UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

For the fiscal year ended December 31, 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.

 

 

Explanatory Note

Youbet.com, Inc. filed an Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “Original Filing”) with the Securities and Exchange Commission on March 15, 2010. This Amendment No. 1 to the Original Filing (“Amendment No. 1”) is being filed solely for the purpose of correcting certain typographical errors contained in the Report of Independent Registered Public Accounting Firm (“Report”) on page F-2 included in this Amendment No. 1.

For purposes of this Amendment No. 1, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Item 8 of Part II of the Original Filing is amended and restated in its entirety. Other than correcting certain typographical errors contained in the Report on page F-2 of the financial statements, there are no other changes to Item 8 of Part II of the Original Filing. Except as expressly set forth in this Amendment No. 1, the Original Filing has not been amended, updated or otherwise modified.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are being filed as exhibits to this Amendment No. 1.

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.

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

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.

* By:	/s/ David Goldberg   David Goldberg Attorney-in-Fact

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). The Company’s management is responsible for these financial statements and financial statement schedule. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 audits 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 opinion.

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

See notes to consolidated financial statements

YOUBET.COM, INC. AND SUBSIDIARIES

		2009				2008				2007
Revenues
Commissions		$	88,320			$	82,929			$	93,969
Contract revenues			19,841				22,064				23,965
Equipment sales			812				1,133				877
Other			2,407				2,902				3,683
			111,380				109,028				122,494
Costs and expenses
Track fees			50,722				39,303				39,246
Licensing fees			4,254				9,124				19,810
Network operations			3,871				3,928				4,564
Contract costs			14,778				14,794				16,584
Cost of equipment sales			187				466				429
			73,812				67,615				80,633
Gross profit			37,568				41,413				41,861
Operating expenses
General and administrative			17,004				17,752				21,160
Sales and marketing			6,094				5,273				10,009
Research and development			3,306				3,430				3,947
Depreciation and amortization			7,217				8,074				9,117
Impairment write downs			—				11,212				8,000
			33,621				45,741				52,233
Income (loss) from continuing operations before other income (expense) and income tax (benefit)			3,947				(4,328	)			(10,372	)
Interest income			44				233				642
Interest expense			(780	)			(1,244	)			(1,796	)
Other			487				174				153
Income (loss) from continuing operations before income tax (benefit)			3,698				(5,165	)			(11,373	)
Income tax (benefit)			(7,938	)			658				2,814
Income (loss) from continuing operations			11,636				(5,823	)			(14,187	)
Discontinued operations
Income (loss) from discontinued operations, net of $731 income tax benefit in 2007			(18	)			1,372				(14,231	)
Net Income (loss)		$	11,618			$	(4,451	)		$	(28,418	)
Basic income (loss) per share
Income (loss) from continuing operations		$	0.28			$	(0.14	)		$	(0.34	)
Income (loss) from discontinued operations			(0.00	)			0.03				(0.34	)
Net Income (loss)			0.28				(0.11	)			(0.68	)
Diluted income (loss) per share
Income (loss) from continuing operations		$	0.27			$	(0.14	)		$	(0.34	)
Income (loss) from discontinued operations			(0.00	)			0.03				(0.34	)
Net Income (loss)			0.27				(0.11	)			(0.68	)
Weighted average common shares outstanding
Basic			41,543,528				41,463,470				41,796,218
Diluted			43,840,875				41,463,470				41,796,218

See notes to consolidated financial statements

YOUBET.COM, INC. AND SUBSIDIARIES

														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive								Treasury
		Shares				Dollars				Capital				Loss				Deficit				Stock				Total
Balances at January 1, 2007			42,119			$	42			$	137,597			$	(10	)		$	(83,555	)		$	(1,300	)		$	52,774
Stock options exercised			444				1				352																353
Payment to former owners of United Tote under “make-whole” provision											(4,473	)															(4,473	)
Other											(88	)															(88	)
Purchase of treasury stock																							(1,019	)			(1,019	)
Cumulative translation adjustment															(46	)											(46	)
Stock based compensation											898																898
Net loss																			(28,418	)							(28,418	)
Balances at December 31, 2007			42,563			$	43			$	134,286			$	(56	)		$	(111,973	)		$	(2,319	)		$	19,981
Purchase of treasury stock																							(60	)			(60	)
Cumulative translation adjustment															(73	)											(73	)
Stock based compensation											1,446																1,446
Net Loss																			(4,451	)							(4,451	)
Balances at December 31, 2008			42,563			$	43			$	135,732			$	(129	)		$	(116,424	)		$	(2,379	)		$	16,843
Stock options exercised			266								201																201
Cumulative translation adjustment															(23	)											(23	)
Stock based compensation											1,037																1,037
Net Income																			11,618								11,618
Balances at December 31, 2009			42,829			$	43			$	136,970			$	(152	)		$	(104,806	)		$	(2,379	)		$	29,676

See notes to consolidated financial statements

YOUBET.COM, INC. AND SUBSIDIARIES

		2009				2008				2007
Operating activities
Net Income (loss)		$	11,618			$	(4,451	)		$	(28,418	)
Income (loss) from discontinued operations			(18	)			1,372				(14,231	)
Income (loss) from continuing operations			11,636				(5,823	)			(14,187	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities, continuing operations
Depreciation and amortization of property and equipment			6,577				7,332				8,376
Amortization of intangibles			640				742				741
Deferred tax assets			(8,100	)							1,797
Goodwill, intangibles and fixed asset impairment							11,212				8,000
Stock-based compensation			1,037				1,446				898
Bad debt			508				707				1,105
Increase in operating (assets) and liabilities
Restricted cash, Players Trust SM			(141	)			32				48
Accounts receivable			(890	)			971				430
Inventory			659				148				502
Prepaid expenses			(75	)			310				(372	)
Other assets			430				213				2,473
Trade payables			(1,053	)			(3,375	)			(3,783	)
Accrued expenses			(3,657	)			1,385				(6,737	)
Customer deposits			113				(160	)			90
Deferred revenues			41				(91	)			5
Net cash provided by continuing operations			7,725				15,049				(614	)
Net cash (used) by discontinued operations			(21	)			(312	)			(392	)
Net cash provided (used) by operating activities			7,704				14,737				(1,006	)
Investing activities
Purchase of property and equipment			(3,280	)			(1,384	)			(2,482	)
Proceeds from sale of property and equipment			31				34
Cash paid for United Tote acquisition, net of $159 cash acquired in 2006											(4,473	)
Other			217								(168	)
Net cash (used) in investing activities			(3,032	)			(1,350	)			(7,123	)
Financing activities
Proceeds from issuance of common stock			201
Proceeds from exercise of stock options and warrants											353
Purchase of treasury stock							(60	)			(1,019	)
Proceeds from sale-leaseback transaction											1,065
Proceeds from debt							10,752				4,409
Repayment of debt			(5,504	)			(14,019	)			(11,045	)
Other											(88	)
Net cash provided (used) by financing activities			(5,303	)			(3,327	)			(6,325	)
Foreign currency translation adjustments			(23	)			(73	)			(46	)
Net increase (decrease) in cash and cash equivalents			(654	)			9,987				(14,500	)
Cash and cash equivalents at the beginning of period			16,538				6,551				21,051
Cash and cash equivalents at the end of period		$	15,884			$	16,538			$	6,551
			2009				2008				2007
Supplemental disclosure of cash flow information:
Cash paid for interest		$	466			$	772			$	1,322
Cash paid for income taxes			889				603				381
Non-cash investing and financing activities:
Equipment acquired with capital lease and other financing arrangements							810				1,428

See notes to consolidated financial statements

Youbet.com and Subsidiaries

Notes to Consolidated Financial Statements

Note 1: THE COMPANY AND THE MERGER AGREEMENT WITH CHURCHILL DOWNS

Youbet.com, Inc. (Youbet) and its consolidated subsidiaries (collectively, the Company) is a licensed, multi-jurisdictional facilitator of online pari-mutuel horse race wagering and a leading supplier of tote equipment and services to the racing industry. Through its main product, Youbet Express^SM, Youbet offers its customers 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, Canada, the United Kingdom, Australia and South Africa. Youbet is working to expand its brand, products and services throughout the United States and in select international markets.

In 2006, Youbet expanded its product and service offering through the acquisition of United Tote Company and United Tote Canada (collectively with U.T. Gaming, Inc., referred to as United Tote). United Tote is a leading supplier of totalizator systems (a system that processes wagers and payouts).

Churchill Downs Merger Agreement

On November 11, 2009, Youbet entered into an Agreement and Plan of Merger (the Merger Agreement) with Churchill Downs Incorporated (Churchill Downs), 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 Youbet common stock issued and outstanding immediately prior to the effective time of the Merger (other than treasury shares, shares held by Youbet’s wholly owned subsidiaries or shares of Youbet 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 Youbet 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 Youbet and Churchill Downs, and compliance by Youbet and Churchill Downs of Youbet’s and Churchill Downs’s respective obligations under the Merger Agreement.

Youbet has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger. Youbet is also subject to a “no-shop” restriction on its 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 Youbet and Churchill Downs, including Youbet’s right to terminate the Merger Agreement under certain circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement under specified circumstances, Youbet 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 Youbet 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.

For a description of litigation relating to the Merger and Youbet’s entry into a Memorandum of Understanding regarding settlement of such litigation, see Note 12.

Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and accounting

The consolidated financial statements include the accounts of Youbet and its wholly-owned subsidiaries (inclusive of Youbet Services Corporation, International Racing Group (consisting of IRG U.S. Holdings Corp, IRG Holdings Curacao, N.V., International Racing Group, N.V. and IRG Services (collectively, IRG), United Tote and Bruen Productions International, Inc. from October 9, 2006 until it was sold effective December 31, 2007 (Bruen)). The operations of IRG were shut down effective February 15, 2008. Both IRG and Bruen are retroactively reported as discounted operations (Note 14). All inter-company accounts and transactions have been eliminated in consolidation.

The Company has not elected to adopt the option available under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ARS)Topic 825, The Fair Value Option for Financial Assets and Financial Liabilities, to measure any of its eligible financial instruments or other items, except as may be required under generally accepted accounting principles or otherwise disclosed elsewhere herein. Accordingly, with such exceptions, the Company continues to measure all of its assets and liabilities on the historical cost basis of accounting.

Preparation of these unaudited consolidated financial statements involves and requires the use of estimates and judgments where appropriate. Events through the date these consolidated financial statements were issued March 15, 2010 were evaluated by management to determine if adjustments to or disclosure in these consolidated financial statements were necessary. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results for current interim periods are not necessarily indicative of the results to be expected for the full year.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition

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

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

The majority of United Tote’s revenues are derived from service contracts principally for the installation and operation of pari-mutuel wagering networks. Services provided via these networks include accepting wagers, performing odds and payout calculations and calculating ticket payouts. United Tote charges the track for these services either by transaction count or by dollar volume in accordance with the related service contract. In order to perform its services under these agreements, United Tote may incur various costs associated with installation of its 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.

Cash equivalents and restricted cash

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. For purposes of the financial statements, restricted cash (Note 3), current and non-current, is excluded from cash and cash equivalents.

Accounts receivable and allowance for doubtful accounts

The Company manages its concentrations of credit risk by evaluating the creditworthiness of tracks before extending credit. Accounts receivable are uncollateralized and carried, net of an appropriate allowance, at their estimated collectible value. The allowance for doubtful accounts (Note 4) is established based on historic loss experience, the individual tracks the relative strength of the Company’s legal position, the related cost of any proceedings, and general economic conditions. Since customer credit is generally extended on a short-term basis, trade receivables do not normally bear interest. Accounts for which no payments have been received for two consecutive months are considered delinquent, and customary collection efforts are initiated. The maximum losses that the Company would incur if a track failed to pay would be limited to the amount due after the related allowances provided.

Fair value of financial instruments

The carrying value of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair value due to the short maturities of these financial instruments. The estimated fair value of long-term receivables and debt approximates their carrying value. In estimating the fair value of other financial instruments, consisting of long-term receivables and debt, the Company generally uses third-party market quotes (level 2 inputs, as defined in ASC Topic 820).

Foreign currency

The Company translates assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. The functional currency of United Tote Canada is Canadian dollars.

Inventories

Inventories consist of totalizator components to build totalizator equipment and ticket paper stock. Inventories are stated at the lower of cost (using the first-in, first-out method) or market value.

Property and equipment

Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation of property and equipment, which includes equipment under capital leases, is provided on the straight-line method over estimated useful lives, generally ranging from three to five years. Leasehold improvements are amortized over the estimated economic life or the term of the lease, including lease renewal option periods, if intended to be exercised, whichever is shorter. The majority of United Tote’s equipment is in place at various pari-mutuel gaming sites located throughout North America.

Goodwill

The Company evaluates its goodwill, if any, on an annual basis (Note 16) and if events and circumstances (such as, significant decreases in the market value of an asset, a change in operating model or strategy and competitive forces) indicate that the carrying amount of an asset may not be recoverable. If the expected undiscounted future cash flow attributable to the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. The estimated fair value is determined using inputs from among the three levels of the fair value hierarchy set forth in ASC Topic 820, Fair Value Measurements and Disclosures, derived from Financial Accounting Standards Board Statement (“FASB”) No. 157, Fair Value Measures, as follows: Level 1 inputs — Unadjusted quoted prices in active markets for identical assets or liabilities, which prices are available at the measurement date. Level 2 inputs — Include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Level 3 inputs — Unobservable inputs that reflect management’s estimates about the assumptions that market participants would use in pricing the asset or liability. Management develops these inputs based on the best available information available, including internally-developed data. In estimating the fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.

Income taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the amount and timing of scheduled reversals of deferred tax liabilities and projected future taxable income over the periods for which the deferred tax assets are deductible.

Effective January 1, 2007, the Company adopted the provisions of ASC Topic 740 Income Taxes derived from FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”). Based on management’s evaluation, the Company concluded that there were no significant uncertain tax positions requiring recognition in its financial statements or related disclosures. Accordingly, no adjustments to recorded tax liabilities or accumulated deficit were required, and there was no effect on 2007 operations as a result of adopting these requirements. As of December 31, 2009 the Company had not provided any liability for unrecognized tax benefits.

The Company’s policy is to recognize interest and penalties related to income tax matters as part of income tax expense (benefit) in its consolidated statements of operations.

Legal defense costs

Estimated legal defense costs are not accrued. Rather, such costs are accrued and expensed when services are provided.

Stock-based compensation

Under the fair value recognition provisions of ASC Topic 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized on a straight-line basis as expense over the vesting period. Additionally, the Company is required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be impacted. The company estimates forfeitures at the time of grant based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant under ASC Topic 718, uses the Black-Scholes option pricing model, which is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the expected term of the awards, and actual and projected employee stock options exercise behaviors. The Company estimates expected volatility using historical data.

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

		Year Ended December 31,
		2009				2008				2007
Risk-free interest rate			3.4	%			1.9	%			3.7	%
Expected term (years)			7				7				7
Volatility			87.0	%			48.0	%			38.1	%
Expected annual dividend			0				0				0

Discontinued Operations

The Company presents the results of operations, financial position and cash flows of operations that met the criteria for “held for sale accounting” as discontinued operations if such operations meet the required conditions. At the time an operation qualifies for held for sale accounting, the operation is evaluated to determine whether or not the carrying value exceeds its fair value less costs to sell. Any loss resulting from carrying value exceeding fair value less cost to sell is recorded in the period the operation meets held for sale accounting. Management judgment is required to (1) assess the criteria required to meet held for sale accounting, and (2) estimate fair value. Changes to fair value could result in an increase or decrease to previously recorded losses.

Earnings or net income (loss) per share

Basic earnings (loss) per share are calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share are calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. In instances where the Company incurs a loss, however, diluting the earnings would not be applicable as the effect would be anti-dilutive.

Following is a reconciliation of the numerators and denominators of the net income (loss) per share computations for the periods presented:

						Weighted Average				Per
		Net Income (Loss)				Shares				Share
		(numerator)				(denominator)				Amount
		(in thousands except per share amounts)
2009
Income per share, basic		$	11,618				41,544			$	0.28
Effect of dilutive securities							2,297
Income per share, dilutive		$	11,618				43,841			$	0.27
2008
Income per share, basic		$	(4,451	)			41,463			$	(0.11	)
(4415 potentially dilutive securities were omitted from the calculation
since the effect of including them would have been anti-dilutive)
2007
Loss per share, basic		$	(28,418	)			41,796			$	(0.68	)
(2797 potentially dilutive securities were omitted from the calculation
since the effect of including them would have been anti-dilutive)

Note 3: RESTRICTED CASH

Facilities lease: As required by a lease agreement (Note 11), the Company provided a standby letter of credit in favor of the landlord secured by restricted cash deposits in like amount (which are immaterial) through 2010.

Players Trust^SM: As of December 31, 2009 and 2008, customer deposits maintained in Players Trust^SM totaled $4.6 million in both years, all of which is reported as restricted cash in current assets pursuant to our licensing agreements.

Note 4: RECEIVABLES

Accounts receivable consisted of the following as of the balance sheet dates presented:

		December 31,				December 31,
		2009				2008
		(in thousands)
Track receivables, net of allowance for doubtful collection of $578 and $541		$	3,273			$	2,904
Other			140				127
		$	3,413			$	3,031

Note 5: INVENTORIES

Inventories are stated at the lower of cost (using the first-in, first-out method) or market value.

		December 31,				December 31,
		2009				2008
		(in thousands)
Totalizator components		$	1,060			$	1,681
Ticket stock			218				256
		$	1,278			$	1,937

Note 6: PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of the balance sheet dates presented:

		December 31,				December 31,
		2009				2008
		(in thousands)
Computer equipment		$	22,312			$	19,441
Pari-mutuel equipment			21,745				21,634
Office furniture, fixtures and equipment			571				576
Leasehold improvements			3,190				3,190
			47,818				44,841
Less: accumulated depreciation and amortization			(34,928	)			(28,623	)
		$	12,890			$	16,218

Depreciation and amortization are recorded over the estimated lives of the following types of property and equipment: computer and pari-mutuel equipment (3 to 5 years), furniture and fixtures (5 years) and leasehold improvements (3 to 5 years, limited to the lease term). In connection with our exploration of strategic alternatives for United Tote, the Company re-evaluated the carrying value of United Tote. As part of this evaluation, the Company compared the current estimated fair value to its carrying value and in February 2009, concluded that the United Tote carrying value was impaired as of December 31, 2008 by $11.2 million. Goodwill of $6.9 million was eliminated and based upon the estimated fair values of property and equipment and intangible assets as of December 31, 2008, the Company reduced the carrying value of property and equipment and intangible assets $3.1 million and $1.2 million respectively. In 2009, the Company performed its annual asset impairment evaluation and concluded that an additional impairment write-down was not deemed necessary for the year ended December 31, 2009.

Note 7: INTANGIBLES, OTHER THAN GOODWILL

Intangibles, other than goodwill, consisted of the following as of the balance sheet dates presented:

		December 31,				December 31,
		2009				2008
		(in thousands)
Intangibles		$	6,750			$	6,750
Less: accumulated amortization			(2,802	)			(2,162	)
		$	3,948			$	4,588

Amortizable intangibles consist of customer listings, non-competition agreements, trademarks, trade names, technology and game content derived through acquisition of United Tote. Amortization expense in 2009 and 2008 for these intangibles was $0.6 million and $0.7 million, respectively. Estimated future amortization of intangibles for each of the next five years is $0.6 million, $0.6 million, $0.6 million, $0.6 million, and $0.6 million, respectively.

Note 8: ACCRUED EXPENSES

Accrued expenses consisted of the following as of the balance sheet dates presented:

		December 31,				December 31,
		2009				2008
		(in thousands)
Legal fees		$	445			$	111
Employee compensation, related taxes and other benefits			2,172				3,908
Track fees			243				926
Accrued interest and taxes			837				2,037
Player incentives			637				450
Other			288				855
			4,622				8,287

Note 9: DEBT

Debt consisted of the following as of the balance sheet dates presented:

		December 31,				December 31,
		2009				2008
		(in thousands)
Capital lease obligations		$	246			$	750
Promissary notes			3,200				3,200
Bank term loan			3,750				8,750
			7,196				12,700
Current portion of long-term debt			7,196				8,704
Long-term debt, less current maturities		$	0			$	3,996

The cost of equipment covered by the capital lease obligations is $0.8 million and $2.1 million for 2009 and 2008, respectively.

In February 2006, the Company completed its acquisition of all of the outstanding stock of United Tote (Note 16) for consideration valued at $31.9 million plus the assumption of approximately $14.7 million of debt (primarily related to the financing of equipment placed with United Tote’s track customers). As part of this purchase, the Company issued three unsecured promissory notes to United Tote’s former owners aggregating $10.2 million in principal amount, with each promissory note bearing interest at a fixed rate of 5.02% per annum and with their principal amounts due in full at their respective maturity dates. The Company repaid a $5.2 million principal amount promissory note in December 2006 and a $1.8 million principal amount promissory note in March 2007. The remaining $3.2 million principal amount promissory note is currently due but is subject to rights of indemnification and offset. The Company has four outstanding claims for indemnification against the former owners of United Tote and will not pay the net balance due until those matters are resolved.

In December 2008, the Company entered into a new credit agreement pursuant to which the lender agreed to provide the Company with up to $15.0 million in total borrowing capacity. The credit facility consists of a $5.0 million revolving line of credit and a $10.0 million term loan. The revolving line of credit requires monthly interest payments and the outstanding principal, if any, is due at maturity. The principal of the term loan is to be repaid in equal monthly installments ($1.25 million quarterly) plus interest, and payments commenced on December 31, 2008. At December 31, 2009, the Company owed $3.8 million under the term loan and no amount was outstanding under the revolving credit facility. At December 31, 2009, the interest rate on this facility was 5.75% per annum.

Proceeds of $4.6 million from the new credit agreement 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. The remaining proceeds will be used for general corporate purposes. No amounts have been borrowed under the revolving and letter of credit facility.

The credit agreement provides for mandatory prepayment upon the occurrence of certain specified events. The credit facility is secured by certain assets of the Company and certain of its subsidiaries are guarantors of the Company’s obligations under the credit facility. The credit agreement 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 specified adjusted EBITDA and (iv) limitations on capital expenditures.

The bank debt, promissory notes and under capital leasing arrangements are collateralized by certain equipment. The debt bears interest at rates ranging from 6.75% to 10.4%. These obligations are payable in monthly installments through December 2010.

Capital leases

The Company has capital lease arrangements for networking equipment, computer equipment and software. Future obligations under these non-cancelable capital leases are as follows:

Year		(in thousands)
2010		$	293
Total obligation			293
Less: interest portion			47
Total principal		$	246

Note 10: INCOME TAXES

Income tax expense (benefit) from continuing operations consists of the following:

		2009				2008				2007
		(in thousands)
Current
Federal		$	50			$	127			$
State			80				417				4
Foreign			32				114				282
			162				658				286
Deferred
Federal			1,524				(99	)			(600	)
State			105				699				(735	)
Change in valuation allowance			(9,729	)			(600	)			3,863
			(8,100	)			0				2,528
		$	(7,938	)		$	658			$	2,814

Income taxes (benefit) from continuing operations for 2009, 2008 and 2007 differ from “expected” income taxes (benefit) for those years computed by applying the U.S. federal statutory rate of 34% to pre-tax income (loss) before taxes for those years as follows:

		2009				2008				2007
		(in thousands)
Tax expense (benefit) at U.S. statutory rate		$	1,258			$	(1,758	)		$	(8,640	)
State tax (benefit) net of federal benefit			158				345				353
Foreign taxes			(3	)			(8	)			30
Amortization/impairment of intangibles							2,332				6,762
Stock based compensation			353				492				305
Other permanent differences			55				42				197
Net change in valuation allowance			(9,729	)			(601	)			3,691
Other, net			(30	)			(186	)			116
		$	(7,938	)		$	658			$	2,814

The Company does not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in the foreign subsidiaries that are essentially permanent in duration. Determination of such additional deferred taxes that have not been provided has not been deemed by management to be practicable.

Except for 2007, income (loss) from discontinued operations principally was composed of transactions with no tax effect.

The Company’s net deferred tax assets at December 31 consist of the following:

		2009				2008				2007
						(in thousands)
Deferred tax assets
Net operating loss carry forwards		$	26,230			$	23,999			$	23,142
Tax credit carryforwards			376				342				226
Depreciation							151
Inventory			228				113
Accrued expenses							564				234
Accounts receivable allowance			621				599				1,361
Other							143				121
			27,455				25,911				25,084
Deferred tax liabilities
Depreciation			(4,602	)							(3,573	)
Intangibles			(772	)			(900	)			(1,717	)
Inventory			(19	)
			(5,393	)			(900	)			(5,290	)
Net deferred tax assets			22,062				25,011				19,794
Valuation allowance			(13,962	)			(25,011	)			(19,794	)
		$	8,100			$	0			$	0

The Company has federal and state net operating loss carry forwards in the amount of $63.8 million and $70.0 million, respectively at December 31, 2009, which are expected to begin expiring in 2012 and 2013, respectively. Due to the change of ownership provisions of the Tax Reform Act of 1986 (Internal Revenue Code Section 382), utilization of a portion of our net operating loss and tax credit carry forwards may be limited in future periods. The Company does not have any known limits under IRC Section 382 at this time. Further, a portion of the carry forwards may expire before being applied to reduce future income tax liabilities. In addition, on September 30, 2008, the State of California suspended the ability of corporations to offset taxable income with net operating loss carry forwards for the tax years 2008 and 2009. The Company has tax credit carry forwards totaling $376,000.

A valuation allowance is required when it is more likely than not that all or portion of a deferred tax asset will not be realized. The Company has recorded valuation allowance against its net deferred tax assets. As of December 31, 2009 and 2008, the valuation allowance recorded was $14.0 million and $25.0 million respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the amount and timing of scheduled reversals of deferred tax liabilities and projected future taxable income over the periods for which the deferred tax assets are deductible. Management believes the company will continue to be profitable for the foreseeable future as necessary to realize the tax benefit. Therefore, based on current year and forecasted taxable income, management determined that it was appropriate to reverse portion of this valuation allowance. In 2009, tax benefit was recognized through reduction of valuation allowance in the amount of $8.1 million.

The Company adopted the provisions of ASC Topic 740 as derived from FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes), on January 1, 2007. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. As of December 31, 2009, the Company did not increase or decrease its liability for unrecognized tax benefit related to tax positions in prior period nor did the company increase its liability for any tax positions in the current year. Furthermore, there were no adjustments to the liability or lapse of statute of limitation or settlements with taxing authorities.

The Company expects resolution of any unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained, therefore, the Company does not expect to have any unrecognized tax benefits that, if recognized, that would affect the effective tax rate.

The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2009, the Company has not recognized liabilities for penalty and interest as the Company does not have liability for unrecognized tax benefits.

The Company is subject to taxation in the US and various states and Canada. The Company’s tax years for 2005 through 2008 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2005. The Company’s federal return was selected for examination by the Internal Revenue Service (IRS) for prior tax year ended December 31, 2006. As of December, 2009, the IRS has not proposed any significant adjustments to the Company’s tax positions. Management does not believe that the resolution of the ongoing income tax examinations will have a material adverse impact on the financial position of the Company.

Note 11: COMMITMENTS

Operating leases

The Company leases office and production facilities in California, Oregon, Kentucky and Canada under various operating leases. Approximate minimum rental payments under these non-cancelable operating leases as of December 31, 2009 are as follows:

Year		(in thousands)
2010		$	663
2011			102
2012			106
2013			85
Thereafter			293
		$	1,249

Total rental expense was approximately $1.4 million, $1.3 million, and $1.7 million for 2009, 2008 and 2007, respectively.

Employee Benefit Plan — The Company sponsors two defined contribution 401(k) plans. The plans provide for voluntary contributions by eligible employees and matching contributions by the Company depending on the respective plan. Matching contributions made by the Company included in general and administrative expenses were $0.4 million, $0.5 million and $0.5 million for 2009, 2008 and 2007, respectively, excluding nominal administrative costs assumed by the Company.

Note 12: CONTINGENCIES

Litigation Related to Pending Merger with Churchill Downs Incorporated

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 the Company, various of the Company’s directors, Churchill Downs, Tomahawk Merger Corp. and Tomahawk Merger LLC. Subsequently, five additional lawsuits were also filed in the Los Angeles Superior Court, two of which name the Company and its 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 the Company’s 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 the Company’s 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 the Company’s 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 the Company’s stockholder rights agreement that the Company 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 the Company’s 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 the Company submitted its 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 the Company’s directors. The Company is also alleged to have aided and abetted the alleged breaches of fiduciary duty by the Company’s 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 the Company, various of the Company’s directors, Churchill Downs, Tomahawk Merger Corp. and Tomahawk 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 the Company’s directors. On January 8, 2010, an amended complaint was filed in Balch, adding a claim against the Company’s 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, Youbet’s 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, Youbet’s 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, Youbet’s 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 Youbet’s non-affiliated public stockholders who held Youbet 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.

Management does not believe that the results of the litigation related to the pending merger will have a material adverse effect on the financial statements of the Company.

Other matters. The Company is also a party to proceedings that are ordinary and incidental to the Company’s business. Management is unable to estimate any minimum losses from any of these legal proceedings. Accordingly, no losses have been accrued.

The United States is currently experiencing a severe and widespread 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 the Company’s future operations and cash flows cannot be estimated at this time buy may likely be significant.

The Company often carries cash on deposit with financial institutions substantially in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions, if any, is not subject to estimation at this time.

Note 13: STOCKHOLDERS’ EQUITY

In June 2005, the Company’s stockholders approved the Youbet.com, Inc. Equity Incentive Plan (the Equity Incentive Plan), which constitutes an amendment, restatement and continuation of the Company’s 1998 Stock Option Plan. As of December 31, 2009, there were outstanding options for 6,794,594 shares of common stock issued under the Equity Incentive Plan, out of a total approved pool of 13,750,000 shares.

During 2009, the Company granted various stock options to officers, other employees and directors, under the Equity Incentive Plan as follows:

1)

Stock options were granted to the then executive officers of the Company to purchase a total of 1,530,000 shares of common stock at exercise prices ranging from $1.26 to $2.23, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

2)

Stock options were granted to other employees of the Company to purchase a total of 390,000 shares of common stock at exercise prices ranging from $0.95 to $1.26, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

3)

Stock options were granted to directors of the Company to purchase a total of 290,000 shares of common stock at an exercise prices ranging from $1.26 to $2.81, the fair market value at the date of grant. These options vest ratably over twelve months and are exercisable for ten years.

During 2008, the Company granted various stock options to officers, other employees and directors, under the Equity Incentive Plan as follows:

1)

Stock options were granted to the then executive officers of the Company to purchase a total of 950,000 shares of common stock at exercise prices ranging from $1.10 to $1.95, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

2)

Stock options were granted to other employees of the Company to purchase a total of 710,500 shares of common stock at exercise prices ranging from $1.13 to $1.95, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

3)

Stock options were granted to directors of the Company to purchase a total of 685,448 shares of common stock at an exercise prices ranging from $1.22 to $1.44, the fair market value at the date of grant. These options vest ratably over twelve months and are exercisable for ten years.

During 2007, the Company granted various stock options to officers, other employees and directors, under the Equity Incentive Plan as follows:

1)

Stock options were granted to the then executive officers of the Company to purchase a total of 180,000 shares of common stock at exercise prices ranging from $2.35 to $2.72, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

2)

Stock options were granted to other employees of the Company to purchase a total of 360,000 shares of common stock at exercise prices ranging from $2.72 to $3.69, the fair market values at the dates of grant. These options vest ratably over four years and are exercisable for ten years.

3)

Stock options were granted to directors of the Company to purchase a total of 185,500 shares of common stock at an exercise price of $2.72, the fair market value at the date of grant. These options vest ratably over twelve months and are exercisable for ten years.

Under all plans, the stock option price per share for options granted is generally based on the market price of the Company’s common stock on the date of grant and no option can be exercised later than ten years from the date it was granted. The stock options generally vest over four years.

At December 31, 2009, there were options outstanding to acquire 6,794,594 shares at an average exercise price of $1.72 per share. The estimated fair value of all awards granted during the year ended December 31, 2009 was $2.9 million.

The following table summarizes the status of these plans as of December 31, 2009:

		Equity Incentive Plan
Options available per the equity incentive plan			13,750,000
Stock options outstanding			6,794,594
Options available for grant			1,309,599
Transactions involving stock options are summarized as follows:

		Number of				Weighted Average
		Shares				Exercise Price
Balance at January 1, 2007			4,905,659			$	2.61
Granted			725,500				2.86
Exercised			(444,359	)			0.79
Cancelled			(469,389	)			3.81
Balance at December 31, 2007			4,717,411			$	2.70
Granted			2,345,948				1.43
Exercised			0				0.00
Cancelled			(1,504,186	)			3.34
Balance at December 31, 2008			5,559,173			$	1.99
Granted			2,210,000				1.33
Exercised			(270,865	)			0.79
Cancelled			(703,714	)			2.95
Balance at December 31, 2009			6,794,594			$	1.72

As of December 31, 2009, the total compensation costs related to non-vested awards yet to be expensed was approximately $3.4 million to be amortized over the next four years.

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of December 31, 2008 and 2009 were as follows:

										Weighted
						Weighted				Average
		Number of				Average				Remaining
		Shares				Exercise Price				Contractual Life				Intrinsic Value
As of December 31, 2008
Employees — Outstanding			5,559,173			$	1.99				7.19			$	11,061,856
Employees — Expected to Vest			1,512,054				2.15				9.15				3,250,916
Employees — Exercisable			4,047,119				1.93				6.45				7,810,940
As of December 31, 2009
Employees — Outstanding			6,794,594			$	1.72				6.61			$	11,709,312
Employees — Expected to Vest			2,969,575				1.47				8.95				4,365,275
Employees — Exercisable			3,825,019				1.92				4.79				7,344,036

Additional information with respect to outstanding options as of December 31, 2009 is a follows:

Options Outstanding														Options Exercisable
						Weighted
Options		Number				Average				Weighted								Weighted
Exercise		of				Remaining				Average				Number of				Average
Price Range		Shares				Contractual Life				Exercise Price				Shares				Exercise Price
$0.49-$0.99			669,135				2.74			$	0.56				644,135			$	0.54
$1.00-$1.99			4,153,384				7.84				1.32				1,443,009				1.31
$2.00-$2.99			1,296,000				4.93				2.36				1,178,500				2.33
$3.00-$3.99			374,400				6.49				3.63				258,925				3.59
$4.00-$4.99			179,775				5.83				4.43				178,650				4.43
$5.00-$6.19			121,900				5.38				5.15				121,800				5.15

Under the Merger Agreement described in Note 1, the Company has agreed not to grant any new stock options or other stock-based awards while the Merger is pending.

Note 14: DISCONTINUED OPERATIONS

Effective December 31, 2007, the Company sold Bruen back to the original owner. The results of Bruen Productions operations have been treated as discontinued operations in these financial statements and are as follows:

		2007
		(in thousands)
Revenues		$	772
Cost of revenues			408
Gross profit			364
Operating expenses			1,288
Net Income (loss)		$	(924	)
Impact on the Company’s income (loss) per share:
- Basic		$	(0.02	)
- Diluted		$	(0.02	)

Effective February 15, 2008, the Company ceased operations at IRG in an orderly and businesslike fashion and, accordingly, has accounted for such operations retroactively as discontinued. The following results of IRG also have been retroactively treated as discontinued operations in these financial statements and are as follows:

		2009				2008				2007
		(in thousands)
Revenues		$	0			$	46			$	16,347
Cost of revenues							84				12,125
Gross profit (loss)			0				(38	)			4,222
Operating expenses (recovery)			18				(1,410	)			17,529
Net income (loss)		$	(18	)		$	1,372			$	(13,307	)
Impact on the Company’s income (loss) per share:
- Basic		$	(0.00	)		$	0.03			$	(0.32	)
- Diluted		$	(0.00	)		$	0.03			$	(0.32	)

Note 15: SEGMENT REPORTING

The Company operates as two reportable segments. The Company’s advance deposit wagering (ADW) segment consists of the operations of Youbet Express and Youbet Services Corporation and its totalizator services segment consists of the operations of United Tote (Note 16). 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 the company’s 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, etc. as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by the company’s totalizator segment to the company’s ADW segment are eliminated in the Company’s consolidated financial statements. Bruen and IRG were previously reported as part of the ADW segment, but are now reported retroactively as discontinued operations (Note 14); therefore, the amounts reported below for the ADW segment have been adjusted to exclude Bruen and IRG.

The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and are described in the summary of significant accounting policies. Company management evaluates a segment’s performance based upon its individual financial results of operations. Sales to customers located outside the United States primarily relate to totalizator services and are immaterial. Stated in thousands.

Revenue		2009				2008				2007
ADW segment		$	90,727			$	85,831			$	97,652
Totalizator segment			21,737				24,443				26,093
Intercompany eliminations			(1,084	)			(1,246	)			(1,251	)
		$	111,380			$	109,028			$	122,494

Revenue by Geographic Area		2009				2008				2007
United States		$	109,339			$	106,846			$	120,225
International			2,041				2,182				2,269
		$	111,380			$	109,028			$	122,494

Reconciliation of Income (loss) before Income Tax		2009				2008				2007
Income (loss) from operations before other income (expense) and income tax
- ADW		$	7,570			$	8,812			$	1,589
- Totalizator			(3,623	)			(13,140	)			(11,961	)
			3,947				(4,328	)			(10,372	)
Interest income			44				233				642
Interest expense			(780	)			(1,244	)			(1,796	)
Other			487				174				153
Loss before income tax from continuing operations			3,698				(5,165	)			(11,373	)
Income (loss) before income tax from discontinued operations			(18	)			1,372				(14,231	)
Loss before income tax		$	3,680			$	(3,793	)		$	(25,604	)