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:  March 31, 2009





OR





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


EXCHANGE
ACT OF 1934





For the
transition period from_______________ to________________





Commission
File Number 0-18412





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
            
            No
       ̈





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


Yes   ̈
            
            No ̈





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


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





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


Yes   ̈
            
            Nox





As of May
6, 2009, there were 70,500,856 shares of the registrant’s Class A Common Stock,
$0.001 par value, outstanding and 33,392,085 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
months ended March 31, 2009





PART I
                        FINANCIAL
      INFORMATIONItem 1.
                        Financial
      Statements.Condensed
      Consolidated Balance Sheets, March 31, 2009 (Unaudited) and December 31,
      2008
                        3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended March 31, 2009 and 2008
                        4Condensed
      Consolidated Statement of Change in Stockholders’ Equity
      (Unaudited)Three
      months ended March 31, 2009
                        5Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended March 31, 2009 and 2008
                        6Notes
      To Condensed Consolidated Financial Statements (Unaudited)
                        8Item 2.
                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                        24Item 3.
                        Quantitative
      and Qualitative Disclosures About Market Risk.
                        38Item 4.
                        Controls
      and Procedures.
                        38PART II
                        OTHER
      INFORMATIONItem 1.
                        Legal
      Proceedings.
                        39Item 1A.
                        Risk
      Factors.
                        40Item 2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds.
                        40Item 3.
                        Defaults
      Upon Senior Securities.
                        40Item 4.
                        Submission
      of Matters to a Vote of Security Holders.
                        40Item 5.
                        Other
      Information.
                        40Item 6.
                        Exhibits.
                        41Signatures





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)
                          March 31, 2009
                        
                        
                        December 31, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        1,806
                        
                        
                        $
                        1,203Restricted
      cash
                        
                        
                        1,804
                        
                        
                        
                        1,667Short-term
      investments
                        
                        
                        331
                        
                        
                        
                        251Accounts
      receivable (less allowance for doubtful accounts of $7 in 2009 and
      2008)
                        
                        
                        1,431
                        
                        
                        
                        2,680Notes
      receivable (less allowance for uncollectible notes of $549 in 2009 and
      $562 in 2008)
                        
                        
                        422
                        
                        
                        
                        458Inventory,
      net
                        
                        
                        932
                        
                        
                        
                        1,335Prepaid
      marketing commissions and advances (less allowance for uncollectible
      advances of $208 in 2009 and $162 in 2008)
                        
                        
                        5,666
                        
                        
                        
                        8,991Assets
      held for sale
                        
                        
                        -
                        
                        
                        
                        844Other
      prepaid expenses and current assets, net
                        
                        
                        801
                        
                        
                        
                        350Total
      current assets
                        
                        
                        13,193
                        
                        
                        
                        17,779Property
      and equipment, net
                        
                        
                        18,130
                        
                        
                        
                        18,728Intangible
      assets, net
                        
                        
                        2,303
                        
                        
                        
                        2,322Goodwill
                        
                        
                        2,979
                        
                        
                        
                        2,979Other
      assets
                        
                        
                        1,278
                        
                        
                        
                        1,278TOTAL
      ASSETS
                        
                        $
                        37,883
                        
                        
                        $
                        43,086LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,613
                        
                        
                        $
                        2,446Accrued
      marketing commissions
                        
                        
                        2,054
                        
                        
                        
                        2,148Accrued
      travel commissions
                        
                        
                        1,016
                        
                        
                        
                        1,784Other
      accrued expenses
                        
                        
                        4,845
                        
                        
                        
                        3,783Deferred
      revenue
                        
                        
                        9,967
                        
                        
                        
                        13,505Short-term
      debt
                        
                        
                        1,948
                        
                        
                        
                        1,973Other
      current liabilities
                        
                        
                        1,442
                        
                        
                        
                        1,303Total
      current liabilities
                        
                        
                        22,885
                        
                        
                        
                        26,942Other
      long-term liabilities:Deferred
      tax liability
                        
                        
                        755
                        
                        
                        
                        755Other
      income tax liabilities
                        
                        
                        190
                        
                        
                        
                        185Other
      liabilities
                        
                        
                        11
                        
                        
                        
                        11Total
      other long-term liabilities
                        
                        
                        956
                        
                        
                        
                        951TOTAL
      LIABILITIES
                        
                        
                        23,841
                        
                        
                        
                        27,893Commitments
      and Contingencies (Notes 2 and 14)STOCKHOLDERS' EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued and outstanding
      at March 31, 2009 and December 31, 2008
                        
                        
                        -
                        
                        
                        
                        -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized; 69,820,565
      and 69,379,259 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively
                        
                        
                        70
                        
                        
                        
                        69Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 33,972,376
      and 34,413,682 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively; convertible into Class A shares on a
      one-for-one basis
                        
                        
                        34
                        
                        
                        
                        34Additional
      paid-in capital
                        
                        
                        39,615
                        
                        
                        
                        38,843Accumulated
      other comprehensive loss
                        
                        
                        (82
                        )
                        
                        
                        (70
                        )Retained
      earnings (deficit)
                        
                        
                        (25,595
                        )
                        
                        
                        (23,683
                        )TOTAL
      STOCKHOLDERS' EQUITY
                        
                        
                        14,042
                        
                        
                        
                        15,193TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        37,883
                        
                        
                        $
                        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
                
                March 31, 2009
                
                
                March 31, 2008NET
      REVENUESInternet
      travel center sales and monthly fees
                
                $
                18,608
                
                
                $
                33,911Travel
      commissions and services
                
                
                2,522
                
                
                
                5,329Training
      programs and marketing materials
                
                
                484
                
                
                
                3,058Other
                
                
                175
                
                
                
                430Total
      net revenues
                
                
                21,789
                
                
                
                42,728OPERATING
      EXPENSESMarketing
      commissions
                
                
                9,367
                
                
                
                25,036Travel
      commissions
                
                
                1,708
                
                
                
                3,852Depreciation
      and amortization
                
                
                658
                
                
                
                536Training
      programs and marketing materials
                
                
                626
                
                
                
                2,171General
      and administrative
                
                
                11,236
                
                
                
                14,596Total
      operating expenses
                
                
                23,595
                
                
                
                46,191LOSS
      FROM OPERATIONS
                
                
                (1,806
                )
                
                
                (3,463
                )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                
                
                29
                
                
                
                69Interest
      expense
                
                
                (26
                )
                
                
                (17
                )Foreign
      currency translation gain (loss)
                
                
                2
                
                
                
                (1
                )Total
      other income (expense)
                
                
                5
                
                
                
                51LOSS
      BEFORE INCOME TAX PROVISION
                
                
                (1,801
                )
                
                
                (3,412
                )INCOME
      TAX PROVISION
                
                
                111
                
                
                
                106NET
      LOSS
                
                $
                (1,912
                )
                
                $
                (3,518
                )NET
      LOSS PER SHARE:Weighted
      average shares outstanding - basic for Class A and Class B
      shares
                
                
                103,792,941
                
                
                
                102,858,468Weighted
      average shares outstanding - diluted for Class A and Class B
      shares
                
                
                103,792,941
                
                
                
                102,858,468Net
      loss per share - basic for Class A and Class B (amounts for Class A and
      Class B shares are the same under the two-class method.  See
      Note 3):
                
                $
                (0.02
                )
                
                $
                (0.03
                )Net
      loss per share - diluted for Class A and Class B (amounts for Class A and
      Class B shares are the same under the two-class method.  See
      Note 3):
                
                $
                (0.02
                )
                
                $
                (0.03
                )





See
accompanying notes to unaudited condensed consolidated financial
statements.





4





YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statement of Changes in Stockholders’ Equity


(Unaudited)





Dollars in thousands, except
                
                Preferred
                
                
                Common Stock
                
                
                Additional
                
                
                Accumulated
                  Other
                
                
                Retained
                
                
                Total
                  Stockholders'share data
                
                Stock
                
                
                Class A
                
                
                Class B
                
                
                Paid-in
                
                
                Comprehensive
                
                
                Earnings
                
                
                EquityShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Income (Loss)
                
                
                (Deficit)
                
                
                (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
                
                
                -
                
                
                
                -
                
                
                
                441,306
                
                
                
                1
                
                
                
                (441,306
                )
                
                
                (1
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Amortization
      of restricted stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                744
                
                
                
                -
                
                
                
                -
                
                
                
                744Stock
      option compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                28
                
                
                
                -
                
                
                
                -
                
                
                
                28Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,912
                )
                
                
                (1,912
                )Foreign
      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (11
                )
                
                
                
                
                
                
                (11
                )Total
      comprehensive loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                (1,923
                )Rounding
      difference
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                -
                
                
                
                (1
                )
                
                
                -
                
                
                
                -Balance
      at March 31, 2009
                
                
                -
                
                
                $
                -
                
                
                
                69,820,565
                
                
                $
                70
                
                
                
                33,972,376
                
                
                $
                34
                
                
                $
                39,615
                
                
                $
                (82
                )
                
                $
                (25,595
                )
                
                $
                14,042





See
accompanying notes to unaudited condensed consolidated financial
statements.





5





YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)




Dollars
      in thousands
                                    
                                    Three months endedMarch 31, 2009
                                    
                                    
                                    March 31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                    
                                    $
                                    (1,912
                                    )
                                    
                                    $
                                    (3,518
                                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                    
                                    
                                    658
                                    
                                    
                                    
                                    536Write-off
      of uncollectible notes and advances
                                    
                                    
                                    -
                                    
                                    
                                    
                                    100Loss
      on disposal of property and equipment
                                    
                                    
                                    2
                                    
                                    
                                    
                                    12Reserve
      against inventory
                                    
                                    
                                    263
                                    
                                    
                                    
                                    1,700Reserve
      against earnest money deposit
                                    
                                    
                                    10
                                    
                                    
                                    
                                    -Write-off
      of deposit on acquisition of business
                                    
                                    
                                    -
                                    
                                    
                                    
                                    311Provision
      for uncollectible notes and advances
                                    
                                    
                                    35
                                    
                                    
                                    
                                    (8
                                    )Interest
      income on notes receivable
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (33
                                    )Provision
      for uncollectible interest on notes receivable
                                    
                                    
                                    1
                                    
                                    
                                    
                                    33Shares
      issued for services
                                    
                                    
                                    -
                                    
                                    
                                    
                                    510Amortization
      of restricted stock
                                    
                                    
                                    744
                                    
                                    
                                    
                                    1,221Stock
      option expense
                                    
                                    
                                    61
                                    
                                    
                                    
                                    33Compensation
      expense (credit)
                                    
                                    
                                    (271
                                    )
                                    
                                    
                                    -Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card
processing
                                    
                                    
                                    (177
                                    )
                                    
                                    
                                    11Restricted
      cash-Canadian operations
                                    
                                    
                                    37
                                    
                                    
                                    
                                    (127
                                    )Accounts
      receivable, net
                                    
                                    
                                    1,267
                                    
                                    
                                    
                                    381Notes
      receivable
                                    
                                    
                                    48
                                    
                                    
                                    
                                    157Inventory
                                    
                                    
                                    140
                                    
                                    
                                    
                                    (1,648
                                    )Prepaid
      marketing commissions and advances
                                    
                                    
                                    3,278
                                    
                                    
                                    
                                    1,165Other
      prepaid expenses and current assets
                                    
                                    
                                    (461
                                    )
                                    
                                    
                                    (453
                                    )Accounts
      payable
                                    
                                    
                                    (836
                                    )
                                    
                                    
                                    2,352Accrued
      marketing commissions
                                    
                                    
                                    (94
                                    )
                                    
                                    
                                    221Accrued
      travel commissions
                                    
                                    
                                    (768
                                    )
                                    
                                    
                                    333Other
      accrued expenses
                                    
                                    
                                    1,308
                                    
                                    
                                    
                                    311Other
      current liabilities
                                    
                                    
                                    136
                                    
                                    
                                    
                                    599Deferred
      revenue
                                    
                                    
                                    (3,539
                                    )
                                    
                                    
                                    958Other
      income tax liabilities
                                    
                                    
                                    5
                                    
                                    
                                    
                                    1NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                                    
                                    
                                    (66
                                    )
                                    
                                    
                                    5,158CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                    
                                    
                                    (40
                                    )
                                    
                                    
                                    (3,977
                                    )Proceeds
      from sale of property and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    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
                                    
                                    
                                    25
                                    
                                    
                                    
                                    -Purchases
      of short-term investments
                                    
                                    
                                    (105
                                    )
                                    
                                    
                                    (25
                                    )NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
                                    
                                    
                                    724
                                    
                                    
                                    
                                    (4,141
                                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Principal
      repayments of debt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5
                                    )Repayment
      of short-term debt
                                    
                                    
                                    (25
                                    )
                                    
                                    
                                    (504
                                    )Cash
      collateral for standby letter of credit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,910
                                    )Reduction
      in cash collateral for standby letter of credit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    357Reduction
      in restricted cash-collateral for outstanding note
                                    
                                    
                                    -
                                    
                                    
                                    
                                    500Proceeds
      from exercise of common stock warrants
                                    
                                    
                                    -
                                    
                                    
                                    
                                    90NET
      CASH USED IN FINANCING ACTIVITIES
                                    
                                    
                                    (25
                                    )
                                    
                                    
                                    (1,472
                                    )EFFECT
      OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
                                    
                                    
                                    (30
                                    )
                                    
                                    
                                    -NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                    
                                    
                                    603
                                    
                                    
                                    
                                    (455
                                    )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                    
                                    
                                    1,203
                                    
                                    
                                    
                                    1,731CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                    
                                    $
                                    1,806
                                    
                                    
                                    $
                                    1,276




6





YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows (continued)


(Unaudited)





Dollars
      in thousands
                
                Three months endedMarch 31, 2009
                
                
                March 31, 2008SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid (net of capitalized interest)
                
                $
                24
                
                
                $
                18Income
      taxes paid
                
                
                16
                
                
                
                30SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Property
      and equipment included in accounts payable and accrued
      expenses
                
                $
                3
                
                
                $
                131Notes
      receivable issued for sale of property and equipment
                
                
                -
                
                
                
                60Stock
      option compensation
                
                
                33
                
                
                
                180Reclass
      of notes receivable to other current assets / other assets
                
                
                -
                
                
                
                65Reclass
      of notes receivable reserve to acquisition of business
    reserve
                
                
                -
                
                
                
                45Transfer
      of Class B common stock shares to Class A common stock
    shares
                
                
                1
                
                
                
                1Shares
      issued for restricted stock grant
                
                
                -
                
                
                
                5





See
accompanying notes to unaudited condensed consolidated financial
statements.





7





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 four
wholly-owned subsidiaries: YTB Marketing, Inc. (formerly YourTravelBiz.com,
Inc., see Note 15 – “Subsequent Events”) and its subsidiaries (collectively
“YTB
Marketing”); YTB Travel Network, Inc. and its subsidiaries (collectively
“YTB Travel”);
YTB Franchise Services, Inc (“YTB Franchise”); and
REZconnect Technologies, Inc. (“REZconnect”).  The
Company, together with its subsidiaries, are hereafter collectively referred to
as the “Company” unless noted otherwise.




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




Each of
the four aforementioned operating subsidiaries was formed to divide the
Company’s operations into four basic divisions. YTB Marketing markets Internet
Travel Centers (“ITC” or “ITCs”), formerly
referred to as internet travel websites, on behalf of YTB Travel by use of
Independent Marketing Representatives (“Reps”). YTB Travel
operates home based travel websites which book online travel transactions,
collect payments, collect licensing fees, and pay travel sales commissions. YTB
Franchise was formed in March 2009, to serve as the corporate entity to offer
the proposed/contemplated franchise offerings in the future for the
Company.  REZconnect operates a franchise chain
of travel agencies and also acts as a host agency for traditional “brick and
mortar” travel companies. All of REZconnect’s franchised operations are
independently owned and operated. All sales of travel products by REZconnect are
made through its independent agencies and franchisees, or through its
interactive websites.





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, Travel Site
Owners (“TSOs”)
formerly known as Referring Travel Agents, (or Referring Travel Affiliates in
Canada), living in these countries can now refer customers to book travel
through ITCs that TSOs acquire from the Company, and, similarly, Reps who are
located there can market ITCs to others in the 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.  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.





The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.  The condensed
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.





Certain
reclassifications have been made to the 2008 financial statements to conform to
the current year presentation as of and for the period ended March 31,
2009.





8





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





As shown
in the accompanying financial statements, the Company has incurred a loss from
operations for the first quarter of 2009 of $1.8 million.  In
addition, negative current economic conditions and other factors have led to a
fall off in the number of active TSOs in the Company.  The number of
active TSOs has declined during the quarter ended March 31, 2009 by a net loss
of 18,582 to 73,801 active TSOs from the 92,383 reported as of December 31,
2008. The Company is also defending against two cases challenging the
legality of our network marketing program.  Litigation claims can
be expensive and time consuming to bring and defend against and could result in
settlements or damages that could significantly affect financial
results.  The Company’s loss from operations, declining active TSO
count, working capital deficiency, uncertainties surrounding the Company’s
pending litigation, and the general downturn in the economy raise substantial
doubt about the Company’s ability to continue as a going concern.





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.  The Board of Directors has 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.  Management has
instituted a cost reduction program that included a reduction in labor and
fringe costs, as well as reductions of discretionary expenditures in the
operating structure of the organization.  The reductions in labor and
fringe were approximately
$1.1 million for the full year 2008 results andapproximately
$800,000 for the three months ended March 31, 2009.  To raise
additional capital, the Company implemented the TSO Stock Purchase Plan which
became operational in April 2009 (see 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.  Management believes these factors will contribute toward
achieving profitability.  However, there can be no assurance that the
Company will be successful in achieving its objectives.





The
accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.  The Company’s ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions
referred to above, on the timeline contemplated by 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.  On April 6, 2009, the
Company reached a tentative settlement agreement with the State of
California in connection with the civil action discussed in Note 14 – "Commitments
and Contigencies" and Note 15 – “Subsequent Events.”  The Company
also reached a tentative agreement with its insurance carriers regarding their
coverage for the defense of the cases, the terms of which are dependent
upon a final settlement with the State of California.  In addition, on
February 9, 2009, the Company filed motions to dismiss the class action lawsuit
in Illinois.  Subsequent to the end of the first quarter, the motions
to dismiss were fully briefed, and the Court has set a hearing for June 1,
2009.  Although the Company believes that it has meritorious
defenses against the legal proceedings described above and in Note 14 and
intends to vigorously defend the cases, if the Company is unsuccessful
in its defense against the claims, the result would likely have a material
adverse effect on its liquidity, financial condition, and results of operations.
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
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 for any
periods presented.





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 impact on
the Company’s financial position or results of operations.





9





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Effective
January 1, 2009, the Company adopted SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”).
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. The adoption of SFAS 141(R) had
no impact on the Company’s financial position or results of operations as
of or for the three months ended March 31, 2009.





In April
2008, the FASB finalized FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142. The intent of FSP 142-3 is to improve
the consistency between the useful life of a recognized asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141R, and other U.S. generally accepted accounting
principles. In addition, FSP 142-3 requires additional disclosures concerning
recognized intangible assets. These additional disclosures would enable users of
financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entity’s intent and/or
ability to renew or extend the arrangement. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those
years.  The Company adopted FSP 142-3 on January 1, 2009.
The adoption had no effect on the Company’s financial
statements.




Recently Issued Accounting Pronouncements




In April
2009 the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSP
141(R)-1”).  FSP 141(R)-1 amends the guidance in SFAS No. 141,
“Business Combinations”, as revised December 2007 (“SFAS 141(R)”)
to:





·
            Require
      that assets acquired and liabilities assumed in a business combination
      that arise from contingencies be recognized at fair value if fair value
      can be reasonably estimated. If fair value of such an asset or liability
      cannot be reasonably estimated, the asset or liability would generally be
      recognized in accordance with SFAS No. 5, “Accounting for Contingencies,”
      (“SFAS
      5”) and FASB Interpretation No. 14, “Reasonable Estimation of the
      Amount of a Loss.” Further, the FASB decided to remove the subsequent
      accounting guidance for assets and liabilities arising from contingencies
      from SFAS 141(R), and carry forward without significant revision the
      guidance in SFAS No. 141.


·
              Eliminate
      the requirement to disclose an estimate of the range of outcomes of
      recognized contingencies at the acquisition date. For unrecognized
      contingencies, the FASB decided to require that entities include only the
      disclosures required by SFAS 5 and that those disclosures be included in
      the business combination
footnote.


·
              Require
      that contingent consideration arrangements of an acquiree assumed by the
      acquirer in a business combination be treated as contingent consideration
      of the acquirer and should be initially and subsequently measured at fair
      value in accordance with SFAS
141(R).





FSP
141(R)-1 is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  The Company does not expect the adoption of FSP 141(R)-1 to
have a material impact on its consolidated financial statements. FSP 141(R)-1
will be effective for any future acquisitions made by the Company.




In
addition, in April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP 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 will adopt
FSP 107-1 and APB 28-1 during the quarter ending June 30, 2009 by making any
required additional financial statement disclosures. The Company does not expect
the adoption of FSP 107-1 and APB 28-1 to have a material impact on its
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 FAS
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 FAS 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 will adopt FSP 115-2 and FAS 124-2 during the quarter ending June
30, 2009.  The Company does not expect the adoption of FSP 115-2
and FAS 124-2 to have a material impact on its consolidated financial
statements.





10





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





Finally,
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 will adopt FSP 157-4 during the quarter ending June 30,
2009.  The Company does not expect the adoption of FSP 157-4 to have a
material impact on its consolidated financial statements.




11





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:





Three months endedMarch 31,Dollars
      in thousands, except share and per share data
                      
                      2009
                      
                      
                      2008Numerator:Net
      loss
                      
                      $
                      (1,912
                      )
                      
                      $
                      (3,518
                      )Denominator:Weighted
      average common shares and denominator for basic
    calculation:
                      
                      
                      103,792,941
                      
                      
                      
                      102,858,468Weighted
      average effects of dilutive equity based compensation
    awards:Stock
      options
                      
                      
                      -
                      
                      
                      
                      -Stock
      warrants
                      
                      
                      -
                      
                      
                      
                      -Restricted
      stock awards
                      
                      
                      -
                      
                      
                      
                      -Denominator
      for diluted calculation
                      
                      
                      103,792,941
                      
                      
                      
                      102,858,468Net
      loss  per share - basic for Class A and Class B
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )Net
      loss  per share - diluted for Class A and Class
B
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )





An
aggregate of 0 and 4,581,442 shares (of both Class A Common Stock and Class B
Common Stock) for the three months ended March 31, 2009 and 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 months ended March 31, 2009 primarily due
to the decline in the Company’s average stock price during that
period.





12





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 4 – RESTRICTED
CASH





Restricted
cash as of March 31, 2009 and December 31, 2008 was $1.8 million and $1.7
million, respectively, representing reserves with the Company’s domestic credit
card processor of $1.7 million and $1.6 million, respectively, and $57,000 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 increased the reserve
requirement from 3% of the average rolling six-month transaction volume to a
flat $3.0 million.  Per the terms of the agreement, the Company
anticipates fully funding the new reserve requirement by June 30,
2009.





NOTE 5 – NOTES
RECEIVABLE




Included
in notes receivable are notes issued to certain Reps that bear interest at rates
that approximate current market interest rates and have terms of one year or
less.  The terms of many of the Rep notes have been extended beyond
the original terms.  The notes are primarily guaranteed by Sales
Directors with at least 2,000 people or more in their organization, against
future earnings of those Sales Directors.  As of March 31, 2009 and
December 31, 2008, reserves of $549,000 and $562,000, respectively, have been
recorded against the respective note balances of $573,000 and
$622,000.




Also
included in notes receivable as of March 31, 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 March 31, 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 – “Subsequent
Events.”  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 March 31, 2009 and December 31, 2008.




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




NOTE 6 – INVENTORY,
NET




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





Dollars in thousands
                          
                          March 31,
                            2009
                          
                          
                          December 31,
                            2008Audio
      / video marketing
                          
                          $
                          39
                          
                          
                          $
                          66Printed
      marketing materials
                          
                          
                          504
                          
                          
                          
                          869Apparel
                          
                          
                          389
                          
                          
                          
                          400Inventory,
      net
                          
                          $
                          932
                          
                          
                          $
                          1,335





For the
three months ended March 31, 2009, the Company recorded a reserve of $263,000
against slow-moving magazines, audio / video and printed marketing materials,
net of previously reserved inventory sold during the quarter of $86,000.
Inventory reserves recorded at March 31, 2009 and December 31, 2008 are $2.9
million and $3.0 million, respectively.




13





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 months ended
March 31, 2008 was $15,000, 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
                            
                            March 31,
                              2009
                            
                            
                            December 31,
                              2008Equipment
                            
                            $
                            3,099
                            
                            
                            $
                            3,131Furniture
      and fixtures
                            
                            
                            751
                            
                            
                            
                            751Capitalized
      software
                            
                            
                            5,286
                            
                            
                            
                            5,296Vehicles
                            
                            
                            64
                            
                            
                            
                            64Buildings
      and improvements
                            
                            
                            4,216
                            
                            
                            
                            4,216Land
                            
                            
                            3,341
                            
                            
                            
                            3,341Construction
      in progress and deposits
                            
                            
                            6,739
                            
                            
                            
                            6,676Leasehold
      improvements
                            
                            
                            148
                            
                            
                            
                            14223,644
                            
                            
                            
                            23,617Less:  Accumulated
      depreciation
                            
                            
                            (5,514
                            )
                            
                            
                            (4,889
                            )Property
      and equipment, net
                            
                            $
                            18,130
                            
                            
                            $
                            18,728





Total
depreciation and amortization expense on property and equipment was $639,000 and
$517,000 for the three months ended March 31, 2009 and 2008,
respectively.





As of
March 31, 2009 and December 31, 2008, capitalized software development costs,
net of accumulated amortization, totaled $261,000 and $305,000,
respectively.  For the three months ended March 31, 2009 and 2008, the
Company recorded amortization of capitalized software development costs of
$44,000 and $37,000, respectively, which is included in total depreciation and
amortization expense above.





On
February 1, 2008, SAP®, the Company’s new enterprise resource planning software
application, was implemented.  The cost of approximately $1.7 million
was recorded as an addition to software during 2008, of which $1.5 million was
capitalized during the first quarter of 2008. Cost, net of accumulated
amortization was $1.1 million and $1.3 million as of March 31, 2009 and December
31, 2008, respectively.  Depreciation for the three months ended March
31, 2009 and 2008 was $134,000 and $78,000, 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 $31,000 for the three months ended March
31, 2008.  During January 2009, construction on the new corporate
headquarters was suspended.





14





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 9 – SHARE-BASED
PAYMENTS




As of
March 31, 2009, the Company had a share-based employee compensation plan and a
share-based Sales Director bonus plan.  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.





2004
Stock Option and Restricted Stock Plan.





Stock
Options





The
Company recognized $61,000 and $33,000 in compensation expense for stock options
issued under the 2004 Plan for the three months ended March 31, 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.  Unrecognized
expense related to future service on existing stock options granted under the
2004 Plan as of March 31, 2009 and 2008 was $398,000 and $402,000,
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.  As of March
31, 2009, the Company had not yet issued the shares which vested on the grant
date.





The
Company recorded $744,000 and $0 for the three months ended March 31, 2009 and
2008, respectively, as net compensation expense related to the amortization of
the restricted stock awards issued under the 2004 Plan.  If the
Company’s actual forfeiture rate is materially different from its estimate, or
if the Company re-evaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different than what was recorded in
the current period.  As of March 31, 2009, there was $878,000 of
unrecognized compensation expense related to the 2,192,367 shares of restricted
stock, which the Company expects to recognize over the next 3.15
years.





2007
Sales Director Bonus Plan





The
Company recorded a reduction in accrued bonuses and a related charge to
additional paid in capital of $51,000 and $180,000 during the three months ended
March 31, 2009 and 2008, respectively, associated with the fair value of the
exercisable portion of the grants issued under the 2007 Sales Director Bonus
Plan.  The Company recorded an increase in accrued bonuses and
recorded a related decrease to additional paid in capital of $84,000 and $0
during the three months ended March 31, 2009 and 2008, respectively, associated
with 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 and known
future forfeitures incurred through the filing date of this Quarterly Report on
Form 10-Q.  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 sheetas of March 31, 2009 and December 31, 2008,
respectively, are $214,000 and $452,000 of accrued bonuses that relate to
options that are exercisable in the future.





15





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
following table provides additional information with respect to the aggregate
stock option plan activity for the first quarter of 2009 under the Company’s
2004 Plan and 2007 Sales Director Bonus Plan, 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
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (23,472
                    )
                    
                    
                    0.71
                    
                    
                    
                    1.03Expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      outstanding, end of period
                    
                    
                    2,429,755
                    
                    
                    $
                    0.85
                    
                    
                    $
                    0.67
                    
                    
                    
                    3.72Options
      exercisable, end of period
                    
                    
                    608,335
                    
                    
                    $
                    0.95
                    
                    
                    $
                    0.54
                    
                    
                    
                    5.13





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 first
quarter of 2008 was $.65.  There were no options exercised during the
first quarter of 2008.





A summary
of stock options outstanding and exercisable as of March 31, 2009 is as
follows:





Options Outstanding
                  
                  
                  Options ExercisableWeightedAverage
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  Remaining
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  AverageRange of Exercise Prices
                  
                  Outstanding
                  
                  
                  Life(Years)
                  
                  
                  ExercisePrice
                  
                  
                  Outstanding
                  
                  
                  ExercisePrice$0.40
      - $1.00
                  
                  
                  1,429,755
                  
                  
                  
                  2.03
                  
                  
                  $
                  0.52
                  
                  
                  
                  235,000
                  
                  
                  $
                  0.40$1.01
      - $1.67
                  
                  
                  1,000,000
                  
                  
                  
                  6.14
                  
                  
                  
                  1.32
                  
                  
                  
                  373,335
                  
                  
                  
                  1.30Total
                  
                  
                  2,429,755
                  
                  
                  
                  3.72
                  
                  
                  $
                  0.85
                  
                  
                  
                  608,335
                  
                  
                  $
                  0.95





One-Time
Restricted Stock Award





The
Company recorded $1.2 million for the three months ended March 31, 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
March 31, 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 months ended March 31,
2009 related to the amortization of the unvested portion of the award shares
scheduled to vest on January 2, 2010.  As of March 31, 2009, there was
approximately $5.0 million of unrecognized compensation expense related to the
4.8 million shares scheduled to vest on January 2, 2010.  As of March
31, 2009, there was approximately $5.0 million of unrecognized compensation
expense related to 4.8 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.





16





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
following table summarizes the status of restricted shares under the Company’s
2004 Plan and the One-Time Restricted Stock Award during the three months ended
March 31, 2009:





WeightedaverageRestricted
                  
                  
                  grant-dateshares
                  
                  
                  fair valueNon-vested
      at beginning of 2009
                  
                  
                  15,299,058
                  
                  
                  $
                  1.05Granted
                  
                  
                  3,251,174
                  
                  
                  
                  0.30Vested
                  
                  
                  1,725,584
                  
                  
                  
                  0.34Forfeited
                  
                  
                  4,979,043
                  
                  
                  
                  1.03Non-vested
      at March 31, 2009
                  
                  
                  11,845,605
                  
                  
                  $
                  0.96





As of
March 31, 2009, there was approximately $11.3 million of unrecognized
compensation expense related to the 11.8 million shares of non-vested restricted
stock which includes $5.0 million of unrecognized compensation expense related
to the 4.8 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 $6.3 million over the next 3.15
years.





Total
compensation cost recognized in the condensed consolidated statement of
operations for all plans for the three months ended March 31, 2009 and 2008 was
$534,000 and $1.3 million, respectively.





NOTE 10 – STOCKHOLDERS’
EQUITY





On
February 23, 2009, the Company filed a registration statement on Form S-8 for
the TSO Stock Purchase Plan.  However, the plan did not become
operational until April 2009.





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 quarter ended March 31, 2009 and
2008, the Company expended $153,000 and $1.0 million, respectively, for these
services.  At December 31, 2008, the Company had a receivable of
$14,000 included in accounts receivable on the consolidated balance sheet for an
advance made to the printing company.  There was no receivable as of
March 31, 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, and another
director and principal shareholder of, Meridian Bank, Timothy Kaiser, M.D. and
Clay Winfield, respectively, are also directors of the Company. See Note 15 -
“Subsequent
Events”. This
transaction was approved by the independent members of the Company’s Board of
Directors.  On January 8, 2008, the Company’s $500,000 certificate of
deposit representing restricted cash collateral for the Company’s outstanding
indebtedness related to its corporate headquarters property was surrendered in
partial repayment of the principal amount outstanding under such
indebtedness.





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




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 March
31, 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 first quarter of 2009 was $19,000.  Interest paid to
Meridian Bank during the first quarter of 2008 was $31,000.





17





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





During
the three months ended March 31, 2009 and 2008, the Company made aggregate
payments of $427,000 and $415,000, respectively, pursuant to the terms of the
development contract for its new corporate headquarters in Wood River,
Illinois.  In addition, at March 31, 2009 and December 31, 2008, the
Company’s accounts payable included $10,000 and $414,000, respectively, of
amounts due under the development contract.  The contract for the
development of the real property on which such headquarters are located, which
was approved by the independent members of the Company’s Board of Directors, was
awarded to Winfield Development, which is controlled by Clay Winfield, a member
of the Company’s Board of Directors. See Note 15 - “Subsequent
Events”.





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 their rights to purchase the
building.  There can be no assurances made that the Company will be
able to obtain proper financing to close on the acquisition or, even if it does
obtain financing, the Company may also elect not to exercise its right to
purchase the building, or 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 quarter of 2009, additional
payments of $10,000 net were made and classified as deposits to preserve
the Company’s
future interest in the property. These amounts were subsequently reserved as of
March 31, 2009.





During
the first quarter of 2009 and 2008, the Company’s rental expense under the
Building Two Lease was approximately $8,000 per month, $25,000 for both the
three months ended March 31, 2009 and 2008.





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 is the business
jet, which is 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.





On August
17, 2007, the Company entered into a Commercial Lease Agreement (the “Magnolia Lease”), by
and between Meridian Land, as lessor, and the Company, as lessee, covering the
approximately 5,500 square feet premises located at #112 Magnolia Drive (Lot #9
Magnolia Commons), Glen Carbon, Illinois 62034 (the “Magnolia Leased
Premises”). The Magnolia Leased Premises serve as additional office space
for the Company.  The Magnolia Lease has an initial term of 18 months,
originally scheduled to commence on November 1, 2007 and expire on April 30,
2009.  Due to delays in construction being performed with respect to
the Magnolia Leased Premises, the term of the Magnolia Lease was postponed such
that it commenced on February 15, 2008 and extends until August 15, 2009. Rent
under the Magnolia Lease has been set at $8,000 per month. In addition to
monthly rental payments, the Company is responsible for utilities and
maintenance and must pay all real estate taxes assessed on the property on which
the Magnolia Leased Premises is located during the term of the Magnolia Lease,
as well as all costs of maintaining any common areas used by the Company in
conjunction with the Magnolia Leased Premises.  During the periods
ended March 31, 2009 and 2008, rental expense for the Magnolia Leased Premises
totaled $25,000 and $17,000, respectively, and real estate tax expense totaled
$2,000 and $0, respectively.  In addition, during the period ended
March 31, 2009 and 2008, expense related to the cost of maintaining common areas
totaled $2,000 and $0, respectively, and payments related to the reimbursement
of tenant build-out costs capitalized to leasehold improvements totaled $0 and
$22,000, respectively.





18





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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





Meridian
Land is controlled by its principals, Timothy Kaiser, M.D. and Clay Winfield,
each of whom is a member of the Company’s Board of Directors. See Note 15 -
“Subsequent
Events”. 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 months ended March 31, 2009 and 2008, REZconnect paid $0 and $5,000,
respectively, in legal fees for work performed by the law firm for which Harold
Kestenbaum, Esq., a member of the Company’s Board of Directors, serves as
counsel.





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 March 31, 2009 and December 31,
2008, accrued fees of $10,000 and $11,000, respectively were included in accrued
expenses on the consolidated balance sheets.





19





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 12 – SEGMENT
INFORMATION





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





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





Dollars
      in thousandsThree
      months endedMarch 31, 2009
                        
                        Marketing
                        
                        
                        Travel
                        
                        
                        Franchise
                        
                        
                        Parent
                        
                        
                        TotalExternal
      and inter-segment revenue
                        
                        $
                        19,092
                        
                        
                        $
                        2,697
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        21,789Net
      income (loss)
                        
                        
                        1,260
                        
                        
                        
                        (1,336
                        )
                        
                        
                        -
                        
                        
                        
                        (1,836
                        )
                        
                        
                        (1,912
                        )Assets
                        
                        
                        12,745
                        
                        
                        
                        2,553
                        
                        
                        
                        200
                        
                        
                        
                        22,385
                        
                        
                        
                        37,883Depreciation
      and amortization
                        
                        
                        344
                        
                        
                        
                        111
                        
                        
                        
                        -
                        
                        
                        
                        203
                        
                        
                        
                        658Capital
      expenditures
                        
                        
                        32
                        
                        
                        
                        0
                        
                        
                        
                        -
                        
                        
                        
                        11
                        
                        
                        
                        43Three
      months endedMarch 31, 2008
                        
                        Marketing
                        
                        
                        Travel
                        
                        
                        Franchise
                        
                        
                        Parent
                        
                        
                        TotalExternal
      and inter-segment revenue
                        
                        $
                        37,013
                        
                        
                        $
                        5,694
                        
                        
                        $
                        -
                        
                        
                        $
                        21
                        
                        
                        $
                        42,728Net
      income (loss)
                        
                        
                        319
                        
                        
                        
                        (2,742
                        )
                        
                        
                        -
                        
                        
                        
                        (1,095
                        )
                        
                        
                        (3,518
                        )Assets
                        
                        
                        36,730
                        
                        
                        
                        3,503
                        
                        
                        
                        -
                        
                        
                        
                        25,394
                        
                        
                        
                        65,627Depreciation
      and amortization
                        
                        
                        316
                        
                        
                        
                        49
                        
                        
                        
                        -
                        
                        
                        
                        171
                        
                        
                        
                        536Capital
      expenditures
                        
                        
                        557
                        
                        
                        
                        338
                        
                        
                        
                        -
                        
                        
                        
                        3,213
                        
                        
                        
                        4,108





GEOGRAPHICAL
FINANCIAL INFORMATION:





Dollars in thousands
                  
                  Three months ended March 31,NET
      REVENUES:
                  
                  2009
                  
                  
                  2008United
      States
                  
                  $
                  21,309
                  
                  
                  $
                  41,440Canada
                  
                  
                  480
                  
                  
                  
                  1,288$
                  21,789
                  
                  
                  $
                  42,728LONG-LIVED
      ASSETS:March 31, 2009
                  
                  
                  December 31, 2008United
      States
                  
                  $
                  24,457
                  
                  
                  $
                  25,040Canada
                  
                  
                  233
                  
                  
                  
                  267$
                  24,690
                  
                  
                  $
                  25,307





20





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 13 – INCOME
TAXES





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





As of
March 31, 2009 and December 31, 2008, the Company had approximately $1.4 million
of unrecognized tax benefits. Of the unrecognized tax benefits at March 31,
2009, $190,000, 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 March
31, 2009 and December 31, 2008, the Company had approximately $18,000 and
$16,000, respectively, of accrued interest related to uncertain positions
included as a component of other non-current income tax
liabilities.





The
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’s tax provision for the three months ended March 31, 2009 consists of
state and foreign income taxes.  The Company has a federal tax loss
for the three months ended March 31, 2009, which received no tax benefit, as the
Company’s deferred tax assets have a full valuation allowance recorded against
them.





Federal
income tax receivable of $13,000 is included in other prepaid expenses and
current assets, net at March 31, 2009 and December 31, 2008.  Foreign
income tax payable of $303,000 and $242,000 and state income tax payable of
$77,000 and $73,000 is included in other current liabilities at March 31, 2009
and December 31, 2008, respectively.





NOTE 14 – COMMITMENTS &
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 alleges that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws. The complaint was filed after 18 months of dialogue, initiated
by 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 seeks a permanent injunction preventing the
defendants from making any untrue or misleading statements or committing any
acts of unfair competition, penalties of at least $15.0 million, and restitution
of at least $10.0 million. See Note 15 – “Subsequent
Events.”





On August
8, 2008, a complaint seeking to be certified as a class-action was filed against
the Company, three Company subsidiaries, and certain executive officers, in the
United States District Court, Southern District of Illinois. The complaint
alleges that the defendants violated the Illinois Consumer Fraud and Deceptive
Business Practices Act. On August 14, 2008, a second, substantively similar,
complaint was filed against the same defendants in the United States District
Court for the Southern District of Illinois. The two cases have now been
consolidated and are proceeding together before the same judge. The plaintiffs
have filed a consolidated complaint, seeking damages of over $100.0 million. On
February 9, 2009, the Company filed motions to dismiss the consolidated
complaint and these motions are now pending before the Court. Subsequent to the
end of the first quarter, the motions to dismiss were fully briefed and the
Court has set a hearing for June 1, 2009.  Management believes the
Company has meritorious defenses and intends to vigorously defend these
cases.





21





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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
conditioned on a final settlement with the State of California and certain
other conditions that have not yet been met.





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.


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, 2008, 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 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.  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 TSOs 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.
  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.


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.





22




YTB
INTERNATIONAL, INC.
 Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 15 – SUBSEQUENT
EVENTS





On April
6, 2009, the Company reached a tentative settlement agreement with the State of
California in connection with the civil action filed on August 4, 2008 against
the Company and certain executive officers of the Company in the Superior Court
of California, County of Los Angeles, by the California Attorney General. The
tentative settlement agreement is awaiting execution by both parties in addition
to final court approval.





On April
6, 2009, the wholly owned subsidiary of the Company, YourTravelBiz.com, Inc.,
changed its name to YTB Marketing, Inc.




On April
30, 2009, Clay Winfield resigned from the Company's Board of
Directors.





NOTE 16 – CASH FLOW
RESTATEMENT





Subsequent
to the issuance of the Company’s condensed consolidated financial statements for
the quarter ended March 31, 2008, the Company determined that its previously
issued condensed consolidated statements of cash flows for the three months
ended March 31, 2008 contained an error resulting from the reclassification of
certain cash flows for both the receipts and payments of the restricted cash
related to amounts withheld by credit card processors.  This error
resulted in a $116,000 overstatement of cash provided by operating activities
and a corresponding $116,000 overstatement of cash used in financing activities
for the quarter ended March 31, 2008.





These
adjustments to the condensed consolidated statement of cash flows do not affect
the Company’s condensed consolidated statement of operations, condensed
consolidated balance sheet, or condensed consolidated statement of changes in
stockholders’ equity (deficit).





23


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 four subsidiaries: YTB Marketing, Inc. (formerly YourTravelBiz.com, Inc.,
“YTB
Marketing”), YTB Travel Network, Inc. (“YTB Travel”), YTB
Franchise Services, Inc (“YTB Franchise”), and
REZconnect Technologies, Inc. (“REZconnect”).  YTB
Marketing establishes and sells Internet Travel Centers (“ITC” or “ITCs”), formerly
referred to as internet travel websites, and compensates its Independent
Marketing Representatives (“Reps”) (independent
contractors) who sell ITCs through a direct sales model and are compensated via
a multilevel marketing commission structure. YTB Travel contracts with the
customers of ITCs, supports online booking transactions, supplies personal
fulfillment services, collects travel commissions and pays travel
commissions.  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.  REZconnect operates a franchise chain of
travel agencies and also acts as a host agency for traditional “brick and
mortar” travel companies.  REZconnect is reported as part of the YTB
Travel segment for segment reporting purposes.
 
 YTB
Marketing conducts business through marketing, training and support of its Rep
sales force who are responsible for marketing and selling ITCs to Travel Site
Owners (“TSOs”), formerly
known as Referring Travel Agents (Referring Travel Affiliates in Canada), most
of whom work from their homes.
 
 YTB
Travel is the travel management subsidiary that processes travel sales from
online business models and processes and handles bookings (reservations)
from ITCs, 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.
 
 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.
  24
  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 TSO develops personal
relationships with his or her customers, who book travel through the TSO’s ITC,
thereby creating a significant advantage for our sales force over the major
online travel companies. Typically, the cost to book a trip through a TSO 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 ITCs 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 ITCs on behalf of YTB Travel will not be
significantly affected by the seasonality of the travel business, or a decline
in travel, since the $49.95 monthly fee is a primary source of our revenue.
Also, typical online travel merchants sell a commodity (travel), which does not
engender strong customer loyalty. By contrast, each TSO develops personal
relationships with his or her customers, who book travel through the TSO’s own
ITC, thereby creating a significant advantage for YTB compared to the major
online travel companies.
 
 We
anticipate that future travel revenue will decline as the average number of
active ITCs declines.  We believe that this decline will be partially
offset by an increase in the average travel bookings per ITC, as we expect our
existing TSOs will become more productive because of increased training
initiatives.  TSO sites are available for use 24 hours, 7 days a week.
On June 30, 2008, we issued a press release announcing that we were named one of
the country’s leading travel agencies in Travel Weekly’s 2008 Power List. In the
2008 Travel Weekly Power List, we were ranked 26thamong
all travel agencies, advancing nine places over our ranking in the previous year
with an 84% increase in travel sales, based on retail travel sales of $414.5
million.  Comparable data for 2008 has not yet been made available to
the public.  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 ITC sales and monthly ITC 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 ITC 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 TSO pays a monthly web-hosting fee
of $49.95 to us, and earns transactional compensation from travel purchased from
his or her ITC.  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 decline in revenues in the coming months due to the general
economic conditions followed by stabilization and ultimate growth because of new
marketing efforts, although we anticipate slower growth compared to what we have
experienced in the past because of the weak economy
generally.  However, with new marketing initiatives and
enhanced/expanded services being added, we believe that we will see a
stabilization of our sales and retention 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 flu 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.
 
 It should
be noted that while only the commissions arising from our TSOs’ 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 TSOs (which directly impacts our commission revenues). The
value of such travel services was $414.5 million in 2007 which ranked us the
26th largest travel agency in the United States by Travel Weekly for the year
ended 2007.  Comparable data for 2008 sales (retail value) has not yet
been made available to the public.  We anticipate receiving the 2009
Travel Weekly ranking in June 2009.
  25
  About Our
Industry
  We
believe that the shift to the internet for booking travel and our unique
programs for our TSOs place us in a valuable and unique position to provide an
income stream for our TSOs 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, 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.
  26
  Results of
Operations
 
 The
following tables set forth, for the three months ended March 31, 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
                        
                        
                        VarianceMarch 31,
                          2009
                        
                        
                        % of Net
                          Revenues
                        
                        
                        March 31,
                          2008
                        
                        
                        % of Net
                          Revenues
                        
                        
                        Increase
                          (Decrease)
                        
                        
                        %Increase
                          (Decrease)NET
      REVENUESInternet
      travel center sales and monthly fees
                        
                        $
                        18,608
                        
                        
                        
                        85.4
                        %
                        
                        $
                        33,911
                        
                        
                        
                        79.4
                        %
                        
                        $
                        (15,303
                        )
                        
                        
                        (45.1
                        )%Travel
      commissions and services
                        
                        
                        2,522
                        
                        
                        
                        11.6
                        %
                        
                        
                        5,329
                        
                        
                        
                        12.5
                        %
                        
                        
                        (2,807
                        )
                        
                        
                        (52.7
                        )%Training
      programs and marketing materials
                        
                        
                        484
                        
                        
                        
                        2.2
                        %
                        
                        
                        3,058
                        
                        
                        
                        7.2
                        %
                        
                        
                        (2,574
                        )
                        
                        
                        (84.2
                        )%Other
                        
                        
                        175
                        
                        
                        
                        0.8
                        %
                        
                        
                        430
                        
                        
                        
                        0.9
                        %
                        
                        
                        (255
                        )
                        
                        
                        (59.3
                        )%Total
      net revenues
                        
                        
                        21,789
                        
                        
                        
                        100.0
                        %
                        
                        
                        42,728
                        
                        
                        
                        100.0
                        %
                        
                        
                        (20,939
                        )
                        
                        
                        (49.0
                        )%OPERATING
      EXPENSESMarketing
      commissions
                        
                        
                        9,367
                        
                        
                        
                        43.0
                        %
                        
                        
                        25,036
                        
                        
                        
                        58.6
                        %
                        
                        
                        (15,669
                        )
                        
                        
                        (62.6
                        )%Travel
      commissions
                        
                        
                        1,708
                        
                        
                        
                        7.8
                        %
                        
                        
                        3,852
                        
                        
                        
                        9.0
                        %
                        
                        
                        (2,144
                        )
                        
                        
                        (55.7
                        )%Depreciation
      and amortization
                        
                        
                        658
                        
                        
                        
                        3.0
                        %
                        
                        
                        536
                        
                        
                        
                        1.3
                        %
                        
                        
                        122
                        
                        
                        
                        22.8
                        %Training
      programs and marketing materials
                        
                        
                        626
                        
                        
                        
                        2.9
                        %
                        
                        
                        2,171
                        
                        
                        
                        5.1
                        %
                        
                        
                        (1,545
                        )
                        
                        
                        (71.2
                        )%General
      and administrative
                        
                        
                        11,236
                        
                        
                        
                        51.6
                        %
                        
                        
                        14,596
                        
                        
                        
                        34.1
                        %
                        
                        
                        (3,360
                        )
                        
                        
                        (23.0
                        )%Total
      operating expenses
                        
                        
                        23,595
                        
                        
                        
                        108.3
                        %
                        
                        
                        46,191
                        
                        
                        
                        108.1
                        %
                        
                        
                        (22,596
                        )
                        
                        
                        (48.9
                        )%LOSS
      FROM OPERATIONS
                        
                        
                        (1,806
                        )
                        
                        
                        (8.3
                        )%
                        
                        
                        (3,463
                        )
                        
                        
                        (8.1
                        )%
                        
                        
                        1,657
                        
                        
                        
                        (47.8
                        )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                        
                        
                        29
                        
                        
                        
                        0.1
                        %
                        
                        
                        69
                        
                        
                        
                        0.1
                        %
                        
                        
                        (40
                        )
                        
                        
                        (58.0
                        )%Interest
      expense
                        
                        
                        (26
                        )
                        
                        
                        (0.1
                        )%
                        
                        
                        (17
                        )
                        
                        
                        0.0
                        %
                        
                        
                        (9
                        )
                        
                        
                        52.9
                        %Foreign
      currency translation gain (loss)
                        
                        
                        2
                        
                        
                        
                        0.0
                        %
                        
                        
                        (1
                        )
                        
                        
                        0.0
                        %
                        
                        
                        3
                        
                        
                        
                        n/m
                        *Total
      other income (expense)
                        
                        
                        5
                        
                        
                        
                        0.0
                        %
                        
                        
                        51
                        
                        
                        
                        0.1
                        %
                        
                        
                        (46
                        )
                        
                        
                        (90.2
                        )%LOSS
      BEFORE INCOME TAX PROVISION
                        
                        
                        (1,801
                        )
                        
                        
                        (8.3
                        )%
                        
                        
                        (3,412
                        )
                        
                        
                        (8.0
                        )%
                        
                        
                        1,611
                        
                        
                        
                        (47.2
                        )%INCOME
      TAX PROVISION
                        
                        
                        111
                        
                        
                        
                        0.5
                        %
                        
                        
                        106
                        
                        
                        
                        0.2
                        %
                        
                        
                        5
                        
                        
                        
                        4.7
                        %NET LOSS
                        
                        $
                        (1,912
                        )
                        
                        
                        (8.8
                        )%
                        
                        $
                        (3,518
                        )
                        
                        
                        (8.2
                        )%
                        
                        $
                        1,606
                        
                        
                        
                        (45.7
                        )%
 
 *not
meaningful
  27
  The
following table sets forth information concerning (i) the number of TSOs that
were added to, and those that were deactivated from (by non-payment or
cancellation), our organization during each of the three months ended March 31,
2009 and 2008, and (ii) the weighted average number of active TSOs during each
such period:
 
 2009
                    
                    Beginning
      Balance
                      Active
      TSOs
                    
                    
                    New
      TSOs
                    
                    
                    Deactivations
                    
                    
                    Ending
      Balance
                      Active
      TSOs
                    
                    
                    Weighted
      Average
                      Active
      TSOsThree
      months ended
                      March
      31, 2009
                    
                    
                    92,383
                    
                    
                    
                    7,427
                    
                    
                    
                    26,009
                    
                    
                    
                    73,801
                    
                    
                    
                    79,022
 
 2008
                    
                    Beginning
      Balance
                      Active
      TSOs
                    
                    
                    New
      TSOs
                    
                    
                    Deactivations
                    
                    
                    Ending
      Balance
                      Active
      TSOs
                    
                    
                    Weighted
      Average
                      Active
      TSOsThree
      months ended
                      March
      31, 2008
                    
                    
                    131,802
                    
                    
                    
                    30,300
                    
                    
                    
                    23,577
                    
                    
                    
                    138,525
                    
                    
                    
                    136,147
  The above
TSO figures represent the number of active TSOs paying $49.95 per month for
monthly ITC web-hosting fees. The new TSOs represent the number of ITC 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 ITC is sold for $449.95, marketing commissions are paid on
that sale. During the first quarter of 2009, we sold 1,902 ITC sites at a rate
of $250.00 as part of an extended Christmas special promotional
program.  Likewise, each recurring monthly ITC web-hosting fee paid
results in marketing commissions paid to our Reps. As the number of active TSOs
declines, the amount of our travel commission revenue decreases as well.
Correspondingly, our travel commission expense follows suit.
 
 A TSO 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 TSO may fail to update this information.  If
the TSO fails to provide payment for future months’ web-hosting fees in advance
of the service being provided, the TSO will be deactivated automatically after
an applicable grace period.  We also have a cancellation policy that
allows a TSO to voluntarily discontinue his or her ITC; such ITC is deactivated
at the time the request is made.  TSOs may be reactivated by simply
resuming payment of web-hosting fees from that point forward.  We
reserve the right to deactivate any TSO which we believe may have fraudulent
activity associated with it or with its owner.
 
 Deactivations
of TSOs in relation to the number of new TSOs during a specified period, is a
key component in the calculation performed to determine the average lifespan
that a TSO remains with our Company.  If the proportion of TSO
deactivations were to grow as a percentage of active paying TSOs, the average
lifespan of a TSO would decrease and vise versa.  In the event of such
a decrease, we would accelerate the time frame over which we recognize the
income and offsetting expense, relating to the TSO initial sign-up
fees.  This acceleration would have a positive impact on our bottom
line, as the amount of revenue deferred from a TSO’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 on the revenue side
and the expense side. 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.
  28
  Three months ended March 31,
2009 compared to three months ended March 31, 2008
 
 We
reported a net loss for the quarter ended March 31, 2009 of $1.9 million or
$0.02 per diluted share compared to a net loss of $3.5 million or $0.03 per
diluted share for the comparable quarter of 2008.
 
 Net
Revenues
 
 Net
revenues totaled $21.8 million and $42.7 million in the first quarter of 2009
and 2008, respectively.
 
 ·
              ITC
      sales decreased $7.3 million, or 52.2%, in the first quarter of 2009 to
      $6.7 million from the $14.0 million reported in the comparable prior year
      quarter.  We have experienced a decrease in the actual number of
      ITCs sold for the three months ended March 31, 2009 to 7,427 from 30,300
      in the prior year period.   As a result, the average number
      of ITC sales  for which we were able to recognize revenue
      decreased to 4,828 in the first three months of 2009 from 11,238 for the
      same period in 2008.  In addition, the average amount of
      recognized revenue from each ITC sale decreased to $444.96 in the first
      quarter of 2009 from $449.95 in the comparable quarter in
      2008.  We believe the decline in the number of new ITC sales is
      attributable to the current economic downturn present in the United States
      and the Company’s pending litigation in California.  We
      anticipate slower growth in the coming months compared to what we have
      experienced in the past.  However, with new marketing
      initiatives and enhanced/expanded services being added, we expect this
      trend to stabilize our sales and retention of our sales
    force.
 
 ·
              Monthly
      renewal fees decreased $8.0 million, or 40.1%, in the first quarter of
      2009 to $11.9 million from the $19.9 million reported in the comparable
      prior year quarter. The decrease is in direct relation to the number of
      active paying TSOs.  The weighted average of paying TSOs per
      month decreased from 136,147 for the three months ended March 31, 2008 to
      79,022 for the same period in 2009.   We anticipate slower
      growth in the coming months compared to what we have experienced in the
      past.  However, with new marketing initiatives and
      enhanced/expanded services being added, we expect this trend to stabilize
      our sales and retention.
 
 ·
              Travel
      commissions and services for the first quarter of 2009 decreased $2.8
      million, or 52.7%, to $2.5 million from the $5.3 million reported in the
      comparable prior year quarter.  The decrease in travel
      commissions is attributable to the decrease in the number of active ITCs
      affecting the gross travel retail bookings which are driven by the number
      of customers utilizing us as their travel provider in 2009.  As
      the decrease in travel bookings occurred in 2009, a preferred travel
      bonus, or override, also decreased from certain vendors who gave that
      override in 2008 in addition to commission.  A portion of the
      anticipated bonus for the first quarter of 2008 was recorded as travel
      commission revenue with an offsetting receivable.  Based on
      current trends we do not anticipate earning this bonus in 2009 and thus
      have not recorded any receivable as of March 31,
  2009.
 
 ·
              Training
      programs and marketing materials revenue decreased $2.6 million, or 84.2%,
      in the first quarter of 2009 to $484,000 from $3.1 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 are mostly due to a decrease in the number of new ITC sales
      compared to what we have experienced in the past. We expect this trend to
      stabilize in the coming months, due to new marketing initiatives aimed at
      the stabilization of our sales force. The reduction in the magazine sales
      is partially due to a decline in the number of participants in the $6,000
      Guarantee Program.
 
 ·
              Other
      income decreased in the first quarter of 2009 as compared to 2008 by
      $255,000, or 59.3%, to $175,000 from $430,000 in the comparable prior year
      quarter.  The decrease is primarily attributed to declining
      online flower sales and the discontinuance of the Two Fly Free discounted
      vacation program.
  29
  Operating
Expenses
  ·
              Marketing
      commissions decreased by $15.7 million, or 62.6%, in the first quarter of
      2009 to $9.4 million from $25.0 million the first quarter of
      2008.  Commission expense related to new ITC sales declined by
      $7.4 million directly related to the decline in the number of new ITC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new ITC 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 TSO monthly fees.  This is a
      direct result of the decline in the number of average active TSOs for the
      first 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 Director’s 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 Director’s Pool program, which included the elimination of
      certain achievement levels that previously resulted in the highest levels
      of bonus payout from the pool along with a complete restructuring of how
      the pool was divided among our Sales Directors.  This change
      resulted in a $3.0 million decrease in marketing commission expenses
      during the first three months 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 shares awarded 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 first
      quarter of 2009.  During the first 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 first 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.  With regard to the 2007 Sales Director Bonus Plan, we
      incurred actual forfeitures greater than our estimated forfeitures of
      $271,000 in the first quarter of 2009 and $0 in the first quarter of
      2008.
 
 ·
              Travel
      commissions and other costs for the first quarter of 2009 decreased by
      $2.1 million, or 55.7%, to $1.7 million from $3.9 million reported in the
      first quarter of 2008. The decrease in travel commissions is attributable
      to the decrease in the number of active TSOs 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.
 
 ·
              Depreciation
      and amortization was $658,000 in the first quarter of 2009 compared to
      $536,000 in the corresponding quarter of 2008, reflecting an increase of
      22.8%, or $122,000.  The increase in depreciation and
      amortization is primarily attributable to the new additions related to our
      current headquarters building and assets related to the growth of our
      infrastructure as well as the new additions of computer software related
      to our expansion into Canada.
 
 ·
              Training
      programs and marketing materials expense decreased $1.5 million, or 71.2%,
      to $626,000 from $2.2 million reported in the first quarter of
      2008.  A decrease of $609,000 relates to the reduction in
      magazine and brochure sales directly affected by the decline in new ITC
      sales and active TSOs.  This decrease is offset by an
      inventory  reserve of $263,000 for the first quarter of 2009;
      there was no reserve in the first quarter of
      2008.     In addition, fulfillment labor and
      freight decreased $588,000 in the first quarter of 2009 compared to the
      same period in 2008, directly related to the reduction of sales aids and
      magazine sales.   Meeting expenses decreased $521,000 in
      2009 compared to 2008 due to the introduction of online training, along
      with a decrease in the number of Red Carpet Day events the company
      hosted.
 
 ·
              General
      and administrative expenses decreased $3.4 million, or 23.0%, to $11.2
      million in the first quarter of 2009 from $14.6 million in the first
      quarter of 2008.  As a percentage of total net revenues, these
      expenses were 51.6% in 2009 and 34.1% in 2008.  The decrease in
      general and administrative expense in 2009 is primarily attributable to
      the costs associated with the reduction of  ITC sales and active
      TSOs.  The decreases year over year relate primarily
      to:
 
 §
              Bad
      debt expense related to advances and notes receivable to the Company’s
      directors decreased in 2009 approximately $389,000 compared to the same
      period in 2008.  An extensive analysis was done in 2008 and
      entries were made to reflect uncollectible
  accounts.
 §
              A
      $1.7 million reserve for a loss that was related to unsold cabins on a
      cruise was recorded in first quarter of 2008 that was not repeated in
      2009.
 §
              Credit
      card service fees decreased $494,000 in the first quarter of 2009 compared
      to the same period in 2008 directly related to the reduction in
      sales.
 §
              Consulting
      fees decreased $479,000 in the first quarter of 2009 compared to the same
      period in 2008 due to the completion of the SAP® software implementation
      and a number of other IT initiatives which required consulting resources
      in 2008.
  30
  §
              Legal
      fees increased $296,000 in the first quarter of 2009 compared to the same
      period in 2008 directly related to defense costs associated with the suit
      filed by the California Attorney General’s
  office.
 §
              Accounting fees
      decreased $357,000 in the first quarter of 2009 compared to the same
      period of 2008. 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 first quarter of 2008.  The majority
      of the on-going Sarbanes-Oxley compliance work was performed internally
      during the first quarter of
      2009.
 §
              Marketing
      event costs for top Sales Directors in our company decreased $832,000 in
      the first quarter of 2009 compared to the same period in
      2008.  This annual performance-based contest for our top sales
      producers of travel and marketing was discontinued in
  2009.
 §
              Restricted
      stock expense increased $744,000 in 2009 as a result of amortization of
      restricted stock issued in the second quarter of 2008 which had no expense
      impact in the first quarter of
2008.
 §
              Printing
      costs decreased $790,000 directly related to the decrease in the number of
      new ITC sales and the number of active
TSOs.
 §
              Contract
      labor decreased $355,000 due to the conversion of consultants to full time
      employees and the elimination of some consulting
  contracts.
 
 BUSINESS
SEGMENTS
 
 We
operate in the following two business segments:  Marketing and
Travel.  Our business segments operate primarily in the United States,
but also have operations in Canada, Puerto Rico, Bermuda, and the Bahamas and
are structured for potential additional international growth.
 
 The
following is a discussion of our results of operations within each
segment.
 
 Marketing
Segment
 
 Dollars
      in thousands
                      
                      Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008
                      
                      
                      % change
                        2009 vs 2008NET
      REVENUESInternet
      travel center sales and monthly fees
                      
                      $
                      18,608
                      
                      
                      $
                      33,911
                      
                      
                      
                      (45.1
                      )%Training
      programs and marketing materials
                      
                      
                      445
                      
                      
                      
                      2,994
                      
                      
                      
                      (85.1
                      )%Other
                      
                      
                      39
                      
                      
                      
                      108
                      
                      
                      
                      (63.9
                      )%Total
      net revenues
                      
                      
                      19,092
                      
                      
                      
                      37,013
                      
                      
                      
                      (48.4
                      )%OPERATING
      EXPENSESMarketing
      commissions
                      
                      
                      9,367
                      
                      
                      
                      25,036
                      
                      
                      
                      (62.6
                      )%Depreciation
      and amortization
                      
                      
                      344
                      
                      
                      
                      316
                      
                      
                      
                      8.9
                      %Training
      programs and marketing materials
                      
                      
                      601
                      
                      
                      
                      2,077
                      
                      
                      
                      (71.1
                      )%General
      and administrative
                      
                      
                      7,430
                      
                      
                      
                      9,291
                      
                      
                      
                      (20.0
                      )%Total
      operating expenses
                      
                      
                      17,742
                      
                      
                      
                      36,720
                      
                      
                      
                      (51.7
                      )%INCOME
      FROM OPERATIONS
                      
                      
                      1,350
                      
                      
                      
                      293
                      
                      
                      
                      360.8
                      %
 
 Net
Revenues
 
 ·
              ITC
      sales decreased $7.3 million, or 52.2%, in the first quarter of 2009 to
      $6.7 million from the $14.0 million reported in the comparable prior year
      quarter.  We have experienced a decrease in the actual number of
      ITCs sold for the three months ended March 31, 2009 to 7,427 from 30,300
      in the prior year period.   As a result, the average number
      of ITCs for which we were able to recognize revenue decreased to 4,828 in
      the first three months of 2009 from 11,238 for the same period in
      2008.    In addition, the average amount of recognized
      revenue from each ITC sale decreased to $444.96 in the first quarter of
      2009 from $449.95 in the comparable quarter in 2008.  We believe
      the decline in the number of new ITC sales is attributable to the current
      economic downturn present in the United States and the Company’s pending
      litigation in California.   We anticipate slower growth in
      the coming months compared to what we have experienced in the
      past.  However, with new marketing initiatives and
      enhanced/expanded services being added, we expect this trend to stabilize
      our sales and retention of our sales
force.
  31
  ·
                Monthly
      renewal fees decreased $8.0 million, or 40.1%, in the first quarter of
      2009 to $11.9 million from the $19.9 million reported in the comparable
      prior year quarter. The decrease is in direct relation to the number of
      active paying TSOs.  The weighted average of paying TSOs per
      month decreased from 136,147 for the three months ended March 31, 2008 to
      79,022 for the same period in 2009.   We anticipate slower
      growth in the coming months compared to what we have experienced in the
      past.  However, with new marketing initiatives and
      enhanced/expanded services being added, we expect this trend to stabilize
      our sales and retention.  We offer Sales Director’s meetings and
      regional meetings to attract new TSOs and motivate and retain current
      TSOs.
 
 ·
              Training
      programs and marketing materials revenue decreased $2.5 million, or 85.1%,
      in the first quarter of 2009 to $445,000 from $3.0 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 are mostly due to a decrease in the number of new ITC sales
      compared to what we have experienced in the past. We expect this
      trend to stabilize in the coming months, due to new marketing initiatives
      aimed at the stabilization of our sales force. The reduction in the
      magazine sales is partially due to a decline in the number of participants
      in the $6,000 Guarantee
Program.
 
 ·
              Other
      income decreased in the first quarter of 2009 as compared to 2008 by
      $69,000, or 63.9%, to $39,000 from $108,000 in the comparable prior year
      quarter, primarily due to a decrease in the number of payment processing
      fees collected.
 
 Operating
Expenses
 
 ·
              Marketing
      commissions decreased by $15.7 million, or 62.6%, in the first quarter of
      2009 to $9.4 million from $25.0 million the first quarter of
      2008.  Commission expense related to new ITC sales declined by
      $7.4 million directly related to the decline in the number of new ITC
      sales.  In addition, we experienced a decrease in the average
      amount of commission expense recognized for each new ITC 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 TSO monthly fees.  This is a
      direct result of the decline in the number of average active TSOs for the
      first 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 Director’s 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 Director’s Pool program which included the elimination of
      certain achievement levels that previously resulted in the highest levels
      of bonus payout from the pool along with a complete restructuring of how
      the pool was divided among our Sales Directors.  This change
      resulted in a $3.0 million decrease in marketing commission expenses
      during the first three months 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 shares awarded 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 first
      quarter of 2009.  During the first 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 first 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.  With regard to the 2007 Sales Director Bonus Plan, we
      incurred actual forfeitures greater than our estimated forfeitures of
      $271,000 in the first quarter of 2009 and $0 in the first quarter of
      2008.
 
 ·
              Depreciation
      and amortization increased $28,000, or 8.9%, to $344,000 in the first
      quarter of 2009 from $316,000 in the first quarter  of
      2008.
 
 ·
              Training
      programs and marketing materials expense decreased $1.5 million, or 71.1%,
      to $601,000 from $2.1 million reported in the first quarter of
      2008.  A decrease of $609,000 relates to the reduction in
      magazine and brochure sales directly affected by the decline in new ITC
      sales and active TSOs.  We have established an inventory reserve
      of $263,000 for the first quarter of 2009; there was no reserve in the
      first quarter of 2008.   In addition, fulfillment labor and
      freight decreased $588,000 in the first quarter of 2009 compared to the
      same period in 2008, directly related to the reduction of sales aids and
      magazine sales.   Meeting expenses decreased $518,000 in
      2009 compared to 2008 due to the introduction of online training, along
      with a decrease in the number of Red Carpet Day events the company
      hosted.
  32
  ·
                General
      and administrative expenses decreased $1.9 million, or 20.0%, to $7.4
      million in the first quarter of 2009 from $9.3 million in the first
      quarter of 2008.  As a percentage of total marketing net
      revenues, these expenses were 38.9% in 2009 and 25.1% in 2008. The
      decrease in general and administrative expense in 2009 is primarily
      attributable to the costs associated with the reduction of  ITC
      sales and active TSOs.  The decreases year over year relate
      primarily to:
 
 §
              Marketing
      event costs for top Sales Directors in our company decreased $832,000 in
      the first quarter of 2009 compared to the same period in
      2008.  This annual performance-based contest for our top sales
      producers of travel and marketing was discontinued in
  2009.
 §
              Credit
      card service fees decreased $485,000 directly related to the reduction in
      sales.
 §
              Printing
      costs decreased $791,000 directly related to the decrease in the number of
      new ITC sales and the number of active
TSOs.
 
 Travel
Segment
 
 Dollars
      in thousands
                    
                    Three
      months endedMarch
      31,
                      2009
                    
                    
                    March
      31,
                      2008
                    
                    
                    %
      change
                      2009
      vs 2008NET
      REVENUESTravel
      commissions and services
                    
                    $
                    2,522
                    
                    
                    $
                    5,329
                    
                    
                    
                    (52.7
                    )%Training
      programs and marketing materials
                    
                    
                    39
                    
                    
                    
                    64
                    
                    
                    
                    (39.1
                    )%Other
                    
                    
                    136
                    
                    
                    
                    301
                    
                    
                    
                    (54.8
                    )%Total
      net revenues
                    
                    
                    2,697
                    
                    
                    
                    5,694
                    
                    
                    
                    (52.6
                    )%OPERATING
      EXPENSESTravel
      commissions
                    
                    
                    1,708
                    
                    
                    
                    3,852
                    
                    
                    
                    (55.7
                    )%Depreciation
      and amortization
                    
                    
                    111
                    
                    
                    
                    49
                    
                    
                    
                    126.5
                    %Training
      programs and marketing materials
                    
                    
                    25
                    
                    
                    
                    94
                    
                    
                    
                    (73.4
                    )%General
      and administrative
                    
                    
                    2,189
                    
                    
                    
                    4,454
                    
                    
                    
                    (50.9
                    )%Total
      operating expenses
                    
                    
                    4,033
                    
                    
                    
                    8,449
                    
                    
                    
                    (52.3
                    )%LOSS
      FROM OPERATIONS
                    
                    
                    (1,336
                    )
                    
                    
                    (2,755
                    )
                    
                    
                    (51.5
                    )%
 
 Net
Revenues
  ·
              Travel
      commissions and services for the first quarter of 2009 decreased $2.8
      million, or 52.7%, to $2.5 million from the $5.3 million reported in the
      comparable prior year quarter.  The decrease in travel
      commissions is attributable to the decrease in the number of active ITCs
      affecting the gross travel retail bookings which are driven by the number
      of customers utilizing us as their travel provider in
      2009.   As the decrease in travel bookings occurred in
      2009, a preferred travel bonus, or override, also decreased from certain
      vendors who gave that override in 2008 in addition to
      commission.  A portion of the anticipated bonus for the first
      quarter of 2008 was recorded as travel commission revenue with an
      offsetting receivable.  Based on current trends we do not
      anticipate earning this bonus in 2009 and thus have not recorded anything
      for it as of March 31, 2009.
 
 ·
              Training
      programs and marketing materials revenue decreased $25,000, or 39.1%, to
      $39,000 from $64,000 reported in the first quarter of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain not-for-profits which eliminated the requirement for
      training.
 
 ·
              Other
      income decreased in the first quarter of 2009 compared to the prior year
      quarter by $165,000, or 54.8%, to $136,000 from $301,000.  The
      decrease is attributable to a decrease in car commission revenue,
      declining online flower sales, and the discontinuance of Two Fly Free
      discounted vacation program.
  33
  Operating
Expenses
  ·
              Travel
      commissions and other costs for the first quarter of 2009 decreased by
      $2.1 million, or 55.7%, to $1.7 from $3.9 million reported in the first
      quarter of 2008. The decrease in travel commissions is attributable to the
      decrease in the number of active ITCs 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.
 
 ·
              Depreciation
      and amortization was $111,000 in the first quarter of 2009, compared to
      $49,000 in the corresponding quarter of 2008. The increase of $62,000, or
      126.5%, in depreciation and amortization is primarily attributable to the
      new addition of computer software related to our expansion into Canada,
      and the addition of infrastructure to support our growth in
      travel.
 
 ·
              Training
      programs and marketing material expense decreased $69,000, or 73.4%, to
      $25,000 from $94,000 reported in the first quarter of 2008 due to
      temporarily suspending a program aimed at sharing travel commissions with
      certain not-for-profits which eliminated the requirement for
      training.
 
 ·
              General
      and administrative expenses decreased $2.3 million to $2.2 million, or
      50.9%, in the first quarter of 2009 from $4.5 million in the first quarter
      of 2008.  As a percentage of total travel net revenues, these
      expenses were 81.2% in 2009 and 78.2% in 2008. The decreases year over
      year relate primarily to:
 
 §
              A
      1.7 million reserve for a loss that was related to unsold cabins on a
      cruise was recorded in first quarter of 2008 that was not repeated in
      2009.
 §
              Allocable
      expenses from parent company decreased by
  $700,000.
 
 Parent
  Dollars
      in thousands
                
                Three
      months endedMarch
      31,
                  2009
                
                
                March
      31,
                  2008
                
                
                %
      change
                  2009
      vs 2008NET
      REVENUESOther
                
                $
                -
                
                
                $
                21
                
                
                
                (100.0
                )%Total
      net revenues
                
                
                -
                
                
                
                21
                
                
                
                (100.0
                )%OPERATING
      EXPENSESDepreciation
      and amortization
                
                
                203
                
                
                
                171
                
                
                
                18.7
                %General
      and administrative
                
                
                1,617
                
                
                
                851
                
                
                
                90.0
                %Total
      operating expenses
                
                
                1,820
                
                
                
                1,022
                
                
                
                78.1
                %LOSS
      FROM OPERATIONS
                
                
                (1,820
                )
                
                
                (1,001
                )
                
                
                81.8
                %
 
  
 Net
Revenues
  ·
              Other
      income for the first quarter of 2008 was $21,000 representing rent
      collected from tenants for one of the Company’s
      buildings.   No such revenue was collected for the first
      quarter of 2009.
  Operating
Expenses
  ·
              Depreciation
      and amortization was $203,000 in the first quarter of 2009, compared to
      $171,000 in the corresponding quarter of 2008. The increase in
      depreciation and amortization of $32,000, or 18.7%, is primarily
      attributable to the new additions related to our current headquarters
      building and assets related to the growth of our
      infrastructure.
 
 ·
              General
      and administrative expenses increased $766,000, or 90.0%, to $1.6 million
      in the first quarter of 2009 from $851,000 in the first quarter of 2008.
      The increases year over year relate primarily
  to:
 
 §
              Legal
      fees increased $295,000 in the first quarter of 2009 compared to the same
      period in 2008 directly related to defense costs associated with the suit
      filed by the California Attorney General’s
  office.
  34
  §
              Consulting
      fees decreased $479,000 in the first quarter of 2009 compared to the same
      period in 2008 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 $357,000 in the first quarter of 2009 compared to the same
      period of 2008. 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 first quarter of 2008.  The majority
      of the on-going Sarbanes-Oxley compliance work was performed internally
      during the first quarter of
2009.
 §
              Contract
      labor decreased  $352,000 due to the conversion of a number of
      consultants to full time employees.
 §
              Restricted
      stock option expense increased $744,000 in 2009 as a result of
      amortization of restricted stock issued in the second quarter of 2008
      which had no expense impact in the first quarter of
  2008.
 
 Liquidity
and Capital Resources
 
 As of
March 31, 2009, we had $1.8 million in cash and cash equivalents.  We
believe that our cash generating capability will be adequate to meet the needs
of our future operations.  However, we cannot predict what the effect
on our business might be from events that are beyond our control, such as the
global credit and liquidity crisis. We will continually assess our cash flow
needs. We have also suspended the ongoing construction costs of our new
corporate headquarters as our revenue growth has not kept pace with prior
trends. We do not have nor have we pursued any credit facilities at the current
time from which we may draw for our liquidity needs.  Currently, our
headquarters expansion project is on hold given the current economic climate in
general and the state of the credit markets.
  As shown
in the accompanying financial statements, our Company has incurred a loss from
operations for the first quarter of 2009 of $1.9 million.  In
addition, negative current economic conditions and other factors have led to a
fall off in the number of active ITCs in our Company.  The number of
active ITC sites has declined during the quarter ended March 31, 2009 by a net
of 18,582 sites to 73,801 active TSO ITCs from the 92,383 reported as of
December 31, 2008. In addition, we are defending against two cases
challenging the legality of our network marketing
program.  Litigation claims can be expensive and time consuming to
bring and defend against and could result in settlements or damages that could
significantly affect financial results.  Consequently, the independent
auditor’s report for the year ended December 31, 2008, includes an explanatory
paragraph to its audit opinion stating that our loss from
operations, deficiency in working capital, and substantial uncertainties
raise substantial doubt about our Company’s ability to continue as a going
concern.
 
 We have
taken several actions and continue to evaluate other areas of opportunity to
ensure that our Company will continue as a going concern.  Our Board
of Directors has 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 our Company.  We have instituted a cost reduction
program that included a reduction in labor and fringe costs, as well as
reductions of discretionary expenditures in the operating structure of the
organization.  The reductions in labor and fringe costs were
approximately $1.1 million for the full year 2008 results and approximately
$800,000 for the three months ended March 31, 2009.  To raise
additional capital, the Company implemented the TSO Stock Purchase Plan which
became operational in April 2009 (see Note 10 – “Stockholders’
Equity”).  Our Company is also evaluating the sale of certain non-core
assets and additional programs to raise new capital for future
operations.  We believe these factors will contribute toward achieving
profitability.  However, there can be no assurance that our Company
will be successful in achieving its objectives.
 
 The
accompanying financial statements have been prepared assuming that 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.  On April 6, 2009, we reached a
tentative settlement agreement with the State of California in connection with
the civil action discussed in Note 14 – “Commitments and
Contingencies.”  We also reached a tentative agreement with our
insurance carriers regarding their coverage for the defense of the cases, the
terms of which are dependent upon a final settlement with the State of
California.  In addition, on February 9, 2009, we filed motions to
dismiss the class action lawsuit in Illinois.  Subsequent to the end
of the first quarter, the motions to dismiss were fully briefed, and the Court
has set a hearing for June 1, 2009.  Although we believe that we
have meritorious defenses against the legal proceedings discussed above and in
Note 14, 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
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.
  35
  The
following table presents a summary of our cash flows for the first quarters of
2009 and 2008:
  Three
      months ended March 31,Dollars
      in thousands
                    
                    2009
                    
                    
                    2008Net
      cash provided by (used in):Operating
      activities
                    
                    $
                    (66
                    )
                    
                    $
                    5,158Investing
      activities
                    
                    
                    724
                    
                    
                    
                    (4,141
                    )Financing
      activities
                    
                    
                    (25
                    )
                    
                    
                    (1,472
                    )Effect
      of exchange rate changes on cash
                    
                    
                    (30
                    )
                    
                    
                    -Net
      increase (decrease) in cash
                    
                    $
                    603
                    
                    
                    $
                    (455
                    )
 
 Net cash
used in operating activities in the first quarter of 2009 was $66,000 compared
to cash provided by operating activities of $5.2 million in the first quarter of
2008.
 
 Net cash
provided by investing activities was $724,000 during the first quarter of 2009
compared to $4.1 million used in the first quarter of 2008. This $4.9 million
decrease in cash consumed was primarily related to a decrease in purchases of
property and equipment of $3.9 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.
 
 Net cash
used in financing activities was $25,000 and $1.5 million, respectively, for the
first quarters ended March 31, 2009 and 2008.  Net cash used in
financing activities during the first quarter of 2009 related to the repayment
of the short-term debt on the Company’s current headquarters.  Net
cash consumed by financing activities in the first quarter of 2008 resulting
primarily from funds deposited in connection with the Company’s obtaining a
standby letter of credit of $1.9 million collateralizing the obligations of the
Company’s Sales Directors under two cruises that they booked of which $357,167
was released during the quarter to the cruise line as a deposit due on such
cruises. Also during the first quarter 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 but
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 increased the reserve
requirement from 3% of the average rolling six-month transaction volume to a
flat $3.0 million, $175,000 of which was funded as of March 31,
2009.  Per the terms of the agreement, the Company anticipates fully
funding the new reserve requirement, an increase of approximately $1.4 million,
by June 30, 2009.
 
 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 for any
periods presented.
 
 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 impact on
the Company’s financial position or results of operations.
  36
  Effective
January 1, 2009, the Company adopted SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”).
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. The adoption of SFAS 141(R) had
no impact on the Company’s financial position or results of operations as of or
for the three months ended March 31, 2009.
 
 In April
2008, the FASB finalized FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142. The intent of FSP 142-3 is to improve
the consistency between the useful life of a recognized asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141R, and other U.S. generally accepted accounting
principles. In addition, FSP 142-3 requires additional disclosures concerning
recognized intangible assets. These additional disclosures would enable users of
financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entity’s intent and/or
ability to renew or extend the arrangement. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those
years.  The Company adopted FSP 142-3 on January 1, 2009.
The adoption had no effect on the Company’s financial
statements.
  Recently Issued Accounting
Pronouncements
  In April
2009 the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSP
141(R)-1”).  FSP 141(R)-1 amends the guidance in SFAS No. 141,
“Business Combinations”, as revised December 2007 (“SFAS 141(R)”)
to:
 
 ·
              Require
      that assets acquired and liabilities assumed in a business combination
      that arise from contingencies be recognized at fair value if fair value
      can be reasonably estimated. If fair value of such an asset or liability
      cannot be reasonably estimated, the asset or liability would generally be
      recognized in accordance with SFAS No. 5, “Accounting for Contingencies,”
      (“SFAS
      5”) and FASB Interpretation No. 14, “Reasonable Estimation of the
      Amount of a Loss.” Further, the FASB decided to remove the subsequent
      accounting guidance for assets and liabilities arising from contingencies
      from SFAS 141(R), and carry forward without significant revision the
      guidance in SFAS No. 141.
 ·
                Eliminate
      the requirement to disclose an estimate of the range of outcomes of
      recognized contingencies at the acquisition date. For unrecognized
      contingencies, the FASB decided to require that entities include only the
      disclosures required by SFAS 5 and that those disclosures be included in
      the business combination
footnote.
 ·
                Require
      that contingent consideration arrangements of an acquiree assumed by the
      acquirer in a business combination be treated as contingent consideration
      of the acquirer and should be initially and subsequently measured at fair
      value in accordance with SFAS
141(R).
 
 FSP
141(R)-1 is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  The Company does not expect the adoption of FSP 141(R)-1 to
have a material impact on its consolidated financial statements. FSP 141(R)-1
will be effective for any future acquisitions made by the Company.
 
 In
addition, in April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP 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 will adopt
FSP 107-1 and APB 28-1 during the quarter ending June 30, 2009 by making
any required additional financial statement disclosures. The Company does not
expect the adoption of FSP 107-1 and APB 28-1 to have a material impact on its
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 FAS
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 FAS 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 will adopt FSP 115-2 and FAS 124-2 during the quarter ending
June 30, 2009.  The Company does not expect the adoption of
FSP 115-2 and FAS 124-2 to have a material impact on its consolidated financial
statements.
 
 Finally,
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 will adopt FSP 157-4 during the quarter ending June
30, 2009.  The Company does not expect the adoption of FSP 157-4
to have a material impact on its consolidated financial
statements.
 
 37
  The
Company does not believe that there are any other new accounting pronouncements
that the Company is required to adopt that are likely to have at least some
effect on the Company’s future financial statements.
 
 Application
of Critical Accounting Policies
 
 Our
significant accounting policies are discussed in the notes to the consolidated
financial statements that are included in our Annual Report on Form 10-K for the
year ended December 31, 2008 that is filed with the SEC.  In most cases,
the accounting policies utilized by us are the only ones permissible under U.S.
Generally Accepted Accounting Principles for businesses in our industry. 
However, the application of certain of these policies requires significant
judgments or a complex estimation process that can affect our results of
operations and financial position, as well as the related footnote
disclosures.  We base our estimates on historical experience and other
assumptions that we believe are reasonable. If actual amounts are ultimately
different from previous estimates, the revisions are included in our results of
operations for the period in which the actual amounts become known.  The
accounting policies and estimates that can have a significant impact on the
operating results, financial position and footnote disclosures of our Company
are described in the Management’s Discussion and Analysis of Financial Condition
and Results of Operations section of our Annual Report on Form 10-K for the year
ended December 31, 2008.
 
 Item 3.Quantitative and Qualitative
Disclosures About Market Risk.
 
 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 March 31, 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.  During the first quarter of
2009, this function began reporting directly to the Chairman of the Audit
Committee of the Board of Directors.
  In
addition, during the first quarter of 2009, 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.
 
 Subsequent
to the end of the first quarter, 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.
  38
  Evaluation
of Disclosure Controls and Procedures
  In
connection with our Quarterly Report on Form 10-Q for the quarter ended March
31, 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 certain of 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 March 31, 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.
 
 PART
II - OTHER INFORMATION
 
 Item 1.Legal
Proceedings.
 
 On August
4, 2008, a civil action was filed against three subsidiaries of our Company and
certain of our executive officers in the Superior Court of California, County of
Los Angeles, by the California Attorney General. The complaint alleges that the
defendants violated California’s unfair competition, anti-pyramid and
advertising laws. The complaint was filed after 18 months of dialogue, initiated
by us with the Attorney General to discuss the implementation of a new
California travel law and its potential effect on our business model. Throughout
these discussions, which broadened over time, we have consistently cooperated
with the state’s information requests. On December 19, 2008, the California
Attorney General amended its complaint to add YTB International, Inc. as an
additional defendant. This addition did not otherwise change the nature of the
allegations or claims asserted in the litigation. The California Attorney
General seeks a permanent injunction preventing the defendants from making any
untrue or misleading statements or committing any acts of unfair competition,
penalties of at least $15.0 million, and restitution of at least $10.0
million.  On April 6, 2009, the Company reached a tentative settlement
agreement with the State of California. The tentative settlement agreement is
awaiting execution by both parties in addition to final court
approval.
 
 On August
8, 2008, a complaint seeking to be certified as a class-action was filed against
our Company, three Company subsidiaries, and certain executive officers, in the
United States District Court, Southern District of Illinois. The complaint
alleges that the defendants violated the Illinois Consumer Fraud and Deceptive
Business Practices Act. On August 14, 2008, a second, substantively similar,
complaint was filed against the same defendants in the United States District
Court for the Southern District of Illinois. The two cases have now been
consolidated and are proceeding together before the same judge. The plaintiffs
have filed a consolidated complaint, seeking damages of over $100.0 million. On
February 9, 2009, we filed motions to dismiss the consolidated complaint and
these motions are now pending before the Court. Subsequent to the end of the
first quarter, the motions to dismiss were fully briefed and the Court has set a
hearing for June 1, 2009.  We believe we have meritorious defenses and
intend to vigorously defend these cases.
 
 After the
Illinois class action and California Attorney General suits were filed, we
provided notice to various insurance carriers. Our primary Directors and
Officers Liability Insurance carrier, Illinois National Insurance Company (an
AIG company) (“Illinois National”)
agreed to provide coverage for the defense of the cases, subject to a
reservation of rights. Because only the executive officers who were sued ("the individual
insureds") are covered for this type of lawsuit under the policy and the
Company is not, Illinois National agreed to pay a portion of the defense costs
incurred in both cases, and in fact it has made some payments toward defense
costs.
 
 On
January 29, 2009, the California Attorney General sent a letter to our defense
counsel, with a copy to Illinois National and three excess insurance carriers,
stating that California Insurance Code section 533.5 provides that there shall
be no duty for any insurance carrier to defend lawsuits alleging violations of
Business and Professional Code Sections 17200 or 17500 in which the Attorney
General seeks recovery of a fine, penalty, or restitution. The lawsuit against
our Company and its executives is such a lawsuit. After receipt of this letter,
counsel for our Company and the individual insureds informed Illinois National's
counsel that their position was that the Illinois National policy is governed by
Illinois law, and therefore California Insurance Code Section 533.5 does not
apply. Counsel for the Company sought Illinois National's assurances that it
agreed with this position but did not receive such assurances.
  39
  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 conditioned ona final settlement
with the State of California and certain other conditions that have not yet been
met.
 
 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.
  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 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.  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 TSOs 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.
  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.
 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.
 
 None.
 
 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 Annual Report on Form 10-K for the year ended
      December 31, 2008.
  40
  Item 6.Exhibits
 
 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.
  41
  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:   May
      11, 2009/s/
      John D. ClaggJohn
      D. ClaggChief
      Financial OfficerDated:   May
      11, 2009
  42