UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

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, 5th 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, 2009) was approximately $99.1 million based on the closing sale price of $3.30/share as reported on the NASDAQ Capital Market on June 30, 2009.

As of December 31, 2009, there were 41,730,038 shares of common stock, $.001 par value per share, outstanding (net of treasury shares).

Portions of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference in Part III of this report.

 

 

YOUBET.COM, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009

		Page
PART I.
Item 1. Business			3
Item 1A. Risk factors			10
Item 1B. Unresolved staff comments			18
Item 2. Properties			18
Item 3. Legal proceedings			18
Item 4. (Removed and reserved)			19
PART II.
Item 5. Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities			20
Item 6. Selected consolidated financial data			22
Item 7. Management’s discussion and analysis of financial condition and results of operations			24
Item 7A. Quantitative and qualitative disclosures about market risk			40
Item 8. Financial statements and supplementary data			40
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure			40
Item 9A(T). Controls and procedures			40
Item 9B. Other information			40
PART III.
Item 10. Directors, executive officers and corporate governance			41
Item 11. Executive compensation			41
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters			41
Item 13. Certain relationships and related transactions			42
Item 14. Principal accountants’ fees and services			42
PART IV.
Item 15. Exhibits and financial statement schedules			42
Signatures			45
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Preliminary Notes

The words “Youbet,” “we,” “our,” “ours,” “us,” and the “Company” refer to Youbet.com, Inc., together with its subsidiaries, except where the context otherwise requires. This annual report on Form 10-K is for the year ended December 31, 2009. This annual report modifies and supersedes documents filed prior to this annual report. The Securities and Exchange Commission (the “SEC”) allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference (such as exhibits to this annual report) is considered to be part of this annual report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this annual report.

Industry and market data used throughout this annual report is based on independent industry and government publications, reports by market research firms and other published independent sources. Some data is also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. Although we believe these sources are reliable, we have not independently verified the information from these third-party sources and cannot guarantee their accuracy or completeness.

Cautionary Statement

This annual report on Form 10-K contains forward-looking statements which include, but are not limited to, statements about our pending merger with and into Churchill Downs Incorporated (“Churchill Downs”) and statements concerning expectations as to our revenues, expenses, and net income, our growth strategies and plans, our assessment of strategic alternatives for United Tote Company (“United Tote”), 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 this 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.

PART I.

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 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 180 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, television speed live audio/video broadcasts with our xStreamAV^tm of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our skilled 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 content 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 (“United Tote”) 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.

Churchill Downs Merger Agreement

On November 11, 2009, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Churchill, Tomahawk Merger Corp., a wholly owned subsidiary of Churchill Downs (“Merger Corp”), and Tomahawk Merger LLC, a wholly owned subsidiary of Churchill Downs (“Merger LLC”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub will merge with and into Youbet, with Youbet surviving as a wholly owned subsidiary of Churchill Downs (the “Merger”) and (ii) following completion of the Merger, the surviving corporation from the Merger will merge with and into Merger LLC, with Merger LLC surviving such merger.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (other than treasury shares, shares held by our wholly owned subsidiaries or shares of our common stock held by Churchill Downs or any of its subsidiaries) will be converted into the right to receive (i) 0.0598 of a share of Churchill Downs common stock and (ii) $0.97 in cash, subject to adjustment to ensure that the Merger does not require Churchill Downs to issue more than 19.6% of the outstanding Churchill Downs common stock outstanding as of immediately prior to the effective time of the Merger.

The Merger is subject to customary closing conditions, including (i) approval and adoption by our stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, (iii) absence of litigation or injunctions prohibiting the transactions contemplated by the Merger Agreement and (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties made by us and Churchill Downs, and compliance by us and Churchill Downs of our and Churchill Downs’s respective obligations under the Merger Agreement.

We have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to conduct our business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger. We are also subject to a “no-shop” restriction on our ability to solicit alternative acquisition proposals, provide certain information and engage in discussions with third parties, subject to certain exceptions. The Merger Agreement also provides for certain termination rights for both us and Churchill Downs, including our right to terminate the Merger Agreement under certain circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement under specified circumstances, we may be required to pay Churchill Downs a termination fee of $4,326,000 and reimburse Churchill Downs’s transaction expenses up to $500,000 and Churchill Downs may be required to pay us a termination fee of $5,000,000.

Additional information regarding the Merger is provided in the proxy statement/prospectus filed with the SEC by Churchill Downs on March 2, 2010 and mailed to our stockholders on March 4, 2010.

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 $12.3 billion in 2009, 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, as amended (the “IHA”), 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 (the “UIGEA”), which includes certain racing protective provisions by maintaining the status-quo with respect to wagering activities covered under the IHA. 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 UIGEA.

Competitive Advantages

We are a leading ADW company focused on horse racing primarily in the U.S. and have processed over $3.1 billion in wagers from January 1, 2004 to December 31, 2009. 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 both additional domestic and international content for our customers to view and to wager on. By entering into additional content agreements with international racing and gaming entities, this will provide our customers with a more diverse array of content to view and to wager on across more hours of the day. In 2009 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

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 79% of our total revenue for 2009. We generate additional revenue primarily from processing fees, monthly subscription service 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

Disposition of Bruen Productions

In October 2006, we 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. We 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 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 14 “Discontinued Operations” in our consolidated financial statements at the end of this report.

Shutdown of IRG

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. On March 14, 2008, we entered into agreements with the U.S. Attorney’s Office in Las Vegas. Pursuant to one agreement, the U.S. Attorney’s Office agreed not to pursue any charges against Youbet or IRG in exchange for our continued cooperation with the government’s ongoing investigation. In separate agreements, we agreed to forfeit approximately $1.5 million previously seized by the government as part of its investigation. 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 14 “Discontinued Operations” in our consolidated financial statements at the end of this report.

Research and Development

Expenses

During 2009, 2008 and 2007, we spent approximately $4.2 million, $4.5 million and $4.4 million, respectively, on research and development activities, including capitalized expenses of $0.9 million, $1.1 million and $0.5 million in 2009, 2008 and 2007, 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 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 16 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. 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 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, Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, AmWest Entertainment, New Jersey Account Wagering, The New York Racing Association ( “NYRA”), Connecticut OTB, Sol Mutuel Limited, Royal River Racing, 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 $12.3 billion in 2009, 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 2009 was approximately $400.5 million or 3.3% 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 principal competitors in this business segment are AmTote International, Inc. (owned by Magna), Scientific Games Corporation and Las Vegas Dissemination Company. 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 May 2009, the 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 2009, 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 October 2009, the Illinois Racing Board approved Youbet’s application for an Advance Deposit Wagering license through the end of 2010.

In November 2009, 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 2009, the California Horse Racing Board renewed our in-state and out-of-state ADW licenses through the end of 2010. Also, in December 2009, 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 2010.

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, 2009, we had a total of 346 employees, 295 of whom were full-time and 51 were part-time. Of the 346 total, 93 were employed in our ADW segment and 253 were employed in our totalizator segment. We have never had a work stoppage. Eighteen of our totalizator segment employees as of December 31, 2009, 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 1A.		RISK FACTORS

The risks and uncertainties described below may not be the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations or financial results. If any of the following risks occur, our business, prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.

Risks Related to Our Business

Our pending Merger with Churchill Downs may cause disruption in our business and, if the pending Merger does not occur, we will have incurred significant expenses and our stock price may decline.

The announcement of our pending Merger with Churchill Downs, whether or not consummated, may result in a loss of key personnel and may disrupt our sales and operations, which may have an impact on our financial performance. The Merger agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger, but includes certain contractual restrictions on the conduct of our business that may affect our ability to execute on our business strategies and attain our financial goals. Additionally, the announcement of the pending Merger, whether or not consummated, may impact our relationships with third parties.

The completion of the pending Merger is subject to certain conditions, including, among others (i) approval and adoption by our stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, (iii) absence of litigation or injunctions prohibiting the transactions contemplated by the Merger Agreement and (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties made by us and Churchill Downs, respectively, and compliance by us and Churchill Downs of our and Churchill Downs’s respective obligations under the Merger Agreement.

We cannot predict whether all of the closing conditions for the pending Merger set forth in the Merger Agreement will be satisfied. As a result, we cannot assure you that the pending Merger will be completed. If the closing conditions for the pending Merger set forth in the Merger Agreement are not satisfied or waived pursuant to the Merger Agreement, or if the transaction is not completed for any other reason, the market price of our common stock may decline. In addition, if the pending Merger does not occur, we will nonetheless remain liable for significant expenses that we have incurred related to the transaction.

If the Merger Agreement is terminated under certain circumstances, then we would be required to pay Churchill Downs a termination fee of approximately $4,326,000 and reimburse Churchill Downs’s transaction expenses up to $500,000.

These matters, alone or in combination, could have a material adverse effect on our business and financial results.

If it is determined that our business practices violate state gaming laws or regulations, we could be subject to claims for damages, fines or other penalties and may be prohibited from accepting pari-mutuel wagers from these states in the future.

We currently have licenses in the states of California, Idaho, Oregon, Virginia, Illinois and Washington to operate an ADW multi-jurisdictional wagering hub and/or to accept wagers from residents of such states. We also accept pari-mutuel wagers from subscribers in other states where, we believe, accepting such wagers is permitted pursuant to the IHA, state laws, and certain other laws and legal principles, including those contained in the U.S. Constitution. However, state attorneys general and gaming regulators may interpret state gaming laws, the federal statutes and constitutional principles and doctrines in a narrower manner than we do. If a federal or state court were to adopt such a narrow interpretation of these laws, we may face criminal or civil damages, fines or other penalties and may be prohibited from accepting pari-mutuel wagers in one or more states in the future, which may adversely affect our business and results of operations.

In addition, if any proceedings were brought by governmental or private litigants who disagree with our interpretation of the applicable laws, the adverse publicity and cost of such litigation and diversion of management’s focus and time away from our business operations may have a materially adverse effect on our financial condition and results of operations. From time to time, we have received correspondence from various state governmental agencies inquiring into the legality of our business activities and, in certain circumstances, alleging our non-compliance with state gaming laws. To date, we have responded in a timely manner to all of these inquiries outlining our legal position, which we believe permits our business operations in such states. We cannot assure you that any of these state governmental agencies agree with our legal position or that proceedings intended to prohibit or restrict our business will not be brought against us by one or more of these state governmental agencies in the future.

Furthermore, a number of states have considered, enacted 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. The extensive regulation by both state and federal authorities of gaming activities also can be significantly affected by changes in the political climate and changes in economic and regulatory policies. Such effects could be materially adverse to us.

Laws and regulations proposed by Congress and various state legislatures or federal or state authorities that are directly applicable to online and Internet gambling could have a material adverse effect on our business.

The UIGEA was signed into law on October 13, 2006. On November 12, 2008, the Department of Treasury and Federal Reserve Board jointly published the UIGEA Rule, implementing the UIGEA.

The UIGEA includes certain racing protective provisions by maintaining the status quo with respect to wagering activities under the IHA. Certain versions of this legislation and other bills introduced in prior years have not included exemptions applicable to our business, and we cannot be certain legislation will not be introduced in the future that could threaten to materially and adversely affect our business.

A number of states have enacted, considered or are considering interactive and Internet gaming legislation and regulations which may or may not be worded so as to permit our business to continue in such states; and anti-gaming conclusions and recommendations of other governmental or quasi-governmental bodies could form the basis for new laws, regulations, or enforcement policies that could have a material adverse effect on our business. International expansion of our business could result in our business being subject to laws and regulations of additional foreign jurisdictions, and changes in such laws and regulations or enforcement policies could have a material adverse effect on our business.

If credit card companies, banks or third party processing companies, as a policy, refuse to process account wagering transactions as a result of perceived legal uncertainty surrounding online live event wagering, our business and results of operations could be adversely affected.

Credit card companies, banks and third party processing companies may in the future become hesitant to process deposits, fees and online transactions by our customers as a result of perceived legal uncertainty, including perceived uncertainty under the UIGEA and the UIGEA Rule, which prohibit 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, even though the UIGEA contains a specific exemption for activities that are permitted under the IHA of 1978. The refusal by credit card companies, banks and third party processing companies to process such transactions would limit the methods of payment available to our subscribers, reducing the convenience of our services, and may make competitive services more attractive. This may adversely affect our business.

If the federal government or state governments impose taxes on wagers or increase fees on wagers, our business could be adversely affected.

If one or more governmental authorities successfully assert that we should collect taxes on wagers, it could adversely affect our business. We do not currently collect taxes on wagers. However, one or more local, state or foreign jurisdictions may seek to tax Internet wagering when a subscriber is physically within their jurisdiction at the time the wager is placed. Such taxes, if imposed, could have a material adverse effect on our business. We currently pay all applicable fees on wagers in accordance with the applicable rules and regulations of the jurisdictions where we are licensed and regulated. If the regulatory authorities in such jurisdictions increase the fees required to be paid on wagers, it would have a material adverse effect on our business.

If any of our significant license and content agreements are terminated or are not renewed, our business and results of operations may be adversely affected.

TVG has formed purported exclusive relationships with a number of major U.S. horse racetracks. In May 2001, we entered into a license and content agreement with TVG. Pursuant to this agreement, we have a non-exclusive license to access the simulcast audio, video and data content, as well as the wagering pools, of certain racing content at these racetracks. If our agreement with TVG is terminated or if such relationships between TVG and such racetracks are terminated or not renewed, and if, following any such termination or non-renewal, we are not able to license such content directly from the track operators, our business and results of operations may be adversely affected. We also have content agreements with TrackNet, NYRA and Hollywood Park which allow us to access the video and data content, as well as the wagering pools, of certain racing content controlled by them or their affiliates. If any of these content agreements are terminated or we are not able to renew such agreements, our business and results of operations may be adversely affected.

We face strong competition, and we expect competition to increase.

TVG, which operates an ADW website and the Television Games Network, is a direct competitor in the interactive, pari-mutuel wagering market. The Television Games Network is a 24-hour national racing channel for distribution over cable, Dish Network and DIRECTV^®, along with an in-home pari-mutuel wagering system that requires a dedicated television set-top box. TVG currently operates in 16 states. Expansion by TVG into states where TVG does not currently operate would increase competition for us.

In January 2009, Betfair completed its purchase of TVG. Changes by Betfair in the operation of TVG, including investment of significant resources into the operation of TVG or expansion into states where TVG currently does not operate, would increase competition for us.

Magna and its affiliated ADW website XpressBet, and Churchill Downs and its affiliated ADW website Twinspires.com, are also direct competitors in the domestic interactive, pari-mutuel wagering market. In March 2007, Magna and Churchill Downs announced that they had formed a joint venture called TrackNet through which the companies’ horse racing content would be available to each other’s various distribution platforms, including XpressBet and Twinspires, and to third parties, including racetracks, casinos and other ADW providers. Magna and Churchill Downs also jointly own Horse Racing Television. For more information about TrackNet, see Item 1. “Business—Competition”.

Other competitors include, but are not limited to, Elite Turf Club, Racing & Gaming Services, Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, AmWest Entertainment, New Jersey Account Wagering, NYRA, Connecticut OTB, Sol Mutuel Limited, Royal River Racing, Penn National Gaming, Inc., Day at the Track, Inc., and Racing2Day LLC. We expect to compete with these entities, as well as new domestic and international competitors which may enter the interactive, pari-mutuel gaming market, including tracks themselves, off-track betting parlors, large established interactive and online software companies and domestic and international gaming companies. It is possible that our current and potential competitors may have greater resources than us.

The refusal by horsemen’s groups to approve content agreements could have a material adverse effect on our business.

In 2008, the Thoroughbred Horsemen’s Group (the “THG”), a collection of horsemen’s groups from several states, refused to approve agreements for the distribution of certain content by ADW operators pursuant to the IHA. Such refusal by the THG did not significantly limit the content we could provide to our customers or have any material effect on our operations for 2008 since we did not have agreements to carry most of the content that was subject to such refusal by the THG. However, it is possible that the THG, other collections of horsemen groups, or individual horsemen groups, could refuse to approve content agreements to which we are a party in the future and such refusal may limit the content we could provide to our customers and therefore have a material adverse affect on our business.

Our inability to retain our relationships with our content providers would have a material adverse effect on our business.

We depend upon a limited number of suppliers for the majority of our premier content, and the cancellation or non-renewal of our license agreements with any one of those suppliers, such as TrackNet, NYRA, Del Mar or Hollywood Park, would have a material adverse effect on our business.

Our inability to retain our core customer base or our failure to attract new customers would have a material adverse effect on our business.

Our data mining software generates detailed customer segmentation analyses based on variables such as wagering propensities and preferences, which allows us to personalize our product offerings through targeted special offers tailored to specific customer segments. We believe that these techniques help us to retain our best customers. In addition, our marketing relationships with the Daily Racing Form and others help us attract new customers. If we are unable to retain our core customer base through robust content offerings and other popular features, if we lose customers to our competitors, or if we fail to attract new customers, our businesses would fail to grow or would be adversely affected.

Current economic climate may adversely impact customers wager frequency and amounts.

The continuing credit crisis, increasing unemployment and the stock market declines may impact our customers’ ability to wager with the same frequency and maintain their wagering level profiles. A significant loss of customers or a considerable decline in wagering would adversely affect our business and results of operations. In addition, the current economic climate could adversely impact wagering levels and profitability at racetracks from which we carry racing content, which may cause certain racetracks to cancel races or cease operations and therefore reduce the content we could provide to our customers. A reduction in the content we provide to our customers could reduce our revenue and have an adverse impact on our profitability.

System failures or damage from earthquakes, fires, floods, power loss, telecommunications failures, break-ins or other unforeseen events could harm our business.

Our business depends upon our communications hardware and our computer hardware. Currently, our hardware is stored in two different locations. Our web services and internet connection hardware are located in a Tier IV co-location facility in Miami, Florida. Our AV distribution systems are stored at a co-location facility in Denver, Colorado. We have built certain redundancies into our systems to avoid downtime in the event of outages, system failures or damage; however, we do not have duplicate geographic locations for our site of operations. Thus, our systems remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist attacks, hardware or software error, computer viruses, computer denial-of-service attacks and similar events. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems could result in lengthy interruptions in our services. Any unscheduled interruption in the availability of our website and our services results in an immediate, and possibly substantial, loss of revenue. Frequent or persistent interruptions in our services could cause current or potential users to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our site, and could permanently harm our reputation and brand. These interruptions also increase the burden on our engineering staff, which, in turn, could delay our introduction of new features and services on our website. We have property and business interruption insurance covering damage or interruption of our systems. However, this insurance might not be sufficient to compensate us for all losses that may occur.

We may not be able to respond to rapid technological changes in a timely manner or without service interruptions, which may cause customer dissatisfaction.

The gaming sector is characterized by the rapid development of new technologies and continuous introduction of new products. Our main technological advantage versus potential competitors is our software lead-time in the market and our experience in operating an Internet-based wagering network. However, we may not be able to maintain our competitive technological position against current and potential competitors, especially those with greater financial resources. Our success depends upon new product development and technological advancements, including the development of new wagering platforms. While we expend a significant amount of resources on research and development and product enhancement, we may not be able to continue to improve and market our existing products or technologies or develop and market new products in a timely manner. Further technological developments may cause our products or technologies to become obsolete or noncompetitive.

If we were to lose the services of key personnel, we may not be able to execute our business strategy.

Our future success depends in a large part upon the continued service of key members of our senior management team. They are critical to our overall management, as well as the development of our technology, culture and strategic direction. Our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, marketing, finance/accounting and customer service personnel. Competition for such personnel is intense, and we may not be able to retain and attract such employees.

Our operating results fluctuate seasonally and may be adversely impacted by a reduction in live racing dates as a result of regulatory factors.

We experience significant fluctuations in quarterly operating results as a result of the seasonality associated with the racing schedules. Generally, revenue is greater in the second and third quarters of the calendar year. We carry a limited number of live racing dates and the number of live racing dates varies somewhat from year to year. The allocation of live racing dates in most of the jurisdictions is subject to regulatory approval from year to year and, in any given year, there may not be the same or more racing dates than in prior years. A significant decrease in the number of live racing dates would reduce our revenue and cause our businesses to suffer.

If the horse racing tracks that we carry experience unfavorable weather, it may cause races to be cancelled which would reduce our revenue and have an adverse impact on our profitability.

Because horse racing is conducted outdoors, unfavorable weather conditions, including extremely high or low temperatures, excessive precipitation, storms or hurricanes, may cause races to be cancelled. Because a substantial portion of our operating expenses are fixed, a reduction in the number of races held or in the number of horses racing due to unfavorable weather would reduce our revenue and have an adverse impact on our profitability.

A horse racing industry controversy could cause a decline in bettor confidence and result in changes to legislation, regulation or industry practices, which could materially reduce the amount wagered on horse racing and increase our costs, and therefore, adversely affect our revenue and operating results.

A horse racing industry controversy could cause a decline in bettor confidence and result in changes to legislation, regulation or industry practices. For example, on October 26, 2002, in connection with the Breeders’ Cup World Thoroughbred Championships held at Arlington Park in Chicago, Illinois, only one person placed winning bets on the Pick 6, a bet to pick the winning horse in six consecutive races. The bettor purchased all six winning tickets, valued at more than $2.5 million, through an off-track betting telephone system. Payment of the winnings was withheld when an examination of the winning bets revealed an unusual betting pattern. Scientific Games Corporation, the parent company of Autotote Systems, Inc., later announced that it had fired an employee who had allegedly accessed the totalizator system operated by Autotote Systems, altered the winning Pick 6 tickets, and erased the record of his access. The Federal Bureau of Investigation conducted an investigation, and three individuals pled guilty in federal court to conspiring to commit fraud and money laundering. Industry controversy, like the Pick 6 matter, could result in a perceived lack of integrity or security, a decline in bettor confidence, and could lead to a decline in the amount wagered on horse racing. Any such controversy could lead to changes in legislation, regulation or industry practices, which could result in a material reduction in the amount wagered on horse racing and in the revenue and earnings of companies in the horse racing industry, including us.

The inability of our systems and controls to handle online security risks would have a material adverse effect on our business.

We use packet filters, fire walls and proxy servers which are all designed to control and filter the data allowed to enter our data centers. However, advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may make it easier for someone to compromise or breach the technology we use to protect our subscribers’ transaction data. If such a breach of security were to occur, it could cause interruptions in service and loss of data or cessation in service to our subscribers. This may also allow someone to introduce a “virus” or other harmful component to Youbet causing an interruption or malfunction.

To the extent our activities involve the storage and transmission of information such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability, as well as costs of complying with laws governing disclosure and remediation following such breaches. Our insurance policies might not be sufficient to reimburse us for losses caused by such security breaches.

The U.S. government’s investigation into the wagering activities of certain IRG customers may adversely affect our financial condition and results of operations.

The U.S. government’s investigation into the wagering activities of certain IRG customers resulted in the seizure of approximately $1.5 million held in IRG bank accounts on October 11, 2007, among other things. On March 14, 2008, we entered into agreements with the U.S. Attorney’s Office in Las Vegas. Pursuant to one agreement, the U.S. Attorney’s Office agreed not to pursue any charges against Youbet or IRG in exchange for our continued cooperation with the government’s ongoing investigation. In separate agreements, we agreed to forfeit approximately $1.5 million previously seized by the government as part of its investigation.

While these agreements resolve the matter for Youbet, the U.S. government’s ongoing investigation creates other ancillary risks. Our continued cooperation with the U.S. government’s investigation may continue to divert management’s attention from managing our day-to-day operations and expenses arising from cooperating and responding to the U.S. government’s investigation may be significant. In addition, current and former employees, officers and directors may seek indemnification, advancement or reimbursement of expenses from us, including attorneys’ fees, with respect to current or future proceedings related to this matter. These events could adversely affect our financial condition, results of operations and the price of our common stock.

Our credit facility imposes significant restrictions on us.

Our credit facility, which consists of a $5.0 million revolving line of credit and a $10.0 million term loan and matures on November 30, 2010, contains 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 minimum specified adjusted EBITDA and (iv) limitations on capital expenditures. Our indebtedness under the loan and security agreement is guaranteed by UT Gaming, Inc. (“UT Gaming”), the direct parent of United Tote, and secured by substantially all of our assets, including our intellectual property, and UT Gaming’s equity in United Tote. The covenants contained in the loan and security agreement may limit our ability to expand, pursue our business strategies and obtain additional funds. Our ability to meet the financial covenants in the loan and security agreement may be adversely affected by deterioration in business conditions or our results of operations, adverse regulatory developments and other events beyond our control. As of December 31, 2009, we were in compliance with financial covenants under the loan and security agreement. Failure to comply with these covenants may result in the occurrence of an event of default. Upon the occurrence of an event of default, the lender may terminate our credit facility and demand immediate payment of all amounts borrowed by us, which would have adverse consequences on our business and results of operations and may adversely affect the trading price of our common stock. The Merger will result in a change of control under our credit facility, which constitutes an event of default. As a result, the lenders on the credit facility may accelerate our obligations under the credit facility.

Risks Related to United Tote

United Tote’s totalizator business depends on its relationships with its track and other partners for a substantial portion of its revenue. The loss of all or a portion of these relationships could result in the failure to realize the expected level of revenue from United Tote’s totalizator business.

United Tote has contracts to provide totalizator services to more than 100 tracks and other facilities that accept pari-mutuel wagers, such as off-track betting parlors, casinos, and jai alai frontons. As a result, the success of United Tote depends, in part, on our ability to maintain successful relationships with United Tote’s contract partners. Should these contract partners discontinue purchasing totalizator services from United Tote, we will fail to realize our expected level of revenue from United Tote’s totalizator business.

United Tote’s totalizator business depends on the total amount of wagers placed with its track partners.

Many of United Tote’s contracts provide that it will receive a percentage of the pari-mutuel wagers for which it provides totalizator services. As the amount of pari-mutuel wagering increase, United Tote’s revenue increases. Accordingly, a decrease in wagers placed at one or more of United Tote’s contract partners could cause a decline in United Tote’s revenue and, in turn, our consolidated revenue as the owner of United Tote. Further, any material reduction by any one of United Tote’s contract partners in its level of commitment of resources, funding, personnel, and interest in continued development of horse racing or other wagering-based businesses could cause a decline in wagering and United Tote’s and our consolidated revenue.

United Tote’s totalizator business depends upon leading with and responding to technological changes.

United Tote’s success depends upon new product development and technological advancements, including the development of more advanced wagering terminals. While United Tote devotes resources to research and development and product enhancement, it may not be able to continue to improve and market existing products or technologies or successfully develop and market new products in a timely manner. Further technological developments by competitors may cause United Tote products or technologies to become obsolete or noncompetitive.

Technological or human errors could have a material adverse effect on United Tote’s totalizator business

Errors by United Tote technology or personnel may subject United Tote to liabilities, including financial penalties under its totalizator service contracts, which could have a material adverse effect on United Tote’s business.

Current economic conditions may lead to a cessation or reduction of operations by United Tote’s contract partners that could have a material adverse effect on United Tote’s totalizator business.

The continuing credit crisis, increasing unemployment and the stock market declines may impact the ability of United Tote’s contract partners to continue operations at current levels. A cessation or reduction of operations by United Tote’s contract partners could cause them to discontinue or limit the totalizator services they purchase from United Tote, which could adversely affect our business and results of operations.

Risks Related to Ownership of Our Common Stock

If we fail to continue to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment and harm our business.

Our common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. One such requirement is a $1.00 per share minimum bid price. For example, in March 2008, our common stock did not meet the $1.00 per share minimum bid price requirement for 30 consecutive business days, and on March 31, 2008, Nasdaq delivered a notice regarding our noncompliance with their continued listing requirements. The share price subsequently increased above $1.00 for the minimum time period specified by Nasdaq and the situation was cured. If, in the future, our share price drops below the minimum bid price requirement for the applicable period prescribed by Nasdaq, our common stock would be delisted if we are unable to demonstrate compliance within the applicable grace period.

In such a scenario, we may seek stockholder approval to affect a reverse stock split to cause an increase in the trading price of our common stock to a level above the minimum bid price requirement. However, a reverse stock split may not prevent the common stock from dropping back down towards the Nasdaq minimum per share price requirement or below the required level. It is also possible that we would otherwise fail to satisfy another Nasdaq requirement for continued listing of our common stock.

If we fail to meet all applicable Nasdaq Capital Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, adversely affect our ability to obtain financing for the continuation of our operations and harm our business. This delisting could also impair the value of your investment.

The share price of our common stock may be volatile and can decline further.

The trading price of our common stock has been volatile and is likely to continue to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of issues, including broad market factors that may have a material adverse impact on our stock price, regardless of actual performance. These factors include the following:

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periodic variations in the actual or anticipated financial results of our business or that of our competitors;

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downward revisions in securities analysts’ estimates of our future operating results or of the future operating results of our competitors;

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material announcements by us or our competitors;

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public sales of a substantial number of shares of our common stock; and

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adverse changes in general market conditions or economic trends or in conditions or trends in the markets in which we operate.

If our quarterly results are below the expectations of securities market analysts and investors, the price of our common stock may decline further.

Many factors, including those described in this report, can affect our business, financial condition and results of operations, which makes the prediction of our financial results difficult. These factors include:

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changes in market conditions that can affect the demand for horse race wagering;

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general economic conditions that affect the availability of disposable income among consumers; and

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the actions of our competitors.

If our quarterly operating results fall below the expectations of securities market analysts and investors due to these or other risks, securities analysts may downgrade our common stock and some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock.

We have the ability to issue additional equity securities, which would lead to further dilution of our issued and outstanding common stock.

The issuance of additional equity securities or securities convertible into equity securities would result in dilution of then-existing stockholders’ equity interests in us. We may from time to time seek additional capital to fund operations and reduce 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. Our Board of Directors has the authority to issue, without vote or action of stockholders, up to 1,000,000 shares of preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders’ interest. Our Board of Directors has no present intention of issuing any such preferred stock, but reserves the right to do so in the future.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

As of December 31, 2009, we owned no real property. We currently lease our facilities for administrative, service and/or sales activities. The terms of the leases for our leased facilities expire at various dates from June 2010 to December 2016. The following table sets forth the location, business segment, approximate square footage and purpose of our properties as of December 31, 2009:

Location		Business Segment		Square Footage				Use
Woodland Hills, California		ADW			30,000			Administrative
Burbank, California		ADW			3,000			Executive
Louisville, Kentucky		Totalizator			26,900			Service
San Diego, California		Totalizator			12,103			Sales/Service
Ottawa, Canada		Totalizator			2,000			Sales/Service

We believe that our facilities are adequate for our current and anticipated future levels of operations.

ITEM 3.		LEGAL PROCEEDINGS

On November 17, 2009, a putative class action lawsuit, Wayne Witkowski v. Youbet.com, Inc., et al., was filed in the Superior Court of Los Angeles, California against Youbet, various of our directors, Churchill Downs, Merger Corp and Merger LLC. Subsequently, five additional lawsuits were also filed in the Los Angeles Superior Court, two of which name Youbet and our directors as defendants and three of which also name Churchill Downs as a defendant. All six lawsuits (the “Los Angeles Litigation”), are putative class actions brought on behalf of our stockholders. Plaintiffs in the Los Angeles Litigation have since moved to consolidate the Los Angeles Litigation, to file a single consolidated complaint and to appoint lead counsel. That motion was granted on January 22, 2010.

The complaints in the Los Angeles Litigation all allege that our directors have breached their fiduciary duties, including alleged duties of loyalty, due care and candor, in connection with the proposed Merger. In that regard, the various complaints include, among other things, allegations that the proposed Merger is the result of an inadequate sales process which has not been designed to maximize stockholder value; that the consideration to be received by our shareholders is unfair and inadequate; that the Merger Agreement includes inappropriate “no solicitation,” “matching rights,” no standstill waiver, and termination fee provisions; that the combined effect of these provisions, together with the waiver of our stockholder rights agreement that we signed in connection with the Merger Agreement with respect to Churchill Downs and the entry into voting agreements by defendants and certain others pursuant to which they have agreed to vote in favor of the Merger, is to “lock up” the proposed Merger, foreclose potential alternative bidders and illegally restrain our ability to solicit or engage in negotiations with a third party; that various defendants acted for their own benefit in approving the proposed Merger, including for the purpose of obtaining positions or pursuing opportunities at Churchill Downs; and that material information has not been provided in connection with the proposed Merger and was not provided at the time that we submitted our stockholder rights agreement to a stockholder vote. Those lawsuits which name Churchill Downs or its affiliates as defendants also allege that Churchill Downs has aided and abetted the alleged breaches of fiduciary duty by our directors. We are also alleged to have aided and abetted the alleged breaches of fiduciary duty by our directors. Among the relief sought by the complaints is an enjoining of the proposed Merger, or unspecified damages if the transaction is consummated, together with payment of attorneys’ fees and costs.

On December 23, 2009, a putative class action lawsuit, Raymond Balch v. Youbet.com, Inc., et al., was filed in the Delaware Court of Chancery against Youbet, various of our directors, Churchill Downs, Merger Corp and Merger LLC. The initial Balch complaint contained allegations similar to those made in the Los Angeles Litigation, including a claim that Churchill Downs aided and abetted alleged breaches of fiduciary duty by our directors. On January 8, 2010, an amended complaint was filed in Balch, adding a claim against our directors for an alleged breach of the fiduciary duty of disclosure, and adding allegations that the draft Registration Statement on Form S-4 filed by Churchill Downs with the SEC in connection with the proposed Merger omits material information and is materially misleading in various respects. Among the relief sought by the Balch amended complaint is an enjoining of the proposed Merger, or unspecified damages if the transaction is consummated, together with payment of attorneys’ fees and costs.

On March 2, 2010, Youbet, our directors, Churchill Downs, Merger Corp, and Merger LLC entered into a memorandum of understanding with the plaintiffs in the Los Angeles litigation and the plaintiffs in the Balch litigation reflecting an agreement in principle to settle the cases based on defendants’ agreement to include additional disclosures relating to the proposed Merger in Youbet’s proxy statement/prospectus relating to the Merger that was mailed to Youbet stockholders on March 4, 2010. Youbet, our directors, Churchill Downs, Merger Corp, and Merger LLC each deny that they have committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts alleged in the complaints, and expressly maintain that they diligently and scrupulously complied with any and all of their legal duties. Although Youbet, our directors, Churchill Downs, Merger Corp, and Merger LLC believe the lawsuits are without merit, they entered into the memorandum of understanding to eliminate the burden and expense of further litigation. The memorandum of understanding provides that the settlement is subject to customary conditions including the completion of appropriate settlement documentation, completion of confirmatory discovery, court approval of the settlement, dismissal of the Los Angeles litigation with prejudice, dismissal of the Balch litigation with prejudice, and the consummation of the proposed Merger by the Outside Date (as such term is defined in the Merger Agreement). Additionally, plaintiffs’ counsel is entitled to void the memorandum of understanding if they determine in good faith that, based upon facts learned subsequent to the execution of the memorandum of understanding, the proposed settlement is not fair, reasonable and adequate.

If the settlement is consummated, the Los Angeles litigation and the Balch litigation will each be dismissed with prejudice and the defendants and other released persons will receive from or on behalf of all of our non-affiliated public stockholders who held our common stock at any time from November 10, 2009, through the date of the consummation of the Merger a release of all claims relating to the proposed Merger, the Merger Agreement and the transactions contemplated therein, disclosures made relating to the proposed Merger, and any compensation or other payments made to the defendants in connection with the proposed Merger; except that the settlement will not include a release of claims by current and former Youbet stockholders to exercise their appraisal rights under Delaware law. Likewise, the plaintiffs will receive a release from the defendants, on the same or substantially equivalent terms as the release to be provided to the defendants. Members of the purported plaintiff class will be sent notice of the proposed settlement, and a hearing date before the Superior Court of California, County of Los Angeles, California, will be scheduled regarding, among other things, approval of the proposed settlement and any application by plaintiffs’ counsel for an award of attorneys’ fees and expenses.

We are party to various legal proceedings that are ordinary and incidental to our business. We do not expect that any of these currently pending legal proceedings will have a material adverse impact on our consolidated financial position, consolidated results of operations or cash flows.

ITEM 4.		(REMOVED AND RESERVED)

PART II.

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock currently trades on the Nasdaq Capital Market under the symbol “UBET”. The following table sets forth, for the periods indicated, the high and low sale price per share for our common stock.

		High				Low
Year Ended December 31, 2008:
First Quarter		$	1.28			$	0.65
Second Quarter			1.72				0.67
Third Quarter			2.09				1.04
Fourth Quarter			1.54				0.66
Year Ended December 31, 2009:
First Quarter		$	1.70			$	0.85
Second Quarter			3.59				1.59
Third Quarter			3.91				1.93
Fourth Quarter			3.03				2.05

On December 31, 2009, the closing sale price per share of our common stock as reported on the Nasdaq Capital Market was $2.87 per share. As of December 31, 2009, we had 114 shareholders of record.

Purchases of Equity Securities by Youbet

In March 2007, our board of directors authorized a $10.0 million repurchase of up to two million shares of our common stock. Share repurchases are administered by a special committee of directors and may not be made at any time we are in default under the terms of our credit agreement. Since the inception of this repurchase program through the end of 2007, we repurchased 586,766 shares of our common stock at a weighted average price of $1.71 per share for an aggregate purchase price of approximately $1.0 million. We used cash on hand and cash provided by operating activities to fund these share repurchases. In April 2009, our board of directors approved the modification and extension of its share repurchase plan, which was scheduled to expire on March 31, 2009. Under the modified repurchase plan, the Company is authorized to purchase up to 10% of its common stock outstanding as of March 31, 2009, subject to certain limitations under its existing credit facility. We did not repurchase any shares of our common stock during 2009 pursuant to this repurchase program. Under the Merger Agreement, we have agreed not to repurchase any of our common stock without the approval of Churchill Downs, and we do not expect to repurchase any more shares while the proposed Merger is pending.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about securities authorized for issuance under our equity compensation plans as of December 31, 2009:

Number of Securities Remaining

Weighted Average

Available for Future Issuance

Number of Securities to be Issued

Exercise Price of

Under Equity Compensation Plans

upon Exercise of Outstanding

Outstanding Options,

(excluding securities reflected in

Plan Category

Options, Warrants and Rights

Warrants and Rights

column (a))

(a)

(b)

(c)

Equity compensation plans approved by

by security holders

6,794,594

1.72

1,309,599

Equity compensation plans not approved by

by security holders

—

—

—

6,794,594

1.72

1,309,599

Comparison of Cumulative Total Returns

The chart below compares the performance of Youbet’s common stock with the performance of the Nasdaq Composite and a peer group index by measuring the changes in common stock prices from December 31, 2004 through December 31, 2009. Pursuant to the SEC’s rules, we created peer group indexes with which to compare our own stock performance since a relevant published industry or line-of-business index does not exist. We have selected a grouping of companies that have lines of business similar to our own. All of the companies included in the peer group index are also engaged in other businesses in which Youbet does not participate. The common stocks of the following companies have been included in the Peer Group Index: Churchill Downs, Inc., Magna Entertainment Corp and Scientific Games Corp. The chart assumes $100 was invested on December 31, 2004 in Youbet’s common stock and in each of the foregoing indices. The stock performance shown on the graph below is not necessarily indicative of future price performance.

Dividends

We have never declared or paid any dividends on our common stock. We intend to retain any future earnings primarily for use in the operation and expansion of our business. Consequently, we do not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future. Our ability to pay dividends is restricted by the loan and security agreement relating to our credit facility. Our ability to declare or pay dividends in the future may be dependent upon our financial condition, results of operations, capital requirements, terms of any debt instruments or preferred stock then outstanding and such other factors as our board of directors may deem relevant at the time. Under the Merger Agreement, we have agreed not to pay dividends on our common stock without the approval of Churchill Downs while the proposed Merger is pending.

ITEM 6.		SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth the selected consolidated financial data for each of the years during the five-year period ended December 31, 2009. We derived the selected consolidated financial data from our audited consolidated financial statements. Prospective investors should read this selected financial data in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this report.

		Years ended December 31,
		2009				2008 (1)				2007(2)				2006 (3)				2005(4)
		(in thousands, except per share data)
Statement of Income Data
Revenues		$	111,380			$	109,028			$	122,494			$	114,594			$	82,366
Operating costs			107,682				114,193				133,867				118,161				78,601
Income (loss) from continuing operations before income tax (benefit)			3,698				(5,165	)			(11,373	)			(3,567	)			3,765
Income tax (benefit)			(7,938	)			658				2,814				734				(1,854	)
Income (loss) from continuing operations			11,636				(5,823	)			(14,187	)			(4,301	)			5,619
Income (loss) from discontinued operations (5)			(18	)			1,372				(14,231	)			2,270				72
Net income (loss)		$	11,618			$	(4,451	)		$	(28,418	)		$	(2,031	)		$	5,691
Earnings (loss) per share:
Basic
Income (loss) from continuing operations		$	0.28			$	(0.14	)		$	(0.34	)		$	(0.12	)		$	0.18
Income (loss) from discontinued operations		$	(0.00	)			0.03				(0.34	)			0.06				0.00
Net income (loss)		$	0.28				(0.11	)			(0.68	)			(0.06	)			0.18
Diluted
Income (loss) from continuing operations		$	0.27			$	(0.14	)		$	(0.34	)		$	(0.12	)		$	0.16
Income (loss) from discontinued operations		$	(0.00	)			0.03				(0.34	)			0.06				0.00
Net income (loss)		$	0.27				(0.11	)			(0.68	)			(0.06	)			0.16
Selected Balance Sheet Data
Cash and cash equivalents		$	15,884			$	16,538			$	6,551			$	21,051			$	16,686
Working capital (deficit)			7,064				(771	)			(14,300	)			5,019				12,015
Total assets			51,644				48,880				65,050				105,605				40,829
Current portion of long-term debt			7,196				8,704				10,390				8,311				620
Long-term debt, net of current portion							3,996				4,767				12,054				178
Stockholders’ equity		$	29,676			$	16,843			$	19,981			$	52,774			$	22,884

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, 2009. 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
		2009																2008
		Mar. 31				Jun. 30				Sep. 30				Dec. 31				Mar. 31(2)				Jun. 30				Sep. 30				Dec. 31
		(in thousands, except per share data)
Revenues		$	28,048			$	30,184			$	27,876			$	25,272			$	24,511			$	29,239			$	29,318			$	25,960
Costs and expenses
Track fees			13,063				13,786				12,807				11,066				8,277				10,199				10,599				10,228
Licensing fees			1,317				1,343				705				889				2,098				2,378				2,482				2,166
Network operations			1,005				981				999				886				925				983				985				1,035
Contract costs			3,240				3,842				4,052				3,644				3,536				3,859				3,906				3,493
Cost of equipment sales			58				40				14				75				88				142				159				77
			18,683				19,992				18,577				16,560				14,924				17,561				18,131				16,999
Gross profit			9,365				10,192				9,299				8,712				9,587				11,678				11,187				8,961
Operating expenses
General and administrative			4,181				4,263				4,256				4,304				4,198				4,983				3,633				4,938
Sales and marketing			1,406				1,487				1,547				1,654				1,243				1,160				1,351				1,519
Research and development			903				800				769				834				862				934				796				838
Depreciation and amortization including intangibles			1,834				1,786				1,807				1,790				1,806				1,972				2,197				2,099
Goodwill and intangible impairment writedown (1)																															11,212
			8,324				8,336				8,379				8,582				8,109				9,049				7,977				20,606
Income (loss) from continuing operations			1,041				1,856				920				130				1,478				2,629				3,210				(11,645	)
Interest expense, net of interest income			(198	)			(184	)			(184	)			(170	)			(285	)			(270	)			(223	)			(233	)
Other income (expense)			81				124				194				88				9				(73	)			101				137
Income (loss) from continuing operations before income tax (benefit)			924				1,796				930				48				1,202				2,286				3,088				(11,741	)
Income tax (benefit)			88				341				52				(8,419	)			19				57				286				296
Income from continuing operations			836				1,455				878				8,467				1,183				2,229				2,802				(12,037	)
Income (loss) from discontinued operations (3)			(16	)			(2	)											(409	)			(213	)			(120	)			2,114
Net income (loss)		$	820			$	1,453			$	878			$	8,467			$	774			$	2,016			$	2,682			$	(9,923	)
Net income per common share, diluted
Income (loss) from continuing operations		$	0.02			$	0.03			$	0.02			$	0.19			$	0.03			$	0.05			$	0.07			$	(0.29	)
Income (loss) from discontinued operations																			(0.01	)							(0.01	)			0.05
Net income (loss) per common share			0.02				0.03				0.02				0.19				0.02				0.05				0.06				(0.24	)

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 2009. 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 180 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 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 a 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.

Churchill Downs Merger Agreement

On November 11, 2009, we entered into the Merger Agreement with Churchill Downs, Merger Corp and Merger LLC. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub will merge with and into Youbet, with Youbet surviving as a wholly owned subsidiary of Churchill Downs and (ii) following completion of the Merger, the surviving corporation from the Merger will merge with and into Merger LLC, with Merger LLC surviving such merger.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (other than treasury shares, shares held by our wholly owned subsidiaries or shares of our common stock held by Churchill Downs or any of its subsidiaries) will be converted into the right to receive (i) 0.0598 of a share of Churchill Downs common stock and (ii) $0.97 in cash, subject to adjustment to ensure that the Merger does not require Churchill Downs to issue more than 19.6% of the outstanding Churchill Downs common stock outstanding as of immediately prior to the effective time of the Merger.

The Merger is subject to customary closing conditions, including (i) approval and adoption by our stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, (iii) absence of litigation or injunctions prohibiting the transactions contemplated by the Merger Agreement and (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties made by us and Churchill Downs, and compliance by us and Churchill Downs of our and Churchill Downs’s respective obligations under the Merger Agreement.

We have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to conduct our business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger. We are also subject to a “no-shop” restriction on our ability to solicit alternative acquisition proposals, provide certain information and engage in discussions with third parties, subject to certain exceptions. The Merger Agreement also provides for certain termination rights for both us and Churchill Downs, including our right to terminate the Merger Agreement under certain circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement under specified circumstances, we may be required to pay Churchill Downs a termination fee of $4,326,000 and reimburse Churchill Downs’s transaction expenses up to $500,000 and Churchill Downs may be required to pay us a termination fee of $5,000,000.

Additional information regarding the Merger is provided in the proxy statement/prospectus filed with the SEC by Churchill Downs on March 2, 2010 and mailed to our stockholders on March 4, 2010.

Results of Operations for 2009 Compared to 2008

The following table sets forth, for the years ended December 31, 2009 and 2008, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $1.1 million and $1.2 million in the years ended December 31, 2009 and 2008, respectively.

		ADW Segment																Totalizator Segment
		Year ended December 31,																Year ended December 31,
										Increase				%												Increase				%
		2009				2008				(Decrease)				Change				2009				2008				(Decrease)				Change
		(in thousands)
Revenues		$	90,727			$	85,831			$	4,896				5.7	%		$	21,737			$	24,443			$	(2,706	)			-11.1	%
Gross profit			30,796				32,229				(1,433	)			-4.4	%			6,772				9,184				(2,412	)			-26.3	%
As % of revenues			33.9	%			37.5	%											31.2	%			37.6	%
Operating expenses			23,226				23,417				(191	)			-0.8	%			10,395				22,324				(11,929	)			-53.4	%
As % of revenues			25.6	%			27.3	%											47.8	%			91.3	%
Income from continuing operations before other income (expense) and income tax		$	7,570			$	8,812			$	(1,242	)			-14.1	%		$	(3,623	)		$	(13,140	)		$	9,517				72.4	%
As % of revenues			8.3	%			10.3	%											-16.7	%			-53.8	%

Note: Revenues exclude intersegment eliminations of $1.1 million in 2009 and $1.2 million in 2008, respectively.

Revenues

Total revenues increased $2.4 million, or 2%, for the year ended December 31, 2009 when compared with 2008. Excluding the impact of intersegment eliminations, the revenue increase was the result of an increase in our ADW segment revenues of $4.9 million, or approximately 6%, which was partially offset by a decrease in our totalizator segment revenues of $2.7 million, or approximately 11%, 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, increased approximately $4.9 million, or approximately 6%, in the year ended December 31, 2009, when compared to 2008. Gross commissions, before deduction of player incentives, during 2009 increased $9.1 million, or approximately 10% compared to 2008 due primarily to a 10% improvement in handle resulting from increased track content. However, the increase in gross commissions was partially offset by higher player incentives in 2009 of $3.7 million, a 46% increase compared to 2008. Approximately $0.4 million of the increase in player incentives relates to the redemption of expired player reward points in the first quarter of 2009, $0.3 million relates to a prospective change in estimate of the value of outstanding reward points and the remainder is associated with the impact of our more aggressive incentive marketing efforts.

Total handle for the year ended December 31, 2009 was $480.3 million, an increase of $42.0 million, or 10%, compared to 2008 primarily as a result of our ability to carry all TrackNet content during 2009 compared to 2008, during which we were unable to carry a significant portion of TrackNet content due to the failure to successfully negotiate an agreement with TrackNet until the end of 2008, as well as our aggressive marketing efforts during 2009.

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), decreased approximately 1.0% to 6.9% in 2009 versus 7.9% in 2008. The lower yield reflects the impact of increased track fees due to changes in track mix (which are driven by player preferences due to such things as race type, time of day and wagering pool size) resulting from the return of the TrackNet content, which generally includes tracks with higher costs and, correspondingly, lower yields, as well as increased revenue sharing expense associated with our co-branding agreement with tracks in Illinois and the increase in player incentives described above.

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

		Year ended December 31,
		2009				2008				Increase (Decrease)				%
		(in thousands)
Handle		$	480,297			$	438,261			$	42,036				9.6	%
Commissions			88,320				82,929				5,391				6.5	%
Less:
Track fees			50,722				39,303				11,419				29.1	%
License fees			4,254				9,124				(4,870	)			-53.4	%
Net revenue		$	33,344			$	34,502			$	(1,158	)			-3.4	%
Yield %			6.9	%			7.9	%

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 $2.7 million, or approximately 11%, when compared to 2008. Contract revenues from the service of totalizator systems, which are driven by wagering handle at tracks serviced, were $20.9 million a decrease of $2.4 million, or approximately 10%, compared to 2008, primarily as a result of track closures, a general industry decline in wagering and reduced racing days. Equipment sales in 2009 were $0.8 million, representing a decrease of $0.3 million, or approximately 28% compared to 2008 due to the reluctance of track owners to invest in new equipment in the current global economy.

Costs and Expenses

Consolidated costs and expenses increased $6.2 million, or approximately 9%, in 2009 compared to 2008 primarily as a result of increased track fees, which were partially offset by decreases in licensing fees and totalizator equipment costs, as discussed below. As a percentage of revenues, consolidated costs and expenses increased from approximately 62% in 2008 to approximately 66% in 2009. 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, increased $11.4 million, or approximately 29%, in 2009 compared to 2008. The increase is partially attributable to the 10% increase in handle and host fee rate increases and a shift of costs from license fees to tracks fees resulting from a reduced number of TVG exclusive tracks. The increase is also attributable to TV streaming costs, source market fees, host fees and track revenue sharing fees associated with the Company’s co-branding agreement with tracks in Illinois, which increased $2.5 million, $1.3 million, $6.4 million and $2.6 million, respectively, in 2009 compared to 2008. The increase in track fees was partially offset by a decrease in California market access fees of $1.8 million over the same period in 2008 due to reduced wagering in California.

Licensing fees: Licensing fees, which represent amounts paid and payable under our licensing agreement with TVG, decreased $4.9 million, or approximately 53%, in 2009 compared to 2008, primarily due to a decrease in the number of TVG exclusive tracks we carried over those periods.

Network operations: Network operations expense, which consists of costs for salaries, data center management, telecommunications and various totalizator fees, decreased $0.1 million or approximately 2% in 2009 compared to 2008. This decrease was primarily attributable to a reduction of totalizator fees of $0.3 million associated with renegotiated totalizator contracts and computer supplies, which was partially offset by higher decoder and AV expenses and increased salaries.

As a percentage of ADW segment revenues, costs and expenses in our ADW segment increased from approximately 62% in 2008 to approximately 66% in 2009.

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 associated with providing totalizator services at racetracks, remained flat in 2009 when compared to 2008. Reductions of $0.2 million in communication expenses, $0.2 million in salaries and $0.2 million in travel/entertainment related expenses in 2009 compared to 2008 were offset by $0.7 in expenses related to inventory write-downs in 2009.

Equipment Costs: Equipment costs, which represent costs associated with equipment sales, decreased from $0.5 million in 2008 to $0.2 million for the comparable period in 2009, due to a decrease in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment increased from approximately 62% in 2008 to approximately 69% in 2009.

Gross Profit

Consolidated gross profit decreased $3.8 million, or approximately 9%, in 2009 compared to 2008 primarily due to increased track fees and player incentives in our ADW segment and the decline in revenues and flat cost structure in our totalizator segment. As a percentage of revenues, consolidated gross profit decreased from approximately 38% in 2008 to approximately 34% in 2009. 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 $30.8 million for 2009, representing a decline of $1.4 million, or approximately 4%, compared to 2008. The decline was primarily due to increased track fees attributable to the change in track mix associated with the return of TrackNet content, which carry higher track fees, increased revenue share expense associated with our co-branding agreement with tracks in Illinois and the increase in player incentives, the total of which offset the revenue gains experienced as a result of increased handle. As a percentage of ADW segment revenues, gross profit in our ADW segment decreased from approximately 38% in 2008 to approximately 34% in 2009.

Totalizator Segment Gross Profit

Gross profit in our totalizator segment was $6.8 million for 2009, representing a decline of $2.4 million, or approximately 26%, compared to 2008. This decline is primarily attributable to the 11% decline in totalizator segment revenues over the same periods and the $0.7 million in expenses related to inventory write-downs in 2009. Due to the nature of the totalizator business and contractual obligation to provide equipment and totalizator services, its cost structure is fairly rigid and less variable to fluctuations in handle processed and reduction in race days. As a percentage of segment revenues, gross profit in our Totalizator segment decreased from approximately 38% in 2008 to approximately 31% in 2009.

Operating Expenses

Research and development: Research and development expense of $3.3 million decreased slightly in 2009 when compared with 2008 due to a reduction in employee related costs in the Totalizator segment.

Sales and marketing: Sales and marketing expense of $6.1 million in 2009 increased $0.8 million, or approximately 16%, compared to 2008. This increase was primarily in the Youbet Express business and resulted from an increase in sales and marketing personnel and management’s priority to more appropriately develop and target marketing efforts to specific initiatives including online customer acquisition, conversion and retention.

General and administrative: General and administrative expense of $17.0 million in of 2009 decreased $0.7 million, or approximately 4% in 2009 compared to 2008. This decrease is attributable to reductions of $1.7 million in employee benefit costs related to reduced severance and bonus accruals, $0.4 million in non-cash compensation due to higher than expected option forfeitures, $0.3 in licenses and $1.1 million in business taxes as a result of a settlement with the City of Los Angeles concerning the proper classification of Youbet operations; business taxes were reserved for in prior periods pending resolution of the matter. These reductions were significantly offset by an increase in salaries of $0.6 million due to an increase in employees, and increases in legal and investment banking costs of $1.6 million and $0.5 million, respectively, primarily related to our proposed merger with Churchill Downs. As a percentage of total revenues, general and administrative costs decreased from approximately 16% in 2008 to approximately 15% in 2009.

Depreciation and amortization: Depreciation and amortization in 2009 decreased $0.9 million, or approximately 11%, compared to 2008 due to the aging of equipment and software in our totalizator segment, which was partially offset by the purchase of new software in our ADW segment.

Impairment Write downs: In connection with our exploration of strategic alternatives for United Tote, we continue to evaluate the goodwill related to United Tote, including comparing the current estimated fair value to the carrying value of the goodwill. In February 2009, we performed an evaluation and concluded that the carrying value of United Tote was 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. In 2009, we performed our annual asset impairment evaluation and concluded that an additional impairment write-down was not deemed necessary.

Interest expense (income): Interest expense of $0.8 million in 2009, decreased $0.4 million compared to $1.2 million in 2008. This decrease is primarily due to lower interest rates and lower debt levels. Interest income in 2009 was $0.2 million lower than 2008, primarily due to lower investment yields in 2009 compared with 2008.

Other income: Other income in 2009 increased $0.3 million when compared to 2008 due to the recovery by United Tote of pre-acquisition receivables previously written off to expense.

Income Taxes: Income taxes were favorably impacted by a $8.1 million reduction in our valuation allowance relating to deferred tax assets for net operating loss carry forwards. According to the provisions of Accounting Standards Codification (“ASC”) Topic 7402 Income Taxes that are derived from 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 2009, 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 carryback deferred benefits to those periods. Based upon this evaluation and expected future profitability, we concluded that our valuation allowance against our net operating loss carry forwards should be reduced.

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, 2009, IRG sustained a loss of $18 thousand compared to income of $1.4 million in 2008.

Results of Operations for 2008 Compared to 2007

The following table sets forth, for the years ended December 31, 2008 and 2007, 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 ended 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,
		2008				2007				Increase (Decrease)				%
		(in thousands)
Handle		$	438,261			$	484,216			$	(45,955	)			-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 represent 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 in 2008 when compared to the 2007.

Income Taxes: Income taxes in 2008 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, we increased our valuation allowance relating to deferred tax assets for net operating loss carry forwards by $2.9 million. According to ASC Topic 740, 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. Based upon this evaluation, we concluded that a valuation allowance was warranted against our 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.

Liquidity and Capital Resources

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.

During 2009, we funded our operations primarily with net cash provided by operating activities.

As of December 31, 2009, we had net working capital of $7.1 million, compared to negative net working capital of $0.8 million at December 31, 2008. On December 31, 2009, the principal balance of our term loan with National City Bank (NCB) was $3.8 million and no amounts had been borrowed under the revolving and letter of credit facility with NCB. The terms of the credit facility are more fully described below under “Credit Facility.”

As of December 31, 2009, we had $15.9 million in cash and cash equivalents and $4.6 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.

Cash Flows for 2009 Compared to 2008

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

		Year Ended December 31,
		2009				2008
		(in thousands)
Net cash provided by operating acivities, from continuing operations		$	7,725			$	15,049
Net cash used in investing activities			(3,032	)			(1,350	)
Net cash used in financing activities			(5,303	)			(3,327	)
Net cash used in operating activities, discontinued operations			(21	)			(312	)
Foreign currency translation adjustments			(23	)			(73	)
Net increase (decrease) in cash and cash equivalents		$	(654	)		$	9,987

Operating Activities

Net cash provided by operating activities was $7.7 million for 2009, compared to $15.0 million for 2008. The year-over-year decrease was primarily due to gross profit erosion in our ADW and totalizator segments of $1.4 million and $2.4 million, for the reasons described above and negative fluctuations in working capital impacting our cash. These negative working capital fluctuations impacting cash were primary attributable to cash payments in the first quarter 2009 in respect of liabilities incurred in 2008, consisting of $1.3 million in license fees, $0.5 million in estimated taxes, $0.2 million in accrued severance, $0.7 million in legal fees and $1.8 million in bonuses. 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 2009 was $3.0 million, compared to $1.4 million for 2008. The $1.6 million increase is attributable to increased capital spending in 2009, associated with the continued improvement of our ADW platform, including functionality, product offering and social communication. Capital spending in 2009 in our ADW and Totalizator segments was $2.4 million and $0.6 million, respectively. We continue to invest in the development of our network infrastructure and to support continued technology upgrades as necessary.

Financing Activities

Net cash used in financing activities in 2009 was $5.3 million, an increase of $2.0 million when compared to 2008, due to higher loan repayments (net of new borrowings) in 2009 in accordance with the terms of our credit facility.

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 Activities

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.

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, 2009, $3.8 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 NCB. The loan and security agreement with NCB 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. As of December 31, 2009, the principal balance outstanding under the term loan was $3.8 million. 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. At December 31, 2009, the interest rate on the term loan was 5.75% per annum.

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, the direct parent of United Tote, and secured by substantially all of our assets, including our intellectual property, and UT Gaming’s equity in United Tote.

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, 2009, we were in compliance with financial covenants under the loan and security agreement.

The Merger will result in a change of control under our credit facility, which constitutes an event of default. As a result, the lenders on the credit facility may accelerate our obligations under the credit facility.

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 repaid this promissory note, including accrued interest through December 31, 2009 of $0.5 million, less reimbursable costs of $0.1 million, on January 12, 2010.

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, 2009, the letter of credit obligation and corresponding cash collateral balance was $58,000.

At December 31, 2009, 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, 2009:

		Payments Due by Period
						Less than 1												More than 5
		Total				year				1-3 years				3-5 years				years
Gary Sproule			106,000				106,000
Capital leases (1)			246,354				246,354
Operating facility leases (2)			1,249,130				662,611				208,724				181,973				195,822
Operating equipment leases (3)			189,908				163,376				26,532
Bank debt (National City Bank) (4)			3,750,000				3,750,000
Note payable (Kinderhook ) (5)			3,200,000				3,200,000
Other			105,334				105,334
			8,846,726				8,233,675				235,256				181,973				195,822

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 Express, we earn and record 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.

We 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. Our 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 annually and 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 (based on level 2 inputs as defined in ASC Topic 820). Accordingly, we had no liabilities for these agreements recorded under ASC Topic 460, Guarantees derived from FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others — an interpretation of Statements No. 5, 57 and 107 and rescission of FIN 34, as of December 31, 2009 and 2008.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements issued, not yet effective or early adopted, that management believes are of significance, or potential significance to the Company.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investments

Our exposure to market risk and related changes in interest rates may impact our investment portfolio. As of December 31, 2009, our portfolio of investments included $15.9 million of cash and cash equivalents and $4.6 million of restricted cash. In 2009, due to the existing economic environment and substantial investment risk that existed, we maintained our portfolio of cash primarily in our checking and savings accounts at our principal banking institutions and took advantage of the expanded FDIC insurance protection offered. The average yield on our investments in 2009 was approximately 0.2%. Due to the conservative nature of our investment portfolio, we believe that a sudden 1% change in interest rates would not have a material effect on the value of the portfolio. The impact on our future interest income will depend largely on the gross amount of our investment portfolio. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.

Debt

We had aggregate debt of $7.2 million outstanding at December 31, 2009 under a term loan, promissory note and capital lease obligations. The following table shows the breakdown of our fixed-rate and variable-rate debt at December 31, 2009:

		(in thousands)
Variable-rate debt		$	3,750
Fixed-rate debt			3,446
Total		$	7,196

The weighted average interest rate paid during 2009 on outstanding indebtedness was 6.5%. For variable-rate debt outstanding at December 31, 2009, a 0.25% increase in interest rates would have increased our annual interest expense by approximately $24,000. Amounts outstanding under the revolving credit facility provides for interest at the banks’ prime rate plus a base rate margin. Our market risk exposure with respect to financial instruments changes in relation to the prime rate.

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 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T).		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of December 31, 2009, our management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)). These disclosure controls and procedures are designed to ensure that material information we must disclose in this report is recorded, processed, summarized and filed or submitted on a timely basis and that such information is accumulated and communicated to management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2009.

Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting. Management’s report on our internal control over financial reporting is included with our consolidated financial statements at the end of this report under the caption, “Management’s Report on Internal Control Over Financial Reporting” and is incorporated herein by reference.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

ITEM 9B.		OTHER INFORMATION

None.

PART III.

ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information called for by Item 10 of Form 10-K will be set forth in our proxy statement for our annual meeting of stockholders (the Proxy Statement) and is incorporated herein by reference.

Code of Ethics

Youbet has a code of business conduct and ethics, referred to as the Youbet.com Code of Conduct (the “Code”), which applies to our Chief Executive Officer, Chief Financial Officer and all other employees. Among other provisions, the Code sets forth standards for honest and ethical conduct, full and fair disclosure in public filings and stockholder communications, compliance with laws, rules and regulations, reporting of code violations and accountability for adherence to the Code. The text of the Code has been posted on our website (http://www.youbet.com/aboutyoubet/investors/code_of_conduct/). A copy of the Code can be obtained free-of-charge upon written request to:

Corporate Secretary
Youbet.com, Inc.
2600 West Olive Avenue, 5^th floor
Burbank, CA 91505

If we make any amendment to, or grant any waivers of, a provision of the Code that applies to our principal executive officer or principal financial officer and that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons for the amendment or waiver on our website.

Material Changes to the Procedures By Which a Stockholder May Recommend Nominees for Election to the Board of Directors

None.

ITEM 11.		EXECUTIVE COMPENSATION

Information called for by Item 11 of Form 10-K will be set forth in the Proxy Statement and is incorporated herein by reference.

ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information called for by Item 12 of Form 10-K will be set forth in the Proxy Statement and is incorporated herein by reference.

ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information called for by Item 13 of Form 10-K will be set forth in the Proxy Statement and is incorporated herein by reference.

ITEM 14.		PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES

Information called for by Item 14 of Form 10-K will be set forth in the Proxy Statement and is incorporated herein by reference.

PART IV.

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 F-1 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:

	2.1			Agreement and Plan of Merger, dated as of November 11, 2009, among Churchill Downs Incorporated, Youbet.com, Inc., Tomahawk Merger Corp. and Tomahawk Merger LLC (incorporated by reference to Exhibit 2.1 to our current report on Form 8-K filed November 13, 2009).
	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			Certificate of Designations of Series B Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on April 1, 2009 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed April 1, 2009).
	3.3			Certificate of Amendment of the Certificate of Incorporation of Youbet.com, Inc., as filed with the Secretary of State of Delaware on June 2, 2009 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed June 2, 2009).
	3.4			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).
	4.3			Rights Agreement, dated as of March 31, 2009, between Youbet.com, Inc. and American Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K filed April 1, 2009).
	4.4			Amendment to Rights Agreement, dated as of November 11, 2009, between Youbet.com, Inc. and American Stock Transfer & Trust Company LLC (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K filed November 13, 2009).

	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 (incorporated by reference to Exhibit 10.9 to our annual report on Form 10-K for the year ended December 31, 2008).
	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 (incorporated by reference to Exhibit 10.15 to our annual report on Form 10-K for the year ended December 31, 2008).*
	10.16			Form of Indemnification Agreement (incorporated by reference to Exhibit 10.16 to our annual report on Form 10-K for the year ended December 31, 2008).
	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 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 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 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 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 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 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 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).*
	10.27			Employment Letter Agreement, dated as of September 8, 2009, between Youbet.com, Inc. and Susan Bracey (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed September 9, 2009).*
	10.28			Youbet Retention Program (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed February 23, 2010).*
	16.1			Letter from Piercy Bowler Taylor & Keen, Certified Public Accountants, regarding change in certifying accountant (incorporated by reference to Exhibit 16.1 to Amendment No. 1 to Form 8-K on Form 8-K/A filed April 17, 2009)
	21.1			List of subsidiaries (incorporated by reference to Exhibit 21.1 to our annual report on Form 10-K for the year ended December 31, 2008).
	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 and any and all amendments to such annual report on Form 10-K 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)		March 15 , 2010
/s/ Susan Bracey   Susan Bracey		Chief Financial Officer  (Principal Financial Officer)		March 15, 2010
/s/ Michael D. Nelson   Michael D. Nelson		Corporate Controller  (Principal Accounting Officer)		March 15, 2010
/s/ F. Jack Liebau   F. Jack Liebau		Chairman of the Board		March 15, 2010
/s/ Michael Brodsky   Michael Brodsky		Executive Chairman of the Board		March 15, 2010
/s/ Gary Adelson   Gary Adelson		Director		March 15, 2010
/s/ Michael D. Sands   Michael D. Sands		Director		March 15, 2010
/s/ James Edgar   James Edgar		Director		March 15, 2010
/s/ Michael Soenen   Michael Soenen		Director		March 15, 2010
/s/ Raymond Anderson   Raymond Anderson		Director		March 15, 2010

Index to Consolidated Financial Statements and Schedule

		Page
Management’s report on internal control over financial reporting		F-1
Report of independent registered public accounting firm		F-2
Consolidated financial statements:
Balance sheets as of December 31, 2009 and 2008		F-3
Statements of operations for the years ended December 31, 2009, 2008 and 2007		F-4
Statements of stockholders’ equity for the years ended December 31, 2009, 2008 and 2007		F-5
Statements of cash flows for the years ended December 31, 2009, 2008 and 2007		F-6
Notes to consolidated financial statements		F-7
Valuation and qualifying accounts		F-25

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, 2009.

/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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years ended December 31, 2009, 2008 and 2007. Our audits included the financial statement schedule of Valuation and Qualifying Accounts included in Item 15(a)(2). 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.

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, 2009 and 2008, and the consolidated results of its operations and cash flows for each of the three years ended December 31, 2009, 2008 and 2007, 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.

PIERCY BOWLER TAYLOR & KERN
Certified Public Accountants

/s/ Piercy Bowler Taylor & Kern

Las Vegas, Nevada
March 15, 2010

YOUBET.COM, INC. AND SUBSIDIARIES

		2009				2008
ASSETS
Current assets
Cash and cash equivalents		$	15,884			$	16,538
Restricted cash			4,616				4,698
Accounts receivable, net of allowance for doubtful collection of $578 and $541			3,413				3,031
Inventories			1,278				1,937
Prepaid expenses and other			1,141				1,066
Current portion of deferred tax asset			2,700
			29,032				27,270
Property and equipment, net of accumulated depreciation and amortization of $34,928 and $28,623			12,890				16,218
Intangibles, other than goodwill, net of accumulated amortization			3,948				4,588
Deferred tax asset, net of current portion			5,400
Other assets			374				804
		$	51,644			$	48,880
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	7,196			$	8,704
Trade payables			5,430				6,484
Accrued expenses			4,622				8,287
Customer deposits			4,558				4,445
Deferred revenues			162				121
			21,968				28,041
Long-term debt, net of current portion							3,996
Total liabilities			21,968				32,037
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, 42,829,373 and 42,562,805 shares issued			43				43
Additional paid-in-capital			136,970				135,732
Deficit			(104,806	)			(116,424	)
Accumulated other comprehensive loss			(152	)			(129	)
Less treasury stock, 1,099,335 shares at cost			(2,379	)			(2,379	)
			29,676				16,843
		$	51,644			$	48,880