009 compared to
      $676,000 in the corresponding quarter of 2008, reflecting an increase of
      0.3%, or $2,000.  The increase in depreciation and amortization
      is primarily attributable to software additions designed to help
      facilitate the strength of our
infrastructure.




38


·
            Training
      programs and marketing materials expense decreased $2.6 million, or 88.0%,
      to $349,000 from $2.9 million reported in the second quarter of
      2008.  A decrease of $584,000 relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active SOs.  In addition, the Company experienced an
      offsetting decrease in the inventory reserve of $400,000 for the second
      quarter of 2009 compared to the same period in
      2008.  Fulfillment labor and freight decreased $455,000 in the
      second 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 $876,000 in the second quarter
      of 2009 compared to the second 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 $2.2 million, or 23.3%, to $7.1
      million in the second quarter of 2009 from $9.3 million in the second
      quarter of 2008.  As a percentage of total net revenues, these
      expenses were 39.4% in the second quarter of 2009 and 21.2% in the second
      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 SOs.  The decreases year over
      year relate primarily to:


.


§
            Sales
      tax expense decreased $684,000 due to the payments made to various states
      in 2008 that are now collected as part of sales in 2009 and remitted to
      the states.


§
            Merchant
      processing fees decreased $627,000 directly related to the reduction in
      sales.


§
            Contract
      labor decreased $562,000 due to the elimination of some consulting
      contracts and the conversion of consultants to full time
      employees.


§
            Legal
      fees decreased $501,000 directly related to the reduction in defense costs
      associated with the suit filed by the California Attorney General’s office
      due to the reimbursement of $765,000 of those fees by the insurance
      carriers.


§
            Payroll
      and related benefits decreased $493,000 due to the reduction in the home
      office staff.


§
            Printing
      and postage costs decreased $337,000 directly related to the decrease in
      the number of new IBC sales and the number of active
  SOs.


§
            Accounting
      fees decreased $203,000.  This decrease is primarily related to
      the costs associated with the Company’s Sarbanes – Oxley compliance
      efforts for which the Company utilized an external service during the
      second quarter of 2008.  The majority of the on-going
      Sarbanes-Oxley compliance work was performed internally during the second
      quarter of 2009.


§
            Restricted
      stock amortization and stock option expense increased $279,000 due to
      expense associated with restricted stock and stock option awards granted
      during the first and second quarters of
2009.


§
            Offsetting
      the abovementioned net reductions in the second quarter of 2009 is a
      reclassification in the second quarter of 2008 of the $1.7 million reserve
      recorded in the first quarter of 2008 for expense related to unsold cabins
      on a cruise and was not repeated in 2009.  This reserve was
      reclassified from general and administrative expenses to travel
      commissions and other costs in the second quarter of
  2008.


39


BUSINESS
SEGMENTS





We
operate in the following two business segments:  Marketing and
Travel.  Our business segments operate primarily in the continental
United States, but also have operations in Canada, Puerto Rico, 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 endedJune 30,
                                2009
                              
                              
                              June 30,
                                2008
                              
                              
                              %change
                                2009 vs2008NET
      REVENUESInternet
      business center sales and monthly fees
                              
                              $
                              13,799
                              
                              
                              $
                              33,352
                              
                              
                              
                              (58.6
                              )%Training
      programs and marketing materials
                              
                              
                              265
                              
                              
                              
                              2,184
                              
                              
                              
                              (87.9
                              )%Other
                              
                              
                              31
                              
                              
                              
                              175
                              
                              
                              
                              (82.3
                              )%Total
      net revenues
                              
                              
                              14,095
                              
                              
                              
                              35,711
                              
                              
                              
                              (60.5
                              )%OPERATING
      EXPENSESMarketing
      commissions
                              
                              
                              6,646
                              
                              
                              
                              24,509
                              
                              
                              
                              (72.9
                              )%Depreciation
      and amortization
                              
                              
                              353
                              
                              
                              
                              344
                              
                              
                              
                              2.6
                              %Training
      programs and marketing materials
                              
                              
                              335
                              
                              
                              
                              2,606
                              
                              
                              
                              (87.1
                              )%General
      and administrative
                              
                              
                              4,832
                              
                              
                              
                              8,094
                              
                              
                              
                              (40.3
                              )%Total
      operating expenses
                              
                              
                              12,166
                              
                              
                              
                              35,553
                              
                              
                              
                              (65.8
                              )%INCOME
      FROM OPERATIONS
                              
                              $
                              1,929
                              
                              
                              $
                              158
                              
                              
                              
                              n/m
                              **
      not meaningful





Net
Revenues





·
            IBC
      sales and monthly fees decreased $19.6 million, or 58.6%, to $13.8
      million in the second quarter of 2009 compared to $33.4 million in the
      comparable prior year quarter.  This decrease is attributable to
      the following:





§
            IBC
      sales revenue decreased $9.6 million, or 70.4%, in the second quarter of
      2009 to $4.0 million from the $13.6 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 June 30, 2009 to
      4,019 from 22,682 in the prior year period.   As a result,
      the average number of IBC sales for which we were able to recognize
      revenue decreased to 3,208 in the first six months of 2009 from 10,302 for
      the same period in 2008.  In addition, the average amount of
      recognized revenue from each IBC sale decreased to $434.16 in the second
      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, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Monthly
      renewal fees revenue decreased $10.1 million, or 51.2%, in the second
      quarter of 2009 to $9.6 million from the $19.7 million reported in the
      comparable prior year quarter. The decrease is in direct relation to the
      number of active paying SOs.  The weighted average of paying SOs
      per month decreased from 134,823 for the three months ended June 30, 2008
      to 64,334 for the same period in 2009.   We anticipate a
      continued decline in the number of active paying SOs in the coming months
      due to the general economic conditions in the United States and
      Canada.  However, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the second quarter
      of 2009 is $145,000 in Enhanced Rep Site fees revenue, a new program in
      the third quarter of 2008.  The Enhanced Rep Site is a powerful
      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 drip campaign system and new
      contact management tools.  This program was temporarily
      discontinued in June 2009.


40





·
            Training
      programs and marketing materials revenue decreased $1.9 million, or 87.9%,
      in the second quarter of 2009 to $265,000 from $2.2 million in the
      comparable prior year quarter.  The decrease was primarily due
      to a reduction of $1.2 million in the sales of magazine, 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 $746,000 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 a restructuring of our training
      programs as well as new marketing initiatives aimed at the stabilization
      of our sales force.





·
            Other
      revenue decreased in the second quarter of 2009 as compared to 2008 by
      $144,000, or 82.3%, to $31,000 from $175,000 in the comparable prior year
      quarter, primarily due to a decrease in the number of payment processing
      fees collected and directly related to the reduction of outbound checks
      being processed.





Operating
Expenses





·
            Marketing
      commissions decreased by $17.9 million, or 72.9%, in the second quarter of
      2009 to $6.6 million from $24.5 million the first quarter of
      2008.  Commission expense related to new IBC sales declined by
      $9.3 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 $3.6 million in
      commission expense relating to SO monthly renewal fees.  This is
      a direct result of the decline in the number of average active SOs for the
      second three months of 2009 compared to the same period in
      2008.  Also contributing to the reduction in commission expense
      for the quarter was the restructuring of our Directors’ Pool, which is the
      bonus plan available to Sales Directors based on their level of
      achievement.  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.  This change resulted in a $3.3 million decrease in
      marketing commission expenses during the second quarter of 2009 when
      compared to the same period in 2008.  In addition, $1.2 million
      of the total variance relates to the one-time restricted stock award to
      certain Sales Directors scheduled to vest on January 2, 2010 and
      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 second quarter of 2009.  During the second quarter of 2008,
      it was our belief that the performance-related vesting conditions
      specified in the agreement would be met for the shares scheduled to vest
      on January 2, 2009.  As such, in the second quarter of 2008, we
      recorded $1.2 of restricted stock amortization associated with this
      vesting.  This amortization was subsequently reversed in the
      third quarter of 2008 when we determined that the performance-related
      vesting conditions would not be met for the shares scheduled to vest on
      January 2, 2009, and the shares were in fact forfeited in January
      2009.  During the second quarter 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 second
      quarter of 2009.





·
            Depreciation
      and amortization increased $9,000, or 2.6%, to $353,000 in the second
      quarter of 2009 from $344,000 in the second quarter of
    2008.





·
            Training
      programs and marketing materials expense decreased $2.3 million, or 87.1%,
      to $335,000 from $2.6 million reported in the second quarter of
      2008.  A decrease of $584,000 relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active SOs.  The inventory reserve decreased by an
      offsetting $400,000 in the second quarter of 2009 compared to the same
      period in 2008.  In addition, fulfillment labor and freight
      decreased $455,000 in the second quarter of 2009 compared to the same
      period in 2008, directly related to the reduction of sales aids and
      magazine sales.   Meeting expenses decreased $802,000 in
      the second quarter of 2009 compared to the second 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.


41


·
            General
      and administrative expenses decreased $3.3 million, or 40.3%, to $4.8
      million in the second quarter of 2009 from $8.1 million in the second
      quarter of 2008.  As a percentage of total marketing net
      revenues, these expenses were 34.3% in the second quarter of 2009 and
      22.7% in the second 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 SOs.  The
      decreases year over year relate primarily
to:





§
            Sales
      tax expense decreased $685,000 due to payments made to various states in
      2008 that are collected as part of sales in 2009 and remitted to the
      states.


§
            Merchant
      processing fees decreased $623,000 directly related to the reduction in
      sales.


§
            Printing
      and postage costs decreased $340,000 directly related to the decrease in
      the number of new IBC sales and the number of active
  SOs.


§
            Payroll
      and related benefits decreased $150,000 due to the reduction in the home
      office staff.


§
            Corporate
      allocation from the parent decreased $1.3 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
                  
                  Three months endedJune 30,
                    2009
                  
                  
                  June 30,
                    2008
                  
                  
                  % change
                    2009 vs 2008NET
      REVENUESTravel
      commissions and services
                  
                  $
                  3,809
                  
                  
                  $
                  7,849
                  
                  
                  
                  (51.5
                  )%Training
      programs and marketing materials
                  
                  
                  20
                  
                  
                  
                  85
                  
                  
                  
                  (76.5
                  )%Other
                  
                  
                  124
                  
                  
                  
                  76
                  
                  
                  
                  63.2
                  %Total
      net revenues
                  
                  
                  3,953
                  
                  
                  
                  8,010
                  
                  
                  
                  (50.6
                  )%OPERATING
      EXPENSESTravel
      commissions
                  
                  
                  2,211
                  
                  
                  
                  6,452
                  
                  
                  
                  (65.7
                  )%Depreciation
      and amortization
                  
                  
                  99
                  
                  
                  
                  60
                  
                  
                  
                  65.0
                  %Training
      programs and marketing materials
                  
                  
                  14
                  
                  
                  
                  298
                  
                  
                  
                  (95.3
                  )%General
      and administrative
                  
                  
                  1,988
                  
                  
                  
                  611
                  
                  
                  
                  225.4
                  %Total
      operating expenses
                  
                  
                  4,312
                  
                  
                  
                  7,421
                  
                  
                  
                  (41.9
                  )%INCOME
      (LOSS) FROM OPERATIONS
                  
                  $
                  (359
                  )
                  
                  $
                  589
                  
                  
                  
                  (161.0
                  )%





Net
Revenues




·
            Travel
      commissions and services revenue for the second quarter of 2009 decreased
      $4.0 million, or 51.5%, to $3.8 million from the $7.8 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 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 $191,000 or 4.7% of
      the change between periods.





·
            Training
      programs and marketing materials revenue decreased $65,000 or 76.5%, to
      $20,000 from $85,000 reported in the second 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 second quarter of 2009 compared to the prior year
      quarter by $48,000, or 63.2%, to $124,000 from $76,000. A new program,
      Shop YTB, was initiated in the second quarter which resulted in a $97,000
      increase in the second quarter of 2009 compared to the same period in
      2008.  This program allows users to earn commissions on retail
      purchases made through stores affiliated with YTB.  The increase
      was offset by a decrease in the payment processing fees directly related
      to the number of outbound checks being
  processed.


42


Operating
Expenses




·
            Travel
      commissions and other costs
      for the second quarter of 2009 decreased by $4.2 million, or 65.7%, to
      $2.2 million from $6.5 million reported in the second quarter of
      2008.  Approximately $2.8 million of the decrease in travel
      commissions is attributable to the decrease in the number of active SOs
      and the decrease in commissions paid for gross travel retail bookings
      which are driven by the number of customers utilizing us as their travel
      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 second
      quarter of 2009 related to unsold cabins on a cruise that was not repeated
      in 2009.





·
            Depreciation
      and amortization was $99,000 in the second quarter of 2009, compared to
      $60,000 in the corresponding quarter of 2008. The increase of $39,000, or
      65.0%, in depreciation and amortization is primarily attributable to the
      new addition of computer software related to our expansion into Canada,
      and the strengthening of our
infrastructure.





·
            Training
      programs and marketing material expense decreased $284,000, or 95.3%, to
      $14,000 from $298,000 reported in the second 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 increased $1.4 million to $2.0 million, or
      225.4%, in the second quarter of 2009 from $611,000 in the second quarter
      of 2008.  As a percentage of total travel net revenues, these
      expenses were 50.3% in 2009 and 7.6% in 2008. The increase year over year
      relates primarily to:





§
            The
      reclassification in the second quarter of 2008 of the $1.7 million reserve
      recorded in the first quarter of 2008 for expense related to unsold cabins
      on a cruise and was not repeated in 2009.  This reserve was
      reclassified from general and administrative expenses to travel
      commissions and other costs in the second quarter of
  2008.





Parent





Dollars in thousands
                    
                    Three months endedJune 30,
                      2009
                    
                    
                    June 30,
                      2008
                    
                    
                    % change
                      2009 vs2008NET
      REVENUESOther
                    
                    $
                    -
                    
                    
                    $
                    (21
                    )
                    
                    
                    (100.0
                    )%Total
      net revenues
                    
                    
                    -
                    
                    
                    
                    (21
                    )
                    
                    
                    (100.0
                    )%OPERATING
      EXPENSESDepreciation
      and amortization
                    
                    
                    226
                    
                    
                    
                    272
                    
                    
                    
                    (16.9
                    )%General
      and administrative
                    
                    
                    290
                    
                    
                    
                    563
                    
                    
                    
                    (48.5
                    )%Total
      operating expenses
                    
                    
                    516
                    
                    
                    
                    835
                    
                    
                    
                    (38.2
                    )%LOSS
      FROM OPERATIONS
                    
                    $
                    (516
                    )
                    
                    $
                    (856
                    )
                    
                    
                    (39.7
                    )%





Net
Revenues





·
            Other
      revenue for the first quarter of 2008 was $21,000 representing rent
      collected from tenants for one of the Company’s
      buildings.   The second quarter of 2008 adjustment of
      ($21,000) is a reclassification of this revenue.  No such
      revenue was recorded in the second quarter of
  2009.


43


Operating
Expenses





·
            Depreciation
      and amortization was $226,000 in the second quarter of 2009, compared to
      $272,000 in the corresponding quarter of 2008. The decrease in
      depreciation and amortization of $46,000, or 16.9%, is primarily
      attributable to the sale of the company jet in January
    2009.





·
            General
      and administrative expenses, net of corporate allocation, decreased
      $273,000, or 48.5%, to $290,000 in the second quarter of 2009 from
      $563,000 in the second quarter of 2008. The decreases year over year
      relate primarily to:





§
            Contract
      labor decreased $594,000 primarily due to the elimination of numerous
      consultants and the conversion of consultants to full time
      employees.


§
            Legal
      fees decreased $523,000 directly related to the reduction in defense costs
      associated with the suit filed by the California Attorney General’s office
      due to the reimbursement of $765,000 of those fees by the insurance
      carriers.


§
            Accounting
      fees decreased $203,000.  This decrease is primarily related to
      the costs associated with the Company’s Sarbanes – Oxley compliance
      efforts for which the Company utilized an external service during the
      second quarter of 2008.  The majority of the on-going
      Sarbanes-Oxley compliance work was performed internally during the second
      quarter of 2009.


§
            Consulting
      fees decreased $110,000 due to the completion of the SAP® software
      implementation and a number of other IT initiatives which required
      consulting resources in 2008.


§
            Payroll
      and related benefits decreased $344,000 due to the reduction in the home
      office staff.


§
            Jet
      maintenance decreased $129,000 due to the sale of the company
      jet.


§
            Restricted
      stock amortization and stock option expense increased $279,000 due to
      expense associated with restricted stock and stock option awards granted
      during the first and second quarters of
2009.


§
            Due
      to the overall decrease in allocable expenses as individually discussed
      above, the corporate allocation to the segments decreased $1.4
      million.  Allocable expenses include contract labor, legal fees,
      accounting fees, consulting fees, restricted stock amortization and stock
      option expense.





Six months ended June 30,
2009 compared to six months ended June 30, 2008





We
reported a net loss for the six months ended June 30, 2009 of $3.5 million or
$.03 per diluted share compared to a net loss of $3.7 million or $.04 per
diluted share for the comparable quarter of 2008.  The overall results
of the first half 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 six months ended June 30, 2009 was
$3.1 million or $0.03 per diluted share compared to $165,000 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 six months
ended June 30, 2009 and 2008.  See Note 12 – “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 $39.4 million and $85.7 million in the first six months of 2009
and 2008, respectively.





·
            IBC
      sales and monthly fees decreased $34.9 million, or 51.8%, to $32.4
      million in the first half of 2009 compared to $67.3 million in the
      comparable prior year period.  This decrease is attributable to
      the following:





§
            IBC
      sales revenue decreased $17.1 million, or 62.0%, in the first six months
      of 2009 to $10.5 million from the $27.6 million reported in the comparable
      period in 2008.  We have experienced a decrease in the actual
      number of IBCs sold for the six months ended June 30, 2009 to 11,446 from
      52,982 in the prior year period.   As a result, the average
      number of IBC sales for which we were able to recognize revenue decreased
      to 4,086 in the first six months of 2009 from 10,327 for the same period
      in 2008.  In addition, the average amount of recognized revenue
      from each IBC sale decreased to $439.91 for the six months ended in 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, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.


44


§
            Monthly
      renewal fees revenue decreased $18.1 million, or 45.7%, in the first six
      months of 2009 to $21.6 million from the $39.7 million reported in the
      comparable period in 2008.  The decrease is in direct relation
      to the number of active paying SOs.  The weighted average of
      paying SOs per month decreased from 135,485 for the six months ended June
      30, 2008 to 71,678 for the same period in 2009.  We anticipate a
      continued decline in the number of active paying SOs in the coming months
      due to the general economic conditions in the United States and
      Canada.  With new marketing initiatives and enhanced/expanded
      services being added, we believe that we will see a slower decline in
      sales and stabilization of sales force
  retention.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the second quarter
      of 2009 is $359,000 in Enhanced Rep Site fees revenue, a new program in
      the third quarter of 2008.  The Enhanced Rep Site is a powerful
      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 drip campaign system and new
      contact management tools. This program was temporarily discontinued in
      June 2009.





·
            Travel
      commissions and services revenue for the first six months of 2009
      decreased $6.5 million, or 52.3%, to $6.0 million from the $12.5 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 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 six 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 $307,000 or 4.7% of
      the change between periods.





·
            Training
      programs and marketing materials revenue decreased $4.6 million, or 85.6%,
      in the first six months of 2009 to $769,000 from $5.3 million in the
      comparable period in 2008.  The decrease was primarily due to a
      reduction in sales of magazine and sales aids of $2.5 million, along with
      a reduction of $2.0 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 a restructuring of our training
      programs as well as new marketing initiatives aimed at the stabilization
      of our sales force.





·
            Other
      revenue decreased in the first six months of 2009 as compared to 2008 by
      $289,000, or 51.2%, to $275,000 from $564,000 in the comparable period in
      2008.  The decrease is primarily attributed to a decline in the
      number of payment processing fees collected directly related to the number
      of outbound checks being
processed.


45


Operating
Expenses





·
            Marketing
      commissions decreased by $33.5 million, or 67.7%, in the first six months
      of 2009 to $16.0 million from $49.5 million compared to the first six
      months of 2008.  Commission expense related to new IBC sales
      declined by $16.7 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 $7.3 million in
      commission expense relating to SO monthly renewal fees.  This is
      a direct result of the decline in the number of average active SOs for the
      first six months of 2009 compared to the same period in
      2008.  Also contributing to the reduction in commission expense
      for the first six months of 2009 was the restructuring of our Directors’
      Pool, which is the bonus plan available to Sales Directors based on their
      level of achievement.  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.  This change resulted in an $6.4 million decrease in
      marketing commission expenses during the first six months of 2009 when
      compared to the same period in 2008.  In addition, $2.4 million
      of the total variance relates to the one-time restricted stock award to
      certain Sales Directors scheduled to vest on January 2, 2010 and
      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 for
      the first six months of 2009.  During the first and second
      quarters of 2008, it was our belief that the performance-related vesting
      conditions specified in the agreement would be met for the shares
      scheduled to vest on January 2, 2009.  As such, in the first six
      months of 2008, we recorded $2.4 million of restricted stock amortization
      associated with this vesting.  This amortization was
      subsequently reversed in the third quarter of 2008 when we determined that
      the performance-related vesting conditions would not be met for the shares
      scheduled to vest on January 2, 2009, and the shares were in fact
      forfeited in January 2009.  Also contributing to the reduction
      in commission expense is $738,000 related to the 2007 Sales Director Bonus
      Plan.  During the first six months of 2009, we incurred actual
      forfeitures greater than our estimated forfeitures of
      $271,000.  There were no forfeitures during the same period of
      2008.  In addition, during the second quarter 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 six months of
2009.





·
            Travel
      commissions and other costs for the first six months of 2009 decreased by
      $6.1 million, or 62.9%, to $3.6 million from $9.8 million reported in the
      first six months of 2008. Approximately $4.6 million of the decrease in
      travel commissions is primarily attributable to the decrease in the number
      of active SOs and the decrease in commissions paid for gross travel retail
      bookings which are driven by the number of customers utilizing us as their
      travel 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
      half of 2008 related to unsold cabins on a cruise that was not repeated in
      2009.





·
            Depreciation
      and amortization was $1.3 million in the first six months of 2009 compared
      to $1.2 million in the corresponding period of 2008, reflecting an
      increase of $124,000, or 10.2%.  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 $4.1 million, or 80.8%
      to $972,000 from $5.1 million reported in the first six months of
      2008.  A decrease of $1.2 million relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active SOs.  In addition, fulfillment labor and
      freight decreased $1.0 million in the first six months of 2009 compared to
      the same period in 2008, directly related to the reduction of sales aids
      and magazine sales.   Meeting expenses decreased $1.4
      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.




46


·
            General
      and administrative expenses decreased $5.5 million, or 23.5%, to $18.0
      million in the first six months of 2009 from $23.6 million in the first
      six months of 2008.  As a percentage of total net revenues,
      these expenses were 45.7% in 2009 and 27.6% 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 SOs.  The decreases year over year relate primarily
      to:





§
            Printing
      and postage costs decreased $1.2 million directly related to the decrease
      in the number of new IBC sales and the number of active
    SOs.


§
            Merchant
      processing fees decreased $1.1 million directly related to the reduction
      in sales.


§
            Contract
      labor decreased $914,000 due to the elimination of some consulting
      contracts and the conversion of consultants to full time
      employees.


§
            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.


§
            Sales
      tax expense decreased $668,000 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 $589,000 due to the completion of the SAP® software
      implementation and a number of other IT initiatives which required
      consulting resources in 2008.


§
            Accounting
      fees decreased $560,000.  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 six months of 2008.  The majority of the on-going
      Sarbanes-Oxley compliance work was performed internally during the first
      six months of 2009.


§
            Bad
      debt expense related to advances and notes receivable to the Company’s
      independent sales contractors decreased
  $428,000.


§
            Payroll
      and related benefits decreased $349,000 due to the reduction in the home
      office staff.


§
            Rep
      recognition awards decreased $303,000 directly related to the number of
      awards given for achieving milestones in the
  business.


§
            Legal
      fees decreased $206,000 directly related to defense costs associated with
      the suit filed by the California Attorney General’s office due to the
      reimbursement of $765,000 of those fees by the insurance
      carriers.


§
            Restricted
      stock amortization and stock option expense increased $1.1 million in 2009
      due to expense 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 $134,000 decrease in other legal
      accruals.


§
            Website
      user fees increased $270,000 relating to the Company’s travel booking
      platform.


§
            Insurance
      costs increased $220,000 due to the increase in premiums associated with
      the risk involved with past and
  pending lawsuits.




47


BUSINESS
SEGMENTS





Marketing
Segment





Dollars
      in thousands
                  
                  Six
      months endedJune
      30,
                    2009
                  
                  
                  June
      30,
                    2008
                  
                  
                  %
      change
                    2009
      vs 2008NET
      REVENUESInternet
      business center sales and monthly fees
                  
                  $
                  32,407
                  
                  
                  $
                  67,263
                  
                  
                  
                  (51.8
                  )%Training
      programs and marketing materials
                  
                  
                  710
                  
                  
                  
                  5,178
                  
                  
                  
                  (86.3
                  )%Other
                  
                  
                  70
                  
                  
                  
                  283
                  
                  
                  
                  (75.3
                  )%Total
      net revenues
                  
                  
                  33,187
                  
                  
                  
                  72,724
                  
                  
                  
                  (54.4
                  )%OPERATING
      EXPENSESMarketing
      commissions
                  
                  
                  16,013
                  
                  
                  
                  49,545
                  
                  
                  
                  (67.7
                  )%Depreciation
      and amortization
                  
                  
                  697
                  
                  
                  
                  660
                  
                  
                  
                  5.6
                  %Training
      programs and marketing materials
                  
                  
                  936
                  
                  
                  
                  4,683
                  
                  
                  
                  (80.0
                  )%General
      and administrative
                  
                  
                  12,262
                  
                  
                  
                  17,385
                  
                  
                  
                  (29.5
                  )%Total
      operating expenses
                  
                  
                  29,908
                  
                  
                  
                  72,273
                  
                  
                  
                  (58.6
                  )%INCOME
      FROM OPERATIONS
                  
                  $
                  3,279
                  
                  
                  $
                  451
                  
                  
                  
                  627.1
                  %




Net
Revenues





·
            IBC
      sales and monthly fees decreased $34.9 million, or 51.8%, to $32.4
      million in the first half of 2009 compared to $67.3 million in the
      comparable prior year period.  This decrease is attributable to
      the following:





§
            IBC
      sales revenue decreased $17.1 million, or 62.0%, in the first six months
      of 2009 to $10.5 million from the $27.6 million reported in the comparable
      period in 2008.  We have experienced a decrease in the actual
      number of IBCs sold for the six months ended June 30, 2009 to 11,446 from
      52,982 in the prior year period.   As a result, the average
      number of IBC sales for which we were able to recognize revenue decreased
      to 4,086 in the first six months of 2009 from 10,327 for the same period
      in 2008.  In addition, the average amount of recognized revenue
      from each IBC sale decreased to $439.91 for the six months ended in 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, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Monthly
      renewal fees revenue decreased $18.1 million, or 45.7%, in the first six
      months of 2009 to $21.6 million from the $39.7 million reported in the
      comparable period in 2008.  The decrease is in direct relation
      to the number of active paying SOs.  The weighted average of
      paying SOs per month decreased from 135,485 for the six months ended June
      30, 2008 to 71,678 for the same period in 2009.  We anticipate a
      continued decline in the number of active paying SOs in the coming months
      due to the general economic conditions in the United States and
      Canada.  However, with new marketing initiatives and
      enhanced/expanded services being added, we believe that we will see a
      slower decline in sales and stabilization of sales force
      retention.





§
            Partially
      offsetting the decline in IBC sales and monthly fees in the second quarter
      of 2009 is $359,000 in Enhanced Rep Site fees revenue, a new program in
      the third quarter of 2008.  The Enhanced Rep Site is a powerful
      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 drip campaign system and new
      contact management tools.  This program was temporarily
      discontinued in June 2009.




48




·
              Training
      programs and marketing materials revenue decreased $4.6 million, or 86.3%,
      in the first six months of 2009 to $710,000 from $5.2 million in the
      comparable to the same period in 2008.  The decrease was
      primarily due to a reduction in sales of magazine and sales aids of $2.5
      million, along with a reduction of $2.0 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 a restructuring of our training
      programs as well as new marketing initiatives aimed at the stabilization
      of our sales force.





·
            Other
      revenue decreased in the first six months of 2009 as compared to 2008 by
      $213,000, or 75.3%, to $70,000 from $283,000 in the comparable prior year
      quarter, primarily due to a decrease in the number of payment processing
      fees collected directly related to the number of outbound checks being
      processed.





Operating
Expenses





·
            Marketing
      commissions decreased by $33.5 million, or 67.7%, in the first six months
      of 2009 to $16.0 million from $49.5 million compared to the first six
      months of 2008.  Commission expense related to new IBC sales
      declined by $16.7 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 $7.3 million in
      commission expense relating to SO monthly renewal fees.  This is
      a direct result of the decline in the number of average active SOs for the
      first six months of 2009 compared to the same period in
      2008.  Also contributing to the reduction in commission expense
      for the first six months of 2009 was the restructuring of our Directors’
      Pool, which is the bonus plan available to Sales Directors based on their
      level of achievement.  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.  This change resulted in an $6.4 million decrease in
      marketing commission expenses during the first six months of 2009 when
      compared to the same period in 2008.  In addition, $2.4 million
      of the total variance relates to the one-time restricted stock award to
      certain Sales Directors scheduled to vest on January 2, 2010 and
      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 for
      the first six months of 2009.  During the first and second
      quarters of 2008, it was our belief that the performance-related vesting
      conditions specified in the agreement would be met for the shares
      scheduled to vest on January 2, 2009.  As such, in the first six
      months of 2008, we recorded $2.4 million of restricted stock amortization
      associated with this vesting.  This amortization was
      subsequently reversed in the third quarter of 2008 when we determined that
      the performance-related vesting conditions would not be met for the shares
      scheduled to vest on January 2, 2009, and the shares were in fact
      forfeited in January 2009.  Also contributing to the reduction
      in commission expense is $738,000 related to the 2007 Sales Director Bonus
      Plan.  During the first six months of 2009, we incurred actual
      forfeitures greater than our estimated forfeitures of
      $271,000.  There were no forfeitures during the same period of
      2008.  In addition, during the second quarter 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 six months of
2009.





·
            Depreciation
      and amortization increased $37,000, or 5.6%, to $697,000 in the first six
      months of 2009 from $660,000 in the first six months of
    2008.





·
            Training
      programs and marketing materials expense decreased $3.7 million, or 80.0%,
      to $936,000 from $4.7 million reported in the first six months of
      2008.  A decrease of $1.2 million relates to the reduction in
      magazine and brochure sales directly affected by the decline in new IBC
      sales and active SOs.  In addition, fulfillment labor and
      freight decreased $1.0 million in the first six months of 2009 compared to
      the same period in 2008, directly related to the reduction of sales aids
      and magazine sales.   Meeting expenses decreased $1.3
      million, in the first six 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.




49




·
              General
      and administrative expenses decreased $5.1 million, or 29.5%, to $12.3
      million in the first six months of 2009 from $17.4 million in the first
      six months of 2008.  As a percentage of total marketing net
      revenues, these expenses were 37.0% in 2009 and 23.9% 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 SOs.  The decreases year over year relate primarily
      to:





§
            Printing
      and postage costs decreased $1.2 million directly related to the decrease
      in the number of new IBC sales and the number of active
    SOs.


§
            Merchant
      processing fees decreased $1.1 million directly related to the reduction
      in sales.


§
            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.


§
            Sales
      tax expense decreased $672,000 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.


§
            Rep
      recognition awards decreased $275,000 directly related to the number of
      awards given for achieving milestones in the
  business.


§
            Payroll
      decreased $201,000 due to the reduction in office
  staff.


§
            Corporate
      allocation from the parent decreased $229,000 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
                  
                  Six
      months endedJune
      30,
                    2009
                  
                  
                  June
      30,
                    2008
                  
                  
                  %
      change
                    2009
      vs 2008NET
      REVENUESTravel
      commissions and services
                  
                  $
                  5,969
                  
                  
                  $
                  12,501
                  
                  
                  
                  (52.3
                  )%Training
      programs and marketing materials
                  
                  
                  59
                  
                  
                  
                  149
                  
                  
                  
                  (60.4
                  )%Other
                  
                  
                  205
                  
                  
                  
                  281
                  
                  
                  
                  (27.0
                  )%Total
      net revenues
                  
                  
                  6,233
                  
                  
                  
                  12,931
                  
                  
                  
                  (51.8
                  )%OPERATING
      EXPENSESTravel
      commissions
                  
                  
                  3,625
                  
                  
                  
                  9,762
                  
                  
                  
                  (62.9
                  )%Depreciation
      and amortization
                  
                  
                  210
                  
                  
                  
                  109
                  
                  
                  
                  92.7
                  %Training
      programs and marketing materials
                  
                  
                  36
                  
                  
                  
                  384
                  
                  
                  
                  (90.6
                  )%General
      and administrative
                  
                  
                  3,863
                  
                  
                  
                  4,765
                  
                  
                  
                  (18.9
                  )%Total
      operating expenses
                  
                  
                  7,734
                  
                  
                  
                  15,020
                  
                  
                  
                  (48.5
                  )%LOSS
      FROM OPERATIONS
                  
                  $
                  (1,501
                  )
                  
                  $
                  (2,089
                  )
                  
                  
                  (28.1
                  )%




Net
Revenues





·
            Travel
      commissions and services revenue for the first six months of 2009
      decreased $6.5 million, or 52.3%, to $6.0 million from the $12.5 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 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 accounts for $307,000 or 4.7%
      of the change between periods.





·
            Training
      programs and marketing materials revenue decreased $90,000, or 60.4%, to
      $59,000 from $149,000 reported in the first six 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.


50





·
            Other
      revenue decreased in the first six months of 2009 compared to the first
      six months of 2008 by $76,000, or 27.0%, to $205,000 from
      $281,000.  The decrease is primarily attributed to a decline in
      the number of payment processing fees collected directly related to the
      number of outbound checks being
processed.





Operating
Expenses





·
            Travel
      commissions and other costs for the first six months of 2009 decreased by
      $6.1 million, or 62.9%, to $3.6 million from $9.8 million reported in the
      first six months of 2008. Approximately $4.6 million of the decrease in
      travel commissions is primarily attributable to the decrease in the number
      of active SOs and the decrease in commissions paid for gross travel retail
      bookings which are driven by the number of customers utilizing us as their
      travel 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
      half of 2008 related to unsold cabins on a cruise that was not repeated in
      2009.





·
            Depreciation
      and amortization was $210,000 in the first six months of 2009, compared to
      $109,000 in the corresponding six months of 2008. The increase in
      depreciation and amortization of $101,000, or 92.7%, is primarily
      attributable to software additions designed to help facilitate the
      strength of our infrastructure.





·
            Training
      programs and marketing material expense decreased $348,000, or 90.6%, to
      $36,000 from $384,000 reported in the first six 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.





·
            General
      and administrative expenses decreased $902,000 to $3.9 million, or 18.9%,
      in the first six months of 2009 from $4.8 million in the first six months
      of 2008.  As a percentage of total travel net revenues, these
      expenses were 62.0% in the first six months of 2009 and 36.9% in the first
      six months of 2008. The decreases year over year relate primarily
      to:





§
            Payroll
      decreased by $331,000 due to the reduction in office
  staff.


§
            Website
      user fees increased $158,000 related to the Company’s travel booking
      platform.


§
            Corporate
      allocation from the parent decreased $846,000 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.





Parent





Dollars
      in thousands
                  
                  Six
      months endedJune
      30,
                    2009
                  
                  
                  June
      30,
                    2008
                  
                  
                  %
      change
                    2009
      vs 2008OPERATING
      EXPENSESDepreciation
      and amortization
                  
                  $
                  429
                  
                  
                  $
                  443
                  
                  
                  
                  (3.2
                  )%General
      and administrative
                  
                  
                  1,907
                  
                  
                  
                  1,414
                  
                  
                  
                  34.9
                  %Total
      operating expenses
                  
                  
                  2,336
                  
                  
                  
                  1,857
                  
                  
                  
                  25.8
                  %LOSS
      FROM OPERATIONS
                  
                  $
                  (2,336
                  )
                  
                  $
                  (1,857
                  )
                  
                  
                  25.8
                  %




Operating
Expenses





·
            Depreciation
      and amortization was $429,000 in the first six months of 2009, compared to
      $443,000 in the first six months of 2008. The decrease in depreciation and
      amortization of $14,000, or 3.2%, is primarily attributable to the
      reduction of depreciation related to the sale of the company jet in
      January, 2009.


.


51


·
            General
      and administrative expenses, net of corporate allocation, increased
      $493,000, or 34.9%, to $1.9 million in the first six months of 2009 from
      $1.4 million compared to the same period in 2008.  The increases
      year over year relate primarily to:





§
            Contract
      labor decreased $946,000 primarily due to the elimination of some
      consulting contracts and the conversion of consultants to full time
      employees.


§
            Accounting
      fees decreased $560,000 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 six months of
      2008.  The majority of the on-going Sarbanes-Oxley compliance
      work was performed internally during the first six months of
      2009.


§
            Bad
      debt decreased $307,000 related to advances and notes receivable to the
      Company’s independent sales
contractors.


§
            Legal
      fees decreased $228,000 directly related to defense costs associated with
      the suit filed by the California Attorney General’s office due to the
      reimbursement of $765,000 of those fees by the Company’s insurance
      carriers.


§
            Consulting
      fees decreased $589,000 due to the completion of the SAP® software
      implementation and a number of other IT initiatives which required
      consulting resources in 2008.


§
            Restricted
      stock amortization and stock option expense increased $1.1 million in 2009
      due to expense associated with restricted stock and stock option awards
      granted during the first and second quarters of
  2009.


§
            Insurance
      expense increased $288,000 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 $134,000 decrease in other legal
      accruals.


§
            Due
      to the overall decrease in allocable expenses as individually discussed
      above, the corporate allocation to the segments decreased $1.0
      million.  Allocable expenses include contract labor, accounting
      fees, legal fees, consulting fees, restricted stock amortization and stock
      option expense.




52


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
                      
                      
                      Six
      months endedJune
      30,
                        2009
                      
                      
                      June
      30,
                        2008
                      
                      
                      %
      change
                        2009
      vs 2008
                      
                      
                      June
      30,
                        2009
                      
                      
                      June
      30,
                        2008
                      
                      
                      %
      change
                        2009
      vs 2008NET
      REVENUES
                      
                      $
                      452
                      
                      
                      $
                      1,074
                      
                      
                      
                      (57.9
                      )%
                      
                      $
                      869
                      
                      
                      $
                      1,847
                      
                      
                      
                      (53.0
                      )%OPERATING
      EXPENSESTravel
      commissions
                      
                      
                      415
                      
                      
                      
                      753
                      
                      
                      
                      (44.9
                      )%
                      
                      
                      709
                      
                      
                      
                      1,295
                      
                      
                      
                      (45.3
                      )%Training
      programs and marketing materials
                      
                      
                      3
                      
                      
                      
                      5
                      
                      
                      
                      (40.0
                      )%
                      
                      
                      6
                      
                      
                      
                      13
                      
                      
                      
                      (53.8
                      )%General
      and administrative
                      
                      
                      307
                      
                      
                      
                      421
                      
                      
                      
                      (27.1
                      )%
                      
                      
                      621
                      
                      
                      
                      721
                      
                      
                      
                      (13.9
                      )%Total
      operating expenses
                      
                      
                      725
                      
                      
                      
                      1,179
                      
                      
                      
                      (38.5
                      )%
                      
                      
                      1,336
                      
                      
                      
                      2,029
                      
                      
                      
                      (34.2
                      )%INCOME
      FROM OPERATIONS
                      
                      
                      (273
                      )
                      
                      
                      (105
                      )
                      
                      
                      160.0
                      %
                      
                      
                      (467
                      )
                      
                      
                      (182
                      )
                      
                      
                      156.6
                      %OTHER
      INCOME (LOSS)
                      
                      
                      2
                      
                      
                      
                      6
                      
                      
                      
                      (66.7
                      )%
                      
                      
                      4
                      
                      
                      
                      18
                      
                      
                      
                      (77.8
                      )%
      *LOSS
      FROM OPERATIONSBEFORE TAX PROVISION
                      
                      
                      (271
                      )
                      
                      
                      (99
                      )
                      
                      
                      93.3
                      %
                      
                      
                      (463
                      )
                      
                      
                      (164
                      )
                      
                      
                      182.3
                      %INCOME
      TAX PROVISION
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      n/m
                      *
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      0.0
                      %LOSS
      ON DISPOSAL, NET OF TAX
                      
                      
                      (2,600
                      )
                      
                      
                      -
                      
                      
                      
                      n/m
                      *
                      
                      
                      (2,600
                      )
                      
                      
                      -
                      
                      
                      
                      n/m
                      *NET
      LOSS FROM DISCONTINUED OPERATIONS
                      
                      $
                      (2,871
                      )
                      
                      $
                      (99
                      )
                      
                      
                      n/m
                      *
                      
                      $
                      (3,064
                      )
                      
                      $
                      (165
                      )
                      
                      
                      n/m
                      **
      not meaningful




The
Company recorded a net loss from discontinued operations in the second quarter
of 2009 of $2.9 million, an increase of $2.8 million from a $99,000 loss
recorded in the second quarter of 2008.  This increase reflects a
downturn in the operations as well as the net loss on disposal of the REZconnect
subsidiary of $2.6 million.  The loss on disposal included pre-tax
exit costs of $2.6 million for the termination of certain employment
agreements.  The net loss from discontinued operations for the six
months ended June 30, 2009 and 2008 was $3.1 million and $165,000,
respectively.  The increased loss is primarily due to the net loss on
disposal recorded in the second quarter of 2009.  See Note 12 –
“Discontinued Operations” to the condensed consolidated financial statements for
further discussion.





Liquidity
and Capital Resources





As of
June 30, 2009, we had $1.0 million in cash and cash equivalents.  We
believe that our cash generating capability will be adequate to meet the needs
of our future operations.  However, we cannot predict what the effect
on our business might be from events that are beyond our control, such as the
global credit and liquidity crisis. We will continually assess our cash flow
needs.  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 half of 2009 and 2008 of $558,000 and $3.5
million, respectively.  In addition, negative current economic
conditions and other factors have led to a falloff in the number of active SO
IBCs in our Company.  The number of active SO IBC sites has declined
during the six months ended June 30, 2009 by a net of 31,969 to 60,414 active SO
IBCs from the 92,383 reported as of December 31, 2008. In addition, from
August 2008 through May 2009, we were defending against a case brought by the
California Attorney General challenging the legality of our network
marketing program.  The Company settled this case in May 2009. 
See Note 15 – “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.


53


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.  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 $1.2
million and $2.0 million, respectively, for the three and six months ended June
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 9 – “Share Based Payments” to the condensed consolidated
financial statements) and generated $117,000 in proceeds as of June 30,
2009.  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 $500,000 has
been paid as of June 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.





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





·
            Through
      our ongoing marketing we are balancing initiatives to attract new SOs and
      retain existing SOs.  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 “Shop
      YTB” where SOs 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 SO 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 15 –
“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.


54


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:





Six
      months ended June 30,Dollars
      in thousands
                          
                          2009
                          
                          
                          2008Net
      cash provided by (used in):Operating
      activitiesContinuing
                          
                          $
                          (608
                          )
                          
                          $
                          4,737Discontinued
                          
                          
                          (345
                          )
                          
                          
                          (43
                          )Total
      operating activities
                          
                          
                          (953
                          )
                          
                          
                          4,694Investing
      activitiesContinuing
                          
                          
                          421
                          
                          
                          
                          (5,885
                          )Discontinued
                          
                          
                          251
                          
                          
                          
                          -Total
      investing activities
                          
                          
                          672
                          
                          
                          
                          (5,885
                          )Financing
      activitiesContinuing
                          
                          
                          70
                          
                          
                          
                          103Discontinued
                          
                          
                          -
                          
                          
                          
                          (11
                          )Total
      financing activities
                          
                          
                          70
                          
                          
                          
                          92Effect
      of exchange rate changes on cash
                          
                          
                          11
                          
                          
                          
                          -Net
      increase (decrease) in cash
                          
                          $
                          (200
                          )
                          
                          $
                          (1,099
                          )




Net cash
used in operating activities of our continuing operations in the first half of
2009 was $608,000 compared to cash provided by operating activities of $4.7
million in the first half of 2008.  In addition, the operating
activities of our discontinued operations used $345,000 and $43,000 of cash in
the six months ended June 30, 2009 and June 30, 2008, respectively.





Net cash
provided by investing activities of our continuing operations was $421,000
during the first half of 2009 compared to $5.9 million used in the first half of
2008. This $6.3 million decrease in cash consumed was primarily related to a
decrease in purchases of property and equipment of $5.7 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 half of 2009.  In addition, the investing
activities of our discontinued operations provided $251,000 of cash in the six
months ended June 30, 2009, which represents net proceeds from the sale of short
term investments.





Net cash
provided by financing activities of our continuing operations was $70,000 and
$103,000, respectively, for the six months ended June 30, 2009 and
2008.  Net cash provided by financing activities during the first half
of 2009 related to proceeds received from the Company’s TSO Stock Purchase
Plan.  Net cash provided by financing activities in the first half of
2008 resulted primarily from proceeds received from the exercise of common stock
warrants.  In addition, during the first half 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 half 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 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 June 30, 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 six months of 2009.





In
addition, the Company expended approximately $871,000 in legal defense costs
during the first six 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.





The
decision to sell the REZconnect subsidiary by the Company yields a loss on the
recognition of future commitments of $2.6 million as a result of the
disposal.  However, the future commitments recognized in the current
period represent $2.0 million in non-cash expenditures.  As a result,
the Company expects to realize cash savings of $2.4 million over the next 5.5
years 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 expenses in the current period, the cash savings in the coming 5.5
years will serve to contribute a significant savings in terms of liquidity,
helping to strengthen the Company’s position.





On July
26, 2009, the $1.9 million balloon payment on the Company’s note on its
corporate headquarters came due.  Per the terms of the agreement, the
note is payable upon demand; however, no demand has been made to
date.  Currently, the Company is in negotiations with the lender to
extend the term of the note.  The Company will continue to make
payments under the original terms of the note.


55


Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





New
Accounting Pronouncements





Recently
Adopted Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160,
“Noncontrolling Interests in Consolidated Financial Statements—an amendment of
ARB No. 51” (“SFAS 160”). SFAS 160
amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements” and establishes accounting and reporting standards that require
non-controlling interests, previously referred to as minority interests, to be
reported as a component of equity. In addition, changes in a parent’s ownership
interest while the parent retains its controlling interest are accounted for as
equity transactions, and upon a gain or loss of control, retained ownership
interests are remeasured at fair value, with any gain or loss recognized in
earnings.  The adoption of SFAS 160 as of January 1, 2009 had no
impact on the Company’s financial position or results of operations as of or for
the three and six months ended June 30, 2009.





The
provisions of SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”) became
effective for the Company on January 1, 2009. SFAS 161 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 of SFAS 161 on a prospective basis. Accordingly, disclosures
related to interim periods prior to the date of adoption have not been
presented. SFAS 161 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 six months ended June 30, 2009.





Effective
January 1, 2009, the Company adopted SFAS No. 141(R), “Business
Combinations” (“SFAS
141(R)”) as amended by FASB Staff Position (“FSP”) FAS No.
141(R)-1 (“FSP
141(R)-1”) issued in April 2009.  SFAS 141(R) establishes
principles and requirements 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.  FSP 141(R)-1 addresses certain issues raised
upon the issuance of SFAS 141(R), with regard to initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination.  SFAS 141(R), as amended, will be effective for any
future acquisitions made by the Company.  The adoption of SFAS 141(R),
as amended, had no impact on the Company’s financial position or results of
operations as of or for the three and six months ended June 30,
2009.





In April
2008, the FASB finalized FSP FAS No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS
142”).  The intent of FSP 142-3 is to improve the consistency
between the useful life of a recognized asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141(R), and other U.S. generally accepted accounting principles (“GAAP”). In addition,
FSP 142-3 requires additional disclosures concerning recognized intangible
assets. These additional disclosures would enable users of financial statements
to assess the extent to which the expected future cash flows associated with the
asset are affected by the entity’s intent and/or ability to renew or extend the
arrangement. FSP 142-3 is effective for fiscal years beginning after December
15, 2008, and interim periods within those years.  The
Company adopted FSP 142-3 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 six months ended June 30, 2009.





In
addition, in April 2009, the FASB issued FSP No. FAS 107-1 and Accounting
Principles Board Opinion (“APB”) 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”) which requires public entities to disclose in their interim
financial statements the fair value of all financial instruments within the
scope of SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments”, as well as the methods and significant assumptions used to
estimate the fair value of those financial instruments. The Company adopted FSP
FAS 107-1 and APB 28-1 during the quarter ended June 30, 2009 by making any
required additional financial statement disclosures. The adoption of FSP FAS
107-1 and APB 28-1 had no impact on the Company’s financial position or results
of operations as of or for the three and six months ended June 30,
2009.





Also in
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”)
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. FSP 115-2 and 124-2 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 FSP 115-2 and 124-2
during the quarter ended June 30, 2009.  The adoption of FSP 115-2 and
124-2 had no impact on the Company’s financial position or results of operations
as of or for the three and six months ended June 30, 2009.


56





The FASB
issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP 157-4”) during
April 2009. FSP 157-4 provides additional 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. FSP 157-4
also requires new disclosures relating to fair value measurement inputs and
valuation techniques (including changes in inputs and valuation techniques). The
Company adopted FSP 157-4 during the quarter ended June 30, 2009.  The
adoption of FSP 157-4 had no impact on the Company’s financial position or
results of operations as of or for the three and six months ended June 30,
2009.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). The
objective of this statement is 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 statement 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 this
statement, an entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The Company adopted SFAS 165 in
the second quarter of 2009 and the adoption had no material impact on the
Company’s financial position or results of operations as of or for the
three and six months ended June 30, 2009.





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140” (“SFAS
166”).  SFAS 166 removes the concept of a qualifying
special-purpose entity from SFAS 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” 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 statement 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 of SFAS 166 to have a material impact on its consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS
167”).  SFAS 167 amends FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities” to
require 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, SFAS 167 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 statement shall be effective as of the beginning of each reporting 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.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles (“SFAS
168”).  SFAS 168 establishes the FASB Accounting Standards
CodificationTM(the
“Codification”)
as the single source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants.  When effective, the Codification will
supersede all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. Following SFAS 168, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates,
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.  SFAS 168 and the Codification are
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The Company has evaluated this new
statement and has determined that it will not have a significant impact on the
determination or reporting of its financial results.





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.


57





Item 3.   Quantitative and Qualitative Disclosures About Market
Risk.





As
discussed in our Annual Report on Form 10-K for the year ended December 31,
2008, our primary market risks include fluctuations in interest rates and
exchange rate variability.  We continually monitor these risks and the
manner in which we manage them.  Based on our most recent evaluation,
we do not believe our risk position at June 30, 2009 has changed materially from
that at December 31, 2008.





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.





Evaluation
of Disclosure Controls and Procedures





In
connection with our Quarterly Report on Form 10-Q for the quarter ended June 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 (the “Exchange Act”)) 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 June 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 June 30, 2009, other than those discussed
above, that have materially affected, or are reasonably likely to materially
affect, our Company’s internal control over financial
reporting.


58


PART
II - OTHER INFORMATION





Item 1.  Legal
Proceedings.





On August
4, 2008, a civil action was filed against three subsidiaries of ourCompany and
certain of ourexecutive 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 complaint was filed after 18 months of dialogue, initiated
by uswith
the Attorney General to discuss the implementation of a new California travel
law and its potential effect on our business model.
Throughout these discussions, which broadened over time, the Company has
consistently cooperated with the state’s information requests. On December 19,
2008, the California Attorney General amended its complaint to add YTB
International, Inc. as an additional defendant. This addition did not otherwise
change the nature of the allegations or claims asserted in the litigation. The
California Attorney General 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 April 6, 2009,
the Company reached a tentative settlement agreement with the State of
California.





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 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 alleging the following: the defendants operated a pyramid scheme in
violation of California law, utilized misleading marketing and other materials,
offered travel credentials and discounts to participants not meeting certain
requirements and operated a franchise without complying with applicable
franchise laws.  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 pertinent 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 register as a franchise with the California Department of
      Corporations on or before June 15, 2009.  The registration
      application documents were submitted to the California Department of
      Corporations on June 10, 2009.





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 half of 2009, the Company recorded a
$1,000,000 accrual related to these payments, of which $500,000 had been paid as
of June 30, 2009, resulting in a balance of $500,000.  The remaining
balance will be paid in two installments of $250,000, due at the end of the next
two quarters of 2009.


59





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, though frequently substantively similar to the
dismissed consolidated complaint,  purported to conform with the Court’s
ruling while also adding 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 plaintiff’s amended complaint in its
entirety based on the Court’s belief that the amended complaint, described as an
“ungainly monster,” likely 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 this
case.


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 ourdefense
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 our Company and the
individual insureds informed Illinois National's counsel that their position was
that the Illinois National policy is governed by Illinois law, and therefore
California Insurance Code Section 533.5 does not apply. Counsel for the Company
sought Illinois National's assurances that it agreed with this position 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. The individual insureds have
not yet served the complaint in this suit on Illinois National and have pursued
discussions with Illinois National about possible resolution of the
matter.  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.  Until Illinois National receives written
notice from the State of California, the individual insureds cannot withdraw
their case.  However, through June 30, 2009, all reimbursements due
from the insurance carriers have been made.


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, was 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 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.





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, each of whom became affiliated with
another network marketing company and violated their contract
terms.  The Complaint for Injunctive Relief requests, among other
things, that the Court enjoin defendants from soliciting or recruiting any of
the Company’s Reps or SOs 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 has set a hearing on the matter for May 14,
2009.  As a result of the hearing, the temporary injunction is in
place.


60





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 their claim has no merit and
intends to vigorously defend its position.





Also on
May 14, 2009, a civil action was filed against three subsidiaries of YTB
International, Inc. (the “Company”) 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 the date by which the Company must respond to their
complaint to August 26, 2009.





Item 1A. Risk
Factors.





The
discussion of our business and operations should be read together with the risk
factors set forth below and those contained in Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities
and Exchange Commission, which describe various risks and uncertainties to which
we are or may become subject. These risks and uncertainties have the potential
to affect our business, financial condition, results of operations and cash
flows in a material and adverse manner. Other than as set forth below, there
have been no material changes to the risk factors set forth in our Annual Report
on Form 10-K for the year ended December 31, 2008.





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





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





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.





The
annual meeting of our stockholders was held on June 15, 2009.  The
holders of 103,892,941 shares of our common stock, consisting of:  (i)
70,281,422 shares of Class A Common Stock, with voting power of one-tenth vote
per share, and (ii) 33,615,519 shares of Class B Common Stock, with voting power
of one vote per share, were entitled to vote at the meeting.  There
were present, either in person or by proxy, holders of at least 81,163,085
shares of our common stock, consisting of:  (i) 55,936,494 shares of
Class A Common Stock and (ii) 25,226,591 shares of Class B Common Stock,
entitled to vote thereat, that being a quorum of the shares entitled to
vote.  The votes taken at such meeting were as follows:





a)
            With
      respect to the approval of Proposal 1 (election of Class II Director
      Nominees):





For
                    
                    
                    Withhold
                      authorityJ.
      Scott Tomer
                    
                    
                    29,168,070
                    
                    
                    
                    1,652,170Paul
      A. Hemings
                    
                    
                    29,821,170
                    
                    
                    
                    999,070





b)
            With
      respect to the approval of Proposal 2 (ratification of UHY LLP as
      Independent Auditors of the
Company):





For
                      
                      Against
                      
                      
                      Abstain30,560,244
                      
                      
                      113,222
                      
                      
                      
                      146,774


61


Item 5.  Other Information.





a)
            None.


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 March 31, 2009.





Item 6.  Exhibits





10.1
                    
                    Form
      of Restricted Stock Award Agreement – At Election Award for Non-Employee
      Directors, by and between the Company and eligible members of the
      Company’s Board of Directors upon election to the
Board.10.2
                    
                    Stipulation
      For Entry of Final Judgment and Permanent Injunction, dated May 14,
      2009.10.3
                    
                    Employment
      Severance Agreement by and between YTB International, Inc., Michael Brent,
      Derek Brent and REZconnect Technologies, Inc., dated as of June 30, 2009,
      incorporated by reference
      to the Company’s Current Report on Form 8-K/A, Exhibit 10.1, filed with
      the SEC on August 5, 2009.10.4
                    
                    Agreement
      of Purchase and Sale by and between Michael Y. Brent and Derek Brent, as
      Purchasers, and YTB International, Inc., as Seller, dated as of June 30,
      2009, incorporated by reference to the Company’s Current Report on Form
      8-K, Exhibit 10.2, filed with the SEC on July 7, 2009.31.1
                    
                    Chief
      Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
                    
                    Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1*
                    
                    Chief
      Executive Officer Certification pursuant to Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2*
                    
                    Chief
      Financial Officer Certification pursuant to Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





*          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.


62


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/
      J. Scott TomerJ.
      Scott TomerDirector
      and Chief Executive OfficerDated:   August
      7, 2009/s/
      John D. ClaggJohn
      D. ClaggChief
      Financial OfficerDated:   August
      7, 2009


63