UBET Youbet.Com (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-26015

YOUBET.COM, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4627253
(State of incorporation)		(I.R.S. employer identification no.)
2600 West Olive Avenue, 5 th floor, Burbank, CA. 91505		91505
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (818) 668-2100

Securities registered under Section 12(b) of the Act:
Common Stock, par value $.001 per share

Securities registered under Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 þ No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2008) was approximately $38.1 million based on the closing sale price of $1.27 as reported on the NASDAQ Capital Market on June 30, 2008.

As of December 31, 2008, there were 41,463,470 shares of common stock, $.001 par value per share, outstanding (net of treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference in Part III of this report.

 

 

Explanatory Note

Youbet.com, Inc. (“we,” “us,” “our,” “Youbet” or the “Company”) is filing this amendment (this “Amendment”) to our Annual Report on Form 10-K for the year ended December 31, 2008 (our “Annual Report”) to voluntarily revise our disclosures in response to comments received from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) in connection with the Staff’s review of our Annual Report. We are filing this Amendment at this time because our Annual Report is incorporated by reference into the proxy statement/prospectus contained in the Registration Statement on Form S-4 filed with the SEC by Churchill Downs Incorporated (“Churchill Downs”) on December 24, 2009 in connection with the proposed merger between Youbet and Churchill Downs.

We are only filing the items of our Annual Report that have been revised in response to the Staff’s comments and all other information in our Annual Report remains unchanged, except for the correction of certain typographical errors. Accordingly, this Amendment should be read in conjunction with our Annual Report. Unless otherwise provided, all information contained in this Amendment is as of March 6, 2009, the original filing date of our Annual Report. This Amendment does not reflect events that have occurred after the filing of the Annual Report and does not modify or update the disclosure therein in any way other than as required to reflect the matters set forth herein.

The only changes to our Annual Report are in Item 1 — “Business,” Item 6 — “Selected Consolidated Financial Data,” Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the financial statements filed as part of Items 8 and 15. In Item 1, the only changes were to expand certain disclosures in the Research and Development and Competition sections. In Item 6, the only changes were the correction of certain typographical errors. In Item 7, the only changes were to (i) expand discussion of segment reporting in the overview section, (ii) expand disclosure in the results of operations and liquidity and capital resources sections, (iii) expand the contractual obligations table and (iv) add additional disclosure to the critical accounting estimates and policies section. The remainder of Items 1 and 7 are unchanged by this Amendment, except for the correction of certain typographical errors.

The financial statements included in Item 15 have been modified solely to (i) expand the discussion of revenue recognition and stock-based compensation in Note 2, (ii) clarify the discussion of net operating loss carry forwards in Note 10, (iii) expand the discussion of segment reporting in Note 15 and (iv) correct certain typographical errors.

Pursuant to the Rule 12b-15 of the Securities Exchange Act of 1934, currently dated certifications from our principal executive and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, are filed or furnished herewith, as applicable.

Cautionary Statement

This annual report on Form 10-K/A contains forward-looking statements which include, but are not limited to, statements concerning expectations as to our revenues, expenses, and net income, our growth strategies and plans, our assessment of strategic alternatives for United Tote, including a possible sale, as to which there can be no assurance of success, the timely development and market acceptance of our products and technologies, the competitive nature of and anticipated growth in our markets, our ability to achieve further cost reductions, the status of evolving technologies and their growth potential, the adoption of future industry standards, expectations as to our financing and liquidity requirements and arrangements, the need for additional capital, and other matters that are not historical facts. These forward-looking statements are based on our current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by it. Words such as “anticipates”, “appears”, “expects”, “intends”, “plans”, “believes, “seeks”, “estimates”, “may”, “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements, which are included in accordance with the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from those results expressed in any forward-looking statements, as a result of various factors, some of which are listed under Item 1A “Risk Factors” of our Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

YOUBET.COM, INC.
INDEX TO FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 2008

		Page
PART I.
Item 1. Business			4
PART II.
Item 6. Selected consolidated financial data			10
Item 7. Management’s discussion and analysis of financial condition and results of operations			12
Item 8. Financial statements and supplementary data			27
PART IV.
Item 15. Exhibits and financial statement schedules			27
Signatures			30
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

ITEM 1.		BUSINESS

Business Overview

We are a diversified provider of technology and pari-mutuel horse racing content for consumers through Internet and telephone platforms, and a leading supplier of totalizator systems, terminals and other pari-mutuel wagering services and systems to the pari-mutuel industry. Youbet Express is a leading online advance deposit wagering (“ADW”) company focused on horse racing primarily in the United States.

Our website, www.youbet.com , enables our customers to securely wager on horse races at over 150 racetracks worldwide from the convenience of their homes or other locations. Our customers receive the same odds and expected payouts they would receive if they were wagering directly at the host track and their wagers are commingled with the host track betting pools.

We appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop” experience. To place a wager, customers open an account and deposit funds with us via several convenient options, including our ExpressCash system, which links our customers’ wagering accounts directly to their personal checking accounts. To enable our customers to make informed wagers, we provide 24-hour access to up-to-the-minute track information, real-time odds and value-added handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality, live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our player service agents, who are available 15 hours a day, seven days a week to provide technical support and address any wagering or funding questions.

Our content partners provide us the same live satellite feeds that they normally broadcast at the track and to off-track betting facilities (“OTBs”). As a result, our partners have the opportunity to increase the total handle wagered on their racing signal, which we believe leads to higher revenues for the host track and a higher quality of racing through larger purses for the horse owners. In return, we receive a commission, or a percentage of the wager (handle) processed through Youbet Express.

We acquired United Tote Company in February 2006. United Tote is a leading supplier of totalizator systems (equipment and technology that processes wagers and payouts). United Tote supplies pari-mutuel tote services to approximately 100 racing facilities in North America and additional facilities in a number of foreign markets. As a result of this acquisition, we now operate two business segments for financial accounting purposes, ADW and totalizator systems. For more information, see Note 15 “Segment Reporting” in our consolidated financial statements at the end of this report.

We were incorporated in Delaware on November 13, 1995. Our executive offices are located at 2600 West Olive Avenue, 5th floor, Burbank, Ca. 91505 and our telephone number is (818) 668-2100. Our website address is www.youbet.com .

Industry Overview

According to The Jockey Club, which is the breed registry for all thoroughbred horses in North America, total U.S. handle on thoroughbred racing, the most popular type of horse racing, was estimated at approximately $13.6 billion in 2008, of which 89% represented wagers made away from the host track, such as at OTBs, at other tracks, or via Internet and telephone wagering. We believe that the ADW segment has outpaced overall pari-mutuel industry growth in recent years and that the largest volume of ADW wagers in the U.S. were processed through entities licensed as multi-jurisdictional ADW wagering hubs.

In 2000, the United States Congress amended the Interstate Horseracing Act of 1978 to clarify the legality of wagering across state lines via telephone or other electronic media and the commingling of pari-mutuel wagering pools.

In the fourth quarter of 2006, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006, which includes certain racing protective provisions by maintaining the status-quo with respect to wagering activities covered under the Interstate Horseracing Act of 1978, as amended. This Act prohibits the acceptance of credit cards, electronic funds transfers, checks, or the proceeds of other financial transactions by persons engaged in unlawful betting or wagering businesses; however, the Act specifically excludes from the definition of unlawful Internet gambling “any activity that is allowed under the Interstate Horseracing Act of 1978”. On November 12, 2008, the Department of Treasury and Federal Reserve Board jointly published the final rule (the “UIGEA Rule”) implementing the Unlawful Internet Gambling Enforcement Act of 2006.

Competitive Advantages

We are a leading ADW company focused on horse racing primarily in the U.S. and have processed over $2.1 billion in wagers from January 1, 2004 to December 31, 2008. We believe we have the following competitive advantages:

Extensive customer database and strong analytical capability

We utilize sophisticated data mining software, which generates detailed customer segmentation analyses based on variables such as wagering propensities and preferences. With this information, we are able to personalize our product offerings through targeted special offers, contests and promotions tailored to specific customer segments. This information also helps us maximize revenue yield by allowing us to target promotions and incentives to wagers on tracks that generate greater revenue yield to us.

Highly scalable infrastructure

Our highly scalable technological infrastructure and automated online and telephonic wagering platform provide us with significant operating leverage. We typically operate at less than 33% of system capacity. This built-in excess capacity enables us to easily process significantly greater wagering volume at a low incremental cost. Additionally, we continuously build automation into our core online and interactive voice recognition wagering platform in order to minimize our incremental staffing requirements. With this operating leverage, we are well-positioned to capitalize on handle growth to increase earnings.

Growth Strategies

We aim to maintain our strong position in the ADW segment and build upon the strength of our brand. We have adopted the following key growth strategies to achieve these objectives:

Continue to develop high-quality wagering products

We intend to continue to develop industry-leading technology and to expand the diversity and breadth of our product offerings and services. We believe this will translate into a more enjoyable customer experience, and as a result, we believe our customers will place a greater portion of their wagering dollars through us.

Seek additional content

We intend to continue to seek access to additional domestic content for our customers to view and to wager on. We also hope to enter into additional content agreements with international racing and gaming entities, which will provide our customers with a more diverse array of content to view and to wager on. In 2008, we derived less than 5% of our handle from races outside of the U.S. and Canada.

Expand geographic presence

We intend to seek opportunities in the U.S. and abroad to leverage our highly scalable online and telephone wagering platforms and to diversify our customer base, revenue streams and content. We hope to increase our penetration of the international market by entering into content and technology agreements with international racing and gaming entities that will enable us to expand our customer base internationally.

Expansion into new gaming opportunities

International jurisdictions permit a broader array of wagering activities than the U.S., including fixed-odds sports betting. We believe that, with modifications, our robust operating platform can be adapted to facilitate such international opportunities.

Leverage our flexible wagering platform to provide online solutions for track operators and other gaming companies

Only a limited number of track operators currently operate a website that accepts ADW wagers. If track operators or other gaming companies decide to enter the online ADW segment, our experience and technological leadership make us highly qualified to assist in building and supporting such websites. In addition, with our technologically advanced, highly scalable and flexible online platform and our excess capacity, we are well-positioned to provide the technological infrastructure for the online initiatives of track operators or other gaming companies.

Revenue Sources

For each pari-mutuel wager placed by our customers, we receive a commission calculated as a percentage of the wager. In the aggregate, these commissions represented approximately 76% of our total revenue for 2008. We generate additional revenue primarily from processing fees, monthly subscription fees and the sale of handicapping information.

United Tote revenue is derived from contractual arrangements for the supply, installation, operation, servicing and maintenance of totalizator systems at pari-mutuel facilities, including horse and dog racing tracks. This revenue is supplemented by sales and licensing of supplies, software and equipment used by the facilities.

Marketing

Using a variety of media channels, consisting primarily of online marketing and search engine optimization, supported by tactical print and radio advertising and complimented by brand placement through our track partners, media and promotions channels, we focus our integrated marketing efforts on targeted marketing to horse racing enthusiasts. An integrated marketing approach allows us to cycle a series of targeted messages and promotions centered on key product features, differentiators, benefits, key content, online tournaments and contests, and event-specific promotions. A complimentary strategy, implemented in 2008, includes design and content modifications to the Youbet.com website aimed at increasing its prominence in natural search results in order to drive new customers to the website.

Our marketing campaigns and customer retention strategies are supported with customer research and analysis and are intended to satisfy the needs of existing customers and drive new customers to Youbet Express ^SM . We frequently initiate communication with our customers via phone, email and online channels. One-to-one messaging through the Youbet Express ^SM platform allows us to tailor dynamic personalized messages and offers to our members based on their wagering propensity, preferences and frequency of visitation.

Acquisitions and Dispositions

Acquisition of United Tote

In February 2006, we completed the acquisition of United Tote for $31.9 million plus the assumption of approximately $14.7 million of United Tote debt (primarily related to the financing of equipment that had been placed with United Tote’s track customers). We financed the acquisition by delivering to UT Group, LLC, United Tote’s former owner, approximately $9.7 million in cash, an aggregate of $10.2 million in unsecured promissory notes and 2,181,818 shares of Youbet common stock, valued at $5.50 per share.

The Youbet shares issued to UT Group were subject to a “make-whole” provision pursuant to which we agreed to pay to UT Group a one-time cash payment equal to the amount by which $5.50 exceeds the average trading price of our common stock for the five trading-day period ending on February 9, 2007, multiplied by the number of shares delivered by us and then held by UT Group. In addition, we were entitled to cause UT Group to sell some or all of the Youbet shares on or before February 9, 2007, if the trading price was below $5.50 per share, provided that we paid to UT Group the make-whole amount within ten trading days of the sale. On January 23, 2007, we delivered notice exercising our right to force the sale of UT Group’s 2,181,818 shares of Youbet common stock. On January 24, 2007, all 2,181,818 shares were sold for $3.45 per share, which sale closed on January 29, 2007, and we paid UT Group the aggregate make-whole payment of $4.5 million.

For more information regarding the promissory notes issued to UT Group, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We have streamlined the operations of United Tote and, as previously announced, we are continuing to evaluate strategic alternatives for this segment of our business, including a possible sale.

Disposition of Bruen Productions

In October 2006, Youbet acquired privately-held Bruen Productions International, Inc. We funded the acquisition with common stock held in treasury, payable in four installments over three years, and the assumption of approximately $0.2 million of debt. Youbet delivered 13,953 shares of common stock in October 2006 as the first installment. As of December 31, 2007, we sold Bruen Productions back to the original owner in exchange for return of the delivered shares, termination of future stock obligations and cash. The decision to sell the Bruen Productions was reached after management concluded that Bruen Productions was not a core business for Youbet, and that the sale would free up management resources to focus on our ADW platform and totalizator services. For more information regarding the sale of Bruen Productions, see Note 17 “Discontinued Operations” in our consolidated financial statements at the end of this report.

Shutdown of IRG

As further described in Item 3 “Legal Proceedings,” the International Racing Group (“IRG”) business was adversely impacted by a severe reduction in wagering activity following the commencement of an investigation involving the IRG business by the U.S. Attorney’s Office in Las Vegas, Nevada. Accordingly, on February 15, 2008, we stopped taking wagers and ceased all other operations associated with its business. In connection with the IRG shutdown, we surrendered IRG’s license with the Oregon Racing Commission (“ORC”). For more information regarding the discontinued operations of IRG, see Note 17 “Discontinued Operations” in our consolidated financial statements at the end of this report.

Research and Development

Expenses

During 2008, 2007 and 2006, we spent approximately $4.5 million, $4.4 million and $4.1 million, respectively, on research and development activities, including capitalized expenses of $1.1 million, $0.5 million and $1.1 million in 2008, 2007 and 2006, respectively.

New Products

We have made important investments in product development areas focused on meeting our customers’ needs. A number of these improvements were released in the fourth quarter of 2008 rolling into 2009. These developments include “experience” related modification such as enhancing the video streaming quality with higher resolution and speed, through implementation of Flash video. This improvement will allow our customers who use Apple’s Mac products to enjoy our streaming service for the first time. We have created other key wagering and analytic tools including “myROI”, a “return on investment” tool to help customers identify and reproduce their greatest areas of success. Additionally, we have launched tools to enhance the wagering experience, leveraging conditional logic and key improvements to our Wager Queue Pro offerings. We have also developed a number of key new promotional capabilities to improve trial and conversion as well as rebuilding and revising our referral program offering, which provides incentives for our customers to invite their friends to join the Youbet.com family.

In 2008, we began providing a co-branded product for a group of four racetracks in Illinois, pursuant to a co-branding agreement with those racetracks which provides for the sharing of the revenue and expenses associated with wagers placed by Illinois customers. The co-branded product provides virtual off-track betting systems and services to customers, including, but not limited to, information regarding horse races enabling customers to transmit wagering instructions on horse races via a Website. This is accomplished through the creation of dynamic pages with a specific URL address to enable visitors and customers to use the service.

Pursuant to the terms of the co-branding agreement, we provide ADW services, including an Internet platform and customer service representatives, and retain a share of the net revenue (commissions less associated direct costs) generated from related wagering and handicapping activity. All revenue and expenses associated with the co-branding agreement are captured and accounted for in the same manner as revenue and expenses associated with our operations for customers outside of Illinois, with the exception that the co-branded product transactions are segregated into a separate profit center. At each month end, we prepare a separate profit and loss analysis for the co-branded product to determine the net revenue generated and remit to the tracks a percentage of the net revenue, which is similar to a source market fee. We account for the amount remitted to the group of race tracks as a track fee in our statement of operations, which reduces our gross profit and Youbet Express yield, as described in more detail under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition

Web-based interactive gaming and wagering is a new and rapidly changing marketplace. We anticipate competition will become more intense as many web-based ventures focus on the gaming industry. Management believes that we are well-positioned to compete with these entities, as well as other established gaming companies seeking to enter the interactive, pari-mutuel gaming market.

Our primary competitors in the domestic interactive pari-mutuel wagering market include ODS Technologies, L.P. and ODS Properties, Inc., collectively doing business as TV Games Network (“TVG”), Churchill Downs Technology Initiatives Company, doing business as TwinSpires (“Twinspires”), and XpressBet, Inc. (“XpressBet”). We do, however, compete with a host of other interactive and off-track pari-mutuel wagering firms on a national, regional, and local level.

TVG currently accepts wagers from customers in 15 states. TVG is a 24-hour national horse racing channel broadcast over cable and satellite. In January 2009, Betfair Group Ltd., a gaming company based in the United Kingdom (“Betfair”), purchased TVG from Macrovision Solutions Corporation.

Twinspires is an ADW platform owned by Churchill Downs Incorporated (“Churchill Downs”). Aside from its namesake track, where the Kentucky Derby is held, Churchill Downs also owns and operates Arlington Park, Calder Race Course and Fair Grounds Race Course.

XpressBet is an ADW platform owned by Magna Entertainment Corp. (“Magna”). Magna owns and operates horse racetracks throughout North America, including Santa Anita Park, Gulfstream Park, Golden Gate Fields and Pimlico Race Course, where The Preakness Stakes is held. Magna also owns AmTote International, Inc., which is a provider of totalizator services.

In March 2007, Magna and Churchill Downs announced that they had formed a joint venture called TrackNet Media Group LLC (“TrackNet”) through which the companies’ horse racing content would be available to each other’s various distribution platforms, including XpressBet and Twinspires, as well as third parties, including racetracks, casinos and other ADW providers. TrackNet also purchases horse racing content to make available through its partners’ respective distribution platforms. Magna and Churchill Downs also jointly own Horse Racing Television.

In 2007 and 2008, we were unable to carry a significant portion of TrackNet content due to the failure to successfully negotiate an agreement with TrackNet, as well as the impact on the distribution of content stemming from disputes among tracks, ADWs, and a number of horsemens’ groups that have consent rights under the Interstate Horse Racing Act of 1978 (“IHA”). We have had an agreement with TrackNet to carry all of its content since the end of 2008 and anticipate being able to continue to carry that content in the future, although the agreement with TrackNet, like all our agreements with content providers, is subject to cancellation by TrackNet at any time. In addition, we may not be able to arrange to carry such content in the future, as any such arrangement is subject to contractual negotiations and the consent of the relevant horsemens’ groups and racing commissions pursuant to the IHA and applicable state law.

Other competitors include, but are not limited to, Elite Turf Club, Racing & Gaming Services, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, AmWest Entertainment, New Jersey Account Wagering, The New York Racing Association, Connecticut OTB, Sol Mutuel Limited, Royal River Racing, Premier Turf Club, Penn National Gaming, Inc., Day at the Track, Inc., and Racing2Day LLC.

According to The Jockey Club, total North American handle on thoroughbred racing, the most popular type of horse racing, was estimated at approximately $14 billion in 2008, of which 89% was wagered away from the host track, such as at OTBs, at other tracks, or via Internet and telephone wagering. Our thoroughbred handle in 2008 was approximately $325 million or 2.5% of North American thoroughbred handle.

We believe potential new domestic and international competitors looking to enter the interactive wagering marketplace may include the tracks themselves, off-track betting parlors, large established interactive and online software companies, media companies and domestic and international gaming companies. Our business strategies may be influenced by the timing of a competitor’s product releases and the similarity of such products to our products. Additional competition may result in significant pressure on our pricing and profit margins.

United Tote competes primarily on the basis of the design, performance, reliability and pricing of our products as well as contract services provided. To effectively compete, we expect to make continued investments in product development and/or acquisitions of technology. Our two principal competitors in this business segment are AmTote International, Inc. (owned by Magna) and Scientific Games Corporation. Our competition outside of North America is more fragmented, with competition also being provided by several international and regional companies.

Government Regulation and Legislation

Current licensing

In June 2008, the Oregon Racing Commission (“ORC”) approved Youbet’s application to renew for one year our multi-jurisdictional simulcast and interactive wagering totalizator hub license to accept and place online and telephone horse racing pari-mutuel wagers. Also, in June 2008, the Washington Horse Racing Commission approved Youbet’s application to renew for one-year our ADW license to accept and place online and telephone horse racing and pari-mutuel wagers.

In November 2008, the Idaho State Racing Commission approved Youbet’s application to renew for one year our multi-jurisdictional simulcast and interactive wagering totalizator hub license to accept and place online and telephone horse racing and pari-mutuel wagers.

In December 2008, the California Horse Racing Board renewed our in-state and out-of-state ADW licenses through the end of 2009. Also, in December 2008, the Virginia Racing Commission approved Youbet’s application to renew for our license to accept and place online and telephone horse racing pari-mutuel wagers through the end of 2009.

We intend to apply for renewal of each of the licenses described above and, at this time, we have no reason to believe that these licenses will not be renewed.

Other government regulation and licensing

Gaming activities are subject to extensive statutory and regulatory control by federal, state and foreign agencies and could be significantly affected by any changes in the political climate and changes to economic and regulatory policies. These changes may impact our operations in a materially adverse way. Our facilities are used by customers to place wagers and we receive commissions derived from such wagers; therefore various statutes and regulations could have a direct and material impact on our business and on the public demand for our products and services.

For a description of pertinent federal legislation, see “Industry Overview.”

From time to time, we receive correspondence from various governmental agencies inquiring into the legality of our activities. We believe that our activities conform to those federal and state laws and regulations applicable to our activities. However, we face the risk of either civil or criminal proceedings brought by governmental or private litigants who disagree with our interpretation of the applicable laws and therefore, we are at risk of losing such lawsuits or actions and may be subject to significant damages or civil or criminal penalties.

A number of states have enacted, considered or are considering interactive and Internet gaming legislation and regulations which may inhibit our ability to do business in such states or reduce the profitability of doing business in such states, and anti-gaming conclusions and recommendations of other governmental or quasi- governmental bodies could form the basis for new laws, regulations and enforcement policies that could have a material adverse impact on our business.

Any expansion into international markets may subject us to additional regulation in those countries into which we expand.

Seasonality and Backlog

Our business segments are subject to seasonal fluctuations in demand associated with racing schedules. The first and fourth quarters of the calendar year traditionally comprise the weakest seasons for our pari-mutual wagering business. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. This adversely affects the amounts wagered and the corresponding service revenues. Due to the services we provide, we do not experience a material backlog in sales orders or the fulfillment of client services.

Employees

As of December 31, 2008, we had a total of 326 employees, all of whom were full-time employees. We have never had a work stoppage. Fifteen of our United Tote employees as of December 31, 2008, were represented by a labor union. We consider our relations with our employees and the union that represents some of our employees to be good.

Available Information

Our internet website address is http://www.youbet.com . We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or otherwise furnished to, the SEC.

ITEM 6.		SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.

		Years ended December 31,
		2008 (1)				2007 (2)				2006 (3)				2005 (4)				2004
		(in thousands, except per share data)
Statement of Income Data
Revenues		$	109,028			$	122,494			$	114,594			$	82,366			$	65,249
Operating costs			114,193				133,867				118,161				78,601				63,868
Income (loss) from continuing operations before income tax (benefit)			(5,165	)			(11,373	)			(3,567	)			3,765				1,381
Income tax (benefit)			658				2,814				734				(1,854	)			(3,250	)
Income (loss) from continuing operations			(5,823	)			(14,187	)			(4,301	)			5,619				4,631
Income (loss) from discontinued operations (5)			1,372				(14,231	)			2,270				72				—
Net income (loss)		$	(4,451	)		$	(28,418	)		$	(2,031	)		$	5,691			$	4,631
Earnings (loss) per share:
Basic
Income (loss) from continuing operations		$	(0.14	)		$	(0.34	)		$	(0.12	)		$	0.18			$	0.16
Income (loss) from discontinued operations (5)		$	0.03				(0.34	)			0.06				0.00				0.00
Net income (loss)		$	(0.11	)			(0.68	)			(0.06	)			0.18				0.16
Diluted
Income (loss) from continuing operations		$	(0.14	)		$	(0.34	)		$	(0.12	)		$	0.16			$	0.14
Income (loss) from discontinued operations (5)		$	0.03				(0.34	)			0.06				0.00				0.00
Net income (loss)		$	(0.11	)			(0.68	)			(0.06	)			0.16				0.14
Selected Balance Sheet Data
Cash and cash equivalents		$	16,538			$	6,551			$	21,051			$	16,686			$	13,287
Working capital (deficit)			(771	)			(14,300	)			5,019				12,015				8,876
Total assets			48,880				65,050				105,605				40,829				25,442
Current portion of long-term debt			8,704				10,390				8,311				620				391
Long-term debt, net of current portion			3,996				4,767				12,054				178				158
Stockholders’ equity			16,843				19,981				52,774				22,884				14,098

Selected Unaudited Quarterly Results of Operations

In the opinion of management, the accompanying unaudited quarterly financial information presented below includes all adjustments which management considers necessary to present fairly the results of its operations for the periods presented below in conformity with accounting principles generally accepted in the United States of America. This quarterly financial information has been prepared consistently with the accounting policies described in the accompanying audited consolidated financial statements for the year ended December 31, 2008. The results of operations for the periods presented below are not necessarily indicative of the results of operations to be expected in the future.

		Fiscal quarters ended
		2008																2007
		Mar. 31				Jun. 30				Sep. 30				Dec. 31				Mar. 31				Jun. 30				Sep. 30				Dec. 31
		(in thousands, except per share data)
Revenues		$	24,511			$	29,239			$	29,318			$	25,960			$	28,592			$	33,274			$	33,392			$	27,236
Costs and expenses
Track fees			8,277				10,199				10,599				10,228				10,261				11,017				9,774				8,194
Licensing fees			2,098				2,378				2,482				2,166				2,823				5,617				6,991				4,379
Network operations			925				983				985				1,035				1,203				1,234				1,079				1,048
Contract costs			3,536				3,859				3,906				3,493				3,760				4,305				4,258				4,261
Cost of equipment sales			88				142				159				77				88				121				189				31
			14,924				17,561				18,131				16,999				18,135				22,294				22,291				17,913
Gross profit			9,587				11,678				11,187				8,961				10,457				10,980				11,101				9,323
Operating expenses
General and administrative			4,198				4,983				3,633				4,938				5,004				4,429				4,342				7,385
Sales and marketing			1,243				1,160				1,351				1,519				2,141				3,598				2,173				2,097
Research and development			862				934				796				838				865				826				925				1,331
Depreciation and amortization including intangibles			1,806				1,972				2,197				2,099				1,618				2,149				2,820				2,530
Impairment writedowns (1)			—				—				—				11,212				—				—				—				8,000
			8,109				9,049				7,977				20,606				9,628				11,002				10,260				21,343
Income (loss) from continuing operations			1,478				2,629				3,210				(11,645	)			829				(22	)			841				(12,020	)
Interest expense, net			(285	)			(270	)			(223	)			(233	)			(258	)			(377	)			(223	)			(296	)
Other income (expense)			9				(73	)			101				137				11				8				30				104
Income (loss) from continuing operations before income tax (benefit)			1,202				2,286				3,088				(11,741	)			582				(391	)			648				(12,212	)
Income tax (benefit)			19				57				286				296				(230	)			(18	)			(59	)			3,121
Income from continuing operations			1,183				2,229				2,802				(12,037	)			812				(373	)			707				(15,333	)
Income (loss) from discontinued operations (2)			(409	)			(213	)			(120	)			2,114				774				16				(640	)			(14,381	)
Net income (loss)		$	774			$	2,016			$	2,682			$	(9,923	)		$	1,586			$	(357	)		$	67			$	(29,714	)
Net income per common share, diluted
Income (loss) from continuing operations		$	0.03			$	0.05			$	0.07			$	(0.29	)		$	0.02			$	(0.01	)		$	0.02			$	(0.37	)
Income (loss) from discontinued operations (2)			(0.01	)			—				(0.01	)			0.05				0.02				—				(0.02	)			(0.34	)
Net income (loss) per common share			0.02				0.05				0.06				(0.24	)			0.04				(0.01	)			—				(0.71	)

ITEM 7.		MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a diversified provider of technology and pari-mutuel horse racing content for consumers through Internet and telephone platforms and a leading supplier of totalizator systems, terminals and other pari-mutuel wagering services and systems to the pari-mutuel industry.

To date, we have focused on the United States pari-mutuel horse race wagering market through our main product, Youbet Express ^SM , which features online wagering, simulcast viewing, and in-depth, up-to-the-minute information on horse racing. Our customers receive interactive, real-time audio/video broadcasts, access to a comprehensive database of handicapping information, and, in most states, the ability to wager on a wide selection of horse races in the United States. We are working to expand the Youbet.Express ^SM brand, its products, and its services throughout the United States and in select international markets.

Based on information compiled by The Jockey Club, over 89% of pari-mutuel wagers, or handle, on thoroughbred racing in the United States were placed at locations away from the host track during 2008. We believe the shift toward off-track wagering has been driven by the betting public’s desire for convenience and access to a broader range of content. Our website, www.youbet.com , enables our customers to securely wager on horse races at over 150 racetracks worldwide from the convenience of their homes or other locations. Our customers receive the same odds and expected payouts they would receive if they were wagering directly at the host track and their wagers are commingled with the host track betting pools.

We appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop” experience. To place a wager, customers open an account and deposit funds with us via several convenient options, including our ExpressCash system, which links our customers’ wagering accounts directly to their personal checking accounts. To enable our customers to make informed wagers, we provide 24-hour access to up-to-the minute track information, real-time odds and value-added handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality, live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our player service agents, who are available 15 hours a day, seven days a week to provide technical support and address any wagering or funding questions.

Our content partners provide us the same live satellite feeds that they normally broadcast at the track and to off-track betting facilities (“OTBs”). As a result, our partners have the opportunity to increase the total handle wagered on their racing signal, which we believe leads to higher revenues for the host track and a higher quality of racing through larger purses for the horse owners. In return, we receive a commission, or a percentage of the wagers (handle) processed by Youbet Express.

We acquired United Tote Company in February 2006. United Tote is a leading supplier of totalizator systems (equipment and technology that processes wagers and payouts) and processes more than $7 billion in handle annually on a global basis, approximately 90% of which is North American pari-mutuel handle. United Tote supplies pari-mutuel tote services to approximately 100 racing facilities in North America and additional facilities in a number of foreign markets.

As result of the United Tote acquisition, we operate two business segments for financial accounting purposes: ADW and totalizator services. Our ADW segment consists of the operations of Youbet Express and Youbet Services Corporation. Our totalizator services segment consists of the operations of United Tote. Each segment operates independently, under separate management and provides distinctly separate services. The ADW segment provides internet wagering services and caters to the general public, whereas the totalizator segment provides totalizator equipment and services to racetracks, as well as off-track betting facilities and ADWs, including our ADW segment. Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is more immune to track closures due to inclement weather, and other factors as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by our totalizator segment to our ADW segment are eliminated in our consolidated financial statements. Our reporting segments follow the same accounting policies used for our consolidated financial statements. Management evaluates each segment’s performance based upon its individual financial results of operations. For information regarding results for each segment, see Note 15 “Segment Reporting” in our consolidated financial statements at the end of this report.

Our ADW segment also included IRG until it closed as of February 15, 2008, and Bruen Productions, which we sold in December 31, 2007, the results of both of which are accounted for as discontinued operations. For information on IRG and Bruen Productions, see Note 14 “Discontinued Operations” in our consolidated financial statements at the end of this report.

Results of Operations for 2008 Compared to 2007

The following table sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $1.2 million and $1.3 million in the years ending December 31, 2008 and 2007, respectively.

		ADW Segment																Totalizator Segment
		Year ended December 31,																Year ended December 31,
										Increase				%												Increase				%
		2008				2007				(Decrease)				Change				2008				2007				(Decrease)				Change
		(in thousands)
Revenues		$	85,831			$	97,652			$	(11,821	)			-12.1	%		$	24,443			$	26,093			$	(1,650	)			-6.3	%
Gross profit			32,229				32,781				(552	)			-1.7	%			9,184				9,080				104				1.1	%
As % of revenues			37.5	%			33.6	%											37.6	%			34.8	%
Operating expenses			23,417				31,192				(7,775	)			-24.9	%			22,324				21,041				1,283				6.1	%
As % of revenues			27.3	%			31.9	%											91.3	%			80.6	%
Income from continuing operations before other income (expense) and income tax		$	8,812			$	1,589			$	7,223				454.6	%		$	(13,140	)		$	(11,961	)		$	(1,179	)			-9.9	%
As % of revenues			10.3	%			1.6	%											-53.8	%			-45.8	%

Note: Revenues exclude intersegment eliminations of $1.2 million in 2008 and $1.3 million in 2007, respectively.

Revenues

Total revenues decreased $13.5 million, or approximately 11%, for the year ended December 31, 2008 when compared with 2007. Excluding the impact of intersegment eliminations, the revenue decrease was the result of a decrease in our ADW segment revenues of $11.8 million, or approximately 12%, and a decrease in our totalizator segment revenues of $1.7 million, or approximately 6%, over those periods. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our revenues on an operating segment basis.

ADW Segment Revenues

ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net of player incentives, decreased by approximately $11.8 million, or 12%, in the year ended December 31, 2008 compared to 2007. Gross commissions, before deduction of player incentives, for 2008 decreased $8.5 million or 9% compared to 2007 due to a 10% decline in wagering handle. ADW segment revenues were further negatively impacted by an increase in player incentives during 2008 of $2.5 million, or approximately 45%, when compared with 2007. In addition, the non-commission related portion of our ADW segment revenues, consisting of subscriptions, information and processing fees, decreased $0.8 million compared to 2007 due to player promotions.

Total handle for 2008 was $438.3 million, a decrease of $46.0 million, or 10%, compared to 2007 primarily due to the loss of certain track content and changes in jurisdictions where we accept wagers.

Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage of handle” (each calculated in accordance with generally accepted accounting principles), increased 70 basis points to 7.9% in 2008 versus 7.2% in 2007. The yield improvement reflects the impact of changes in track mix (which are driven by player preferences due to such things as race type, time of day and wagering pool size) favoring tracks with higher yields, the loss of lower yielding TrackNet content and a reduction in lower yielding TVG content in 2008. TrackNet content generally includes tracks with higher costs and, correspondingly, lower yields. Loss of a significant portion of TrackNet content had the impact of shifting player wagers to higher yielding tracks, thus changing the proportion of funds wagered on lower versus higher yielding content.

The following table sets forth our calculation of Youbet yield for the periods indicated:

		Year ended December 31,
										Increase
		2008				2007				(Decrease)				%
		(in thousands)
Handle		$	438,260			$	484,216			$	(45,956	)			-9.5	%
Commissions			82,929				93,969				(11,040	)			-11.7	%
Less:
Track fees			39,303				39,246				57				0.1	%
License fees			9,124				19,810				(10,686	)			-53.9	%
Net revenue		$	34,502			$	34,913			$	(411	)			-1.2	%
Yield %			7.9	%			7.2	%

We believe that yield is a useful measure to evaluate our operating results and profitability. Yield, however, should not be considered an alternative to operating income or net income as indicators of Youbet’s financial performance and may not be comparable to similarly titled measures used by other companies.

Totalizator Segment Revenues

Totalizator segment revenues, which consist of contract revenues associated with the service of totalizator systems and equipment sales, decreased $1.7 million, or approximately 6%, in 2008 when compared 2007 due to a decrease in contract revenues, which was partially offset by an increase in equipment sales. Contract revenues from the service of totalizator systems, which are driven by wagering handle at tracks serviced, were $23.3 million in 2008, representing a decrease of $1.9 million, or approximately 8%, compared to 2007, primarily as a result of track closures, a general industry decline in wagering and reduced racing days. Equipment sales in 2008 were $1.1 million, representing an increase of $0.3 million, or approximately 29%, compared to 2007 due to several international sales transactions.

Costs and Expenses

Consolidated costs and expenses decreased $13.0 million, or approximately 16%, in 2008 compared to 2007 primarily as a result of a $10.7 million decrease in license fees associated with the fewer number of TVG exclusive tracks in 2008 and a $1.8 million reduction in totalizator contract costs. As a percentage of revenues, consolidated costs and expenses decreased from approximately 66% in 2007 to 62% in 2008. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our costs and expenses on an operating segment basis.

ADW Segment Costs and Expenses

Costs and expenses in our ADW segment consist of track fees, licensing fees and network operations, each as described below.

Track fees : Track fees, which primarily consist of host and market access fees paid and payable to various tracks remained flat in 2008 when compared to 2007. A year-over-year decrease in track fees attributable to reduced handle was offset by the shift of costs from license fees to track fees resulting from a reduced number of TVG exclusive tracks and higher host fees paid to the NYRA tracks as a result of such shift. TV streaming costs, source market fees and track revenue sharing fees increased $1.1 million, $1.6 million and $0.3 million, respectively, in 2008 compared to 2007 whereas California market access fees decreased $2.7 million over the same period due to reduced wagering in California.

Licensing fees : Licensing fees, which represent amounts paid and payable under our licensing agreement with TVG, decreased $10.7 million, or 54%, in 2008 compared to 2007, primarily due to decreased wagering on horse races at TVG tracks and the fact that, in 2007, certain California racetracks and, beginning in 2008, NYRA racetracks were no longer TVG exclusive and, therefore, became subject to lower licensing fees.

Network operations : Network operations expense, which consists of costs for salaries, data center management, telecommunications and various totalizator fees, declined $0.6 million or 14% in 2008 when compared to 2007. This decrease was primarily attributable to lower data communication, AV fees and totalizator fees, partially offset by higher outside service expenses related to the relocation of our servers to a more secure facility in the latter part of 2007.

As a percentage of ADW segment revenues, costs and expenses in our ADW segment decreased from approximately 66% in 2007 to 63% in 2008.

Totalizator Segment Costs and Expenses

Costs and expenses in our totalizator segment consist of contract costs and equipment costs, each as described below.

Contract costs : Contract costs, which represent costs of United Tote associated with providing totalizator services at racetracks, decreased $1.8 million, or 11%, in 2008 compared to 2007, largely due to lower compensation costs resulting from the restructuring initiated during the second half of 2007. In addition, lower repair and maintenance costs, professional fees and data communication expenses were partially offset by higher equipment rental and outside labor expense.

Equipment Costs: Equipment costs, which costs of United Tote associated with earning equipment sales revenue, increased 9% in 2008, when compared with 2007, due to an increase in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment decreased from approximately 65% in 2007 to 62% in 2008.

Gross Profit

Consolidated gross profit decreased $0.4 million, or approximately 1%, in 2008 compared to 2007 primarily due to the 10% decline in overall wagering handle, increased incentives provided players to mitigate the impact of the handle decline and revenue decline experienced by our totalizator segment, which were partially offset by a $13.0 million, or 16% decline, in consolidated costs and expenses. As a percentage of revenues, consolidated gross profit increased from approximately 34% in 2007 to 38% in 2008. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our gross profit on an operating segment basis.

ADW Segment Gross Profit

Gross profit in our ADW segment was $32.2 million for 2008, as compared to $32.8 million in 2007, a $0.6 million or 2% decline. The decline was primarily due to reduced commission revenue as a result of the decline in wagering handle, as well as increased player incentives, which were partially offset by reduced license fees as described above. As a percentage of ADW segment revenues, gross profit in our ADW segment increased from approximately 34% in 2007 to 38% in 2008.

Totalizator Segment Gross Profit

Gross profit in our totalizator segment was $9.2 million for 2008, representing an increase of $0.1 million, or approximately 1%, compared to 2007. This increase is primarily attributable to measures taken to reduce contract operating costs in consideration of reduced contract revenue and improved margins on equipment sales. As a percentage of totalizator segment revenues, gross profit in our totalizator segment increased from approximately 35% in 2007 to 38% in 2008.

Operating Expenses

Research and development : Research and development expense decreased $0.5 million, or approximately 13%, in 2008 compared with 2007 primarily due to labor cost savings and higher capitalization of internally developed software. We continue to invest in the development of our network infrastructure and to support continued technology upgrades as necessary, which may increase our research and development expenses in the future.

Sales and marketing : Sales and marketing expense decreased $4.7 million, or approximately 47%, in 2008 compared to 2007. This decrease was primarily all in the Youbet Express business and resulted from a management priority to reduce and more appropriately target marketing efforts to specific initiatives including online customer acquisition, conversion and retention.

General and administrative : General and administrative expense decreased $3.4 million, or approximately 16%, in 2008 compared to 2007. The decrease in these expenses results primarily from reduced personnel relating to the recording of severance/termination charges of $2.0 million in the fourth quarter of 2007 and employee reductions, benefits and recruiting costs totaling $1.1 million, accounting fees and expenses related to improving and testing our internal control over financial reporting of $0.9 million, as well as other cost reduction initiatives that commenced in the fourth quarter of 2007. These reductions were partially offset by a $0.7 million severance payment to our former interim chief executive officer accrued in the second quarter of 2008 and higher non-cash compensation expense of $0.5 million in 2008 compared with 2007.

Depreciation and amortization : Depreciation and amortization decreased $1.0 million, or approximately 11%, compared to 2007, primarily due to the amortization of $0.5 million of capitalized software development costs associated with our King Contest product in 2007 and continued aging of assets.

Impairment Write downs: In connection with our exploration of strategic alternatives for United Tote, we re-evaluated the goodwill related to United Tote. As part of this evaluation, we compared the current estimated fair value to the carrying value of goodwill, and on March 25, 2008, we concluded that United Tote goodwill was impaired and recorded a non-cash impairment charge of $8.0 million as of December 31, 2007. In February, 2009, we concluded that the carrying value of United Tote was further impaired as of December 31, 2008. The total amount of this additional non-cash impairment charge was $11.2 million, which included a $6.9 million impairment of goodwill, and write downs in computer equipment and intangible assets of $3.1 million and $1.2 million, respectively.

Interest expense (income) : Interest expense of $1.2 million in 2008, decreased $0.6 million compared to $1.8 million in 2007. This decrease is primarily due to lower debt levels during 2008 and lower interest rates. Interest income was $0.4 million lower than 2007, primarily due to lower investment yields in 2008 compared with 2007.

Other income : Other income remained flat when compared to the twelve months ended December 31, 2007.

Income Taxes: Income taxes were negatively impacted by several permanent and non-permanent book/tax differences such as amortization of intangibles, asset impairments, stock based compensation and depreciation. Additionally, in the third quarter of 2008, the State of California suspended the use of net operating loss carry forwards, resulting in additional tax of $0.4 million being recognized in 2008. In 2007, the company increased its valuation allowance relating to deferred tax assets for net operating loss carry forwards by $2.9 million. According to Statement of Financial Accounting Standards Board Statement (“SFAS”) No. 109, “ Accounting for Income Taxes ,” a deferred tax asset should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. For 2008, positive evidence we considered included future revenue and expenses, reversals of book to tax temporary differences, and the implementation of and/or ability to employ various tax planning strategies. Negative evidence included book and tax losses generated in prior periods, and the inability to achieve forecasted results for those periods. The company concluded that a valuation allowance was warranted against its net operating loss carry forwards.

Discontinued Operations: Effective February 15, 2008, we ceased operations at IRG and, accordingly, have accounted for such operations retroactively as discontinued operations. For the year ended December 31, 2008, IRG generated income of $1.4 million resulting from a negotiated earn-out settlement, reducing the earn-out accrual as of December 31, 2007, by $2.2 million. For the year ended December 31, 2007, IRG sustained a net loss of $13.3 million, including an impairment charge for the intangibles associated with the IRG business of $10.9 million. Additionally, effective December 31, 2007, we sold Bruen Productions back to the original owner and we have accounted for Bruen’s operations as discontinued operations. For the year ended December 31, 2007, Bruen generated a loss of $0.9 million, which includes a $0.4 million third quarter charge for the impairment of goodwill.

Results of Operations for 2007 Compared to 2006

The following table sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $1.3 million and $1.0 million in the years ending December 31, 2007 and 2006, respectively.

		ADW Segment																Totalizator Segment
		Year ended December 31,																Year ended December 31,
										Increase				%												Increase				%
		2007				2006				(Decrease)				Change				2007				2006				(Decrease)				Change
		(in thousands)
Revenues		$	97,652			$	91,746			$	5,906				6.4	%		$	26,093			$	23,885			$	2,208				9.2	%
Gross profit			32,781				27,107				5,674				20.9	%			9,080				9,677				(597	)			-6.2	%
As % of revenues			33.6	%			29.5	%											34.8	%			40.5	%
Operating expenses			31,192				30,625				567				1.9	%			21,041				9,018				12,023				133.3	%
As % of revenues			31.9	%			33.4	%											80.6	%			37.8	%
Income from continuing operations before other income (expense) and income tax		$	1,589			$	(3,518	)		$	5,107				-145.2	%		$	(11,961	)		$	659			$	(12,620	)			1915.0	%
As % of revenues			1.6	%			-3.8	%											-45.8	%			2.8	%

Note: Revenues exclude intersegment eliminations of $1.3 million in 2007 and $1.0 million in 2006, respectively.

Revenues

Total revenues increased $7.9 million, or approximately 7%, for the year ended December 31, 2007 when compared with 2006. Excluding the impact of intersegment eliminations, the revenue increase was due to an increase in ADW segment revenues of $5.9 million, or approximately 6%, and an increase in totalizator segment revenues of $2.2 million, or approximately 9%, largely due to the inclusion of full year results for United Tote (acquired in mid-February 2006) in 2007. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our revenues on an operating segment basis.

ADW Segment Revenues

ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net of player incentives, increased by approximately $5.9 million, or approximately 6%, in 2007 compared to 2006. Gross commissions, before deduction of player incentives, for the year 2007 increased $7.8 million, or approximately 9%, compared to the same period in 2006 due to a 4% increase in wagering handle and elimination of various track incentives of $2.5 million. The increase in gross commissions was partially offset by an increase in player incentives during 2007 of $2.0 million, or approximately 55%, when compared with 2006.

Total wagering handle for 2007 was $484.2 million, an increase of $20.5 million, or approximately 4% when compared to 2006. We believe the increase in the Youbet Express handle was driven primarily by an increase in our marketing activity, including player award programs offered in 2007.

Youbet Express yield defined as “commission revenue less track and licensing fees as a percentage of handle” (each calculated in accordance with generally accepted accounting principles) was 7.2% in 2007, up from 6.1% in the prior year, reflecting our efforts to increase handle on higher yielding tracks.

The following table sets forth our calculation of Youbet yield for the periods indicated:

		Year ended December 31,
										Increase
		2007				2006				(Decrease)				%
		(in thousands)
Handle		$	484,216			$	463,750			$	20,466				4.4	%
Commissions			93,969				88,093				5,876				6.7	%
Less:
Track fees			39,246				37,688				1,558				4.1	%
License fees			19,810				21,967				(2,157	)			-9.8	%
Net Revenue		$	34,913			$	28,438			$	6,475				22.8	%
Yield %			7.2	%			6.1	%

We believe that yield is a useful measure to evaluate our operating results and profitability. Yield, however, should not be considered an alternative to operating income or net income as indicators of Youbet’s financial performance and may not be comparable to similarly titled measures used by other companies.

Totalizator Segment Revenues

Totalizator segment revenues, which consist of contract revenues associated with the service of totalizator systems and equipment sales, increased $2.2 million, or approximately 9%, in 2007 when compared 2006 due to the inclusion of full year results for United Tote (acquired in mid-February 2006) in 2007. Contract revenues from the service of totalizator systems, which is driven by wagering handle at tracks serviced, were $25.2 million in 2007, representing a increase of $2.6 million, or approximately 12%, compared to 2006. Equipment sales in 2007 were $0.9 million, representing a decrease of $0.4 million, or approximately 31%, compared to 2006 due to decreased international demand.

Costs and Expenses

Consolidated costs and expenses increased $2.8 million, or approximately 4%, in 2007 compared to 2006 primarily as a result of a $1.6 million, or approximately 4%, increase in track fees associated with increased handle, coupled with a $3.0 million increase in totalizator contract costs due the inclusion of a full year results for United Tote. These increases were partially offset by a $2.2 million reduction in license fees due to the fewer number of TVG exclusive tracks in 2007. As a percentage of revenues, consolidated costs and expenses decreased from approximately 68% in 2006 to 66% in 2007. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our costs and expenses on an operating segment basis.

ADW Segment Costs and Expenses

Costs and expenses in our ADW segment consist of track fees, licensing fees and network operations, each as described below.

Track Fees: Track fees increased $1.6 million, or 4%, in 2007 compared to 2006. The increase is consistent with increased handle.

Licensing Fees: For 2007, Licensing fees decreased $2.2 million, or 9.8%, compared to 2006, primarily due to reduced wagering at TVG exclusive tracks and in 2007 certain California racetracks were no longer TVG exclusive and therefore, became subject to lower licensing fees.

Network Operations: Network operations expense increased $0.6 million, or 16%, for 2007 compared to 2006, primarily due to increased tote fees and communication costs associated with the increase in handle.

As a percentage of ADW segment revenues, costs and expenses in our ADW segment decreased from approximately 71% in 2006 to 66% in 2007.

Totalizator Segment Costs and Expenses

Costs and expenses in our totalizator segment consist of contract costs and equipment costs, each as described below.

Contract Costs : Contract costs increased $3.0 million, or 22%, for the year ended December 31, 2007 compared to 2006 largely because of the mid-February 2006 acquisition of our United Tote subsidiary, increased data communication costs of $0.5 million, professional fees for internal control reviews of its tote operations of $0.1 million and payroll related costs.

Equipment Costs: Equipment costs for 2007 declined $0.2 million or 36%, when compared with 2006, due to the decline in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment increased from approximately 60% in 2006 to 65% in 2007.

Gross Profit

Consolidated gross profit increased $5.1 million, or approximately 14%, in 2007 compared to 2006 primarily due to the 4% increase in overall wagering handle and inclusion of a full year of contract revenue from United Tote (acquired in mid February 2006), partially offset by increased player incentives and increased totalizator contract costs. As a percentage of revenues, consolidated gross profit increased from approximately 32% in 2006 to 34% in 2007. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our gross profit on an operating segment basis.

ADW Segment Gross Profit

Gross profit in our ADW segment was $32.8 million for the year ended December 31, 2007, as compared to $27.1 million for the same period in 2006, a $5.7 million or 21% increase. The increase was primarily due to increased commission revenue from the increase in wagering handle and reduced license fees, offset by increased player incentives as described above. As a percentage of ADW segment revenues, gross profit in our ADW segment increased from approximately 30% in 2006 to 34% in 2007.

Totalizator Segment Gross Profit

Gross profit in our totalizator segment was $9.1 million for the year ended December 31, 2007, representing a decrease of $0.6 million or approximately 6%, compared to 2006. This decrease is primarily attributable to the reduction of higher margin equipment sales and higher communication and professional fees incurred in 2007 for internal control reviews of its tote operations. As a percentage of totalizator segment revenues, gross profit in our totalizator segment decreased from approximately 41% in 2006 to 35% in 2007.

Operating Expenses

Research and Development: Research and development expense increased $0.9 million, or approximately 31%, for 2007, compared to 2006. The 2007 increase is primarily due to a full year’s research and development expense at United Tote, which was acquired in February 2006, reduced capitalization of research and development costs due to a fewer number of projects and the write-off of costs associated with several work-in-progress projects. We continue to invest in the development of our network infrastructure and to support continued technology upgrades, which may increase our research and development expenses in the future.

Sales and Marketing: Sales and marketing expense increased $2.1 million, or approximately 27%, for the year ended December 31, 2007 compared to the same period of 2006 largely due to increased marketing expenditures in the second and third quarters of 2007. This increase was primarily at Youbet Express and resulted from increased business development efforts and marketing programs, including expanded print and television advertising and race track promotional expenses, targeted at reducing the impact of the loss of TrackNet content.

General and Administrative: General and administrative expense increased $1.6 million, or approximately 7%, for the year ended December 31, 2007 compared to the same period of 2006. Reductions were in payroll, incentive compensation, consulting costs as well as the nonrecurring legal expenses associated with a prior-year arbitration with TVG and bank debt refinancing which accounted for approximately $0.8 million of expenses in 2006 that were not incurred in 2007. These reductions were offset by the full year impact of the 2006 acquisition of United Tote and a $0.6 million increase United Tote’s bad debt reserve. Additionally, in connection with restructuring our cost structure, we recorded severance/termination charges of $2.0 million in the fourth quarter of 2007.

Depreciation and Amortization: Depreciation and amortization increased $3.1 million compared to the year ended December 31, 2006. This increase was primarily due to the impact of 2007 capital spending, a full years’ depreciation expense and intangible amortization expense at United Tote, which was acquired in the middle of the first quarter of 2006, the final purchase price allocation for that company, completed at year-end 2006 and the amortization of $0.5 million of capitalized software development costs associated with our King Contest product in the third quarter of 2007.

Impairment Write downs: In connection with our exploration of strategic alternatives for United Tote, we re-evaluated the goodwill related to United Tote. As part of this evaluation, we compared the current estimated fair value to the carrying value of goodwill, and on March 25, 2008, we concluded that United Tote goodwill was impaired as of December 31, 2007. The total amount of this non-cash impairment charge was $8.0 million.

Interest Expense : Interest expense decreased to $1.8 million in 2007 compared to $2.0 million in 2006. The decrease is primarily due the pay down of our bank debt. Interest expense is related to our credit facility and, to a lesser extent, the unsecured promissory notes issued in connection with our February 2006 acquisition of United Tote and capitalized leases.

Other Income : Other income increased $0.1 million compared to 2006 primarily due to an early termination fee received by United Tote in the second quarter of 2006.

Income Taxes: Income taxes were negatively impacted by several permanent and non-permanent book/tax differences such as amortization of intangibles, asset impairments, stock based compensation and depreciation. Additionally, we increased our valuation allowance relating to deferred tax assets for net operating loss carry forwards by $2.9 million. According to Statement of Financial Accounting Standards Board Statement (“SFAS”) No. 109, “ Accounting for Income Taxes ,” a deferred tax asset should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. For 2007, positive evidence we considered included future revenue and expenses, reversals of book to tax temporary differences, and the implementation of and/or ability to employ various tax planning strategies. Negative evidence included book and tax losses generated in prior periods, and the inability to achieve forecasted results for those periods. We concluded that a valuation allowance was warranted against a portion of our net operating loss carry forwards. On January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, which had no effect on our financial statements or related disclosures.

Discontinued Operations: Effective February 15, 2008, we ceased operations at IRG and, accordingly, have accounted for such operations retroactively as discontinued operations. For the year ended December 31, 2007, IRG sustained a net loss of $13.3 million, including an impairment charge for the intangibles associated with the IRG business of $11 million, and for the year ended December 31, 2006, IRG had a net loss of $3.4 million. Additionally, effective December 31, 2007, we sold Bruen Productions back to the original owner and we have accounted for Bruen’s operations as discontinued operations. For the year ended December 31, 2007, Bruen sustained a net loss of $0.9 million, which includes a $0.4 million third quarter charge for the impairment of goodwill and for the year ended December 31, 2006, Bruen generated net income of $0.03 million.

Liquidity and Capital Resources

During 2008, we funded our operations primarily with net cash provided by operating activities.

As of December 31, 2008, we had negative net working capital of $0.8 million, compared to negative net working capital of $14.3 million at December 31, 2007. In December 2008, we entered into a new credit agreement with National City Bank, which provides us with up to $15.0 million in total borrowing capacity. The credit facility consists of a $5.0 million revolving line of credit and a $10.0 million term loan. Proceeds of $4.6 million from the term loan under new credit facility were used to repay principal and interest in full amounts owed to Wells Fargo Foothill, Inc., our prior lender, as well as fees and expenses associated with the refinancing. The remaining proceeds will be used for general corporate purposes. On December 31, 2008, a principal repayment of $1.25 million was made on the term loan. No amounts have been borrowed under the revolving and letter of credit facility. The terms of the new credit facility are more fully described below under “Credit Facility.”

As of December 31, 2008, we had $16.5 million in cash and cash equivalents and $4.7 million in restricted cash.

Our principal ongoing cash requirements consist of payroll and benefits, business insurance, real estate and equipment leases, legal fees, data center operations, telecommunications and debt service.

The United States is currently experiencing a recession accompanied by, among other things, reduced credit availability and highly curtailed gaming and other recreational activities. The effects and duration of these developments and related risks and uncertainties on our future operations and cash flows cannot be estimated by management at this time, however, such effects may be significant.

Nevertheless management presently believes that our borrowing capacity, as well as on-going efforts to contain costs and operate efficiently, and growth in handle and yield improvement at Youbet Express will generate sufficient cash flow to adequately support its operations. We believe that our cash flow from operations and our unrestricted cash and cash equivalents are sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may from time to time seek additional capital to fund our operations, and to reduce our liabilities in response to changes in the business environment. To raise capital, we may seek to sell additional equity securities, issue debt or convertible securities or seek to obtain credit facilities through financial institutions or other resources. We have an effective shelf registration statement under which we may from time to time issue shares of preferred stock, shares of common stock, warrants, stock purchase contracts, stock purchase units, and stock purchase rights for an original maximum aggregate offering amount of approximately $30 million. Unless otherwise described in future prospectus supplements, we intend to use the net proceeds from the sale of securities registered under this universal shelf registration statement for general corporate purposes, which may include additions to working capital, the repayment or redemption of existing indebtedness and the financing of capital expenditures and future acquisitions. The sale of additional equity or convertible securities would result in additional dilution to our stockholders.

Cash Flows for 2008 Compared to 2007

The following table presents a summary of the net increase (decrease) in cash and cash equivalents in the periods presented:

		Year Ended December 31,
		2008				2007
		(in thousands)
Net cash provided (used) by operating acivities, from continuing operations		$	15,049			$	(614	)
Net cash used in investing activities			(1,350	)			(7,123	)
Net cash used in financing activities			(3,327	)			(6,325	)
Net cash used in operating activities, discontinued operations			(312	)			(392	)
Foreign currency translation adjustments			(73	)			(46	)
Net increase (decrease) in cash and cash equivalents		$	9,987			$	(14,500	)

Operating Activitie s

Net cash provided by operating activities was $15.0 million for 2008, compared to net cash used by operating activities of $0.6 million for 2007. The year-over-year increase was primarily due to improved earnings resulting from a 70 basis point improvement in wagering yield experienced by our ADW segment, reduced expenses from headcount reductions, reduced consulting and marketing costs, as well as favorable working capital fluctuations resulting from improved receivable collections and increased accruals relating to the deferral of bonuses and business tax payments. Additionally, we made a non-recurring payment of a $1.2 million arbitration award to TVG in the first quarter of 2007. Operating cash flow is impacted by wagering activity that typically peaks in the second and third quarters of the year.

Investing Activities

Net cash used in investing activities for 2008 was $1.4 million, compared to net cash used in investing activities of $7.1 million for 2007. The year-over-year decrease was primarily due to the net cash paid out in 2007 in connection with the United Tote ($4.5 million) acquisition and decreased purchases of property and equipment ($1.1 million). Our primary investing activities relate to the continued improvement of our wagering platform and new equipment acquired by our totalizator segment, which is driven by service contract renewals and maintenance requirements.

Financing Activities

Net cash used in financing activities was $3.3 million and $6.3 million for 2008 and 2007, respectively. The year-over-year decrease of $3.0 million was primarily due the refinancing of our term loan and pay down of debt. In December 2008, we entered into a new credit facility, the terms of which are described below under “Credit Facility.” Proceeds of $4.6 million from the term loan under the new credit facility were used to repay principal and interest in full amounts owed to the prior lender, as well as fees and expenses associated with the refinancing. Total repayment of debt in 2008 was $14.0 million, which included a $1.25 million repayment on the new term loan versus repayment of $11.0 million of debt in 2007.

Cash Flows for 2007 Compared to 2006

The following table presents a summary of the net increase (decrease) in cash and cash equivalents in the periods presented:

		Year Ended December 31,
		2007				2006
		(in thousands)
Net cash provided (used) by operating acivities, from continuing operations		$	(614	)		$	6,921
Net cash used in investing activities			(7,123	)			(15,888	)
Net cash provided (used) in financing activities			(6,325	)			13,331
Net cash provided (used) in operating activities, discontinued operations			(392	)			11
Foreign currency translation adjustments			(46	)			(10	)
Net increase (decrease) in cash and cash equivalents		$	(14,500	)		$	4,365

Operating Activities

Net cash used in operating activities was $0.6 million for 2007, compared to net cash provided by operating activities of $6.9 million for 2006. The year-over-year decrease of $7.5 million was primarily due to reduced profitability, coupled with decreases of $3.8 million and $6.7 million in accounts payable and accrued expenses, respectively, due to the timing of obligation requirements, attributable a decline in wagering handle experienced in the fourth quarter of 2007 versus 2006. Additionally, we incurred $2.0 million and $0.5 million related to termination and severance costs in 2007, respectively. These decreases were partially offset by the collection of receivables.

Investing Activities

Net cash used in investing activities for 2007 was $7.1 million, compared to net cash used in investing activities of $15.9 million for 2006. The year-over-year decrease of $8.8 million was primarily due to the net cash paid out in 2006 in connection with the United Tote ($10.1 million) and increased purchases of property and equipment ($6.2 million) versus 2007 activity consisting of a $4.5 million make-whole payment made in the first quarter to the former owners of United Tote, and general capital spending of $2.5 million.

Financing Activities

Net cash provided by (used in) financing activities was ($6.3 million) and $13.1 million for 2007 and 2006, respectively. The year-over-year decrease of $19.4 million was primarily due to proceeds generated from a registered direct offering occurring in the fourth quarter of 2006 ($18.9 million) and the exercise of stock options and warrants, partially offset by the repayment of long-term debt in 2006. The proceeds from the direct registered public offering were used in 2007 to pay off debt ($7.9 million), repurchase Youbet stock ($1.0 million) and working capital requirements. Additional cash proceeds were obtained in 2007 through a sale/leaseback of totalizator equipment and short-term borrowings of $1.1 million and $1.3 million, respectively.

Credit Facility

Our credit facility currently consists of a $5.0 million revolving line of credit and a $10.0 million term loan. At December 31, 2008, $8.8 million was owed on the term loan and we had no outstanding borrowings under the revolving credit facility.

On December 3, 2008, we entered into a loan and security agreement with National City Bank. The loan and security agreement with National City Bank provides for a $10.0 million term loan, and a $5.0 million revolving line of credit and letter of credit facility. In no event, however, may the aggregate principal amount borrowed by us under the loan and security agreement exceed a borrowing base determined by the amount of our available cash plus a percentage, differing in each case, of the value of certain of our eligible accounts, inventory and equipment, subject to additional reserves established by National City Bank at its discretion. In connection with closing the loan and security agreement, we paid National City Bank a fee of $225,000.

On December 3, 2008, we borrowed the full $10.0 million under the term loan. We used $4.6 million to repay principal and interest in full amounts owed to Wells Fargo Foothill, Inc., as well as fees and expenses associated with the refinancing, and the remaining proceeds will be used for general corporate purposes. We have not borrowed any amounts under the revolving and letter of credit facility.

Any indebtedness under the term loan and the revolving credit facility bears interest at a variable rate equal to either, at our discretion, prime plus 200 to 250 basis points or LIBOR plus 325 to 375 basis points. The applicable basis point margin is determined by our leverage ratio as at the most recently delivered calculation thereof pursuant to provisions of the loan and security agreement. Any interest accruing on the basis of the prime rate is due and payable on the first business day of each month. Any interest accruing on the basis of LIBOR is due and payable on the date upon which such LIBOR loan ends as determined by us. LIBOR loans may have a one, two or three month term.

The outstanding principal amount under the term loan is due and payable on the last day of each quarter beginning on December 31, 2008 in installments of $1.25 million. The term loan and the revolving credit facility each mature on November 30, 2010. The loan and security agreement provides for mandatory prepayment in the event of certain asset sales and recovery events; provided that, so long as an event of default has not occurred, a mandatory prepayment of the net proceeds is not required, subject to certain thresholds or amounts as more fully described in the loan and security agreement. Our indebtedness under the loan and security agreement is guaranteed by UT Gaming, Inc., the direct parent of United Tote Company, and secured by substantially all of our assets, including our intellectual property, and UT Gaming’s equity in United Tote Company.

We are subject to customary covenants under the loan and security agreement, including restrictions on our ability to incur indebtedness, make investments, pay dividends or engage in mergers and acquisitions. The loan and security agreement also contains certain financial covenants, including (i) a requirement to maintain a specified debt service coverage ratio, (ii) a requirement to maintain a leverage ratio not to exceed 2:1, (iii) a requirement to maintain a certain specified adjusted EBITDA and (iv) limitations on capital expenditures.

As of December 31, 2008, we were in compliance with financial covenants under the loan and security agreement.

Youbet Promissory Notes

On February 10, 2006, we issued three promissory notes with an aggregate principal amount of $10.2 million in connection with the acquisition of United Tote. For information regarding this acquisition, see Item 1 “Business-Acquisitions and Dispositions”.

The first promissory note had a principal amount of $5.2 million, matured on February 9, 2007, and bore interest at 5.02% per annum, which interest was payable on a quarterly basis beginning May 31, 2006. The terms of this promissory note required that we promptly prepay this obligation if we receive any “excess capital”, and our December 2006 registered direct offering created “excess capital”. In accordance with the terms of the first promissory note, we prepaid the $5.2 million note, including interest, from the proceeds of our registered direct offering in December 2006.

The second promissory note had a principal amount of $1.8 million and bore interest at 5.02%. The terms of the $1.8 million note provide that we are not required to make a mandatory “excess capital” prepayment under the $1.8 million note until the $5.2 million note has been paid in full, but no earlier than March 12, 2007. We prepaid the $1.8 million principal amount, including accrued interest of $0.1 million, on March 12, 2007 with a portion of the proceeds of our December 2006 registered direct offering.

The third promissory note has a principal amount of $3.2 million, bears interest at 5.02%, and is currently due, but is subject to rights of indemnification and offset. The terms of the $3.2 million note provide that: (i) we are not required to make a mandatory “excess capital” prepayment under the $3.2 million note until both the $5.2 million note and the $1.8 million note have been paid in full, but no earlier than June 11, 2007; and (ii) we may set off from the amount we owe under this note any loss suffered by us for which we are entitled to indemnification under the United Tote stock purchase agreement. We have four outstanding indemnification claims regarding a United Tote employee lawsuit, a Canadian tax issue, an Internal Revenue Service tax issue, and a Pennsylvania tax issue. As such, payments may be subject to appeal and/or subject to escrow pending resolution. Accrued interest on the $3.2 million note at December 31, 2008 was approximately $0.3 million.

The remaining promissory note cannot be transferred without our consent. Also, this promissory note contains customary events of default and provides that, upon the occurrence of certain events of default, we will be required to pay default interest of 11.02% per annum until the event of default is cured or until the note is paid in full. We are not in default under the remaining outstanding promissory note.

Off Balance Sheet Arrangements

We have a standby letter of credit outstanding that is collateralized by a restricted cash account in connection with the lease of our executive and operating offices in Woodland Hills, California. This letter of credit includes automatic renewals on the anniversary date of the lease origination, and permits annual automatic reductions of approximately $0.1 million. As of December 31, 2008, the letter of credit obligation and corresponding cash collateral balance was $0.2 million.

At December 31, 2008, we had outstanding various other irrevocable standby letters of credit issued to the benefit of the California Horse Racing Board, ORC and Washington Horse Racing Commission totaling $0.7 million. These letters of credit include automatic renewals on their anniversary dates.

Contractual Obligations, Contingent Liabilities and Commitments

We have contractual obligations and commitments primarily with regard to facilities leases and employment contracts. The following table aggregates our expected contractual obligations as of December 31, 2008:

		Payments Due by Period
																		2013 and
Contractual Obligations		2009				2010				2011				2012				Beyond				Total
Gary Sproule’s severance agreement		$	318,000			$	106,000			$				$				$				$	424,000
James Burk’s employment agreement (1)			175,000																				175,000
Capital leases and other financial arrangements (2)			503,721				246,354																750,075
Operating facility leases (3)			1,207,930				282,086				102,272				106,452				377,795				2,076,535
Operating equipment leases (4)			701,378				163,376				26,104				428								891,286
Bank debt (5)			5,000,000				3,750,000																8,750,000
Notes payable (6)			3,200,000																				3,200,000
Other			212,000				105,334																317,334
Total		$	11,318,029			$	4,653,150			$	128,376			$	106,880			$	377,795			$	16,584,230

All accounts payable and accrued expenses presented in the consolidated financial statements are excluded from the above table.

Critical Accounting Estimates and Policies

Critical accounting policies are those that are important to the portrayal of our financial condition and results, and which require management to make difficult, subjective or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We have made critical estimates in the following areas. We also believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Through Youbet, the Company earns and records commissions on wagers placed with tracks for customers as revenue and the related track and market area access fees as operating expenses when the wagers are settled, typically the same day as the wager, based upon associated track contracts. Other sources of revenue, including membership and information fees, are relatively insignificant. Prepayments of such fees are treated as deferred revenue and later recognized over the duration of the subscription. Incentives offered to customers to encourage wagering on events at tracks that generate higher margins are charged immediately to operations as reductions in commissions earned.

Youbet launched a player rewards program during the second quarter of 2006 called Youbet Advantage. Participating members earn points based on the amount they wager, and they can redeem their points for merchandise, travel rewards, and wager credits. Youbet’s Player Advantage incentives and other volume incentives are recorded as a reduction of commission revenue (a contra-revenue) and the associated liability is accrued as the points are issued. Reward points are valued based upon a “par” value applied to points earned based upon the rewards category the player is assigned. Player reward categories are assigned to players based upon their respective wagering volume. An estimated point redemption rate, by reward category, is applied against the outstanding points to estimate the future utilization of points awarded for proper valuation.

The majority of United Tote’s revenues are derived from service contracts principally for the installation and operation of pari-mutuel wagering networks. Services provided via these networks include accepting wagers, performing odds and payout calculations and calculating ticket payouts. United Tote charges the track for these services either by transaction count or by dollar volume in accordance with the related service contract. In order to perform its services under these agreements, United Tote may incur various costs associated with the installation of the totalizator equipment at the track to enable it to function as required. Such installation costs include service personnel, including electricians, to set up networks and other items necessary for the proper functioning of all terminals being deployed at the track, which in some cases number as many as several hundred. Such installation costs are capitalized and amortized over the life of the related contract, since such costs are a prerequisite for the proper operation of the equipment, which in turn is necessary to generate future totalizator revenue. United Tote is also required to provide various levels of routine operational support and software maintenance throughout the life of the contract, which is expensed as incurred. Revenue from the sale of pari-mutuel gaming systems equipment and related parts is recognized upon delivery and customer acceptance.

Sales and similar revenue-based taxes collected from customers are excluded from revenue but rather are recorded as a liability payable to the appropriate taxing authority and included in accrued expenses.

Allowance for doubtful accounts

We are required to make judgments, based on historical experience and future expectations, as to the collectability of accounts receivable. The allowances for doubtful accounts represent allowances for trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their estimated net realizable value. We record these allowances as a charge to general and administrative expenses based on estimates related to the following factors:

	•		customer specific allowance;
	•		amounts based upon an aging schedule; and
	•		an estimated amount, based on our historical experience, for issues not yet identified.

Inventory obsolescence

We regularly review inventory quantities on hand and record provisions for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements.

Valuation of long-lived and intangible assets

Long-lived assets, consist primarily of property, plant and equipment, goodwill and intangibles.

Long-lived assets, including goodwill, are reviewed for impairment whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to its fair value in a current transaction between willing parties, other than in a forced liquidation sale. Recorded fair value is estimated by using independent appraisals or other valuation techniques.

Factors we consider important which could trigger an impairment review include the following:

	•		Significant underperformance relative to expected historical or projected future operating results;
	•		Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
	•		Significant negative industry or economic trends;
	•		Significant decline in our stock price for a sustained period; and
	•		Our market capitalization relative to net book value.

If we determine that the carrying value of long-lived assets and related goodwill may not be recoverable, we would measure any impairment based on comparing the carrying amount of the asset to its fair value in a current transaction between willing parties or, in the absence of such measurement, on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Any amount of impairment so determined would be written off as a non-cash charge to the income statement, together with an equal reduction of the related asset.

Intangibles, such as licenses and patents are stated at cost and are amortized over their estimated economic life or agreement term, whichever is shorter.

Internally developed software

The capitalization of software development costs under the provisions of Statement of Position 98-1, or SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use requires judgment in determining when a project has reached and concluded the development stage and the period over which the Company expects to benefit from the use of that software. We amortize capitalized software development costs using the straight-line method over the expected useful life of the product, generally between two and four years. We regularly review the carrying value and amortization lives of capitalized software development costs, and we recognize a non-cash charge if the estimated future revenue stream of using the asset falls below its unamortized cost.

Indemnification agreements

Under our bylaws and certain consulting and employment agreements, we have agreed to indemnify our officers, directors and other service providers. The term of the indemnification period is for the individual’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, Youbet has a director and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business. Under these provisions, we generally indemnify the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

We believe the estimated fair value of these agreements is minimal. Accordingly, we had no liabilities for these agreements recorded under FIN 45, Guarantor ’ s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34 , as of December 31, 2007 and 2008.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “ Fair Value Measurements. ” SFAS No. 157 defines fair value and establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 became effective for us only for financial assets and liabilities on January 1, 2008. SFAS 157 becomes effective for nonfinancial assets January 1, 2009. Since we carry no nonfinancial assets on an estimated fair value basis of accounting, the adoption of SFAS No. 157 for nonfinancial assets will not have an effect on our financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141R,” Business Combinations. ” SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date, none of which are presently expected.

In December 2007, the FASB also issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51. ” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary (including a consolidatable variable interest entity) and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2007, and earlier adoption is prohibited. Since we do not now have and do not contemplate acquiring any interests in subsidiaries or variable interest entities with noncontrolling interests, we currently expect that SFAS 160 will not have an impact on our future financial position, results of operations or operating cash flows except if we dispose of a subsidiary (see Note 16 to our consolidated financial statements) before its effective date.

In March 2008, the FASB issued SFAS No. 161, “ Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 ”. SFAS No. 161 expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, regarding an entity’s derivative instruments and hedging activities. SFAS No. 161 will be effective for the Company’s fiscal year and interim periods beginning January 1, 2009. We do not expect that SFAS No. 161 will have an impact on the Company’s future financial condition, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Lives of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. This interpretation will be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. We are still assessing the potential impact of adoption.

ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements for Youbet.com, Inc. are included at the end of this report beginning on page F-1.

ITEM 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

(1)

The consolidated financial statements of Youbet.com, Inc., which are listed on the Index to consolidated financial statements appearing on page 36 of this report.

(2)

Schedule II — Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable, not required or the information is included elsewhere in the consolidated financial statements or notes thereto.

(3)

List of Exhibits:

	3.1			Certificate of Incorporation of Youbet.com, Inc., as amended (incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-QSB for the quarter ended September 30, 2003).
	3.2			Amended and Restated Bylaws of Youbet.com, Inc. (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed April 20, 2007).
	4.1			Registration Rights Agreement by and among Youbet.com, Inc. (formerly You Bet International, Inc.) and the other parties listed therein dated June 29, 1998 (incorporated by reference to Exhibit 99.5 to our current report on Form 8-K filed July 14, 1998).

	4.2			Warrant to purchase Youbet common stock issued to Robert M. Fell dated June 29, 1998 (incorporated by reference to Exhibit 99.3 to our current report on Form 8-K filed July 14, 1998).
	10.1			Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to our registration statement on Form S-3, File No. 333-126131).*
	10.2			Amendment Number One to the Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed June 16, 2006).*
	10.3			Amendment Number Two to the Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed June 17, 2008).*
	10.4			Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 to our current report on Form 8-K filed June 17, 2008).*
	10.5			Form of Performance Stock Option Agreement (incorporated by reference to Exhibit 10.5 to our current report on Form 8-K filed June 17, 2008).*
	10.6			Form of Non-Employee Director Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K filed June 17, 2008).*
	10.7			Lease Agreement for the Woodland Hills Facility dated March 11, 2000 (incorporated by reference to Exhibit 10.26 to our annual report on Form 10-K for the year ended December 31, 2000).
	10.8			Amendment, dated as of September 8, 2003, to lease agreement for the Woodland Hills Facility dated March 11, 2000 (incorporated by reference to Exhibit 10.6 to our annual report on Form 10-KSB for the year ended December 31, 2003).
	10.9			Assignment and Assumption of Lease, dated as of December 15, 2008, by and between Youbet.com, Inc. and Youbet Services Corporation.†
	10.10			License and Content Agreement, dated as of May 18, 2001, by and among ODS Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by reference to Exhibit 10.27 to our quarterly report on Form 10-Q for the quarter ended June 30, 2001).
	10.11			Amendment to License and Content Agreement dated as of June 6, 2007, by and among ODS Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed June 12, 2007).
	10.12			Youbet.com, Inc. Offer Letter to Michael D. Nelson, dated December 12, 2006 and accepted December 13, 2006 (incorporated by reference to Exhibit 99.2 to our current report on Form 8-K filed January 8, 2007).*
	10.13			Employment Agreement, dated as of July 9, 2007, by and between Youbet.com, Inc. and James A. Burk (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 11, 2007).*
	10.14			Employment Agreement, dated as of March 1, 2008, by and between Youbet.com, Inc. and Daniel Perini (incorporated by reference to Exhibit 10.7 to our quarterly report on Form 10-Q for the quarter ended June 30, 2008).*
	10.15			Severance and General Release Agreement, by and between Youbet.com, Inc. and James A. Burk.* †
	10.16			Form of Indemnification Agreement.†
	10.17			Promissory Notes issued by Youbet.com, Inc. in favor of UT Group, LLC (incorporated by reference to Exhibit 10.4 to our current report on Form 8-K and filed February 13, 2006).

	10.18			Settlement Agreement, dated as of November 13, 2008, by and among Youbet.com, Inc., Louis J. Tavano, James Scott, Richard M. Tavano and Jacktrade LLC (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed November 19, 2008).
	10.19			Loan and Security Agreement, dated as of December 3, 2008, by and among Youbet.com, Inc., United Tote Company and Youbet Services Corporation, as borrowers, and National City Bank, as lender (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K and filed December 9, 2008).
	10.20			Term Note A, dated as of December 3, 2008, made by Youbet.com, Inc., United Tote Company and Youbet Services Corporation in favor of National City Bank (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K and filed December 9, 2008).
	10.21			Revolving Note, dated as of December 3, 2008, made by Youbet.com, Inc., United Tote Company and Youbet Services Corporation in favor of National City Bank (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K and filed December 9, 2008).
	10.22			Guaranty, dated as of December 3, 2008, made by UT Gaming, Inc. in favor of National City Bank (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K and filed December 9, 2008).
	10.23			Stock Pledge Agreement, dated as of December 3, 2008, between UT Gaming, Inc. and National City Bank (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K and filed December 9, 2008).
	10.24			Intellectual Property Security Agreement, dated as of December 3, 2008, by and among Youbet.com, Inc., United Tote Company and Youbet Services Corporation, as borrowers, and National City Bank, as secured party (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K and filed December 9, 2008).
	10.25			Employment Agreement, dated as of January 1, 2004, by and between Youbet.com, Inc. and Gary W. Sproule (incorporated by reference to Exhibit 10.2 to our quarterly report on Form 10-Q for the quarter ended June 30, 2004).*
	10.26			First Amendment, dated as of August 1, 2005, to Employment Agreement, dated as of January 1, 2004, by and between Youbet.com, Inc. and Gary W. Sproule (incorporated by reference to Exhibit 10.4 to our quarterly report on Form 10-Q for the quarter ended September 30, 2005).*
	21.1			List of subsidiaries.†
	23.1			Consent of Piercy Bowler Taylor & Kern, Certified Public Accountants.**
	24.1			Power of Attorney (set forth on the signature page of this report).
	31.1			Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.**
	31.2			Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.**
	32.1			Certifications Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.**

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Power of Attorney

Youbet.com, Inc., a Delaware corporation, and each person whose signature appears below, constitutes and appoints David Goldberg and Susan Bracey, and either of them, with full power to act without the other, as such person’s true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this annual report on Form 10-K/A and any and all amendments to such annual report on Form 10-K/A and other documents in connection therewith, and to file the same, and all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Youbet.com, Inc. and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ David Goldberg   David Goldberg		President and Chief Executive Officer (Principal Executive Officer)		January 27, 2010
/s/ Susan Bracey   Susan Bracey		Chief Financial Officer (Principal Financial Officer)		January 27, 2010
/s/ Michael D. Nelson   Michael D. Nelson		Chief Accounting Officer (Principal Accounting Officer)		January 27, 2010
/s/ F. Jack Liebau   F. Jack Liebau		Chairman of the Board		January 27, 2010
/s/ Michael Brodsky   Michael Brodsky		Executive Chairman		January 27, 2010
/s/ Gary Adelson   Gary Adelson		Director		January 27, 2010
/s/ Michael D. Sands   Michael D. Sands		Director		January 27, 2010
/s/ James Edgar   James Edgar		Director		January 27, 2010
/s/ Michael Soenen   Michael Soenen		Director		January 27, 2010
/s/ Raymond Anderson   Raymond Anderson		Director		January 27, 2010

Index to Consolidated Financial Statements

		Page
Management’s report on internal control over financial reporting			F-2
Report of independent registered public accounting firm			F-3
Consolidated financial statements:
Balance sheets as of December 31, 2008 and 2007			F-4
Statements of operations for the years ended December 31, 2008, 2007 and 2006			F-5
Statements of stockholders’ equity for the years ended December 31, 2008, 2007 and 2006			F-6
Statements of cash flows for the years ended December 31, 2008, 2007 and 2006			F-7
Notes to consolidated financial statements			F-8

MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008.

The Company’s independent registered public accounting firm, Piercy, Bowler, Taylor & Kern, Certified Public Accountants, has issued an audit report on the Company’s internal control over financial reporting. Their report on the audit of internal control over financial reporting is included in their report on the audit of our consolidated financial statements, which appears on page F-3 of this Form 10-K/A.

/s/ David Goldberg   David Goldberg		/s/ Susan Bracey   Susan Bracey
President and Chief Executive Officer		Chief Financial Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Youbet.com, Inc.
Burbank, California

We have audited the accompanying consolidated balance sheets of Youbet.com, Inc. and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years ended December 31, 2008, 2007 and 2006. Our audits included the financial statement schedule of Valuation and Qualifying Accounts included in Item 15(a)(2). We have also audited the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008 and 2007, and the consolidated results of its operations and cash flows for each of the three years ended December 31, 2008, 2007 and 2006, in conformity with accounting principles generally accepted in the United States. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

PIERCY BOWLER TAYLOR & KERN
/s/ Piercy, Bowler, Taylor & Kern
Certified Public Accountants
Las Vegas, Nevada
March 6, 2009

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2008 and 2007

(in thousands, except share amounts)

		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	16,538			$	6,551
Current portion of restricted cash			4,698				8,635
Accounts receivable, net of allowance for doubtful collection of $541 and $3,406			3,031				7,314
Inventories			1,937				2,085
Prepaid expenses and other current assets			1,066				1,417
			27,270				26,002
Property and equipment, net of accumulated depreciation and amortization of $28,623 and $21,638			16,218				24,664
Intangibles, other than goodwill			4,588				6,505
Goodwill							6,859
Other assets			804				1,020
		$	48,880			$	65,050
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	8,704			$	10,390
Trade payables			6,484				10,028
Accrued expenses			8,287				11,346
Customer deposits			4,445				8,326
Deferred revenues			121				212
			28,041				40,302
Long-term debt, net of current portion			3,996				4,767
			32,037				45,069
Stockholders’ equity
Preferred stock, $0.001 par value, authorized 1,000,000 shares, none outstanding
Common stock, $0.001 par value, authorized 100,000,000 shares, 42,562,805 shares issued			43				43
Additional paid-in-capital			135,732				134,286
Deficit			(116,424	)			(111,973	)
Accumulated other comprehensive loss			(129	)			(56	)
Less treasury stock, 1,099,335 and 1,043,781 shares at cost			(2,379	)			(2,319	)
			16,843				19,981
		$	48,880			$	65,050

See notes to consolidated financial statements

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except per share amounts)

		2008				2007				2006
Revenues
Commissions		$	82,929			$	93,969			$	88,093
Contract revenues			22,064				23,965				21,569
Equipment sales			1,133				877				1,295
Other			2,902				3,683				3,637
			109,028				122,494				114,594
Costs and expenses
Track fees			39,303				39,246				37,688
Licensing fees			9,124				19,810				21,967
Network operations			3,928				4,564				3,934
Contract costs			14,794				16,584				13,548
Cost of equipment sales			466				429				673
			67,615				80,633				77,810
Gross profit			41,413				41,861				36,784
Operating expenses
General and administrative			17,752				21,160				22,771
Sales and marketing			5,273				10,009				7,912
Research and development			3,430				3,947				3,002
Depreciation and amortization			8,074				9,117				5,958
Impairment write downs			11,212				8,000
			45,741				52,233				39,643
Loss from continuing operations before other income (expense) and income tax			(4,328	)			(10,372	)			(2,859	)
Interest income			233				642				536
Interest expense			(1,244	)			(1,796	)			(1,955	)
Other			174				153				711
Loss from continuing operations before income tax			(5,165	)			(11,373	)			(3,567	)
Income tax			658				2,814				734
Loss from continuing operations			(5,823	)			(14,187	)			(4,301	)
Discontinued operations
Income (loss) from discontinued operations, net of $731 income tax benefit in 2007			1,372				(14,231	)			2,270
Net loss		$	(4,451	)		$	(28,418	)		$	(2,031	)
Basic income (loss) per share
Loss from continuing operations		$	(0.14	)		$	(0.34	)		$	(0.12	)
Income (loss) from discontinued operations			0.03				(0.34	)			0.06
Net loss			(0.11	)			(0.68	)			(0.06	)
Diluted income (loss) per share
Loss from continuing operations		$	(0.14	)		$	(0.34	)		$	(0.12	)
Income (loss) from discontinued operations			0.03				(0.34	)			0.06
Net loss			(0.11	)			(0.68	)			(0.06	)
Weighted average shares outstanding
Basic			41,463,470				41,796,218				35,141,027
Diluted			41,463,470				41,796,218				35,141,027