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, 2010





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   ̈
            Non-accelerated
      filer   ̈
            Smaller
      reporting company  x





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


Yes   ̈
            
            Nox





As of May
7, 2010, there were 79,628,769 shares of the registrant’s Class A Common Stock,
$0.001 par value, outstanding and 34,329,728 shares of the registrant’s Class B
Common Stock, $0.001 par value, outstanding.*





*
Excludes 914,516 restricted shares of Class A Common Stock and 1,829,032
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, 2010





PART
      I
                                              
                                              FINANCIAL
      INFORMATIONItem
      1.
                                              
                                              Financial
      Statements.Condensed
      Consolidated Balance Sheets, March 31, 2010 (Unaudited) and December 31,
      2009
                                              
                                              3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended March 31, 2010 and 2009
                                              
                                              4Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended March 31, 2010 and 2009
                                              
                                              5Notes
      To Condensed Consolidated Financial Statements (Unaudited)
                                              
                                              6Item
      2.
                                              
                                              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                              
                                              19Item
      3.
                                              
                                              Quantitative
      and Qualitative Disclosures About Market Risk.
                                              
                                              32Item
      4.
                                              
                                              Controls
      and Procedures.
                                              
                                              32PART
      II
                                              
                                              OTHER
      INFORMATIONItem
      1.
                                              
                                              Legal
      Proceedings.
                                              
                                              32Item
      1A.
                                              
                                              Risk
      Factors.
                                              
                                              32Item
      2.
                                              
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                              
                                              32Item
      3.
                                              
                                              Defaults
      Upon Senior Securities.
                                              
                                              32Item
      4.
                                              
                                              [Removed
      and Reserved.]
                                              
                                              32Item
      5.
                                              
                                              Other
      Information.
                                              
                                              33Item
      6.
                                              
                                              Exhibits.
                                              
                                              33Signatures
                                              
                                              34


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,
                          2010
                        
                        
                        December31,
                          2009ASSETSCurrent
      assets:Cash
                        
                        $
                        1,041
                        
                        
                        $
                        678Restricted
      cash
                        
                        
                        2,331
                        
                        
                        
                        2,637Short-term
      investments
                        
                        
                        28
                        
                        
                        
                        28Accounts
      receivable (less allowance for doubtful accounts of $0 in 2010 and $110 in
      2009)
                        
                        
                        564
                        
                        
                        
                        674Notes
      receivable
                        
                        
                        1,581
                        
                        
                        
                        1,602Inventory,
      net
                        
                        
                        96
                        
                        
                        
                        125Prepaid
      marketing commissions and advances
                        
                        
                        1,234
                        
                        
                        
                        1,282Other
      prepaid expenses and current assets, net
                        
                        
                        343
                        
                        
                        
                        332Total
      current assets
                        
                        
                        7,218
                        
                        
                        
                        7,358Assets
      held for sale
                        
                        
                        5,248
                        
                        
                        
                        5,248Property
      and equipment, net
                        
                        
                        5,959
                        
                        
                        
                        6,432Goodwill
                        
                        
                        2,529
                        
                        
                        
                        2,529Other
      assets
                        
                        
                        49
                        
                        
                        
                        49TOTAL
      ASSETS
                        
                        $
                        21,003
                        
                        
                        $
                        21,616LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,026
                        
                        
                        $
                        1,275Accrued
      commissions
                        
                        
                        2,285
                        
                        
                        
                        2,740Other
      accrued expenses
                        
                        
                        2,405
                        
                        
                        
                        2,424Deferred
      revenue
                        
                        
                        2,923
                        
                        
                        
                        2,989Short-term
      debt
                        
                        
                        2,230
                        
                        
                        
                        1,587Other
      current liabilities
                        
                        
                        1,292
                        
                        
                        
                        1,274Total
      current liabilities
                        
                        
                        12,161
                        
                        
                        
                        12,289Other
      long-term liabilities:Other
      income tax liabilities
                        
                        
                        187
                        
                        
                        
                        183Accrued
      severance
                        
                        
                        1,589
                        
                        
                        
                        1,731Total
      other long-term liabilities
                        
                        
                        1,776
                        
                        
                        
                        1,914TOTAL
      LIABILITIES
                        
                        
                        13,937
                        
                        
                        
                        14,203Commitments
      and Contingencies (Note 14)STOCKHOLDERS' EQUITYPreferred
      stock, $.001 par value, 5,000,000 authorized, none issued and outstanding
      at March 31, 2010 and December 31, 2009
                        
                        
                        -
                        
                        
                        
                        -Class
      A Common stock, $.001 par value, 300,000,000 shares authorized; 79,601,069
      and 76,185,988 shares issued and outstanding at March 31, 2010 and
      December 31, 2009, respectively
                        
                        
                        80
                        
                        
                        
                        76Class
      B Common Stock, $.001 par value, 100,000,000 shares authorized; 34,357,428
      and 33,613,412 shares issued and outstanding at March 31, 2010 and
      December 31, 2009, respectively; convertible into Class A shares on a
      one-for-one basis
                        
                        
                        34
                        
                        
                        
                        34Additional
      paid-in capital
                        
                        
                        40,927
                        
                        
                        
                        40,856Accumulated
      other comprehensive loss
                        
                        
                        11
                        
                        
                        
                        10Accumulated
      deficit
                        
                        
                        (33,964
                        )
                        
                        
                        (33,541
                        )Treasury
      stock, at cost, 25,404 shares at March 31, 2010 and December 31,
      2009
                        
                        
                        (22
                        )
                        
                        
                        (22
                        )TOTAL
      STOCKHOLDERS' EQUITY
                        
                        
                        7,066
                        
                        
                        
                        7,413TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        21,003
                        
                        
                        $
                        21,616





See
accompanying notes to unaudited condensed consolidated financial
statements.


3


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Operations


(Unaudited)





Three months ended March 31,Dollars in thousands, except share and per share data
                
                2010
                
                
                2009NET
      REVENUESITC
      and PDS sales and monthly fees
                
                $
                6,939
                
                
                $
                18,608Travel
      and product commissions and services
                
                
                1,888
                
                
                
                2,160Training
      programs and marketing materials
                
                
                330
                
                
                
                484Other
                
                
                128
                
                
                
                120Total
      net revenues
                
                
                9,285
                
                
                
                21,372OPERATING
      EXPENSESMarketing
      commissions
                
                
                2,960
                
                
                
                9,367Travel  and
      product commissions
                
                
                1,139
                
                
                
                1,414Depreciation
      and amortization
                
                
                456
                
                
                
                658Training
      programs and marketing materials
                
                
                143
                
                
                
                623General
      and administrative
                
                
                4,960
                
                
                
                10,922Total
      operating expenses
                
                
                9,658
                
                
                
                22,984OPERATING
      LOSS
                
                
                (373
                )
                
                
                (1,612
                )OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                
                
                37
                
                
                
                27Interest
      expense
                
                
                (67
                )
                
                
                (26
                )Foreign
      currency translation gain
                
                
                -
                
                
                
                2Total
      other income (expense)
                
                
                (30
                )
                
                
                3LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
                
                
                (403
                )
                
                
                (1,609
                )INCOME
      TAX PROVISION
                
                
                25
                
                
                
                110LOSS
      FROM CONTINUING OPERATIONS
                
                
                (428
                )
                
                
                (1,719
                )INCOME
      (LOSS) FROM DISCONTINUED OPERATIONS (NET OF TAX)
                
                
                5
                
                
                
                (193
                )NET
      LOSS
                
                $
                (423
                )
                
                $
                (1,912
                )NET
      LOSS PER SHARE:Weighted
      average shares outstanding - basic and diluted for Class A and Class B
      shares
                
                
                113,014,900
                
                
                
                103,792,941Loss
      per share from continuing operations - basic and diluted*
                
                $
                (0.00
                )
                
                $
                (0.02
                )Income
      (loss) per share from discontinued operations - basic and
      diluted*
                
                $
                0.00
                
                
                $
                (0.00
                )Net
      loss per share - basic and diluted*
                
                $
                (0.00
                )
                
                $
                (0.02
                )





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





See
accompanying notes to unaudited condensed consolidated financial
statements.


4


YTB
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Dollars in thousands
                
                Three months ended March 31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (423
                )
                
                $
                (1,912
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                456
                
                
                
                658Provision
      for uncollectible notes and advances
                
                
                -
                
                
                
                35Loss
      on disposal of property and equipment
                
                
                -
                
                
                
                2Income
      from disposal of discontinued operations, net of tax
                
                
                (5
                )
                
                
                -(Recoveries
      of) reserve against inventory
                
                
                (14
                )
                
                
                263Reserve
      against earnest money deposit
                
                
                -
                
                
                
                10Interest
      income on notes receivable
                
                
                -
                
                
                
                (1
                )Provision
      for uncollectible interest on notes receivable
                
                
                -
                
                
                
                1Bad
      debt provision reversal
                
                
                (74
                )
                
                
                -Amortization
      of restricted stock
                
                
                3
                
                
                
                744Stock
      option expense
                
                
                63
                
                
                
                61Compensation
      expense (credit)
                
                
                (97
                )
                
                
                (271
                )Change
      in operating assets and liabilities:Restricted
      cash-collateral used as reserves for credit card
processing
                
                
                300
                
                
                
                (177
                )Restricted
      cash-Canadian operations
                
                
                7
                
                
                
                37Accounts
      receivable, net
                
                
                185
                
                
                
                1,267Notes
      receivable
                
                
                21
                
                
                
                48Inventory
                
                
                43
                
                
                
                140Prepaid
      marketing commissions and advances
                
                
                48
                
                
                
                3,278Other
      prepaid expenses and current assets
                
                
                (11
                )
                
                
                (461
                )Accounts
      payable
                
                
                (249
                )
                
                
                (836
                )Accrued
      commissions
                
                
                (415
                )
                
                
                (862
                )Other
      accrued expenses
                
                
                (94
                )
                
                
                1,308Other
      current liabilities
                
                
                19
                
                
                
                136Deferred
      revenue
                
                
                (68
                )
                
                
                (3,539
                )Other
      income tax liabilities
                
                
                4
                
                
                
                5NET
      CASH USED IN OPERATING ACTIVITIES
                
                
                (301
                )
                
                
                (66
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (2
                )
                
                
                (40
                )Proceeds
      from sale of property and equipment
                
                
                19
                
                
                
                -Proceeds
      from asset held for sale
                
                
                -
                
                
                
                872Cash
      paid to prepare asset for sale
                
                
                -
                
                
                
                (28
                )Proceeds
      from redemption of short-term investments
                
                
                -
                
                
                
                25Purchases
      of short-term investments
                
                
                -
                
                
                
                (105
                )NET
      CASH PROVIDED BY INVESTING ACTIVITIES
                
                
                17
                
                
                
                724CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of debt
                
                
                650
                
                
                
                -Repayment
      of short-term debt
                
                
                (7
                )
                
                
                (25
                )NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                
                
                643
                
                
                
                (25
                )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                
                
                4
                
                
                
                (30
                )NET
      INCREASE IN CASH
                
                
                363
                
                
                
                603CASH,
      BEGINNING OF PERIOD
                
                
                678
                
                
                
                1,203CASH,
      END OF PERIOD
                
                $
                1,041
                
                
                $
                1,806SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid (net of capitalized interest)
                
                $
                62
                
                
                $
                24Income
      taxes paid
                
                
                10
                
                
                
                16SUPPLEMENTAL
      NON-CASH INVESTING AND FINANCING ACTIVITIES:Shares
      issued for severance liability
                
                $
                79
                
                
                $
                -Stock
      option compensation
                
                
                54
                
                
                
                33Shares
      issued for restricted stock grant
                
                
                3
                
                
                
                -Transfer
      of Class B common stock shares to Class A common stock
    shares
                
                
                1
                
                
                
                1Property
      and equipment included in accounts payable
                
                
                -
                
                
                
                3





See
accompanying notes to unaudited condensed consolidated financial
statements.


5





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 1 - ORGANIZATION AND
NATURE OF OPERATIONS





YTB
International, Inc. (“YTB,” or the “Company”) operates
primarily through two wholly-owned subsidiaries: ZamZuu, Inc. (formerly YTB
Marketing, Inc. and YourTravelBiz.com, Inc.) and its subsidiaries (collectively,
“ZamZuu”) and
YTB Travel Network, Inc. and its subsidiaries (collectively, “YTB
Travel”).  The Company, together with its subsidiaries, is
hereafter collectively referred to as the “Company” unless noted
otherwise.





The
Company markets and provides internet-based business solutions offering
travel-related services as well as shopping opportunities through over 550
affiliate stores and nine featured stores.  The two aforementioned
operating subsidiaries were formed to divide the Company’s operations into two
basic divisions.





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





In
addition, ZamZuu establishes and sells Internet Travel Centers (“ITC” or “ITCs”), formerly
referred to as Internet Business Centers, and Product Distribution Systems
(“PDS” or
“PDSs”), and
compensates its Independent Marketing Representatives (“Reps”) (independent
contractors).  Reps sell ITC and PDSs through a direct sales model and are
compensated via a multilevel marketing commission structure.  ZamZuu
conducts business through marketing, training and support of its Rep sales
force, which is responsible for marketing and selling PDSs to Business Owners
(“BOs”) and
ITCs to Travel Store Owners (“TSOs”), the latter is
a collective term for Affiliates, Referring Travel Agents and Travel Agents and
formerly known as Site Owner, Travel Site Owners or Referring Travel Agents
(Referring Travel Affiliates in Canada), most of whom work from their
homes.





YTB
Travel provides customer access to online travel vendors within the ITC and PDS
as well as access to over 550 affiliate stores and nine featured stores within
the PDS.  YTB Travel also supports online booking transactions,
supplies personal fulfillment services, collects retail product and travel
commissions from vendors, and pays retail product and travel sales commissions.
YTB Travel is the e-commerce and travel management subsidiary that processes
retail and travel sales from online vendors, processes and handles bookings
(reservations) from ITCs and PDSs, negotiates deals with preferred vendors, and
receives incentives based on the volume of business produced through the ITCs
and PDSs.  The fulfillment services are offered through interactive,
real-time booking engines and include access to preferred deals with leading
travel industry suppliers as well as high commissionable retail products with
the launch of ZamZuu.





The
Company provides services to customers located primarily in the United States,
but also provides services to customers in Canada, Bermuda, and the Bahamas and
maintains its corporate headquarters in the State of Illinois.





NOTE 2 – BASIS OF
PRESENTATION





The
accompanying condensed consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).  Certain
information and disclosures included in the financial statements prepared in
accordance with U.S. generally accepted accounting principles (“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, 2009.





The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.  The condensed
consolidated balance sheet as of December 31, 2009 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, 2009.  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.


6


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





In
connection with the preparation of the condensed consolidated financial
statements, the Company evaluated subsequent events after the balance sheet date
of March 31, 2010 through the date of issuance of the Company’s condensed
consolidated financial statements.  Based upon the evaluation, the
Company did not identify any non-recognized subsequent events that would require
adjustment or disclosure in the condensed consolidated financial
statements.  See Note 15 – “Subsequent Events.”





Certain
reclassifications have been made to the 2009 financial statements to conform to
the current year presentation as of and for the periods ended March 31,
2010.  In the second quarter of 2009, our Board of Directors approved
the sale of REZconnect.  As such, REZconnect operations have been
presented as discontinued operations for all periods presented.  Refer
to Note 11 – “Discontinued Operations” for additional information.





New
Accounting Guidance





Recently
Adopted Accounting Guidance




In June
2009, the Financial Accounting Standards Board (“FASB”) issued amended
guidance on the accounting for transfers of financial assets. The amended
guidance removes the concept of a qualifying special-purpose entity, establishes
a new “participating interest” definition that must be met for transfers of
portions of financial assets to be eligible for sale accounting, clarifies and
amends the derecognition criteria for a transfer to be accounted for as a sale,
and changes the amount that can be recognized as a gain or loss on a transfer
accounted for as a sale when beneficial interests are received by the
transferor. Enhanced disclosures are also required to provide information about
transfers of financial assets and a transferor’s continuing involvement with
transferred financial assets. This amended guidance must be applied as of the
beginning of an entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited.  The Company adopted this guidance in the
first quarter of 2010 and the adoption had no impact on the financial position
or results of operations as of or for the period ending March 31,
2010.




In June
2009, the FASB issued amended guidance on the consolidation of variable interest
entities which requires an enterprise to qualitatively assess the determination
of the primary beneficiary of a variable interest entity (“VIE”) based on
whether the entity (1) has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and (2) has the
obligation to absorb losses of the entity or the right to receive benefits from
the entity that could potentially be significant to the VIE. In addition, the
amended guidance requires an ongoing reconsideration of the primary beneficiary,
and amends the events that trigger a reassessment of whether an entity is a VIE.
Enhanced disclosures are also required to provide information about an
enterprise’s involvement in a VIE. This amended guidance must be applied as of
the beginning of an entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company adopted this guidance in the first
quarter of 2010 and the adoption had no impact on the financial position or
results of operations as of or for the period ending March 31,
2010.





In
October 2009, the FASB issued guidance amending the accounting and reporting for
own-share lending arrangements issued in contemplation of a convertible debt
issuance. The effective dates of the amendments are dependent upon the date the
share-lending arrangement was entered into and include retrospective application
for arrangements outstanding as of the beginning of fiscal years beginning on or
after December 15, 2009. The Company adopted this guidance in the first quarter
of 2010 and the adoption had no impact on the financial position or results of
operations as of or for the period ending March 31, 2010.




In
January 2010, the FASB issued guidance requiring new disclosures and clarifying
existing disclosure requirements about fair value measurement. The FASB’s
objective is to improve these disclosures and, thus, increase the transparency
in financial reporting. Specifically, the amendments now require a reporting
entity to:




·
            Disclose
      separately the amounts of significant transfers in and out of Level 1 and
      Level 2 fair value measurements and describe the reasons for the
      transfers; and


·
            Present
      separately information about purchases, sales, issuances, and settlements
      in the reconciliation for fair value measurements using significant
      unobservable inputs.


7


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements




In
addition, the guidance clarifies the requirements of the following existing
disclosures:




·
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities;
  and


·
            A
      reporting entity is to provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.




The
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
application is permitted. The Company adopted the revised disclosure guidance in
the first quarter of 2010 and the adoption did not have a material impact on the
Company’s condensed consolidated financial statements as of or for the period
ending March 31, 2010.





The
Company does not believe that there are any other new accounting pronouncements
that the Company is required to adopt that are likely to have at least some
effect on the Company’s future financial statements.





NOTE 3 – LIQUIDITY AND
FINANCIAL CONDITION





As of
March 31, 2010, cash totaled $1.0 million.  Based on current cash flow
budgets and forecasts of the Company’s short-term and long-term liquidity needs,
management believes that the Company’s projected sources of liquidity will be
sufficient to meet its projected liquidity needs for the next 12
months.  However, management cannot predict what the effect might be
on the Company’s business from events that are beyond the Company’s control,
such as the recent global credit and liquidity crisis.  Management
will continue to assess the Company’s liquidity position and potential sources
of supplemental liquidity in view of the Company’s operating performance,
current economic and capital market conditions, and other relevant
circumstances.  The Company does not have, but is pursuing establishing, a
credit facility from which it may draw for its liquidity needs.





As shown
in the accompanying condensed consolidated financial statements, the Company has
incurred losses from continuing operations for the first quarter of 2010 and
2009 of $428,000 and $1.7 million, respectively.  In addition,
negative current economic conditions and other factors have led to a falloff in
the number of active TSOs and BOs in the Company.  The number of
active TSOs and BOs has declined during the first quarter of 2010 by a net of
4,687 to 36,487 active TSOs and BOs as of March 31, 2010 from the 41,174
reported as of December 31, 2009.





The
Company is addressing the decline in new ITC and PDS sales and retention of
existing TSOs and BOs with the following key marketing and training
initiatives:





·
            Understanding
      that the Company’s customers today are more value oriented in their
      purchase decisions, the Company is expanding the “value” received in
      purchasing an ITC by bringing “in-house” its new ZamZuu initiative where
      TSOs can direct customers to shop for items they already purchase online
      and receive cash back on normal purchases of everyday items, as well as
      commissions on the purchase of featured specialty
  products.





·
            The
      Company is developing new marketing programs and enhancing existing
      marketing programs to communicate the value of its ITCs and PDSs by
      offering a marketing system that enhances consistent marketing and
      tracking of the TSOs’ and BOs’ sales efforts via a systematic marketing
      program.





·
            The
      Company has expanded training of TSOs and BOs by providing them videos on
      how to conduct home “parties” to help sell the various featured
      products.





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





The
outstanding balance of the Company’s headquarters note as of March 31, 2010 and
December 31, 2009 was $1.6 million.  The maturity date of the note was
April 30, 2010.  To date, the Company has not paid the $1.6 million
balance on the note.  See Note 7 – “Short-Term Debt”.  The
Company is currently in negotiations with the lender to renew the
note.  Management believes that the Company will be successful in
renewing the note; however, there can be no assurance that negotiations will be
successful.   Management is also exploring other alternative
methods of financing to replace or supplement its current
facility.


8





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 4 – NET LOSS PER
SHARE




Basic
income or loss per common share for continuing operations and discontinued
operations is computed by dividing net income or loss by the weighted average
number of common shares outstanding (both Class A and Class B) during the
period.  Diluted income or loss per common share is computed by
dividing net income or loss by the weighted average number of common shares
outstanding (both Class A and Class B), plus the issuance of common shares, if
dilutive, resulting from the exercise of outstanding stock options and warrants
and the lapse of restrictions on restricted stock.  These potentially
dilutive securities were not included in the calculation of loss per common
share for the three months ended March 31, 2010 and 2009, due to the loss
we incurred during such periods as their inclusion would have been
anti-dilutive.





Potentially
dilutive securities not included in diluted loss per common share for continuing
operations and discontinued operations consisted of an aggregate of 13,020,841
shares as of March 31, 2010 and 17,833,923 shares as of March 31,
2009.  The potentially dilutive securities at March 31, 2010 consist
of stock options to purchase up to 4,539,091 shares of common stock, warrants to
purchase up to 3,558,783 shares of common stock, and 4,922,967 shares of
restricted stock that have been excluded from the calculation until the
restrictions lapse.  The potentially dilutive securities at March 31,
2009 consist of stock options to purchase up to 2,429,755 shares of common
stock, warrants to purchase up to 3,558,563 shares of common stock, and
11,845,605 shares of restricted stock that have been excluded from the
calculation until the restrictions lapse.





NOTE 5 – NOTES
RECEIVABLE




On
January 20, 2010, the Company assigned a real estate mortgage to Normandy
Corporation (“Normandy”) in
connection with the execution of a commercial promissory note with Normandy in
the amount of $650,000.  See Note 7 – “Short-Term Debt.”





NOTE 6 – INVENTORY,
NET





Inventory,
net, consists of the following materials available for sale to Reps as of March
31, 2010 and December 31, 2009:





Dollars in thousands
                    
                    March 31,
                      2010
                    
                    
                    December31,
                      2009Audio
      / video marketing
                    
                    $
                    4
                    
                    
                    $
                    29Printed
      marketing materials
                    
                    
                    70
                    
                    
                    
                    78Apparel
                    
                    
                    22
                    
                    
                    
                    18Inventory,
      net
                    
                    $
                    96
                    
                    
                    $
                    125





Inventory
reserves recorded at March 31, 2010 and December 31, 2009 are $1.0
million.





NOTE 7 – SHORT-TERM
DEBT





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





The
Agreement renewed the note executed by the Company in connection with the Loan
and the Note Renewal in the new amount of $1.9 million (the “Note”) and extended
the maturity of the Note Renewal and Loan to April 30, 2010.  The
amount due under the Note bears interest at a rate of 8%
annually.  The Company paid a principal installment on September 30,
2009.  A second additional principal installment for $200,000,
originally due and payable on December 31, 2009, was extended to January 31,
2010 then subsequently extended to April 29, 2010. To date, the Company has not
made either the $200,000 payment or the outstanding principal balance payment of
$1.6 million due April 30, 2010.  FH Partners has not given the
Company notice of its intention to accelerate the debt as a result of the
Company’s failure to make the $200,000 payment that was due April 29, 2010 or
the outstanding principal balance of $1.6 million that was due April 30,
2010.  In the event of default, as defined in the Note, FH Partners
has the right to declare the entire unpaid balance of principal and interest on
the Note due and payable. All other terms of the Note Renewal and the Loan,
including the representations and warranties, remain unchanged.


9


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





In
connection with the execution of the agreement to extend to April 29, 2010 the
above-mentioned principal payment originally due on December 31, 2010, which the
Company entered into on April 22, 2010 (the “Extension”), the
Company assigned to FH Partners that certain Promissory Note made payable to the
Company in the amount of $500,000 by WR Landing, LLC (the “WR Landing Note”),
with a principal balance of $475,000 as of March 31, 2010, and all related
documents securing and relating to the WR Landing Note to secure the Note and
the Agreement, including that certain Mortgage dated November 24, 2008 securing
the WR Landing Note (collectively, the “WR Landing Collateral
Documents”).  The Extension provides that in the event the
Company pays to FH Partners the amount of $200,000 on or before the close of
business on April 29, 2010, FH Partners will return the WR Landing Note to the
Company and assign back to the Company all of the WR Landing Collateral
Documents.  In the event the Company does not pay $200,000 to FH
Partners on or before the close of business on April 29, 2010, on or after April
30, 2010, FH Partners shall only be obligated to return the WR Landing Note to
the Company and assign back to the Company all of the WR Landing Collateral
Documents in the event the Company pays in full all of its outstanding
indebtedness and obligations to FH Partners.  The Extension provides
that after April 30, 2010, FH Partners will be entitled to pursue all of its
rights and remedies against the Company under or related to all security
agreements, mortgages and other documents or instruments executed in connection
with or securing the Company’s indebtedness to FH Partners, including pursuant
to the Extension.  See Note 3 – “Liquidity and Financial
Condition.”





On
December 16, 2008, the Company entered into a contract for deed with an
unaffiliated third party, (the “Purchaser”), to sell
an administrative facility located at One Country Club View Drive, Edwardsville,
Illinois, (the “Building One
Property”) for the price of $1.5 million.  As of the contract
date, the Company received from the Purchaser the sum of $300,000 and will
receive the remaining $1.2 million subject to a promissory note signed in
connection with the subject contract for deed within 18 months and not later
than June 16, 2010.





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





NOTE 8 – SHARE-BASED
PAYMENTS




As of
March 31, 2010, the Company had a share-based employee compensation plan, a
share-based Sales Director bonus plan and a TSO Stock Purchase Plan (the “TSO
SPP”).  The share-based employee compensation plan (the 2004
Stock Option and Restricted Stock Plan (the “2004 Plan”)), the
share-based Sales Director bonus plan (the “2007 Sales Director Bonus
Plan”) and the TSO SPP are more fully described in Note 14 – “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,
2009.


10


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





2004
Plan





Stock
Options





On
January 19, 2010, the Company’s Board of Directors granted non-qualified stock
options to purchase shares of the Company’s Class A Common Stock to eligible
employees at an exercise price equal to the closing market price of the
Company’s Class A Common Stock on January 19, 2010 (the “Grant Date”) subject
to the sufficient availability of shares under the 2004 Plan.  In
January 2010, the Company’s 2004 Plan had enough shares available to issue only
one-third of the approved award.  In April 2010, the Company’s Board
of Directors amended the 2004 Plan to provide for additional shares to cover the
previously granted options.  See Note 15 – “Subsequent
Events.”  On January 19, 2010, the Company’s eligible employees
received a non-qualified stock option award equal to one-third of the award to
purchase 1,310,717 shares of the Company’s Class A Common Stock of which 53,427
were forfeited as of March 31, 2010.  These stock options vest one
year from the Grant Date and expire five years from the Grant
Date.  The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for these grants: risk-free interest rate of 1.48%; expected
life of 3.0 years; dividend yield of 0% and expected volatility of
117.24%.  The expected average life represents the period of time that
options granted are expected to be outstanding giving consideration to vesting
schedules, historical exercise and forfeiture patterns.  The expected
dividend yield is based on historical information and management’s
plan.  Since the Company had sufficient historical data available,
expected volatility is based on the Company’s historical volatility as measured
for the expected term of the grant. The Company recognized $14,000 in
compensation expense for the three months ended March 31, 2010 for one-third of
the non-qualified stock options awarded under this
grant.





The
Company recognized $61,000 in compensation expense for all stock options issued
under the 2004 Plan for the three months ended March 31, 2010 and
2009.  The Company adjusts share-based compensation on a quarterly
basis for changes to the estimate of expected equity awarded for forfeitures
based on a review of recent forfeiture activity and expected future employee
turnover.  If the Company’s actual forfeiture rate is materially
different from its estimate, or if the Company re-evaluates the forfeiture rate
in the future, the stock-based compensation expense could be significantly
different from 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, 2010 and 2009 was $194,000 and $398,000,
respectively.  Such amount is expected to be recognized over a
weighted average amortization period of 0.79 years.





Restricted
Stock Awards





On
January 19, 2010, the Company’s Board of Directors granted restricted stock
awards to certain Sales Directors in replacement of previously issued restricted
stock and option awards (the “Replacement
Awards”).  The Replacement Awards consisted of 613,479 shares
of the Company’s Class A Common Stock and 897,584 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 grant date, the number of shares issued and an
estimate of shares that will not vest due to forfeitures.  The Company
recognized compensation expense for the amortization of the Replacement Awards
of $66,000 for the three months ended March 31, 2010.





The
Company recorded $3,000 and $744,000 as net compensation expense related to the
amortization of all restricted stock awards issued under the 2004 Plan for the
three months ended March 31, 2010 and 2009, 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 from what was recorded in
the current period.  As of March 31, 2010, there was $197,000 of
unrecognized compensation expense related to the 2,179,419 shares of unvested
restricted stock.  The weighted average period over which the total
unrecognized compensation expense related to these nonvested awards is expected
to be recognized is 1.0 years.


11


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





2007
Sales Director Bonus Plan





The
Company recorded a net increase in accrued bonuses with an offset to additional
paid-in capital of $55,000 and $33,000 during the three months ended March 31,
2010 and 2009, respectively, associated with the fair value of the exercisable
portion of the grants issued under the 2007 Sales Director Bonus Plan which were
net of forfeitures of previously exercisable portions of the
grants.  In addition, during the first quarter of
2010 and 2009, accrued bonuses and marketing commissions expense were reduced by
$97,000 and $271,000, respectively, for actual forfeitures incurred during the
respective quarters.  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 from what was recorded in the current
period.  Included in accrued commissions on the condensed consolidated
balance sheetsas of March 31, 2010 and December 31, 2009, respectively,
are $31,000 and $73,000 of accrued bonuses that relate to options that are
exercisable in the future.





TSO
SPP





The
Company recognized $2,000 as a reduction in revenues for equity unit options
purchased under the TSO SPP for the three months ended March 31,
2010.  The Company adjusts share-based compensation on a quarterly
basis for changes to the estimate of expected equity awarded for forfeitures
based on a review of recent forfeiture activity and expected future TSO
turnover.  If the Company’s actual forfeiture rate is materially
different from its estimate, or if the Company re-evaluates the forfeiture rate
in the future, the stock-based compensation expense could be significantly
different from what was recorded in the current period.  Unrecognized
expense related to future service on existing equity unit options purchased
under the TSO SPP as of March 31, 2010 was $42,000.





Option
Summary:





The
following table provides additional information with respect to the aggregate
stock option plan activity for the first three months of 2010 under the
Company’s 2004 Plan, 2007 Sales Director Bonus Plan, and the TSO SPP, taken as a
whole:





Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    AverageFair
                    Value
                  
                  
                  Weighted
                    Average
                    Remaining
                    Life (Years)Options
      outstanding at beginning of 2010
                  
                  
                  3,561,511
                  
                  
                  $
                  0.49
                  
                  
                  $
                  0.33For
      the period from January 1, 2009 to March 31, 2010:Granted
                  
                  
                  1,310,717
                  
                  
                  
                  0.07
                  
                  
                  
                  0.05Forfeited
                  
                  
                  (333,137
                  )
                  
                  
                  0.26
                  
                  
                  
                  0.34Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding March 31, 2010
                  
                  
                  4,539,091
                  
                  
                  $
                  0.38
                  
                  
                  $
                  0.25
                  
                  
                  
                  5.29Options
      exercisable at March 31, 2010
                  
                  
                  1,800,000
                  
                  
                  $
                  0.54
                  
                  
                  $
                  0.32
                  
                  
                  
                  4.17





As of
March 31, 2010, the aggregate intrinsic value of all options outstanding and
exercisable is $0.


12


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





A summary
of stock options outstanding and exercisable as of March 31, 2010 is as
follows:





Options Outstanding
                      
                      
                      Options ExercisableWeightedAverage
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedNumber
                      
                      
                      Remaining
                      
                      
                      Average
                      
                      
                      Number
                      
                      
                      AverageRange of Exercise Prices
                      
                      Outstanding
                      
                      
                      Life (Years)
                      
                      
                      Exercise Price
                      
                      
                      Outstanding
                      
                      
                      Exercise Price$0.07
      - $1.00
                      
                      
                      3,639,091
                      
                      
                      
                      5.22
                      
                      
                      $
                      0.16
                      
                      
                      
                      1,240,000
                      
                      
                      $
                      0.20$1.01
      - $1.67
                      
                      
                      900,000
                      
                      
                      
                      5.58
                      
                      
                      
                      1.28
                      
                      
                      
                      560,000
                      
                      
                      
                      1.30Total
                      
                      
                      4,539,091
                      
                      
                      
                      5.29
                      
                      
                      $
                      0.38
                      
                      
                      
                      1,800,000
                      
                      
                      $
                      0.54





One-Time
Restricted Stock Award





On
January 2, 2010 and 2009, all shares scheduled to vest on such dates under the
One-Time Restricted Stock Award were forfeited, as the performance-related
vesting conditions specified in the applicable restricted stock award agreements
were not met.





As of
March 31, 2010, there was approximately $2.8 million of unrecognized
compensation expense related to the 2,743,548 shares scheduled to vest on
January 2, 2011.  As of March 31, 2010, the Company expects that the
performance-related vesting conditions specified in the applicable restricted
stock award agreements will not be met for all shares scheduled to vest on
January 2, 2011.





Summary





The
following table summarizes the status of restricted shares under the Company’s
2004 Plan and the One-Time Restricted Stock Award during the three months ended
March 31, 2010:





WeightedaverageRestricted
                    
                    
                    grant-dateshares
                    
                    
                    fair valueNon-vested
      at beginning of 2010
                    
                    
                    10,767,732
                    
                    
                    $
                    0.73For
      the period from January 1, 2010 to March 31, 2010:Granted
                    
                    
                    1,511,063
                    
                    
                    
                    0.07Vested
                    
                    
                    2,961,065
                    
                    
                    
                    0.19Forfeited
                    
                    
                    4,394,763
                    
                    
                    
                    0.98Non-vested
      at March 31, 2010
                    
                    
                    4,922,967
                    
                    
                    $
                    0.64





As of
March 31, 2010, there was approximately $3.0 million of unrecognized
compensation expense related to the 4,922,967 shares of unvested restricted
stock under the Company’s 2004 Plan and the One-Time Restricted Stock Award,
which includes $2.8 million of unrecognized compensation expense related to the
2,743,548 shares expected to be forfeited on January 2, 2011 due to the failure
to meet performance-related vesting conditions.  The Company expects
to recognize the remaining $197,000 of total compensation expense not yet
recognized related to the remaining nonvested awards over a weighted average
period of 1.0 years.





A net
compensation credit of $31,000 and a net compensation charge of $534,000 were
recognized in the condensed consolidated statement of operations for all stock
option and restricted stock plans for the three months ended March 31, 2010 and
2009, respectively.


13


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





NOTE 9 – STOCKHOLDERS’
EQUITY





During
the first quarter of 2010, the Company issued 1,198,032 shares of common stock,
with a fair value of $63,000, to Michael Brent under the terms of the Employment
Severance Agreement by and between REZconnect and Michael and Derek Brent, Chief
Executive Officer and President of REZconnect, respectively and the
Company.  See Note 11 – “Discontinued Operations.”





NOTE 10 – RELATED PARTY
TRANSACTIONS





Certain
members of management of the Company own a company that YTB Marketing, Inc., now
known as ZamZuu, utilizes for the printing, shipping and fulfillment of its
sales materials and for various other marketing initiatives. During the three
months ended March 31, 2010 and 2009, the Company expended $2,000 and $153,000,
respectively, for these services.  Included in accounts payable on the
condensed consolidated balance sheet at March 31, 2010 and December 31, 2009, is
$6,000 and $8,000, respectively, for amounts due by the Company for these
services.





The
Company leased approximately 5,000 square feet of office space (which served as
part of the Company’s previous headquarters office) at the real property
location at 600 Country Club View, Edwardsville, Illinois 62025 (the “Building Two
Property”) under a commercial lease agreement (the “Building Two Lease”),
dated August 4, 2005, by and between Meridian Land Company, Inc. (“Meridian Land”), as
lessor, and the Company, as lessee, which is to expire on October 31,
2010.





The
Company’s rental expense under the Building Two Lease was approximately $8,000
per month, or $25,000 for the quarters ended March 31, 2010 and
2009.  Net deposits of $25,000 and $36,000 are included in other
prepaid expenses and current assets in the consolidated balance sheets as of
March 31, 2010 and December 31, 2009, respectively, which the Company will
recognize as rent expense under the remaining term of the Building Two
Lease.  In addition to monthly rental payments, the Company is
responsible for reimbursement of insurance premiums and repairs and maintenance
during the term of the Building Two Lease.  During the three months
ended March 31, 2010 and 2009, insurance and repairs and maintenance expense
totaled $8,000 and $6,000, respectively.





On August
17, 2007, the Company entered into a Commercial Lease Agreement (the “Magnolia Lease”), by
and between Meridian Land, as lessor, and the Company, as lessee, covering the
approximately 5,500 square feet premises located at #112 Magnolia Drive (Lot #9
Magnolia Commons), Glen Carbon, Illinois 62034 (the “Magnolia Leased
Premises”). The Magnolia Leased Premises served as additional office
space for the Company.  The Magnolia Lease had an initial term of 18
months, originally scheduled to commence on November 1, 2007 and expire on April
30, 2009.  Due to delays in construction being performed with respect
to the Magnolia Leased Premises, the term of the Magnolia Lease was postponed
such that it commenced on February 15, 2008 and extended until August 15, 2009.
Rent under the Magnolia Lease was approximately $8,000 per month, or $25,000 for
quarter ended March 31, 2009.  In addition to monthly rental payments,
during the first quarter of 2009, the Company incurred costs of $2,000 for
insurance, repairs and common area charges and an additional $2,000 for real
estate taxes.





Meridian
Land is controlled by its principals, Timothy Kaiser, M.D. and Clay Winfield,
each of whom were members of the Company’s Board of Directors until June 16,
2009 and April 30, 2009, respectively.  Each of the transactions
entered into by the Company with Meridian Land (including the Building Two
Lease, the acquisition of the Building Two Property, the acquisition of the
membership interests of Meridian/Silver and the Magnolia Lease) was considered
and approved by the independent members of the Company’s Board of
Directors.





Pursuant
to the terms of the development contract with Winfield Development for its new
corporate headquarters in Wood River, Illinois (the “Contract”), the
Company made aggregate payments of $422,000 during the three months ended March
31, 2009.  The Contract was approved by the independent members of the
Company’s Board of Directors.  Clay Winfield, who was a member of the
Company’s Board of Directors until April 30, 2009, controls Winfield
Development.





During
the three months ended March 31, 2010 and 2009, the Company expended $119,000
and $52,000, respectively, to J. Lloyd “Coach” Tomer, former director and
Chairman of the Company’s Board of Directors, for commissions earned as a
Rep.  As of March 31, 2010 and December 31, 2009, $74,000 and $73,000,
respectively are included in accounts payable on the condensed consolidated
balance sheets and $403,000 and $424,000, respectively, are included in accrued
commissions for commissions due Mr. Tomer.  The Company also expended
$1,000 in book royalty fees to Mr. Tomer during the first quarter of 2010, which
is also included in accounts payable in the condensed consolidated balance sheet
as of March 31, 2010.





During
the three months ended March 31, 2010 and 2009, the Company expended $75,000 and
$49,000, respectively, to J. Scott Tomer, Chairman of the Company’s Board of
Directors, for commissions earned as a Rep.  As of March 31, 2010 and
December 31, 2009, $8,000 is included in accounts payable on the condensed
consolidated balance sheets and $23,000 and $10,000, respectively, are included
in accrued commissions for commissions due Mr. Tomer.


14





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





During
the three months ended March 31, 2010 and 2009, the Company expended $31,000 and
$49,000, respectively, to J. Kim Sorensen, Vice Chairman of the Company’s Board
of Directors, for commissions earned as a Rep.  As of March 31, 2010
and December 31, 2009, $43,000 is included in accounts payable on the condensed
consolidated balance sheets and $74,000 and $75,000, respectively, are included
in accrued commissions for commissions due Mr. Sorensen.





During
the three months ended March 31, 2009, the Company expended $49,000 to Michael
Brent, Chief Executive Officer and President of the Company’s former
wholly-owned subsidiary REZconnect, for commissions earned as a Rep prior to the
sale of REZconnect on June 30, 2009.  See Note 11 – “Discontinued
Operations.”  Included in the condensed consolidated balance sheets as
of both March 31, 2010 and December 31, 2009, are $43,000 in accounts payable
and $65,000 in accrued commissions for commissions due Mr. Brent earned prior to
June 30, 2009.





During
the three months ended March 31, 2010 and 2009, the Company expended $7,000 and
$17,000, respectively, to Lou Brock, a member of the Company’s Board of
Directors, for commissions earned as a Rep and a TSO and $1,000 for insurance
premiums paid to Mr. Brock for the first quarter of 2009.  Included in
accrued commissions on the condensed consolidated balance sheets as of March 31,
2010 and December 31, 2009 are $2,000 for commissions due Mr.
Brock.





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 until November 5, 2009.  The fees covered
services performed by Andrew Wilder for expanded duties in his role as Audit
Committee Chairman and a member of the Compensation Committee of the Company’s
Board of Directors.  The independent members of the Company’s Board of
Directors approved the fees.





Included
in accounts payable at December 31, 2009, are legal fees of $2,000 for work
performed by Jack Humes, a member of the Company's Board of
Directors.  The fees covered services performed by Jack Humes related
to the corporate headquarters building asset held for sale.





NOTE 11 – DISCONTINUED
OPERATIONS





The
income (loss) from disposition of the REZconnect subsidiary, net of tax,
consists of the following for the three months ended March 31,
2010:





Dollars in thousandsTrue-up
      of contract termination costs settled in stock
                      
                      $
                      16Non-cash
      accretion of contract termination liability
                      
                      
                      (11
                      )Income
      from disposal, net of tax
                      
                      $
                      5





The
following table summarizes the net revenues and operating results for the
REZconnect operations included in discontinued operations for the three months
ended March 31, 2010 and 2009:





Dollars in thousands2010
                  
                  
                  2009Discontinued
      operations:Net
      revenues
                  
                  $
                  -
                  
                  
                  $
                  417Loss
      from operations before income tax provision
                  
                  $
                  -
                  
                  
                  $
                  (192
                  )Income
      tax provision
                  
                  
                  -
                  
                  
                  
                  (1
                  )Income
      from disposal, net of tax
                  
                  
                  5
                  
                  
                  
                  -Income
      (loss) from discontinued operations, net of tax
                  
                  $
                  5
                  
                  
                  $
                  (193
                  )


15





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





The
following table summarizes the activity in the accrued exit cost liability for
the REZconnect subsidiary for the three months ended March 31,
2010:





Dollars in thousands
                  
                  Fair Value at
                    December 31,
                    2009
                  
                  
                  Common
                    stock
                    settlements
                  
                  
                  Cash
                    payments
                  
                  
                  Non-cash
                    accretion
                  
                  
                  Fair Value at
                    March 31,
                    2010Contract
      termination costs
                  
                  $
                  2,355
                  
                  
                  $
                  (79
                  )
                  
                  $
                  (72
                  )
                  
                  $
                  11
                  
                  
                  $
                  2,215Total
      exit costs
                  
                  $
                  2,355
                  
                  
                  $
                  (79
                  )
                  
                  $
                  (72
                  )
                  
                  $
                  11
                  
                  
                  $
                  2,215





In the
Company’s condensed consolidated balance sheet as of March 31, 2010 and December
31, 2009, the current portion of the liability balance is $626,000 and $624,000,
respectively, which is included in other accrued expenses, and the long-term
portion is $1.6 million and $1.7 million, respectively, which is included in
accrued severance.





NOTE 12 – SEGMENT
INFORMATION





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





Prior to
the first quarter of 2010, the Company had reported in two operating segments,
Marketing and Travel.  With the launch of ZamZuu in January 2010, the
Company renamed the Travel segment to the Product segment since the commissions
received and paid on retail products purchased through the ZamZuu business
solution are processed by the YTB Travel subsidiary.





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





Dollars in thousandsThree months ended March 31, 2010
                  
                  Marketing
                  
                  
                  Product
                  
                  
                  Parent
                  
                  
                  TotalExternal
      and inter-segment revenue
                  
                  $
                  7,286
                  
                  
                  $
                  1,999
                  
                  
                  $
                  -
                  
                  
                  $
                  9,285Income
      (loss) from continuing operations
                  
                  
                  647
                  
                  
                  
                  (599
                  )
                  
                  
                  (476
                  )
                  
                  
                  (428
                  )Assets
                  
                  
                  8,140
                  
                  
                  
                  717
                  
                  
                  
                  12,146
                  
                  
                  
                  21,003Depreciation
      and amortization
                  
                  
                  241
                  
                  
                  
                  22
                  
                  
                  
                  193
                  
                  
                  
                  456Capital
      expenditures
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  2
                  
                  
                  
                  2





Three months ended March 31, 2009
                            
                            Marketing
                            
                            
                            Product
                            
                            
                            Parent
                            
                            
                            TotalExternal
      and inter-segment revenue
                            
                            $
                            19,092
                            
                            
                            $
                            2,280
                            
                            
                            $
                            -
                            
                            
                            $
                            21,372Income
      (loss) from continuing operations
                            
                            
                            1,260
                            
                            
                            
                            (1,143
                            )
                            
                            
                            (1,836
                            )
                            
                            
                            (1,719
                            )Assets
      (1)
                            
                            
                            8,519
                            
                            
                            
                            775
                            
                            
                            
                            12,322
                            
                            
                            
                            21,616Depreciation
      and amortization
                            
                            
                            344
                            
                            
                            
                            111
                            
                            
                            
                            203
                            
                            
                            
                            658Capital
      expenditures
                            
                            
                            32
                            
                            
                            
                            -
                            
                            
                            
                            11
                            
                            
                            
                            43(1) Segment
      totals represent assets as of December 31, 2009.


16





YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





GEOGRAPHICAL
FINANCIAL INFORMATION:





Net
revenues for the three months ended March 31, 2010 and 2009 consist
of:





Dollars in thousands2010
                  
                  
                  2009United
      States
                  
                  $
                  8,971
                  
                  
                  $
                  20,892Canada
                  
                  
                  314
                  
                  
                  
                  480Total
      net revenues
                  
                  $
                  9,285
                  
                  
                  $
                  21,372





All
long-lived assets as of March 31, 2010 and December 31, 2009 were located in the
United States.





NOTE 13 – INCOME
TAXES





As of
March 31, 2010 and December 31, 2009, the Company had approximately $1.4 million
of unrecognized tax benefits.  Of the unrecognized tax benefits at
March 31, 2010, $187,000, if recognized, would impact the Company’s effective
income tax rate.





NOTE 14 – COMMITMENTS AND
CONTINGENCIES





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
million.  On February 9, 2009, the Company filed motions to dismiss
the consolidated complaint.





On June
5, 2009, the Court granted the Company’s motions and dismissed the class action
complaint, but granted the plaintiffs leave to file an amended complaint that
conformed with the Court’s ruling.  On July 15, 2009, the plaintiffs
filed an amended complaint that purported to conform to the Court’s
ruling.  The amended complaint asserts claims similar to those
contained in the dismissed complaint.  On July 20, 2009, the Court,
acting on its own motion, struck the plaintiffs’ amended complaint in its
entirety based on the Court’s belief that the amended complaint does not pass
muster under the applicable federal pleading standards.  As of July
27, 2009, the plaintiffs filed motions for leave with the Court to amend their
complaints.  The Court granted their motions and a second amended
complaint was filed on December 24, 2009.  On February 12, 2010, the
Company filed motions to dismiss the amended consolidated
complaint.  On April 19, 2010, the Court granted the Motion to Dismiss
as to all the out-of-state plaintiffs.  As a result, there is only one
remaining plaintiff who is a citizen of Illinois.  Consequently, the
Court has requested further briefing on the issue of whether the Court retains
jurisdiction to hear the matter when both plaintiffs and defendants are citizens
of the same state.  The additional briefing is due on May 19,
2010.





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





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


17


YTB
INTERNATIONAL, INC.


Notes to
Unaudited Condensed Consolidated Financial Statements





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





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





NOTE 15 – SUBSEQUENT
EVENTS





On April
6, 2010, the Board of Directors of the Company adopted a resolution to (i)
terminate the existing employment agreement dated effective January 1, 2008
between the Company and J. Lloyd Tomer, former Chairman of the Board and (ii)
enter into a Master Distributor Letter of Understanding (the “Letter”) between the
Company and J. Lloyd Tomer.  Upon approval by the Board, the Letter
was retroactive to compensation earned as of February 1, 2010.  Under
the Letter, Mr. Tomer will earn commissions and overrides generated by the
Director 5 position occupied by a former sales director in lieu of his current
salary subject to certain salary reduction limitations.  In addition,
he will receive a monthly marketing stipend as well as reimbursement for
business related expenses as defined in the Letter.





Also, on
April 6, 2010, the Board adopted a resolution to modify paragraph 3.3 of the
existing employment agreement dated effective January 1, 2008 between the
Company and J. Scott Tomer, Chairman of the Board (the “Modification”).  Upon
approval by the Board, the Modification was retroactive to compensation earned
as of February 1, 2010.  Under the Modification, J. Scott Tomer will
earn commissions and overrides generated by the Director 4 position occupied by
a former sales director in lieu of earning commissions and overrides generated
by Representative position #2.  All other terms and conditions of his
existing employment agreement remain unchanged.





As of
April 16, 2010, the Company’s Board of Directors amended the 2004 Plan to
increase the total number of shares of Common Stock reserved and available for
distribution under the 2004 Plan from 15,000,000 shares to 20,000,000
shares.  This amendment made available a sufficient number of shares
to cover the remaining two-thirds of the non-qualified stock option award
granted by the Company’s Board of Directors on January 19, 2010 (the “Grant
Date”).  See Note 8 – “Share-Based Payments.”  These
additional two-thirds of the January 19, 2010 grant represent options to
purchase 2,621,581 shares of the Company’s Class A Common Stock, 50% vesting two
years from the Grant Date and 50% vesting three years from the Grant Date with
all options expiring five years from the Grant Date.





On April
22, 2010, the Company entered into the Extension with FH Partners pursuant to
which the due date for the $200,000 principal payment due under the terms of the
Loan Modification, Renewal, and Extension Agreement originally due on December
31, 2009 and extended to January 31, 2010, was extended to April 29,
2010.  As consideration for the extension of the due date, the Company
assigned to FH Partners the WR Landing Note in the amount of $500,000, with a
principal balance of $475,000 as of March 31, 2010, and the WR Landing
Collateral Documents.  The Extension provides that in the event the
Company pays to FH Partners the amount of $200,000 on or before the close of
business on April 29, 2010, FH Partners will return the WR Landing Note to the
Company and assign back to the Company all of the WR Landing Collateral
Documents.  In the event the Company does not pay $200,000 to FH
Partners on or before the close of business on April 29, 2010, on or after April
30, 2010, FH Partners shall only be obligated to return the WR Note to the
Company and assign back to the Company all of the WR Landing Collateral
Documents in the event the Company pays in full all of its outstanding
indebtedness and obligations to FH Partners. After April 30, 2010, FH Partners
will be entitled to pursue all of its rights and remedies against the Company
under or related to all security agreements, mortgages and other documents or
instruments executed in connection with or securing the Company’s indebtedness
to FH Partners, including pursuant to the Extension. The Company agreed to pay
FH Partners an extension fee of $10,000 in connection with the Extension, which
Extension is contingent upon payment of the extension fee.  As of this
date, the Company has not made either the $200,000 payment or the outstanding
principal balance payment of $1.6 million due April 30, 2010.  FH
Partners has not given the Company notice of its intention to accelerate the
debt as a result.


18


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




This
management’s discussion and analysis provides a review of the results of
operations, financial condition and the liquidity and capital resources of YTB
International, Inc. and its subsidiaries (“YTB” “we,” “our”
and  the “Company”) on a
historical basis and outlines the factors that have affected recent earnings, as
well as those factors that may affect future earnings.  The following
discussion and analysis should be read in conjunction with the Company’s
unaudited condensed consolidated financial statements and related notes included
elsewhere in this report.





Forward-Looking
Statements





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, 2009 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




We are a
leading marketer and provider of internet-based business solutions offering
travel-related services as well as shopping opportunities through over 550
affiliate stores and nine featured stores.  We operate through our two
wholly-owned subsidiaries and their respective subsidiaries: ZamZuu, Inc.
(formerly YTB Marketing, Inc. and YourTravelBiz.com, Inc., “ZamZuu”) and YTB
Travel Network, Inc. (“YTB
Travel”).





On
January 15, 2010, the Company renamed its YTB Marketing, Inc. subsidiary ZamZuu,
Inc. and simultaneously launched ZamZuu, an e-commerce business
solution.  ZamZuu is strategically positioned in the world of
e-commerce to not only continue to capture online travel sales but to also take
advantage of the growing trend of online retail sales and is an expansion of
shopYTB from 2009.  ZamZuu is specifically designed for the individual
who is interested in all facets of online retail.  This business
solution is sold for a set up fee of $249.95 and a monthly hosting fee of
$49.95.  In conjunction with the launch of ZamZuu, the Company no
longer operates under the trade name “YourTravelBizTM” or the website
“YourTravelBiz.com ®.”





In
addition, ZamZuu establishes and sells Internet Travel Centers (“ITC” or “ITCs”), formerly
referred to as Internet Business Centers, and Product Distribution Systems
(“PDS” or
“PDSs”), and
compensates its Independent Marketing Representatives (“Reps”) (independent
contractors).  Reps sell ITCs and PDSs through a direct sales model and are
compensated via a multilevel marketing commission structure.  ZamZuu
conducts business through marketing, training and support of its Rep sales
force, which is responsible for marketing and selling PDSs to Business Owners
(“BOs”) and
ITCs to Travel Store Owners (“TSOs”), the latter is
a collective term for Affiliates, Referring Travel Agents and Travel Agents and
formerly known as Site Owners, Travel Site Owners or Referring Travel Agents
(Referring Travel Affiliates in Canada), most of whom work from their
homes.


19


YTB
Travel provides customer access to online travel vendors within the ITC and PDS
as well as access to over 550 affiliate stores and nine featured stores within
the PDS.  YTB Travel also supports online booking transactions,
supplies personal fulfillment services, collects retail product and travel
commissions from vendors, and pays retail product and travel sales commissions.
YTB Travel is the e-commerce and travel management subsidiary that processes
retail and travel sales from online vendors, processes and handles bookings
(reservations) from ITCs and PDSs, negotiates deals with preferred vendors, and
receives incentives based on the volume of business produced through the ITCs
and PDSs.  The fulfillment services are offered through interactive,
real-time booking engines and include access to preferred deals with leading
travel industry suppliers as well as high commissionable retail products with
the launch of ZamZuu.





We
believe that the shift to the internet for shopping and for booking travel and
our unique programs for our TSOs and our BOs place us in a valuable and unique
position to provide an income stream for our TSOs and BOs and allows the
ultimate consumer a choice of booking his or her travel through the ever-growing
internet travel industry and/or to shop online at over 550 affiliate stores
offering cash back as well as discounts.  The emerging market shift to
the internet for shopping and travel services presents the opportunity for
advancement of products and services by referral
relationships.  Typical online travel merchants sell a commodity
(travel), which does not engender strong customer loyalty.  By
contrast, each TSO and BO develops personal relationships with his or her
customers, who book travel or shop through the TSO’s ITC or the BO’s PDS,
thereby creating a significant advantage for our sales force over the major
online travel companies and online shopping sites.  Typically, the
cost to book a trip through a TSO or BO 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 and
PDSs provide access to more than 35 booking engines, including World Choice
Travel (a subsidiary of Travelocity), Hotels.com, Apple Vacations, Collette
Vacations, and others.  For shopping, customers receive cash back in
the range of 2.5% to 12% and are eligible for all discounts offered by the
online retailer.





In
addition to our travel related products, we are very excited about the
introduction of new high commissionable retail products with the launch of
ZamZuu.  We believe we are at the beginning of a paradigm shift as it
pertains to retail shopping.  We are designing the appropriate product
mix, technology platforms and marketing programs to address this in the months
and years to come.





Our
revenues are comprised primarily of ITC and PDS sales and monthly ITC and PDS
web hosting fees, commissions paid by travel providers, commissions on the sales
of products through the ZamZuu network of online retail stores and direct sales
of travel.  In addition, certain travel suppliers pay
performance-based compensation known as “override commissions” or
“overrides.”  Commission revenues and gross retail sales, net of
allowances for cancellations, are recognized generally based on either the
expected date of travel or the retail product date of
purchase.  Overrides are recognized on an accrual basis based on prior
year’s expense adjusted for current year volumes.  Revenue from the
sale of ITCs and PDSs is deferred and recognized ratably as revenue over a
twelve-month period, which represents the average lifespan during which a TSO or
BO remains with our Company.





Commissions
earned on affiliated stores are in the form of cash back to the customer making
the purchases and a matching payment to the TSO and BO with the rates in a range
of 2% to 15% of the purchase.  Commissions earned on featured stores
range up to 50% with the Company earning the first 20% and the BO and marketing
organization sharing the remaining 80%.





The
commission rates paid by travel suppliers, in addition to overrides, are
determined by individual travel suppliers and are subject to
change.  Historically, typical standard base commission rates paid by
travel suppliers have been approximately 10% to 12% for hotel reservations, 5%
to 10% for car rentals, 10% to 18% for cruises and vacation packages and a
nominal service fee for airline tickets.  During the past several
years, leisure vendors (including tour operators, cruise lines, hotel and car
packagers) have not reduced their commission levels but in fact have offered YTB
Travel incentive commissions above the standard compensation for its volume
business.  YTB Travel expects that its average commission rate from
online transaction revenues will increase due to a higher proportion of
non-commodity product sales and an increase in higher profit negotiated
preferred supplier contracts.  Each TSO or BO pays a monthly web
hosting fee of $49.95 to us, and can earn transactional compensation from travel
purchased from his or her PDS or ITC in the range of 60% to 100% of the
commission earned.  There can be no assurance that travel suppliers
will not reduce commission rates paid to YTB Travel or eliminate such
commissions entirely, which could, individually or in the aggregate, have a
material adverse effect on our business, operating results and financial
condition.





We anticipate a continuing decline in
revenues in the coming months due to the general economic conditions and the
trending decline in the number of active TSOs and BOs.  However, due
to new marketing initiatives, enhanced/expanded services and the new focus on
ZamZuu, we believe that we will see a stabilization of sales coupled with slower
declines in attrition over the next year.


20


Results of
Operations





The
following tables set forth, for the three months ended March 31, 2010 and 2009,
as indicated, the percentage relationship of certain items from the Company’s
condensed consolidated statement of operations to total net
revenues.  A summary of consolidated results follows.





Dollars in thousands
                        
                        Three months ended March 31,2010
                        
                        
                        % of Net
                          Revenues
                        
                        
                        2009
                        
                        
                        % of Net
                          Revenues
                        
                        
                        Increase
                          (Decrease)
                        
                        
                        % Increase
                          (Decrease)NET
      REVENUESITC
      and PDS sales and monthly fees
                        
                        $
                        6,939
                        
                        
                        
                        74.7
                        %
                        
                        $
                        18,608
                        
                        
                        
                        87.1
                        %
                        
                        $
                        (11,669
                        )
                        
                        
                        (62.7
                        )%Travel
      and product commissions and services
                        
                        
                        1,888
                        
                        
                        
                        20.3
                        %
                        
                        
                        2,160
                        
                        
                        
                        10.1
                        %
                        
                        
                        (272
                        )
                        
                        
                        (12.6
                        )%Training
      programs and marketing materials
                        
                        
                        330
                        
                        
                        
                        3.6
                        %
                        
                        
                        484
                        
                        
                        
                        2.3
                        %
                        
                        
                        (154
                        )
                        
                        
                        (31.8
                        )%Other
                        
                        
                        128
                        
                        
                        
                        1.4
                        %
                        
                        
                        120
                        
                        
                        
                        0.5
                        %
                        
                        
                        8
                        
                        
                        
                        6.7
                        %Total
      net revenues
                        
                        
                        9,285
                        
                        
                        
                        100.0
                        %
                        
                        
                        21,372
                        
                        
                        
                        100.0
                        %
                        
                        
                        (12,087
                        )
                        
                        
                        (56.6
                        )%OPERATING
      EXPENSESMarketing
      commissions
                        
                        
                        2,960
                        
                        
                        
                        31.9
                        %
                        
                        
                        9,367
                        
                        
                        
                        43.8
                        %
                        
                        
                        (6,407
                        )
                        
                        
                        (68.4
                        )%Travel  and
      product commissions
                        
                        
                        1,139
                        
                        
                        
                        12.3
                        %
                        
                        
                        1,414
                        
                        
                        
                        6.6
                        %
                        
                        
                        (275
                        )
                        
                        
                        (19.4
                        )%Depreciation
      and amortization
                        
                        
                        456
                        
                        
                        
                        4.9
                        %
                        
                        
                        658
                        
                        
                        
                        3.1
                        %
                        
                        
                        (202
                        )
                        
                        
                        (30.7
                        )%Training
      programs and marketing materials
                        
                        
                        143
                        
                        
                        
                        1.5
                        %
                        
                        
                        623
                        
                        
                        
                        2.9
                        %
                        
                        
                        (480
                        )
                        
                        
                        (77.0
                        )%General
      and administrative
                        
                        
                        4,960
                        
                        
                        
                        53.4
                        %
                        
                        
                        10,922
                        
                        
                        
                        51.1
                        %
                        
                        
                        (5,962
                        )
                        
                        
                        (54.6
                        )%Total
      operating expenses
                        
                        
                        9,658
                        
                        
                        
                        104.0
                        %
                        
                        
                        22,984
                        
                        
                        
                        107.5
                        %
                        
                        
                        (13,326
                        )
                        
                        
                        (58.0
                        )%OPERATING
      LOSS
                        
                        
                        (373
                        )
                        
                        
                        (4.0
                        )%
                        
                        
                        (1,612
                        )
                        
                        
                        (7.5
                        )%
                        
                        
                        1,239
                        
                        
                        
                        (76.9
                        )%OTHER
      INCOME (EXPENSE)Interest
      and dividend income
                        
                        
                        37
                        
                        
                        
                        0.4
                        %
                        
                        
                        27
                        
                        
                        
                        0.1
                        %
                        
                        
                        10
                        
                        
                        
                        37.0
                        %Interest
      expense
                        
                        
                        (67
                        )
                        
                        
                        (0.7
                        )%
                        
                        
                        (26
                        )
                        
                        
                        (0.1
                        )%
                        
                        
                        (41
                        )
                        
                        
                        157.7
                        %Foreign
      currency translation loss
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        2
                        
                        
                        
                        0.0
                        %
                        
                        
                        (2
                        )
                        
                        
                        (100.0
                        )%Total
      other income (expense)
                        
                        
                        (30
                        )
                        
                        
                        (0.3
                        )%
                        
                        
                        3
                        
                        
                        
                        0.0
                        %
                        
                        
                        (33
                        )
                        
                        
                        n/m
                        *LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
                        
                        
                        (403
                        )
                        
                        
                        (4.3
                        )%
                        
                        
                        (1,609
                        )
                        
                        
                        (7.5
                        )%
                        
                        
                        1,206
                        
                        
                        
                        (75.0
                        )%INCOME
      TAX PROVISION
                        
                        
                        25
                        
                        
                        
                        0.3
                        %
                        
                        
                        110
                        
                        
                        
                        0.5
                        %
                        
                        
                        (85
                        )
                        
                        
                        (77.3
                        )%LOSS
      FROM CONTINUING OPERATIONS
                        
                        
                        (428
                        )
                        
                        
                        (4.6
                        )%
                        
                        
                        (1,719
                        )
                        
                        
                        (8.0
                        )%
                        
                        
                        1,291
                        
                        
                        
                        (75.1
                        )%INCOME
      (LOSS) FROM DISCONTINUED OPERATIONS (NET OF TAX)
                        
                        
                        5
                        
                        
                        
                        0.0
                        %
                        
                        
                        (193
                        )
                        
                        
                        (0.9
                        )%
                        
                        
                        198
                        
                        
                        
                        (102.6
                        )%NET
      LOSS
                        
                        $
                        (423
                        )
                        
                        
                        (4.6
                        )%
                        
                        $
                        (1,912
                        )
                        
                        
                        (8.9
                        )%
                        
                        $
                        1,489
                        
                        
                        
                        (77.9
                        )%





*Not
meaningful


21


The
following tables set forth information concerning (i) the number of TSOs and BOs
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,
2010 and 2009, and (ii) the weighted average number of active TSOs and BOs
during each such period:





2010
                  
                  Beginning Balance
                    Active TSOs and BOs
                  
                  
                  New TSOs
                  
                  
                  New BOs
                  
                  
                  Deactivations
                  
                  
                  Ending Balance Active
                    TSOs and BOs
                  
                  
                  Weighted Average
                    Active TSOs and BOsThree
      months ended
                    March
      31, 2010
                  
                  
                  41,174
                  
                  
                  
                  657
                  
                  
                  
                  2,762
                  
                  
                  
                  8,106
                  
                  
                  
                  36,487
                  
                  
                  
                  37,844





2009
                  
                  Beginning Balance
                    Active TSOs and BOs
                  
                  
                  New TSOs
                  
                  
                  New BOs
                  
                  
                  Deactivations
                  
                  
                  Ending Balance Active
                    TSOs and BOs
                  
                  
                  Weighted Average
                    Active TSOs and BOsThree
      months ended
                    March
      31, 2009
                  
                  
                  92,383
                  
                  
                  
                  7,427
                  
                  
                  
                  -
                  
                  
                  
                  26,009
                  
                  
                  
                  73,801
                  
                  
                  
                  79,022





The above
figures represent the number of active TSOs and BOs paying $49.95 per month for
monthly web hosting fees.  New TSOs represents the number of ITCs sold
during the respective periods.  New BOs represents the number of PDSs
sold during the respective periods.  As each new ITC and PDS is sold,
marketing commissions are paid on that sale.  During the first quarter
of 2010, the Company sold 563 new ITCs at $449.95 compared to 5,525 in the first
quarter of 2009.  The stores sold at $449.95 entitle the TSOs the
option of completing training which allows them to earn higher travel commission
levels.  During the first quarter of 2009, the Company sold 1,902 ITCs
at a rate of $250.00 as part of a Christmas special promotional program that
began in December of 2008.  This program allowed potential TSOs the
opportunity to access the site for a lower initial fee.  The TSOs were
then given the option of upgrading to the full price membership in order to
realize the full benefit of ownership.  This program ended during the
third quarter of 2009.  Also in the third quarter of 2009, the Company
introduced a payment plan under which the TSOs could pay $99.95 per month for
five months, which allowed customers flexible payment terms for purchase of the
store.  The Company sold 94 ITCs with the payment plan in the first
quarter of 2010.  This program ended in the first quarter of
2010.   Also during the first quarter of 2010, the Company
introduced a new program focused on selling PDSs at $249.95 each.  The
Company sold 2,762 PDSs during the first quarter of 2010.  The number
of sales, and the number of recurring monthly web hosting fees paid, each
directly impacts our revenues and expenses.  Likewise, each recurring
monthly web hosting fee paid results in marketing commissions paid to our Reps.
As the number of active TSOs and BOs declines, the amount of our travel and
product commission revenue decreases as well. Correspondingly, our travel and
product commission expense follows suit.





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





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





The
decline on a year-to-year basis of our organization that is evidenced by the
above numbers directly impacts our financial results, both in terms of revenue
and expense recognition. As fewer ITCs and PDSs are sold and maintained, the
amount of marketing and travel and product commissions correspondingly
decreases.  As these decreases occur, we must reduce infrastructure
costs that are volume driven, such as wage and benefit costs as well as other
discretionary expenditures.





The
Company is addressing the decline in new ITC and PDS sales and existing TSO and
BO retention with the following key initiatives:





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


22





·
            We
      are developing new marketing programs and enhancing existing marketing
      programs to communicate the value of our ITCs and PDSs by offering a
      marketing system that enhances consistent marketing and tracking of the
      TSOs’ and BOs’ sales efforts via a systematic marketing
      program.





·
            Training
      has been expanded by providing TSOs and BOs with videos on how to conduct
      home parties to help sell the various featured products.  The
      recent launch of a “media center” provides easier access and a larger
      variety of training videos.





Three Months Ended March 31,
2010 compared to Three Months Ended March 31, 2009





We
reported net loss for the quarter ended March 31, 2010 of $423,000, or $0.00 per
basic and diluted share, compared to net loss of $1.9 million, or $0.02 per
basic and diluted share, for the comparable quarter of 2009.  Net
income from discontinued operations for the quarter ended March 31, 2010 was
$5,000, or $0.00 per basic and diluted share, compared to a net loss of
$193,000, or $0.00 per basic and diluted share, for the comparable quarter of
2009.





The
following discussions of the Company’s results of continuing operations exclude
the results related to our former subsidiary REZConnect Technologies, Inc.
(“REZconnect”).  This
business has been segregated from continuing operations and included in
discontinued operations for the three months ended March 31, 2010 and
2009.  See Note 11 – “Discontinued Operations” to the condensed
consolidated financial statements for further discussion.





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





Net
Revenues





Net
revenues totaled $9.3 million and $21.4 million in the first quarter of 2010 and
2009, respectively.





·
            ITC
      and PDS sales along with monthly fees decreased $11.7 million to $6.9
      million in the first quarter of 2010 compared to $18.6 million in the
      comparable prior year quarter.  This decrease is attributable to
      the following:





§
            ITC
      and PDS sales revenue decreased $5.5 million in the first quarter of 2010
      to $1.0 million from the $6.5 million reported in the comparable prior
      year quarter.  We have experienced a decrease in the actual
      number of ITCs and PDSs sold for the three months ended March 31, 2010 to
      3,419 from 7,427 in the prior year period.   As a result,
      the average number of sales for which we were able to recognize revenue
      decreased to 1,089 in the first quarter of 2010 from 4,964 for the same
      period in 2009.  In addition, the average amount of recognized
      revenue from each new sale decreased to $354.44 in the first quarter of
      2010 from $443.62 in the comparable quarter in 2009 due to the
      introduction of the PDSs in the first quarter of 2010, which are sold for
      $249.95.  We believe the decline in the number of new ITC and
      PDS sales is mostly attributable to the current economic downturn present
      in the United States and Canada.  However, due to new marketing
      initiatives, enhanced/expanded services and the new focus on the ZamZuu
      business solution, we believe that we will see a stabilization of sales
      coupled with slower declines in attrition over the next
    year.





§
            Monthly
      renewal fees revenue decreased $6.0 million in the first quarter of 2010
      to $5.9 million from the $11.9 million reported in the comparable prior
      year quarter. The decrease is in direct relation to the number of active
      paying TSOs and BOs.  The weighted average of paying TSOs and
      BOs per month decreased from 79,022 for the three months ended March 31,
      2009 to 37,844 for the same period in 2010.  We anticipate a
      continued decline in the number of active paying TSOs and BOs in the
      coming months due to the general economic conditions in the United States
      and Canada.  However, due to new marketing initiatives,
      enhanced/expanded services and the new focus on the ZamZuu business
      solution, we believe that we will see a stabilization of sales coupled
      with slower declines in attrition over the next
  year.





·
            Travel
      and product commissions and services revenue for the first quarter of 2010
      decreased $272,000 to $1.9 million from the $2.2 million reported in the
      comparable prior year quarter.  The decrease in travel and
      product commissions and services revenue 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
      sale provider in 2010.  In addition, general economic conditions
      have lowered the overall demand for
travel.





·
            Training
      programs and marketing materials revenue decreased $154,000 in the first
      quarter of 2010 to $330,000 from $484,000 in the comparable prior year
      quarter.   The decrease was primarily due to a reduction in
      the number of training events that the Company held.  The
      reduction in the number of training events held were related to the
      decline in the number of new ITC and PDS sales and the number of active
      paying TSOs and BOs compared to what we have experienced in the
      past.  We expect this trend to stabilize in the coming months as
      our new focus on the ZamZuu business solution helps stabilize sales and
      attrition.


23


Operating
Expenses





·
            Marketing
      commissions decreased $6.4 million in the first quarter of 2010 to $3.0
      million from $9.4 million in the first quarter of
      2009.  Commission expense related to new sales declined $4.2
      million directly related to the decline in the number of new ITC and PDS
      sales.  The average number of new sales for which we recognized
      a commission expense decreased to 1,089 in the first quarter of 2010
      compared to 4,964 in the first quarter of 2009.  At the same
      time, the average amount of recognized expense for each new sale decreased
      to $268.46 in 2010 compared to $370.29 in 2009.  As our new
      sales decline, the amount of leadership and dream bonuses paid also
      decreases which are included in the calculation to determine the average
      commission expense recognized on each new sale.  We also
      experienced a decrease of $2.2 million in commission expense relating to
      TSO and BO monthly renewal fees.  This is a direct result of the
      decline in the number of average active TSOs and BOs for the first quarter
      of 2010 compared to the same period in
2009.





·
            Travel
      and product commissions for the first quarter of 2010 decreased $275,000
      to $1.1 million from $1.4 million reported in the comparable quarter of
      2009.  The decrease in travel and product commissions is
      primarily 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 sale
      provider in 2010, in addition to an overall decline in the volume of
      travel due to current economic
conditions.





·
            Depreciation
      for the first quarter of 2010 decreased $202,000 to $456,000 from $658,000
      reported in the first quarter of 2009.  The decrease is
      primarily attributable to the sale of Company vehicles, excess computers,
      and the retirement of software that was not being
  utilized.





·
            Training
      programs and marketing materials expense decreased $480,000 to $143,000 in
      the first quarter of 2010 from $623,000 reported in the first quarter of
      2009.  The Company experienced a decrease in training material
      sales of $97,000 as a result of the elimination of the sales of magazines
      and a reduction in the number of new ITC and PDS sales compared to what we
      have experienced in the past.  The inventory reserve decreased
      $277,000 in the first quarter of 2010 compared to the same period in 2009,
      net of additions and disposals.   Fulfillment labor and
      freight decreased $131,000 in the first quarter of 2010 compared to the
      same period in 2009, directly related to the reduction of sales of
      magazines and sales aids and the creation of more online sales
      materials.





·
            General
      and administrative expenses decreased $6.0 million to $5.0 million in the
      first quarter of 2010 from $10.9 million in the same quarter of
      2009.  As a percentage of total net revenues, these expenses
      were 53.4% in the first quarter of 2010 and 51.1% in the first quarter of
      2009.  The decrease in general and administrative expense in
      2010 is primarily attributable to the costs associated with the reduction
      of new ITC and PDS sales and active TSOs and BOs.  The decreases
      year over year relate primarily to:





§
            Merchant
      processing fees decreased $252,000 directly related to the number of
      transactions processed by the Company, linked to the downturn in
      revenue.


§
            Accounting
      fees decreased $313,000 due to lower annual audit
  costs.


§
            Restricted
      stock amortization decreased $740,000 due to a decline in the Company’s
      stock price, a reduction in the number of restricted stock awards granted
      in 2010 compared to 2009 and first quarter forfeitures associated with
      restricted stock awards granted during the first quarter of
      2009.


§
            Legal
      settlement expense decreased $1.0 million due to an accrual for the legal
      settlement related to the suit filed by the California Attorney General’s
      Office in the first quarter of 2009 that was not repeated in the first
      quarter of 2010.


§
            Salaries
      and related benefits decreased $1.3 million due to the reduction in the
      home office staff.


§
            Legal
      fees decreased $1.5 million directly related to the reduction in defense
      costs associated with the suit filed by the California Attorney General’s
      Office.





BUSINESS
SEGMENTS





We
operate in the following two business segments:  Marketing and
Product.  Our business segments operate primarily in the United
States, but also have operations in Canada, Bermuda, and the Bahamas and are
structured for potential additional international growth.  The
“Parent” discussions include corporate items not specifically allocated to the
segments.




Prior to
the first quarter of 2010, the Company had reported in two operating segments,
Marketing and Travel.  With the launch of ZamZuu in January 2010, the
Company renamed the Travel segment to the Product segment since the commissions
received and paid on retail products purchased through the ZamZuu business
solution are processed by the YTB Travel subsidiary.


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


24


Marketing
Segment





Dollars in thousands
                  
                  Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %Increase
                    (Decrease)NET
      REVENUESITC
      and PDS sales and monthly fees
                  
                  $
                  6,939
                  
                  
                  $
                  18,608
                  
                  
                  $
                  (11,669
                  )
                  
                  
                  (62.7
                  )%Training
      programs and marketing materials
                  
                  
                  323
                  
                  
                  
                  445
                  
                  
                  
                  (122
                  )
                  
                  
                  (27.4
                  )%Other
                  
                  
                  24
                  
                  
                  
                  39
                  
                  
                  
                  (15
                  )
                  
                  
                  (38.5
                  )%Total
      net revenues
                  
                  
                  7,286
                  
                  
                  
                  19,092
                  
                  
                  
                  (11,806
                  )
                  
                  
                  (61.8
                  )%OPERATING
      EXPENSESMarketing
      commissions
                  
                  
                  2,960
                  
                  
                  
                  9,367
                  
                  
                  
                  (6,407
                  )
                  
                  
                  (68.4
                  )%Depreciation
      and amortization
                  
                  
                  241
                  
                  
                  
                  344
                  
                  
                  
                  (103
                  )
                  
                  
                  (29.9
                  )%Training
      programs and marketing materials
                  
                  
                  133
                  
                  
                  
                  601
                  
                  
                  
                  (468
                  )
                  
                  
                  (77.9
                  )%General
      and administrative
                  
                  
                  3,296
                  
                  
                  
                  7,430
                  
                  
                  
                  (4,134
                  )
                  
                  
                  (55.6
                  )%Total
      operating expenses
                  
                  
                  6,630
                  
                  
                  
                  17,742
                  
                  
                  
                  (11,112
                  )
                  
                  
                  (62.6
                  )%OPERATING
      INCOME
                  
                  $
                  656
                  
                  
                  $
                  1,350
                  
                  
                  $
                  (694
                  )
                  
                  
                  (51.4
                  )%





Net
Revenues





·
            ITC
      and PDS sales, along with monthly fees decreased $11.7 million to $6.9
      million in the first quarter of 2010 compared to $18.6 million in the
      comparable prior year quarter.  This decrease is attributable to
      the following:





§
            ITC
      and PDS sales revenue decreased $5.5 million in the first quarter of 2010
      to $1.0 million from the $6.5 million reported in the comparable prior
      year quarter.  We have experienced a decrease in the actual
      number of ITCs and PDSs sold for the three months ended March 31, 2010 to
      3,419 from 7,427 in the prior year period.   As a result,
      the average number of sales for which we were able to recognize revenue
      decreased to 1,089 in the first quarter of 2010 from 4,964 for the same
      period in 2009.  In addition, the average amount of recognized
      revenue from each new sale decreased to $354.44 in the first quarter of
      2010 from $443.62 in the comparable quarter in 2009 due to the
      introduction of the PDSs in the first quarter of 2010, which are sold for
      $249.95.  We believe the decline in the number of new ITC and
      PDS sales is mostly attributable to the current economic downturn present
      in the United States and Canada.  However, due to new marketing
      initiatives, enhanced/expanded services and the new focus on the ZamZuu
      business solution, we believe that we will see a stabilization of sales
      coupled with slower declines in attrition over the next
    year.





§
            Monthly
      renewal fees revenue decreased $6.0 million in the first quarter of 2010
      to $5.9 million from the $11.9 million reported in the comparable prior
      year quarter. The decrease is in direct relation to the number of active
      paying TSOs and BOs.  The weighted average of paying TSOs and
      BOs per month decreased from 79,022 for the three months ended March 31,
      2009 to 37,844 for the same period in 2010.  We anticipate a
      continued decline in the number of active paying TSOs and BOs in the
      coming months due to the general economic conditions in the United States
      and Canada.  However, due to new marketing initiatives,
      enhanced/expanded services and the new focus on the ZamZuu business
      solution, we believe that we will see a stabilization of sales coupled
      with slower declines in attrition over the next
  year.





·
            Training
      programs and marketing materials revenue decreased $122,000, in the first
      quarter of 2010 to $323,000 from $445,000 in the comparable prior year
      quarter.  The decrease was primarily due to a reduction of
      $65,000 in the sales of magazines, sales aids, and related shipping
      revenue, along with a reduction in the number of training events that the
      Company held resulting in a decrease of $57,000 in
      revenue.  These reductions in sales are primarily due to a
      decrease in the number of new ITC and PDS sales compared to what we have
      experienced in the past.   We expect this trend to
      stabilize in the coming months, due to the release of a new training
      program, RPM, which was released late in the third quarter of 2009, as
      well as new marketing initiatives aimed at the stabilization of our sales
      force.   Qualified representatives of the Company in
      various cities throughout the country teach RPM Training, which includes a
      complete study of all YTB products, how to sell them, and how to build a
      successful YTB business.


25


Operating
Expenses





·
            Marketing
      commissions decreased $6.4 million in the first quarter of 2010 to $3.0
      million from $9.4 million in the first quarter of
      2009.  Commission expense related to new sales declined $4.2
      million directly related to the decline in the number of new ITC and PDS
      sales.  The average number of new sales for which we recognized
      a commission expense decreased to 1,089 in the first quarter of 2010
      compared to 4,964 in the first quarter of 2009.  At the same
      time, the average amount of recognized expense for each new sale decreased
      to $268.46 in 2010 compared to $370.29 in 2009.  As our new
      sales decline, the amount of leadership and dream bonuses paid also
      decreases which are included in the calculation to determine the average
      commission expense recognized on each new sale.  We also
      experienced a decrease of $2.2 million in commission expense relating to
      TSO and BO monthly renewal fees.  This is a direct result of the
      decline in the number of average active TSOs and BOs for the first quarter
      of 2010 compared to the same period in
2009.





·
            Depreciation
      and amortization decreased $103,000 to $241,000 in the first quarter of
      2010 from $344,000 in the first quarter of 2009.   The
      decrease is primarily attributable to the sale of Company vehicles and
      excess computers.





·
            Training
      programs and marketing materials expense decreased $468,000 to $133,000
      from $601,000 reported in the first quarter of 2009.  The
      Company experienced a decrease in training material sales of $97,000
      directly affected by the elimination of the sales of magazines and a
      reduction in the number of new ITC and PDS sales compared to what we have
      experienced in the past.  The inventory reserve decreased
      $277,000 in the first quarter of 2010 compared to the same period in 2009,
      net of additions and disposals.  Fulfillment labor and freight
      decreased $131,000 in the first quarter of 2010 compared to the same
      period in 2009, directly related to the reduction of sales aids and
      magazine sales and the creation of more online sales
      materials.





·
            General
      and administrative expenses decreased $4.1 million to $3.3 million in the
      first quarter of 2010 from $7.4 million in the first quarter of
      2009.  As a percentage of total marketing net revenues, these
      expenses were 45.2% in the first quarter of 2010 and 38.9% in the first
      quarter of 2009. The decrease in general and administrative expense in
      2010 is primarily attributable to the costs associated with the reduction
      of ITC and PDS sales and active TSOs and BOs.  The decreases
      year over year relate primarily to:





§
            Merchant
      processing fees decreased $252,000 directly related to the number of
      transactions processed by the Company, linked to the downturn in
      revenue.


§
            Corporate
      allocation from the parent decreased $3.4 million due to the variances in
      the following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.





Product
Segment





Dollars in thousands
                  
                  Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  % Increase
                    (Decrease)NET
      REVENUESTravel
      and product commissions and services
                  
                  $
                  1,888
                  
                  
                  $
                  2,160
                  
                  
                  $
                  (272
                  )
                  
                  
                  (12.6
                  )%Training
      programs and marketing materials
                  
                  
                  7
                  
                  
                  
                  39
                  
                  
                  
                  (32
                  )
                  
                  
                  (82.1
                  )%Other
                  
                  
                  104
                  
                  
                  
                  81
                  
                  
                  
                  23
                  
                  
                  
                  28.4
                  %Total
      net revenues
                  
                  
                  1,999
                  
                  
                  
                  2,280
                  
                  
                  
                  (281
                  )
                  
                  
                  (12.3
                  )%OPERATING
      EXPENSESTravel
      and product commissions
                  
                  
                  1,139
                  
                  
                  
                  1,414
                  
                  
                  
                  (275
                  )
                  
                  
                  (19.4
                  )%Depreciation
      and amortization
                  
                  
                  22
                  
                  
                  
                  111
                  
                  
                  
                  (89
                  )
                  
                  
                  (80.2
                  )%Training
      programs and marketing materials
                  
                  
                  10
                  
                  
                  
                  22
                  
                  
                  
                  (12
                  )
                  
                  
                  (54.5
                  )%General
      and administrative
                  
                  
                  1,425
                  
                  
                  
                  1,875
                  
                  
                  
                  (450
                  )
                  
                  
                  (24.0
                  )%Total
      operating expenses
                  
                  
                  2,596
                  
                  
                  
                  3,422
                  
                  
                  
                  (826
                  )
                  
                  
                  (24.1
                  )%OPERATING
      LOSS
                  
                  $
                  (597
                  )
                  
                  $
                  (1,142
                  )
                  
                  $
                  545
                  
                  
                  
                  (47.7
                  )%


26




Net
Revenues




·
            Travel
      and product commissions and services revenue for the first quarter of 2010
      decreased $272,000 to $1.9 million from the $2.2 million reported in the
      comparable prior year quarter.  The decrease in travel and
      product commissions and services revenue 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
      sale provider in 2010.  In addition, general economic conditions
      have lowered the overall demand for
travel.





·
            Training
      programs and marketing materials revenue decreased $32,000 to $7,000 from
      $39,000 reported in the first quarter of 2009 due to temporarily
      suspending a program aimed at sharing travel commissions with certain
      non-profit organizations which eliminated the requirement for
      training.





·
            Other
      revenue increased in the first quarter of 2010 by $23,000 to $104,000 from
      $81,000 reported in the comparable prior year quarter.  This
      increase primarily results from the introduction of the shopYTB program,
      which was transitioned to ZamZuu, in the second quarter of 2009 which
      generated revenue of $117,000 during the first quarter of
      2010.





Operating
Expenses




·
            Travel
      and product commissions for the first quarter of 2010 decreased $275,000
      to $1.1 million from $1.4 million reported in the same comparable quarter
      of 2009.  The decrease in travel and product commissions is
      primarily 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 sale
      provider in 2010, in addition to an overall decline in the volume of
      travel due to current economic
conditions.





·
            Depreciation
      and amortization was $22,000 in the first quarter of 2010 compared to
      $111,000 in the corresponding quarter of 2009.  The decrease of
      $89,000 in depreciation and amortization is primarily attributable to the
      retirement of software that was not being
  utilized.





·
            Training
      programs and marketing material expense decreased $12,000 to $10,000 from
      $22,000 reported in the first quarter of 2009 due to the elimination of
      promotional items that were purchased in the first quarter of
      2009.





·
            General
      and administrative expenses decreased $450,000 to $1.4 million in the
      first quarter of 2010 from $1.9 million in the first quarter of
      2009.  As a percentage of total travel net revenues, these
      expenses were 71.3% in 2010 and 82.2% in 2009. The decrease year over year
      relates primarily to:





§
            Salaries
      and related benefits decreased $233,000 due to the reduction in the home
      office staff.


§
            Corporate
      allocation from the parent decreased $126,000 due to the variances in the
      following allocable expenses as explained in the parent discussion
      below:  legal fees, contract labor, accounting fees, consulting
      fees and restricted stock
amortization.





Parent





Dollars in thousands
                          
                          Three months ended March 31,2010
                          
                          
                          2009
                          
                          
                          Increase
                            (Decrease)
                          
                          
                          % Increase
                            (Decrease)NET
      REVENUESOther
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          n/m
                          *Total
      net revenues
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          n/m
                          *OPERATING
      EXPENSESDepreciation
      and amortization
                          
                          
                          193
                          
                          
                          
                          203
                          
                          
                          
                          (10
                          )
                          
                          
                          (4.9
                          )%General
      and administrative
                          
                          
                          239
                          
                          
                          
                          1,617
                          
                          
                          
                          (1,378
                          )
                          
                          
                          (85.2
                          )%Total
      operating expenses
                          
                          
                          432
                          
                          
                          
                          1,820
                          
                          
                          
                          (1,388
                          )
                          
                          
                          (76.3
                          )%OPERATING
      LOSS
                          
                          $
                          (432
                          )
                          
                          $
                          (1,820
                          )
                          
                          $
                          1,388
                          
                          
                          
                          (76.3
                          )%*Not
      meaningful


27





Operating
Expenses





·
            Depreciation
      and amortization was $193,000 in the first quarter of 2010 compared to
      $203,000 in the corresponding quarter of 2009.  The decrease in
      depreciation and amortization of $10,000 is primarily attributable to the
      fully amortized software in 2009 and the impairment and transfer of
      intangible assets to the Marketing and Product
  segments.





·
            General
      and administrative expenses, net of corporate allocation, decreased $1.4
      million to $239,000 in the first quarter of 2010 from $1.6 million in the
      first quarter of 2009.  The decreases year over year relate
      primarily to:





§
            Salaries
      and related benefits decreased $990,000 due to the reduction in the home
      office staff.


§
            Legal
      settlement expense decreased $1.0 million due to an accrual for the legal
      settlement related to the suit filed by the California Attorney General’s
      Office in the first quarter of 2009 that was not repeated in the first
      quarter of 2010.


§
            Due
      to the overall decrease in allocable expenses as individually discussed
      below, the corporate allocation to the segments decreased $3.5
      million.  Allocable expenses include contract labor, legal fees,
      accounting fees, consulting fees, restricted stock amortization and stock
      option expense.


·
            Contract
      labor decreased $240,000 primarily due to the elimination of numerous
      consultants and the conversion of consultants to full time
      employees.


·
            Accounting
      and audit fees decreased $313,000 due to decreased annual audit
      costs.


·
            Restricted
      stock amortization decreased $740,000 due to a decline in the Company’s
      stock price, a reduction in the number of restricted stock awards granted
      in 2010 compared to 2009 and first quarter forfeitures associated with
      restricted stock awards granted during the first quarter of
      2009.


·
            Legal
      fees decreased $1.5 million directly related to the reduction in defense
      costs associated with the suit filed by the California Attorney General’s
      Office.





Discontinued
Operations





The
results of the REZconnect subsidiary, formerly included in our Product segment,
are classified as discontinued operations.  Results of the business as
well as the loss on disposal are summarized below:





Dollars in thousands
                            
                            Three months ended March 31,2010
                            
                            
                            2009
                            
                            
                            Increase
                              (Decrease)
                            
                            
                            %Increase
                              (Decrease)NET
      REVENUES
                            
                            $
                            -
                            
                            
                            $
                            417
                            
                            
                            $
                            (417
                            )
                            
                            
                            (100.0
                            )%OPERATING
      EXPENSESTravel
      and product commissions
                            
                            
                            -
                            
                            
                            
                            294
                            
                            
                            
                            (294
                            )
                            
                            
                            (100.0
                            )%Training
      programs and marketing materials
                            
                            
                            -
                            
                            
                            
                            3
                            
                            
                            
                            (3
                            )
                            
                            
                            (100.0
                            )%General
      and administrative
                            
                            
                            -
                            
                            
                            
                            314
                            
                            
                            
                            (314
                            )
                            
                            
                            (100.0
                            )%Total
      operating expenses
                            
                            
                            -
                            
                            
                            
                            611
                            
                            
                            
                            (611
                            )
                            
                            
                            (100.0
                            )%OPERATING
      LOSS
                            
                            
                            -
                            
                            
                            
                            (194
                            )
                            
                            
                            194
                            
                            
                            
                            (100.0
                            )%OTHER
      INCOME
                            
                            
                            -
                            
                            
                            
                            2
                            
                            
                            
                            (2
                            )
                            
                            
                            (100.0
                            )%LOSS
      FROM OPERATIONS BEFORE INCOME TAX PROVISION
                            
                            
                            -
                            
                            
                            
                            (192
                            )
                            
                            
                            192
                            
                            
                            
                            (200.0
                            )%INCOME
      TAX PROVISION
                            
                            
                            -
                            
                            
                            
                            1
                            
                            
                            
                            (1
                            )
                            
                            
                            (100.0
                            )%INCOME
      FROM DISPOSAL, NET OF TAX
                            
                            
                            5
                            
                            
                            
                            -
                            
                            
                            
                            5
                            
                            
                            
                            n/mINCOME
      (LOSS) FROM DISCONTINUED OPERATIONS (NET OF TAX)
                            
                            $
                            5
                            
                            
                            $
                            (193
                            )
                            
                            $
                            198
                            
                            
                            
                            (102.6
                            )%*
      not meaningful


28





The
Company recorded net income from discontinued operations in the first quarter of
2010 of $5,000, a decrease in loss of $198,000 from a $193,000 net loss recorded
in the first quarter of 2009.  This decrease in net loss is due to the
disposal of the REZconnect subsidiary at the end of the second quarter of
2009.  See Note 11 – “Discontinued Operations” to the condensed
consolidated financial statements for further discussion.





Liquidity
and Capital Resources





Liquidity





As of
March 31, 2010, we had $1.0 million in cash.  Based on our current
cash flow budgets and forecasts of our short-term and long-term liquidity needs,
management believes that our projected sources of liquidity will be sufficient
to meet our projected liquidity needs for the next 12
months.  However, we cannot predict what the effect might be on our
business from events that are beyond our control, such as the recent global
credit and liquidity crisis.  Management will continue to assess our
liquidity position and potential sources of supplemental liquidity in view of
our operating performance, current economic and capital market conditions, and
other relevant circumstances.  We do not have, but are pursuing
establishing, a credit facility from which we may draw for our liquidity
needs.





As shown
in the accompanying condensed consolidated financial statements, our Company has
incurred losses from continuing operations for the first quarter of 2010 and
2009 of $428,000 and $1.7 million, respectively.  In addition,
negative current economic conditions and other factors have led to a falloff in
the number of active TSOs and BOs in our Company.  The number of
active TSOs and BOs has declined during the first quarter of 2010 by a net of
4,687 to 36,487 active TSOs and BOs as of March 31, 2010 from the 41,174
reported as of December 31, 2009.





The
Company is addressing the decline in new ITC and PDS sales and retention of
existing TSOs and BOs with the following key marketing and training
initiatives:





·
            Understanding
      that our customers today are more value oriented in their purchase
      decisions, we are expanding the “value” received in purchasing an ITC by
      bringing “in-house” our new ZamZuu initiative where TSOs can direct
      customers to shop for items they already purchase online and receive cash
      back on normal purchases of everyday items, as well as commissions on the
      purchase of featured specialty
products.





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





·
            We
      have expanded training of TSOs and BOs by providing them videos on how to
      conduct home “parties” to help sell the various featured
      products.





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





During
the first quarter of 2010, the Company’s primary domestic credit card processor
returned $300,000 of the reserve requirement reducing our restricted cash
balance from $2.6 million as of December 31, 2009 to $2.3 million as of March
31, 2010.





In
addition, the Company expended approximately $584,000 in legal defense costs
during the first quarter of 2009 that did not recur in the first quarter of 2010
and are not expected to continue into future periods.  However,
additional legal expenses will be incurred related to the civil action filed by
the State of Illinois, which the Company anticipates will be significantly lower
than those incurred in conjunction with the California Attorney General
suit.





The
Company sold its REZconnect subsidiary in the second quarter of
2009.  As a result, the Company expects to realize cash savings of
$2.4 million over the 5.5 years from the date of disposal based upon the cash
payments to be made under the employment severance agreement versus the cash
payments that would have been required under the original employment
contracts.  Thus, the cash savings over the 5.5 years from the date of
disposal will serve to contribute a significant savings in terms of liquidity,
helping to strengthen the Company’s position.  During the first
quarter of 2010, the cash savings recognized by the company was
$76,000.





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


29


The
Agreement renews the note executed in connection with the Loan, and subsequently
extended in July 2008 (the “Note”), in the new
amount of $1.9 million and extended the maturity of the Note and Loan to April
30, 2010.  The amount due under the Note bears an annual interest rate
of 8.0%.  We paid a principal installment of $300,000 on September 30,
2009.  A second additional principal installment for $200,000,
originally due and payable on December 31, 2009, was extended to January 31,
2010 then subsequently extended to April 29, 2010.  To date, the
Company has not made either of the $200,000 payment or the outstanding principal
balance of $1.6 million due April 30, 2010.  FH Partners has not given
the Company notice of its intention to accelerate the debt because of the
Company’s failure to make the $200,000 payment that was due April 29, 2010 or
the outstanding principal balance of $1.6 million that was due April 30,
2010.  In the event of default, as defined in the Note, FH Partners
has the right to declare the entire unpaid balance of principal and interest on
the Note due and payable.  All other terms of the Note and the Loan,
including the representations and warranties, remain unchanged.





In
connection with the execution of the agreement to extend to April 29, 2010 the
above-mentioned principal payment originally due on December 31, 2010, which the
Company entered into on April 22, 2010 (the “Extension”), the
Company assigned to FH Partners that certain Promissory Note made payable to the
Company in the amount of $500,000 by WR Landing, LLC (the “WR Landing Note”),
with a principal balance of $475,000 as of March 31, 2010, and all related
documents securing and relating to the WR Landing Note to secure the Note and
the Agreement, including that certain Mortgage dated November 24, 2008 securing
the WR Landing Note (collectively, the “WR Landing Collateral
Documents”).  The Extension provides that in the event the
Company pays to FH Partners the amount of $200,000 on or before the close of
business on April 29, 2010, FH Partners will return the WR Landing Note to the
Company and assign back to the Company all of the WR Landing Collateral
Documents.  In the event the Company does not pay $200,000 to FH
Partners on or before the close of business on April 29, 2010, on or after April
30, 2010, FH Partners shall only be obligated to return the WR Landing Note to
the Company and assign back to the Company all of the WR Landing Collateral
Documents in the event the Company pays in full all of its outstanding
indebtedness and obligations to FH Partners.  The extension provides
that after April 30, 2010, FH Partners will be entitled to pursue all of its
rights and remedies against the Company under or related to all security
agreements, mortgages and other documents or instruments executed in connection
with or securing the Company’s indebtedness to FH Partners, including pursuant
to the Extension.





The
outstanding balance of the Note as of March 31, 2010 and December 31, 2009 was
$1.6 million.  The Company is currently in negotiations with the
lender to renew the Note.  Management believes that the Company will be
successful in renewing the Note, however, there can be no assurance that
negotiations will be successful.  Management is also exploring other
alternative methods of financing to replace or supplement its current
facility.





On
December 16, 2008, we entered into a contract for deed with an unaffiliated
third party, (the “Purchaser”), to sell
an administrative facility located at One Country Club View Drive, Edwardsville,
Illinois, (the “Building One
Property”) for the price of $1.5 million.  As of the contract
date, we received from the Purchaser the sum of $300,000 and will receive the
remaining $1.2 million subject to a promissory note signed in connection with
the subject contract for deed within 18 months and not later than June 16,
2010.





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


30


Cash
Flow Data





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





Three months ended March 31,Dollars in thousands
                          
                          2010
                          
                          
                          2009Net
      cash provided by (used in):Operating
      activitiesContinuing
                          
                          $
                          (301
                          )
                          
                          $
                          (248
                          )Discontinued
                          
                          
                          -
                          
                          
                          
                          182Total
      operating activities
                          
                          
                          (301
                          )
                          
                          
                          (66
                          )Investing
      activitiesContinuing
                          
                          
                          17
                          
                          
                          
                          776Discontinued
                          
                          
                          -
                          
                          
                          
                          (52
                          )Total
      investing activities
                          
                          
                          17
                          
                          
                          
                          724Financing
      activitiesContinuing
                          
                          
                          643
                          
                          
                          
                          (25
                          )Discontinued
                          
                          
                          -
                          
                          
                          
                          -Total
      financing activities
                          
                          
                          643
                          
                          
                          
                          (25
                          )Effect
      of exchange rate changes on cash
                          
                          
                          4
                          
                          
                          
                          (30
                          )Net
      increase in cash
                          
                          $
                          363
                          
                          
                          $
                          603





Net cash
used in operating activities of our continuing operations in the first quarter
of 2010 was $301,000 compared to $248,000 in the first quarter of
2009.  In addition, the operating activities of our discontinued
operations used $0 of cash in the first quarter of 2010 and provided $182,000 in
the same period of 2009.





Net cash
provided by investing activities of our continuing operations was $17,000 during
the first quarter of 2010 compared to $776,000 in the first quarter of
2009.  This $759,000 decrease in cash provided was primarily related
to $872,000 in proceeds received from the sale of assets held for sale resulting
from the sale of the Company’s business jet in the first quarter of 2009 for
$872,000, net of $28,000 in closing costs, partially offset by the decrease in
purchases of property and equipment of $38,000.  In addition, the
investing activities of our discontinued operations used $52,000 of cash in the
first quarter of 2009 compare to $0 in the first quarter of 2010.





Net cash
provided by financing activities of our continuing operations was $643,000 for
the first quarter of 2010 compared to $25,000 in cash used by financing
activities for the prior year quarter.  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
provided in the first quarter of 2010 of $643,000 was primarily the result of
proceeds from new short-term debt the Company acquired in January
2010.





New
Accounting Guidance





See Note
2 – “Basis of Presentation” to condensed consolidated financial statements for
information regarding new accounting guidance.





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, 2009 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, 2009.


31





Item
      3.
            Quantitative and
      Qualitative Disclosures About Market
  Risk.





Not
applicable.





Item
      4.
            Controls and
      Procedures.





Disclosure controls and procedures.Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) of YTB
International, Inc. at the end of the period covered by this report. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, at the end of such period, our disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, on a timely basis, and is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.





Changes in Internal Control over
Financial Reporting.No change in our internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) or
15d-15(f)) occurred during the period covered by this quarterly report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





PART
II - OTHER INFORMATION





Item 1.
            Legal
      Proceedings.




Refer to
Note 14 – “Commitments and Contingencies” to the unaudited condensed
consolidated financial statements included in this Form 10-Q for a description
of the Company’s current material legal proceedings.





Item 1A.
            Risk
      Factors.





For a discussion of the Company’s risk
factors, see the information under the heading “Risk
Factors” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009, filed with the
SEC on April 14, 2010.  The risks described therein are not the only
risks facing our Company.  Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.





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





None.





Item 3.
            Defaults Upon Senior
      Securities.





None.





Item 4.
            [Removed and
      Reserved.]


32


Item 5.
            Other
      Information.





(a)
            None.





(b)
            There
      have been no material changes to the procedures by which security holders
      may recommend nominees to the Company’s Board of Directors implemented in
      the period covered by this report.





Item
6. Exhibits





10.1
              
              Master
      Distributor Letter of Understanding adopted April 6, 2010 by and between
      J. Lloyd Tomer and YTB International, Inc.10.2
              
              Compensation
      Modification adopted April 6, 2010 by and between J. Scott Tomer and YTB
      International, Inc.10.3
              
              Commercial
      Promissory Note by and between YTB International, Inc. and Normandy
      Corporation dated January 20, 2010 (incorporated by reference to Exhibit
      10.31 to the Company’s 2009 Annual Report on Form 10-K filed with the SEC
      on April 14, 2010).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.


33


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





YTB
      International, Inc./s/ Robert M. Van PattenRobert
      M. Van PattenChief
      Executive Officer, Interim Chief Financial Officer,President
      and DirectorDated:   May
      17, 2010


34