10-K

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, 2008

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

Commission file number: 0-26015

YOUBET.COM, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation)	95-4627253 (I.R.S. employer identification no.)
2600 West Olive Avenue, 5th floor, Burbank, CA. 91505 (Address of principal executive offices)	91505 (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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

YOUBET.COM, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007

	Page
PART I.
Item 1. Business		4
Item 1A. Risk factors		9
Item 1B. Unresolved staff comments		16
Item 2. Properties		16
Item 3. Legal proceedings		16
Item 4. Submission of matters to a vote of security holders		17
PART II.
Item 5. Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities		17
Item 6. Selected consolidated financial data		20
Item 7. Management’s discussion and analysis of financial condition and results of operations		22
Item 7A. Quantitative and qualitative disclosures about market risk		32
Item 8. Financial statements and supplementary data		32
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure		32
Item 9A. Controls and procedures		33
Item 9B. Other information		33
PART III.
Item 10. Directors, executive officers and corporate governance		35
Item 11. Executive compensation		35
Item 12. Security ownership of certain beneficial owners and management		35
Item 13. Certain relationships and related transactions		35
Item 14. Principal accountants’ fees and services		35
PART IV.
Item 15. Exhibits and financial statement schedules		35
Signatures		38
Exhibit 10.9
Exhibit 10.15
Exhibit 10.16
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

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Preliminary Notes

This annual report on Form 10-K is for the year ended December 31, 2008. This annual report modifies and supersedes documents filed prior to this annual report. The Securities and Exchange Commission, or 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 concerning expectations as to our revenues, expenses, and net income, our growth strategies and plans, our assessment of strategic alternatives for United Tote, including a possible sale, as to which there can be no assurance of success, the timely development and market acceptance of our products and technologies, the competitive nature of and anticipated growth in our markets, our ability to achieve further cost reductions, the status of evolving technologies and their growth potential, the adoption of future industry standards, expectations as to our financing and liquidity requirements and arrangements, the need for additional capital, and other matters that are not historical facts. These forward-looking statements are based on our current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by it. Words such as “anticipates”, “appears”, “expects”, “intends”, “plans”, “believes, “seeks”, “estimates”, “may”, “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements, which are included in accordance with the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from those results expressed in any forward-looking statements, as a result of various factors, some of which are listed under Item 1A “Risk Factors” of 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.

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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 Express is a leading online advance deposit wagering (“ADW”) company focused on horse racing primarily in the United States.

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

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

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

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

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

Industry Overview

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

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

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

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Competitive Advantages

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

Extensive customer database and strong analytical capability

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

Highly scalable infrastructure

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

Growth Strategies

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

Continue to develop high-quality wagering products

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

Seek additional content

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

Expand geographic presence

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

Expansion into new gaming opportunities

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

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

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

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Revenue Sources

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

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

Marketing

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

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

Acquisitions and Dispositions

Acquisition of United Tote

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

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

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

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

Disposition of Bruen Productions

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

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Shutdown of IRG

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

Research and Development

Expenses

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

New Products

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

In 2008, we began providing a co-branded product for a group of four racetracks in Illinois, which provides for the sharing of the revenue from wagers placed by Illinois customers and sharing the expenses for providing the co-branded product. The co-branded offering 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.

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”).

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

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

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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.

Other competitors include Elite Turf Club, Racing & Gaming Services, Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, and AmWest Entertainment.

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

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

Government Regulation and Legislation

Current licensing

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

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

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

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

Other government regulation and licensing

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

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

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

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

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

Seasonality and Backlog

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

Employees

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

Available Information

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

ITEM 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

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 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 Interstate Horseracing Act of 1978, as amended, 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.

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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 Unlawful Internet Gambling Enforcement Act of 2006, (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 final rule (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 Interstate Horseracing Act of 1978, as amended. 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 UIEGA 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 UIEGA contains a specific exemption for activities that are permitted under the Interstate Horseracing Act 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.

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If any of our significant license and content agreements is terminated or is 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 15 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 Elite Turf Club, Racing & Gaming Services, Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, and AmWest Entertainment. We expect to compete with these entities, as well as new companies which may enter the interactive, pari-mutuel gaming market. 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 (“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 Interstate Horseracing Act of 1978. It is possible that the THG, other collections of horsemen groups, or individual horsemen groups, could refuse to approve such agreements 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.

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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.

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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.

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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 specified adjusted EBITDA and (iv) limitations on capital expenditures. Our indebtedness under the loan and security agreement is guaranteed by UT Gaming, Inc., the direct parent of United Tote Company, and secured by substantially all of our assets, including our intellectual property, and UT Gaming’s equity in United Tote Company. 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, 2008, 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.

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.

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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. On October 16, 2008, the Nasdaq temporarily suspended the $1.00 minimum bid price requirement until January 16, 2009 and has now extended the temporary suspension until April 20, 2009.

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:

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

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

• material announcements by us or our competitors;

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

• 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:

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

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

• the actions of our competitors.

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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, 2008, Youbet owned no real property. Youbet currently leases its facilities for administrative, service and/or sales activities. The terms of the leases for our leased facilities expire at various dates from June 2009 to December 2016. The following table sets forth the location, business segment, approximate square footage and purpose of our properties as of December 31, 2008:

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
Portland, Oregon	Totalizator		1,750	Service

Youbet believes that its facilities are adequate for its current and anticipated future levels of operations.

ITEM 3. LEGAL PROCEEDINGS

A search warrant was served on the Company on October 4, 2007 at its headquarters in Woodland Hills, California, by federal agents, accompanied by agents of the Nevada Gaming Control Board, for various records including, among other things, business records of IRG related to the wagering activities of certain customers. The investigation is being conducted by the U.S. Attorney’s Office in Las Vegas, Nevada. We were advised that the U.S. Attorney’s Office is investigating a potentially wide net of activities of certain individuals who may have used telephone rebate wagering services, including those offered by IRG, in an allegedly illegal manner. In connection with its investigation, the U.S. government on October 11, 2007, took possession of approximately $1.5 million held in IRG bank accounts by way of civil asset forfeiture.

Following the seizure of the IRG accounts, ORC issued a notice to commence proceedings seeking suspension of IRG’s license based upon IRG’s alleged noncompliance with ORC requirements. IRG contested the ORC’s complaint and requested a hearing. Prior to the scheduling of a hearing date, we shut down IRG operations and entered into a Stipulated Order of License Surrender with the ORC, pursuant to which IRG and the ORC agreed that IRG would voluntarily surrender the license issued by the ORC, IRG would not re-apply for a hub license in Oregon, and the ORC would deem the allegations in their notice to be resolved and not pursue them.

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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.

We also 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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 closing price per share for our common stock.

	High		Low
Year Ended December 31, 2007:
First Quarter	$	3.75	$	2.53
Second Quarter		3.39		2.44
Third Quarter		2.46		1.61
Fourth Quarter		2.06		0.79
Year Ended December 31, 2008:
First Quarter	$	1.25	$	0.72
Second Quarter		1.65		0.69
Third Quarter		2.01		1.05
Fourth Quarter		1.54		0.80

On December 31, 2008, the closing sale price per share of our common stock as reported on the Nasdaq Capital Market was $0.85 per share. As of December 31, 2008, we had 305 stockholders of record.

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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 must be made on or before March 31, 2009, but 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. We did not repurchase any shares of our common stock during 2008 pursuant to this repurchase program.

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, 2008:

					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		5,559,173		1.99		2,811,588
Equity compensation plans not approved by by security holders		—		—		—
		5,559,173		1.99		2,811,588

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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, 2003 through December 31, 2008. 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 Indexes: Peer Group (1) — Churchill Downs, Inc. and Magna Entertainment Corp. Previously included Gemstar-TV Guide International, Inc. was removed due to its acquisition by Macrovision. Peer Group (2) — Churchill Downs, Inc., Magna Entertainment Corp and Scientific Games Corp. The chart assumes $100 was invested on December 31, 2003 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.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

	Years ended December 31,
	2008 (1)			2007(2)			2006 (3)			2005(4)			2004
	(in thousands, except per share data)
Statement of Income Data
Revenues	$	109,028		$	122,494		$	114,594		$	81,115		$	65,249
Operating costs		114,193			133,867			118,161			77,350			63,868
Income (loss) from continuing operations before income tax (benefit)		(5,165	)		(11,373	)		(3,567	)		3,765			1,381
Income tax (benefit)		658			2,814			734			(1,854	)		(3,250	)
Income (loss) from continuing operations		(5,823	)		(14,187	)		(4,301	)		5,619			4,631
Income (loss) from discontinued operations (5)		1,372			(14,231	)		2,270			72			—
Net income (loss)	$	(4,451	)	$	(28,418	)	$	(2,031	)	$	5,691		$	4,631
Earnings (loss) per share:
Basic
Income (loss) from continuing operations	$	(0.14	)	$	(0.34	)	$	(0.12	)	$	0.18		$	0.16
Income (loss) from discontinued operations (5)	$	0.03			(0.34	)		0.06			0.00			0.00
Net income (loss)	$	(0.11	)		(0.68	)		(0.06	)		0.18			0.16
Diluted
Income (loss) from continuing operations	$	(0.14	)	$	(0.34	)	$	(0.12	)	$	0.16		$	0.14
Income (loss) from discontinued operations (5)	$	0.03			(0.34	)		0.06			0.00			0.00
Net income (loss)	$	(0.11	)		(0.68	)		(0.06	)		0.16			0.14
Selected Balance Sheet Data
Cash and cash equivalents	$	16,538		$	6,551		$	21,051		$	16,686		$	13,287
Working capital (deficit)		(771	)		(14,300	)		5,019			12,015			8,876
Total assets		48,880			65,050			105,605			40,829			25,442
Current portion of long-term debt		8,704			10,390			8,311			620			391
Long-term debt, net of current portion		3,996			4,767			12,054			178			158
Stockholders’ equity		16,843			19,981			52,774			22,884			14,098

(1)	In connection with our evaluation of strategic alternatives for United Tote, in February 2009, we concluded that the carrying value of United Tote was impaired and recorded a non-cash impairment charge of $11.2 million as of December 31, 2008, which includes the elimination of $6.9 million in goodwill and reductions in the carrying value of computer equipment and intangible assets of $3.1 million and $1.2 million, respectively.
(2)	In connection with our evaluation of strategic alternatives for United Tote, in March 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.
(3)	In February 2006, we acquired United Tote, and in October 2006, we acquired Bruen Productions. In 2006, we paid amounts and incurred associated legal fees totaling $2.7 million in connection with an arbitration award related to an audit of amounts paid to TVG under our license agreement with TVG for the period April 2002 through March 2005.
(4)	In June 2005, we acquired IRG.
(5)	In December 2007, we sold Bruen Productions and in February 2008, we ceased operations at IRG. The results of both Bruen Productions and IRG have been accounted for as discontinued operations. See Note 14 to our consolidated financial statements at the end of this report.

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Selected Unaudited Quarterly Results of Operations

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

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

(1)	We recognized impairment charges in United Tote as of December 31, 2008 and 2007 in the amounts of $11.2 million and $8.0 million, respectively.
(2)	In December 2007, we sold Bruen Productions and in February 2008, we ceased operations at IRG. The results of both Bruen Productions and IRG have been accounted for as discontinued operations. See Note 14 to our consolidated financial statements at the end of this report.

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

Overview

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

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

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

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

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

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

We have two reportable segments for accounting purposes. Our ADW segment consists of our core Youbet Express operations. 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. United Tote operations constitute a separate totalizator segment. For information regarding results for each segment, see Note 15 “Segment Reporting” in our consolidated financial statements at the end of this report.

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Results of Operations for 2008 Compared to 2007

Revenues

Total revenues decreased $13.5 million, or 11%, for 2008 when compared with 2007. ADW segment revenue, which consists primarily of commissions on wagers placed by our customers, decreased approximately $11.8 million, or 12%, compared to 2007 resulting primarily from a 9% decline in handle, as discussed below, as well as higher customer incentives and rebates, which amounted to $2.5 million and represented a 45% increase in such incentives and rebates compared with the prior year. Totalizator segment revenues decreased $1.7 million, or 6%, when compared to 2007.

Total handle for 2008 was $438.3 million, a decrease of $46.0 million, or 9%, 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 (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 favoring tracks with higher yields, the loss of lower yielding TrackNet content and a reduction in lower yielding TVG content in 2008. 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.

Revenue generated by our United Tote operations in 2008 included contract revenue associated with the service of totalizator systems of $22.1 million and equipment sales of $1.1 million, representing a decrease of $1.9 million and an increase of $0.3 million, respectively, compared to 2007. Service revenue declined as a result of track closures and reduced racing days due to inclement weather and track maintenance.

Costs and Expenses

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. The year-over-year decrease in track fees attributable to reduced handle was offset by source market fee settlement accruals and higher host fees paid to the NYRA tracks. In the beginning of 2008, these NYRA tracks were no longer TVG exclusive.

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.

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

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

Operating Expenses

Research and development: Research and development expense decreased $0.5 million, or 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 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.

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General and administrative: General and administrative expense decreased $3.4 million, or 16%, in 2008 compared to 2007. The decrease in these expenses results primarily from reduced personnel and recruiting expenses, accounting fees and expenses related to improving and testing our internal control over financial reporting, as well as other cost reduction initiatives that commenced in the fourth quarter of 2007 and the of recording severance/termination charges of $2.0 million 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 in 2008 compared with 2007.

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

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

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

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

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

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

Results of Operations for 2007 Compared to 2006

Revenues

Total revenues increased $7.9 million, or 7%, for 2007 compared to 2006. ADW segment revenue increased $5.9 million, or 6%, and totalizator segment revenues increased $2.0 million largely due to including full year results for United Tote (acquired in mid-February 2006) in 2007.

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

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Youbet Express yield (defined as commission revenue less track and licensing fees as a percentage of handle) was 7.2% in 2007, up from 6.1% in the prior year, reflecting our efforts to increase handle on higher yielding tracks. We believe that yield is a useful measure to evaluate 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.

Revenue generated by our United Tote operations in 2007 included contract revenue associated with the service of totalizator systems of $23.0 million and equipment sales of $0.9 million, an increase of $1.4 million and a decrease of $0.4 million, respectively, compared to 2006.

Costs and Expenses

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

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

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

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

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

Operating Expenses

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

Cash Flows for 2008 Compared to 2007

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 of $15.6 million was primarily due to improved earnings resulting from increase revenues from our ADW segment, reduced expenses, favorable working capital fluctuations and a non-recurring payment of a $1.2 million arbitration award to TVG in the first quarter of 2007

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 of $5.7 million 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).

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

Cash Flows for 2007 Compared to 2006

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

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

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

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Credit Facility

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

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

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

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

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

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

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

Youbet Promissory Notes

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

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

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

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

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

Off Balance Sheet Arrangements

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

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

Contractual Obligations, Contingent Liabilities and Commitments

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

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

(1)	The terms of Mr. Burk’s employment agreement and our obligations to make payments thereunder are superseded by the severance and general release agreement we entered into with Mr. Burk on March 5, 2009. See Item 9B. “Other Information — Departure of James A. Burk.”
(2)	Consists of capital lease arrangements for networking equipment, computer equipment and software.
(3)	Consists of minimum rental payments under non-cancelable operating leases for office and production facilities in California, Oregon, Kentucky and Canada.
(4)	Consists of operating lease arrangements for network and computer equipment.
(5)	Consists of the aggregate principal amount of the term loan under our credit facility described above under “Credit Facility.”
(6)	Consists of the principal amount of the third promissory note described above under “Youbet Promissory Notes.”

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

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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.

Revenues

We record commission revenues and the related track and market access fees as operating expenses when wagers are settled, typically the same day as the wager. Other sources of revenue, such as tote services, are recorded when earned. Incentives offered to customers for them to wager on tracks that generate the greatest margins are deducted from gross revenues as are other volume related incentives offered.

We retain a portion of all wagers as commissions prior to distributing payoffs to the winners. In the aggregate, these commissions, coupled with tote service revenue, represent our primary revenue stream. We expect the majority of our future revenue to be in the form of commissions and fees from pari-mutuel wagering and tote service revenue. We generate additional revenue from processing fees, monthly subscription fees and the sale of handicapping information.

Allowance for doubtful accounts

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

• customer specific allowance;

• amounts based upon an aging schedule; and

• an estimated amount, based on our historical experience, for issues not yet identified.

Inventory obsolescence

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

Valuation of long-lived and intangible assets

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

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

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

• Significant underperformance relative to expected historical or projected future operating results;

• Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

• Significant negative industry or economic trends;

• Significant decline in our stock price for a sustained period; and

• Our market capitalization relative to net book value.

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If we determine that the carrying value of long-lived assets and related goodwill may not be recoverable t, 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 value benefit related to the asset falls below the unamortized cost.

Indemnification agreements

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

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

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

Recent Accounting Pronouncements

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

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

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

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

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

ITEM 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, 2008, our portfolio of investments included $16.5 million of cash and cash equivalents and $4.7 million of restricted cash. Our portfolio of cash and cash equivalents consists of highly liquid investments with maturities of three months or less at the date of purchase. The average yield on our investments in 2008 was approximately 2.5%. 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 $12.7 million outstanding at December 31, 2008 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, 2008:

	(in thousands)
Variable-rate debt	$	8,750
Fixed-rate debt		3,950
Total	$	12,700

The weighted average interest rate paid during 2008 on outstanding indebtedness was 5.9%. For variable-rate debt outstanding at December 31, 2008, a 0.25% increase in interest rates would increase annual interest expense by approximately $22,000. 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.

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of December 31, 2008, our management, including the Chief Executive Officer, Chief Operating 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 Operating 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 Operating Officer, Chief Financial Officer and Chief Accounting Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2008.

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, 2008 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 and the report of our independent registered public accounting firm on our internal control over financial reporting are included with our consolidated financial statements at the end of this report under the captions, “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.

ITEM 9B. OTHER INFORMATION

United Tote Goodwill Impairment

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 in February  2009, we concluded that United Tote goodwill was impaired as of December 31, 2008. The total amount of this non-cash impairment charge was $11.2 million, which includes the elimination of $6.9 million in goodwill and write downs in capitalized software and intangible assets of $3.1 million and $1.2 million, respectively, and is included in our consolidated financial statements at the end of this report.

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Option Grants and Cash Bonuses for Certain Officers and Directors

On March 4, 2009, the compensation committee of our board of directors approved cash bonus compensation and grants of options to purchase shares of our common stock for certain of our employees and directors, including the bonus payments and options grants set forth in the table below for the following director and executive officers:

	Cash Bonus ($)		Option Grant
F. Jack Liebau, Chairman of the Board				200,000
Michael Brodsky, Chief Executive Officer		400,616		400,000
David Goldberg, Chief Operating Officer		100,260		800,000
Michael Nelson, Chief Accounting Officer		125,000		75,000
Daniel Perini, General Counsel		125,000		75,000

The exercise price for each of the above options is $1.26 per share, which represents the closing price of our common stock on March 4, 2009, the grant date. Each of the above options will vest ratably in four equal installments over a four year period on the anniversary of the grant date, beginning on March 2010, and are exercisable until March 3, 2019.

Departure of James A. Burk

On March 5, 2009, we entered into a severance and general release agreement with James A. Burk, under which we agreed with Mr. Burk that he will step down as Chief Financial Officer of Youbet, effective March 31, 2009. The severance and general release agreement, in pertinent part, modifies the severance payable to Mr. Burk under his employment agreement with us and provides that Mr. Burk will be paid a lump sum severance payment of $180,000, which payment is in lieu of severance payments contemplated under his employment agreement, and a lump sum bonus of $120,000. The severance and general release agreement also contains a release of claims on behalf of Mr. Burk.

The foregoing description of the separation and general release agreement with Mr. Burk is qualified in its entirety by reference to the full text of the separation and general release agreement, a copy of which is filed as Exhibit 10.15 and is incorporated herein by reference.

Adoption of Form Indemnification Agreement for Directors

On March 4, 2009, our board of directors approved a form of indemnification agreement between us and each of our directors. The purpose of the indemnification agreement is to provide specific contractual assurance with respect to indemnification and expense advancement rights extended to such directors under our Amended and Restated Bylaws in order to attract highly qualified individuals to serve as directors or in other capacities. The form of indemnification agreement provides assurance that no future amendment to or revocation of our Amended and Restated Bylaws will adversely affect any contractual right of a director or certain other individuals with respect to indemnification and expense advancement.

The foregoing description of the form of indemnification agreement is qualified in its entirety by reference to the full text of the form of indemnification agreement, a copy of which is filed as Exhibit 10.16 and is incorporated herein by reference.

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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 is applicable to our Chief Executive Officer, Chief Operating 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 36 of this report.

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

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(3) List of Exhibits:

3.1	Certificate of Incorporation of Youbet.com, Inc., as amended (incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-QSB for the quarter ended September 30, 2003).
3.2	Amended and Restated Bylaws of Youbet.com, Inc. (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed April 20, 2007).
4.1	Registration Rights Agreement by and among Youbet.com, Inc. (formerly You Bet International, Inc.) and the other parties listed therein dated June 29, 1998 (incorporated by reference to Exhibit 99.5 to our current report on Form 8-K filed July 14, 1998).
4.2	Warrant to purchase Youbet common stock issued to Robert M. Fell dated June 29, 1998 (incorporated by reference to Exhibit 99.3 to our current report on Form 8-K filed July 14, 1998).
10.1	Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to our registration statement on Form S-3, File No. 333-126131).*
10.2	Amendment Number One to the Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed June 16, 2006).*
10.3	Amendment Number Two to the Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed June 17, 2008).*
10.4	Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 to our current report on Form 8-K filed June 17, 2008).*
10.5	Form of Performance Stock Option Agreement (incorporated by reference to Exhibit 10.5 to our current report on Form 8-K filed June 17, 2008).*
10.6	Form of Non-Employee Director Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.6 to our current report on Form 8-K filed June 17, 2008).*
10.7	Lease Agreement for the Woodland Hills Facility dated March 11, 2000 (incorporated by reference to Exhibit 10.26 to our annual report on Form 10-K for the year ended December 31, 2000).
10.8	Amendment, dated as of September 8, 2003, to lease agreement for the Woodland Hills Facility dated March 11, 2000 (incorporated by reference to Exhibit 10.6 to our annual report on Form 10-KSB for the year ended December 31, 2003).
10.9	Assignment and Assumption of Lease, dated as of December 15, 2008, by and between Youbet.com, Inc. and Youbet Services Corporation.
10.10	License and Content Agreement, dated as of May 18, 2001, by and among ODS Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by reference to Exhibit 10.27 to our quarterly report on Form 10-Q for the quarter ended June 30, 2001).
10.11	Amendment to License and Content Agreement dated as of June 6, 2007, by and among ODS Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed June 12, 2007).
10.12	Youbet.com, Inc. Offer Letter to Michael D. Nelson, dated December 12, 2006 and accepted December 13, 2006 (incorporated by reference to Exhibit 99.2 to our current report on Form 8-K filed January 8, 2007).*
10.13	Employment Agreement, dated as of July 9, 2007, by and between Youbet.com, Inc. and James A. Burk (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 11, 2007).*
10.14	Employment Agreement, dated as of March 1, 2008, by and between Youbet.com, Inc. and Daniel Perini (incorporated by reference to Exhibit 10.7 to our quarterly report on Form 10-Q for the quarter ended June 30, 2008).*
10.15	Severance and General Release Agreement, by and between Youbet.com, Inc. and James A. Burk.*
10.16	Form of Indemnification Agreement.
10.17	Promissory Notes issued by Youbet.com, Inc. in favor of UT Group, LLC (incorporated by reference to Exhibit 10.4 to our current report on Form 8-K and filed February 13, 2006).

36

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

* Management contract or compensatory plan.

37

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.

	YOUBET.COM, INC.
March 6, 2009	By:	/s/ Michael Brodsky
		Michael Brodsky,
		President and Chief Executive Officer

Power of Attorney

Youbet.com, Inc., a Delaware corporation, and each person whose signature appears below, constitutes and appoints Michael Brodsky and James A. Burk, 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/ Michael Brodsky Michael Brodsky	President and Chief Executive Officer (Principal Executive Officer)	March 6, 2009
/s/ David Goldberg David Goldberg	Chief Operating Officer	March 6, 2009
/s/ James A. Burk James A. Burk	Chief Financial Officer (Principal Financial Officer)	March 6, 2009
/s/ Michael D. Nelson Michael D. Nelson	Corporate Controller (Principal Accounting Officer)	March 6, 2009
/s/ F. Jack Liebau F. Jack Liebau	Chairman of the Board	March 6, 2009
/s/ Gary Adelson Gary Adelson	Director	March 6, 2009
/s/ Michael D. Sands Michael D. Sands	Director	March 6, 2009
/s/ Jay Pritzker Jay Pritzker	Director	March 6, 2009
/s/ James Edgar James Edgar	Director	March 6, 2009
/s/ Michael Soenen Michael Soenen	Director	March 6, 2009
/s/ Raymond Anderson Raymond Anderson	Director	March 6, 2009

38

Index to Consolidated Financial Statements

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

F-1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

(i)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
(iii)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

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

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

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

/s/ Michael Brodsky	/s/ James A. Burk
Michael Brodsky President and Chief Executive Officer	James A. Burk Chief Financial Officer

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

PIERCY BOWLER TAYLOR & KERN

/s/ Piercy, Bowler, Taylor & Kern

Certified Public Accountants
Las Vegas, Nevada
March 6, 2009

F-3

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2008 and 2007

(in thousands, except share amounts)

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

See notes to consolidated financial statements

F-4

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except per share amounts)

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

See notes to consolidated financial statements

F-5

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

Years Ended December 31, 2008, 2007 and 2006

								Accumulated
					Additional			Other
	Common Stock				Paid-In			Comprehensive						Treasury
	Shares		Dollars		Capital			Loss			Deficit			Stock			Total
Balances at January 1, 2006		33,452		33		105,716			—			(81,524	)		(1,341	)		22,884
Warrants exercised		25				12												12
Stock options exercised		260		1		255												256
Treasury stock re-issuance						13									41			54
Equity sale		6,200		6		18,947												18,953
Stock issued in connection with acquisition of United Tote		2,182		2		11,998												12,000
Cumulative translation adjustment									(10	)								(10	)
Stock based compensation						656												656
Net loss												(2,031	)					(2,031	)
Balances at December 31, 2006		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

See notes to consolidated financial statements

F-6

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	2008			2007			2006
Operating activities
Net loss	$	(4,451	)	$	(28,418	)	$	(2,031	)
Income (loss) from discontinued operations		1,372			(14,231	)		2,270
Loss from continuing operations		(5,823	)		(14,187	)		(4,301	)
Adjustments to reconcile net loss to net cash provided by operating activities, continuing operations
Depreciation and amortization of property and equipment		7,332			8,376			5,279
Amortization of intangibles		742			741			679
Goodwill, intangibles and fixed asset impairment		11,212			8,000			—
Stock-based compensation		1,446			898			656
Bad debt		707			1,105			173
Increase in operating (assets) and liabilities								—
Restricted cash, Players Trust SM		32			48			(185	)
Accounts receivable		971			430			(1,813	)
Inventory		148			502			(610	)
Prepaid expenses		310			(372	)		757
Deferred tax asset		—			1,797			(231	)
Other assets		213			2,473			765
Trade payables		(3,375	)		(3,783	)		4,432
Accrued expenses		1,385			(6,737	)		698
Customer deposits		(160	)		90			365
Deferred revenues		(91	)		5			(313	)
Deferred tax liability		—			—			570
Net cash provided (used) by operating activities, from continuing operations		15,049			(614	)		6,921
Investing activities
Purchase of property and equipment		(1,384	)		(2,482	)		(6,197	)
Proceeds from sale of property and equipment		34			—			576
Cash paid for United Tote acquisition, net of $159 cash acquired in 2006		—			(4,473	)		(10,191	)
Investments in intangibles and other		—			—			(1,116	)
Increase in restricted cash (other than Players Trust SM)		—			—			(258	)
Decrease in restricted cash (other than Players Trust SM)		—			(168	)		1,132
Other		—			—			166
Net cash used in investing activities		(1,350	)		(7,123	)		(15,888	)
Financing activities
Proceeds from issuance of common stock		—			—			19,009
Proceeds from exercise of stock options and warrants		—			353			269
Purchase of treasury stock		(60	)		(1,019	)		—
Proceeds from sale-leaseback transaction		—			1,065			—
Proceeds from debt		10,752			4,409			3,893
Repayment of debt		(14,019	)		(11,045	)		(9,840	)
Other		—			(88	)		—
Net cash provided (used) by financing activities		(3,327	)		(6,325	)		13,331
Net cash provided by (used in) operating activities, discontinued operations		(312	)		(392	)		11
Foreign currency translation adjustments		(73	)		(46	)		(10	)
Net increase (decrease) in cash and cash equivalents		9,987			(14,500	)		4,365
Cash and cash equivalents at the beginning of period		6,551			21,051			16,686
Cash and cash equivalents at the end of period	$	16,538		$	6,551		$	21,051
Supplemental disclosure of cash flow information:
Cash paid for interest	$	772		$	1,322		$	15
Cash paid for income taxes		603			381			195
Non-cash investing and financing activities:
Seller financing of United Tote acquisition								12,000
Equipment acquired with capital lease and other financing arrangements		810			1,428			469

See notes to consolidated financial statements

F-7

Youbet.com and Subsidiaries

Notes to Consolidated Financial Statements

Note 1: THE COMPANY

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 process wagers and payouts).

Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

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.

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 and IRG, 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 when the points are issued or discounts are earned.

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 some instances, United Tote incurs significant costs relating to these contracts before the systems become operational. 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.

F-8

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

Accounts receivable are uncollateralized and carried, net of an appropriate allowance, at their estimated collectible value. 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 allowance for doubtful accounts (Note 4) is established based on historic loss experience, the individual tracks and players, the relative strength of the Company’s legal position, the related cost of any proceedings, and general economic conditions.

The Company manages its concentrations of credit risk by evaluating the creditworthiness of tracks and players before extending credit. The maximum losses that the Company would incur if a track or player 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 fair value due to the short maturities of these financial instruments. In evaluating the fair value of other financial instruments, consisting of long-term receivables and debt, the Company generally uses third-party market quotes. The estimated fair value of long-term receivables and debt approximates their carrying value.

Foreign currency

The functional currency of United Tote Canada is Canadian dollars. 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.

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. The Company regularly reviews inventory quantities on hand and records an allowance for estimated excess and obsolete inventory based primarily on the Company’s forecast of product demand and production requirements.

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.

Also included in property and equipment is internally developed software. Internally used software, whether purchased or developed, is capitalized and amortized using the straight-line method over an estimated useful life of two to four years, in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

F-9

Goodwill

The Company evaluates its goodwill 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 the Financial Accounting Standards Board Statement No. 157, Fair Value Measurements, 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 estimated 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 Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). 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 FIN 48. As of December 31, 2008 the Company had not recognized liabilities for penalty and interest as the Company does not have liability for unrecognized tax benefits.

The Company will 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

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123R) using the modified prospective transition method, for accounting for all stock-based compensation. Stock-based compensation expense related to employee and director stock options recognized for the years ended December 31, 2008, 2007 and 2006 was $1.4 million, $0.9 million and $0.7 million, respectively.

Under the fair value recognition provisions of SFAS No. 123(R), 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. Under SFAS No. 123R, 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 materially impacted. Expected forfeitures are immaterial and, therefore, the Company is recognizing forfeitures as they occur.

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant under SFAS 123R 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.

F-10

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,
	2008			2007			2006
Risk-free interest rate		1.9	%		3.7	%		4.7	%
Expected term (years)		7			7			7
Volatility		48.0	%		38.1	%		30.2	%
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.

The 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 share amounts)
2008
Income per share, basic (486 potentially dilutive securities were omitted from the calculation since the effect of including them would have been anti-dilutive)	$	(4,451	)		41,463	$	(0.11	)
2007
Loss per share, basic (714 potentially dilutive securities were omitted from the calculation since the effect of including them would have been anti-dilutive)	$	(28,418	)		41,796	$	(0.68	)
2006
Loss per share, basic (3,750 potentially dilutive securities were omitted from the calculation since the effect of including them would have been anti-dilutive)	$	(2,031	)		35,141	$	(0.06	)

F-11

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 through 2010. The restricted cash requirement ($168,000 and $275,000 at December 31, 2008 and 2007, respectively) decreases $107,000 per year for the first five years of the lease and $98,000 thereafter until expiration. The portion of the restricted deposit that is allowed to be released in the subsequent year is reported as a current asset in the accompanying financial statements, the remainder is included in other assets.

Players Trust^SM: As of December 31, 2008 and 2007, customer deposits maintained in Players Trust^SM totaled $4.6 million and $8.6 million, respectively, 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,
	2008		2007
	(in thousands)
Track receivables, net of allowance for doubtful collection of $541 and $1,180	$	2,904	$	6,784
Player receivables, net of allowance for doubtful collection of $0 and $759		0		60
Other, net of allowance for doubtful collection of $0 and $1,467		127		470
	$	3,031	$	7,314

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,
	2008		2007
	(in thousands)
Totalizator components	$	1,681	$	1,477
Ticket stock		256		608
	$	1,937	$	2,085

Note 6: PROPERTY AND EQUIPMENT

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

	December 31,			December 31,
	2008			2007
	(in thousands)
Computer equipment owned	$	11,940		$	14,520
Computer equipment under capital lease (Note 9)		2,053			1,605
Pari-mutuel equipment		21,634			21,966
Software		5,448			4,347
Office furniture, fixtures and equipment		576			663
Leasehold improvements		3,190			3,201
		44,841			46,302
Less: accumulated depreciation and amortization		(28,623	)		(21,638	)
	$	16,218		$	24,664

F-12

Depreciation and amortization are recorded over the estimated lives of the following types of property and equipment: computer equipment (3 to 5 years), software (2 to 10 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 carrying 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.

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,
	2008			2007
	(in thousands)
Intangibles	$	6,750		$	7,925
Less: accumulated amortization		(2,162	)		(1,420	)
	$	4,588		$	6,505

Amortizable intangibles consist of customer listings, non-competition agreements, trademarks, trade names, technology and game content derived through acquisition of IRG and United Tote. Amortization expense in 2008 and 2007 for these intangibles was $0.7 million and $1.9 million, respectively. Estimated future amortization of intangibles for each of the next five years is $0.7 million, $0.7 million, $0.7 million, $0.6 million, and $0.6 million, respectively. See footnote 6 above for explanation of the $1.2 million reduction in the carrying value of intangibles as of December 31, 2008.

Note 8: ACCRUED EXPENSES

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

	December 31,		December 31,
	2008		2007
	(in thousands)
Legal fees	$	111	$	298
Employee compensation, related taxes and other benefits		3,908		2,853
IRG earnout				4,293
Track fees		926
Accrued interest and taxes		2,037		2,074
Player incentives		450		532
Other		855		1,296
		8,287		11,346

F-13

Note 9: DEBT

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

	December 31,		December 31,
	2008		2007
	(in thousands)
Capital lease obligations and other financing arrangement	$	750	$	999
Promissary notes		3,200		3,200
Bank term loan		8,750		10,958
		12,700		15,157
Current portion of long-term debt		8,704		10,390
Long-term debt, less current maturities	$	3,996	$	4,767

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, 2008, the Company owed $8.8 million under the term loan and no amount was outstanding under the revolving credit facility. At December 31, 2008, 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.

In April 2007, United Tote entered into a sale-leaseback transaction with a bank. United Tote sold certain totalizator equipment to the bank for proceeds of $1.1 million and agreed to lease back the equipment for a 24-month period at an implicit interest rate of 8.8%.

The Company has financed the purchase of certain equipment through the issuance of bank debt, promissory notes and under capital leasing arrangements. The debt bears interest at rates ranging from 5.0% to 10.4%. Such obligations are payable in monthly installments through May 2010.

Annual maturities for debt, including capital lease obligations as of December 31, 2008, are as follows:

Year	(in thousands)
2009	$	8,704
2010		3,996
	$	12,700

F-14

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)
2009	$	546
2010		254
Total obligation		800
Less: interest portion		50
Total principal	$	750

Note 10: INCOME TAXES

Income tax expense from continuing operations consists of the following:

	2008			2007			2006
	(in thousands)
Current
Federal	$	127		$			$	76
State		417			4			18
Foreign		114			282			307
		658			286			401
Deferred
Federal		(99	)		(600	)		(244	)
State		699			(735	)		577
Change in valuation allowance		(600	)		3,863
		0			2,528			333
	$	658		$	2,814		$	734

Income taxes from continuing operations for 2008, 2007 and 2006 differ from “expected” income taxes for those years computed by applying the U.S. federal statutory rate of 34% to loss before taxes for those years as follows:

	2008			2007			2006
	(in thousands)
Tax expense (benefit) at U.S. statutory rate	$	(1,758	)	$	(8,640	)	$	(441	)
State tax (benefit) net of federal benefit		345			353			(76	)
Foreign taxes		(8	)		30
Amortization/impairment of intangibles		2,332			6,762			323
Stock based compensation		492			305			261
Jurisdictional penalties								254
Other permanent differences		42			197			86
Net change in valuation allowance		(601	)		3,691
Expiration of California								405
Other, net		(186	)		116			(78	)
	$	658		$	2,814		$	734

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. The determination of the additional deferred taxes that have not been provided is not practicable.

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

F-15

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

	2008			2007			2006
	(in thousands)
Deferred tax assets
Net operating loss carry forwards	$	23,999		$	23,142		$	21,848
Tax credit carryforwards		342			226			226
Depreciation		151
Inventory		113
Accrued expenses		564			234			1,272
Accounts receivable allowance		599			1,361			399
Other		143			121			4
		25,911			25,084			23,749
Deferred tax liabilities
Depreciation					(3,573	)		(3,210	)
Intangibles		(900	)		(1,717	)		(2,082	)
Inventory								(31	)
		(900	)		(5,290	)		(5,323	)
Net deferred tax assets		25,011			19,794			18,426
Valuation allowance		(25,011	)		(19,794	)		(16,629	)
	$	0		$	0		$	1,797

The Company has federal and state net operating loss carry forwards in the amount of $59,066,000 and $60,588,000, respectively at December 31, 2008, 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. 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 $342,000.

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. Although the management believes the Company will be profitable in the foreseeable future, based upon the Company’s history of continuing operating losses, realization of its deferred tax assets does not meet the more likely than not criteria under SFAS No. 109 and, accordingly, a valuation allowance for the entire deferred tax asset amount has been recorded.

The Company adopted the provisions of 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, 2007, the Company did not increase or decrease 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, 2008, 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, 2006, and 2007 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, 2008, the IRS has not proposed any significant adjustments to the Company’s tax positions. Additionally, the Canadian Revenue Agency is currently auditing United Tote’s Canadian subsidiary’s operations for the tax years 2002, 2003 and 2004. The outcome of these audits is uncertain; however, management believes there is no material tax liability exposure to the Company at this time.

F-16

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, 2008 are as follows:

Year	(in thousands)
2009	$	1,208
2010		282
2011		102
2012		106
2013		106
	$	1,804

Total rental expense was approximately $1.3 million, $1.7 million, and $1.3 million for 2008, 2007 and 2006, respectively.

Employment Commitments

Agreement with James A. Burk — Effective July 9, 2007, Mr. Burk entered into a two year employment agreement. Under his employment agreement, Mr. Burk’s annual salary is $300,000 during the first year and may increase in succeeding years based on his and the Company’s performance. Upon execution of the employment agreement, Mr. Burk received 150,000 stock options at an exercise price of $2.35. The stock options are ten year options and shall vest ratably over four years. In addition, Mr. Burk is eligible to receive an annual bonus to be determined by the board of directors in its discretion and based on attaining mutually agreed upon business objectives and certain profitability goals. On March 5, 2009, we entered into a severance and general release agreement with James A. Burk, under which we agreed with Mr. Burk that he will step down as Chief Financial Officer of Youbet, effective as of March 31, 2009. The severance and general release agreement, in pertinent part, modifies the severance payable to Mr. Burk under his employment agreement with us and provides that Mr. Burk will be paid a lump sum severance payment of $180,000, which payment is in lieu of severance payments contemplated under his employment agreement, and a lump sum bonus of $120,000. The severance and general release agreement also contains a release of claims on behalf of Mr. Burk.

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 $0.5 million, $0.5 million and $0.4 million for 2008, 2007 and 2006, respectively, excluding nominal administrative costs assumed by the Company.

Note 12: CONTINGENCIES

The Company is 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 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.

F-17

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, 2008, there were outstanding options for 5,559,173 shares of common stock issued under the Equity Incentive Plan, out of a total approved pool of 13,750,000 shares.

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.

F-18

During 2006, 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 225,000 shares of common stock at an exercise price of $3.67, the fair market value at the date 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 678,814 shares of common stock at exercise prices ranging from $3.33 to $5.08, 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 90,000 shares of common stock at exercise prices ranging from $3.69 to $5.08, the fair market values at the dates 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, 2008, there were options outstanding to acquire 5,559,173 shares at an average exercise price of $1.99 per share. The estimated fair value of all awards granted during the year ended December 31, 2008 was $1.7 million.

The following table summarizes the status of these plans as of December 31, 2008:

	Equity Incentive Plan
Options available per the equity incentive plan		13,750,000
Stock options outstanding		5,559,173
Options available for grant		2,811,588
Transactions involving stock options are summarized as follows:

	Number of			Weighted Average
	Shares			Exercise Price
Balance at January 1, 2006		4,394,372		$	2.30
Granted		993,717			3.95
Exercised		(259,819	)		1.00
Cancelled		(222,611	)		4.43
Balance at December 31, 2006		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

As of December 31, 2008, the total compensation costs related to non-vested awards yet to be expensed was approximately $2.2 million to be amortized over the next four years.

F-19

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of December 31, 2007 and 2008 were as follows:

					Weighted
			Weighted		Average
	Number of		Average		Remaining
	Shares		Exercise Price		Contractual Life		Intrinsic Value
As of December 31, 2007
Employees — Outstanding		4,717,411	$	2.70		6.03	$	12,737,009
Employees — Expected to Vest		1,308,616		3.55		8.87		4,645,587
Employees — Exercisable		3,408,795		2.37		4.95		8,078,844
As of December 31, 2008
Employees — Outstanding		5,559,173	$	1.99		7.19	$	11,062,754
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

Additional information with respect to outstanding options as of December 31, 2008 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		870,000		3.42	$	0.53		870,000	$	0.53
$1.00-$1.99		2,325,948		9.67		1.43		1,285,448		1.28
$2.00-$4.99		2,280,575		6.12		2.99		1,821,033		2.99
$5.00-$6.19		82,650		6.36		5.32		70,638		5.32

The Company has elected to adopt the detailed method provided in SFAS No. 123R for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R.

Note 14: DISCONTINUED OPERATIONS

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

	2007			2006
	(in thousands)
Revenues	$	772		$	282
Cost of revenues		408			72
Gross profit		364			210
Operating expenses		1,288			183
Net income (loss)	$	(924	)	$	27
Impact on the Company’s income (loss) per share:
- Basic	$	(0.02	)	$	0.00
- Diluted	$	(0.02	)	$	0.00

F-20

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 treated as discontinued operations in these financial statements and are as follows:

	2008			2007			2006
	(in thousands)
Revenues	$	46		$	16,347		$	21,807
Cost of revenues		84			12,125			16,123
Gross profit (loss)		(38	)		4,222			5,684
Operating expenses (recovery)		(1,410	)		17,529			3,441
Net income (loss)	$	1,372		$	(13,307	)	$	2,243
Impact on the Company’s income (loss) per share:
- Basic	$	0.03		$	(0.32	)	$	0.06
- Diluted	$	0.03		$	(0.32	)	$	0.06

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). Bruen and IRG were previously reported as part of the advance deposit wagering segment, but are now reported retroactively as discontinued operations (Note 14); therefore, the amounts reported below for the advanced deposit wagering 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.

F-21

Revenue	2008			2007			2006
ADW segment	$	85,831		$	97,652		$	91,746
Totalizator segment		24,443			26,093			23,885
Intercompany eliminations		(1,246	)		(1,251	)		(1,037	)
	$	109,028		$	122,494		$	114,594

Revenue by Geographic Area	2008		2007		2006
United States	$	106,846	$	120,225	$	112,503
International		2,182		2,269		2,091
	$	109,028	$	122,494	$	114,594

Reconciliation of income (loss) before income tax	2008			2007			2006
Income (loss) from operations before other income (expense) and income tax
- ADW	$	8,812		$	1,589		$	(3,518	)
- Totalizator		(13,140	)		(11,961	)		659
		(4,328	)		(10,372	)		(2,859	)
Interest income		233			642			536
Interest expense		(1,244	)		(1,796	)		(1,955	)
Other		174			153			711
Loss before income tax from continuing operations		(5,165	)		(11,373	)		(3,567	)
Income (loss) before income tax from discontinued operations		1,372			(14,231	)		2,270
Loss before income tax	$	(3,793	)	$	(25,604	)	$	(1,297	)

Capital Spending (including capital leases)	2008		2007		2006
ADW segment	$	1,667	$	287	$	2,235
Totalizator segment		527		2,217		4,431
	$	2,194	$	2,504	$	6,666

Depreciation and Amortization	2008		2007		2006
ADW segment	$	1,722	$	2,464	$	1,662
Totalizator segment		6,352		6,653		4,296
	$	8,074	$	9,117	$	5,958

Total Assets	2008		2007		2006
ADW segment	$	25,431	$	23,617	$	50,280
Totalizator segment		23,449		41,433		55,325
	$	48,880	$	65,050	$	105,605

F-22

Note 16: IMPAIRMENT OF INTANGIBLES AND GOODWILL

Intangibles and goodwill are reviewed for impairment annually during the third quarter or when circumstances exist which indicate a possible impairment has occurred. The fair value of the reporting unit associated with the intangibles and goodwill is typically estimated using the expected present value of expected future cash flows. If the present value of expected future cash flows is are less than the carrying value of an asset, an impairment charge is taken to reduce the value on the Company’s balance sheet to fair value. The following table shows the Company’s intangible assets and goodwill activity for the period ended December 31, 2008 and 2007.

	Intangibles						Goodwill
	Advance						Advance
	deposit						deposit
	wagering			Totalizator			wagering			Totalizator
	segment			segment			segment			segment
	(in thousands)
Balance as of January 1, 2007	$	6,123		$	7,246		$	384		$	14,859
Additions		5,998
Amortization		(1,198	)		(741	)
Impairment losses		(10,923	)					(384	)		(8,000	)
Balance as of December 31, 2007		0			6,505			0			6,859
Additions
Amortization					(742	)
Impairment losses					(1,175	)					(6,859	)
Balance as of December 31, 2008	$	—		$	4,588		$	—		$	—

In connection with our evaluation of strategic alternatives for United Tote, the Company re-evaluated the goodwill related to United Tote as of December 31, 2007. The Company determined that the carrying value of the net assets of United Tote, including goodwill, exceeded its estimated fair value and concluded goodwill was impaired as of December 31, 2007 by $8.0 million. As the Company is continuing its evaluation of strategic alternatives for United Tote, including a possible sale, combined with the decline in live track wagering and the deterioration in the economic environment, the Company again re-evaluated the carrying value of United Tote as of December 31, 2008 using valuations by interested third parties and discounted cash flow analyses (referred to Level 3 inputs) and concluded that the carrying value of net assets of United Tote exceeded the estimated fair value as of December 31, 2008 by $11.2 million. The Company eliminated the remaining $6.9 million of goodwill and reduced the carrying value of computer equipment and intangible assets by $3.1 million and $1.2 million respectively.

F-23

IRG had $7.0 million in intangible assets and had a single player that accounted for over 50% of IRG’s wagering handle during the first nine months of 2007 and the federal government seized $1.5 million from IRG’s three bank accounts. Additionally, IRG had lost or been denied content. After adjusting assumptions for current facts and circumstances, management determined that an impairment of IRG intangible assets was not required in the third quarter.

The Company continued to monitor the results of IRG and attempted to forecast future results. Due to the loss of content and the reduced player base, wagering handle was not expected to recover.

In view of these facts, the Company performed a follow-up impairment test as of December 31, 2007 to ascertain the need for an impairment adjustment of the intangibles associated with IRG. The intangibles reviewed include those relating to acquired customer lists and a non-compete agreement. These intangibles have increased in amount since the acquisition of IRG due to the annual earn-outs paid to the prior owners due the achievement of certain performance criteria as indicated in the purchase agreement and total approximately $6.7 million (net of amortization). As of December 31, 2007, an additional $4.4 million was earned and was due to be paid as of August 31, 2008. Based on these events, the cash flow forecast for IRG was revised downward resulting in an impairment of the intangibles associated with IRG in the fourth quarter of 2007.

During the fourth quarter of 2008, the Company settled with the former owners of IRG, agreeing to pay $2,252,000 in cash in settlement of all existing disputes and claims, including all claims under the stock purchase agreement and the management agreement. Under the settlement agreement, the former owners relinquished their rights to 55,554 shares of Youbet’s common stock acquired by them in connection with their sale of the IRG business pursuant to the stock purchase agreement. As a result of this settlement, the Company reduced the amortization and depreciation of IRG by $2.2 million, representing the difference between the accrued earn-out payment and the amount of the settlement.

F-24

SCHEDULE II
YOUBET.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS

	Balance at		Charged to
	beginning of		cost and		Charged to						Balance at end
Description	period		expenses		other accounts			Deductions			of period
	(in thousands)
Fiscal 2008
Allowance for doubtful accounts receivable	$	3,406		707					(3,572	)	$	541
Allowance for doubtful notes receivable	$	0									$	0
Deferred tax asset valuation allowance	$	19,794		5,217							$	25,011
Fiscal 2007
Allowance for doubtful accounts receivable	$	1,813		3,002		(7	)		(1,402	)	$	3,406
Allowance for doubtful notes receivable	$	76				(76	)				$	0
Deferred tax asset valuation allowance	$	16,629		3,165							$	19,794
Fiscal 2006
Allowance for doubtful accounts receivable	$	346		173		1,294					$	1,813
Allowance for doubtful notes receivable	$					76					$	76
Deferred tax asset valuation allowance	$	16,629									$	16,629

F-25

EXHIBIT INDEX

Exhibit Number		Description
	10.9	Assignment and Assumption of Lease, dated as of December 15, 2008, by and between Youbet.com, Inc. and Youbet Services Corporation
	10.15	Severance and General Release Agreement, by and between Youbet.com, Inc. and James A. Burk *
	10.16	Form of Indemnification Agreement
	21.1	List of subsidiaries.
	23.1	Consent of Piercy Bowler Taylor & Kern
	31.1	Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
	32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934

* Management contract or compensatory plan.

EX-10.9

Exhibit 10.9

ASSIGNMENT AND ASSUMPTION OF LEASE — 5901 DE SOTO AVENUE

This ASSIGNMENT AND ASSUMPTON OF LEASE — 5901 DE SOTO AVENUE (this “Agreement”) is made and entered into as of December 15, 2008 (the “Effective Date”), by and between YOUBET SERVICES CORPORATION (“YB Services”), with its principal place of business at 5901 De Soto Avenue, Woodland Hills, California, 91367, and YOUBET.COM, INC. (“Youbet”), a Delaware corporation with its principal place of business located at 2600 West Olive Avenue, 5^th Floor, Burbank, CA 91505.

BACKGROUND

A. Youbet is a diversified provider of technology and pari-mutuel horse racing content for consumers through Internet and telephone platforms.

B. Youbet leases the premises commonly known as 5901 De Soto Avenue, Woodland Hills, California, 91367, pursuant to a lease dated March 11, 2000 (“Lease”) with 5901 Associates LLC (“Landlord”). The Lease is attached hereto as Exhibit A.

C. YB Services provides various corporate services to Youbet, including financial and accounting, payroll, marketing, customer relations, software development and engineering, and administrative (“Corporate Services”). YB Services will provide Corporate Services to Youbet utilizing the Premises.

D. The parties desire to enter into an agreement whereby Youbet will assign, and YB Services will assume, the obligations under the Lease.

AGREEMENT

Now, therefore, in consideration of the premises and mutual covenants hereinafter set forth, the parties hereby agree as follows:

1. Assignment and Assumption. Subject to all applicable terms and conditions in the Lease, including, but not limited to, those pertaining to assignment assumption, Youbet hereby assigns all of its rights and interests under the Lease to YB Services, and YB Services hereby accepts said assignment and agrees to be bound by, and to perform, all duties and obligations of Youbet under the terms and provisions of the Lease.

2. Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the State of California (i.e., without reference to its conflict of law rules).

3. Severability. If any provision or part of this Agreement will be declared illegal, void, or unenforceable, the remaining provisions will continue in full force and effect to the extent permitted by law insofar as the primary purpose of this Agreement is not frustrated.

4. Notices. All notices required or permitted to be given under this Agreement will be in writing and addressed as follows:

If to YB Services:	Youbet Services Corporation
	5901 De Soto Avenue
	Los Angeles, CA 91367
	Attention: President
If to Youbet:	Youbet.com, Inc.
	2600 West Olive Avenue, 5th Floor
	Burbank, CA 91505
	Attention: Chief Executive Officer

or such other address as each party may designate in writing to the other party for this purpose. Such notice will be deemed to have been duly given and received either: (a) on the day of delivery, if hand delivered or delivered by overnight courier; (b) on the fifth (5th) day after the date sent, when sent by prepaid certified mail; or (c) on the date sent when sent by facsimile and confirmed the same day by overnight courier or prepaid certified mail, addressed as above.

5. Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed an original and all of which, taken together, will constitute one instrument.

IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date.

YOUBET SERVICES CORPORATION		YOUBET.COM, INC.
By:	/s/ David Goldberg	By:	/s/ Jim Burk
	David Goldberg		Jim Burk
	Chief Operating Officer		Chief Financial Officer

EXHIBIT A
(see attached)

EX-10.15

Exhibit 10.15

SEVERANCE AND GENERAL RELEASE AGREEMENT

This Severance and General Release Agreement (“Agreement”) is made and entered into by and between James A. Burk (“Employee”), an individual, and Youbet.com, Inc. (“Youbet”), upon the following terms and conditions:

RECITALS

WHEREAS, Employee’s employment with Youbet will terminate on March 31, 2009 (the “Separation Date”);

WHEREAS, Employee will be paid all current salary, all accrued vacation pay, and any benefits Employee qualifies for under the terms of any group insurance benefit plan or tax-qualified retirement plan through and concluding on the Separation Date;

WHEREAS, Employee’s rights and obligations under the July 9, 2007 Employment Agreement (“Employment Agreement”) will end as of the Effective Date (as defined in Section 2 below) and Employee as of the Effective Date waives and otherwise forfeits any and all rights under the Employment Agreement;

WHEREAS, Youbet is willing to provide Employee with severance pay and certain other consideration upon the terms and conditions set forth in this Agreement; and

WHEREAS, Employee has had the opportunity to consult with legal counsel before signing this Agreement, has read this Agreement and understood its contents, and has signed this Agreement voluntarily.

NOW, THEREFORE, in consideration of the mutual promises, consideration, covenants, and conditions provided for in this Agreement, the adequacy and sufficiency of which are hereby acknowledged, and intending to be legally bound, Youbet and Employee agree as follows:

COVENANTS

1. Recitals. The parties hereto acknowledge the truth and accuracy of the foregoing recitals.

2. Effective Date. Once signed by both parties, this Agreement shall become binding upon Youbet and Employee on the later to occur of (a) the date upon which this Agreement has been signed by Youbet, or (b) eight (8) days after this Agreement has been signed by Employee (such applicable date being referred to herein as the “Effective Date”).

3. Confidential Information. Employee shall return to Youbet, and shall not take, copy, utilize or disclose, in any form or manner, confidential customer lists, operations manuals, budgets and business plans, strategic plans, financial statements and other confidential financial information concerning Youbet or its customers, and other confidential or proprietary materials or information.

4. Payments and Consideration. In consideration for Employee entering into this Agreement and the release contained herein, Youbet agrees to the following:

A. To assist Employee in his transition to new employment and in consideration for the promises contained in this Agreement, Youbet shall pay to Employee within ten (10) days after the later of (i) the Effective Date and (ii) the Separation Date, a lump sum severance payment of One Hundred and Eighty Thousand Dollars ($180,000.00), less appropriate deductions for federal and state withholding and other applicable taxes and legally required deductions. Youbet further will pay Employee’s monthly COBRA health, dental and vision insurance premiums for up to twelve (12) months following the Separation Date, provided Employee timely and fully completes all COBRA elections forms. Youbet’s obligation to make such COBRA payments shall cease immediately if Employee becomes eligible for other health insurance benefits at the expense of a new employer or otherwise becomes ineligible for COBRA coverage. Finally, as further consideration for the promises contained in this Agreement, Youbet shall pay to Employee on the earlier of (i) the date when Youbet executives are paid incentive bonuses and (ii) ten (10) days after the Separation Date, but in no event prior to the Effective Date, a lump sum bonus payment of One Hundred and Twenty Thousand Dollars ($120,000.00), less appropriate deductions for federal and state withholding and other applicable taxes and legally required deductions.

B. Nothing in this Agreement shall be deemed to terminate Youbet’s obligation to reimburse Employee for all reasonable and documented business expenses incurred by him/her prior to the Separation Date within 30 days after submission of a written expense report, provided that (a) Youbet receives the same within 90 days after the Separation Date, and (b) such expenses were incurred, and the request for reimbursement was submitted, in accordance with Youbet’s policies and procedures, including attaching all receipts and customary documentation.

C. Subject only to Section 4.A. above, all other wages, compensation, bonuses, 401k plan eligibility, insurances, club dues, expenses, automobile allowance, financial consulting, severance and benefits will cease permanently on or before the Separation Date. The parties acknowledge that no contract other than the Employment Agreement governed any terms and conditions of Employee’s employment, and Employee hereby waives and otherwise forfeits any rights under the Employment Agreement.

D. Employee acknowledges that the commitments provided to Employee under this Section 4 exceed any compensation or benefits which he is otherwise entitled to receive on termination of Employee’s employment.

E. Employee acknowledges that he shall be required to perform his job duties through and including the Separation Date.

F.  Employee shall retain any and all rights which Employee has acquired under Youbet’s Stock Option Plan, including the 150,000 options granted Employee therein and the right to exercise the 37,500 vested options prior to 5:00 PM Pacific Time, June 29, 2009.

- 2 -

5. Release. Except for the specific obligations set forth in Section 4A of this Agreement, Employee, on behalf of himself/herself, his/her descendants, ancestors, dependents, heirs, executors, administrators, assigns and successors, and each of them, hereby irrevocably and unconditionally fully releases and discharges, Youbet, its subsidiaries and affiliates, past and present, and each of them, as well as its and their respective partners, directors, officers, members, agents, attorneys, insurers, employees, stockholders, representatives, ERISA plans, current and former trustees and administrators of ERISA plans, assigns and successors, past and present, and each of them (hereinafter collectively referred to as the “Releasees”), with respect to and from any and all charges, complaints, claims, wages, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, which he/she now owns or holds or he/she has at any time heretofore owned or held as against said Releasees, arising out of or in any way connected with his/her employment relationship and the ending of that employment relationship with Youbet, the Employment Agreement, or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said Releasees, or any of them, committed or omitted on or before the date of this Agreement including, without limitation, to the maximum extent permitted by applicable law, any claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000(e), et. seq.; the Age Discrimination in Employment Act, 29 U.S.C. § 623, et. seq. (“ADEA”); the Americans with Disabilities Act, 42 U.S.C. § 12101(e), et. seq.; the California Fair Employment and Housing Act, California Government Code § 12940, et. seq. (which may include claims for age, race, color, ancestry, national origin, disability, medical condition, marital status, sexual orientation, gender, gender identity, religious creed, pregnancy, sex discrimination and harassment); the Employment Retirement Income Security Act of 1974, 29 U.S.C. § 100, et. seq.; the Worker Adjustment and Retraining Notification Act, 29 U.S.C § 2101, et. seq.; the Pregnancy Discrimination Act, 42 U.S.C. § 2000e (k); the Family and Medical Leave Act (“FMLA”), the California Family Rights Act (“CFRA”), the Fair Labor Standards Act (“FLSA”), the Equal Pay Act, wage and hour law, any and all protections pursuant to any state’s Labor Code (to the extent waivable), the United States and California Constitutions; and any other federal or state law, severance pay, bonus, retention payment, sick leave, holiday pay, vacation pay, paid time off, life insurance, health or medical insurance or any other employee or fringe benefit, breach of contract, breach of the implied covenant of fair dealing, defamation, slander, workers’ compensation, disability, personal injury, negligence, discrimination, harassment, retaliation, negligent or intentional infliction of emotional distress, fraud, misrepresentation or invasion of privacy; provided, however, that nothing contained herein shall affect Employee’s rights under Youbet’s Stock Option Plan and the 150,000 options granted to Employee thereunder (including, without limitation, the right to exercise the 37,500 vested options prior to 5:00 p.m. Pacific time, June 29, 2009) and nothing contained herein shall affect claims that cannot be waived under applicable law. Employee further agrees to waive irrevocably the right to recover under any claim that may be filed by or with the Equal Employment Opportunity Commission or any other federal, state or local government entity, relating to Employee’s employment with Youbet or the ending of that employment, to the maximum extent permitted by applicable law. This release does not cover any rights or claims that may arise after the date this Agreement is signed.

- 3 -

Neither this Agreement nor any term herein shall be deemed to be an admission by Youbet, or shall be admissible in any proceeding as evidence, of any violation of any of Youbet’s policies or procedures or any federal, state or local laws or regulations.

It is the intention of Employee in executing this Agreement that the foregoing general release shall be effective as a bar to each and every claim, demand and cause of action specified hereinabove, to the maximum extent permitted by applicable law. In furtherance of this intention, Employee hereby expressly waives any and all rights and benefits conferred upon him/her by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE, and expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

Employee acknowledges that he/she may hereafter discover claims or facts in addition to or different from those which Employee now knows or believes to exist with respect to the subject matter of this Agreement and which, if known or suspected at the time of executing this Agreement, may have materially affected the terms of this release. Nevertheless, Employee hereby waives any right, claim or cause of action that might arise as a result of such different or additional claims or facts. Employee acknowledges that he/she understands the significance and consequence of the foregoing release and the specific waiver of SECTION 1542.

6. Notice re: Waiver of Age Discrimination Claims.

A. Employee understands that this Agreement contains a full release of existing claims, whether currently known or unknown, including age discrimination or other claims under the ADEA. Employee has been and is hereby again advised to consult with an attorney prior to executing this Agreement and, by executing this Agreement, acknowledges that he/she has been afforded at least twenty-one (21) days to consider this Agreement and to decide whether to enter into this Agreement, and in the event he/she should decide to execute this Agreement in fewer than twenty-one (21) days, he/she has done so with the express understanding that he/she has been given and declined the opportunity to consider this Agreement for a full twenty-one (21) days.

- 4 -

B. Employee has the right to revoke this Agreement within seven (7) days of signing it. To revoke this Agreement, Employee must send a written letter by certified mail to:

Youbet.com
5901 De Soto Avenue
Woodland Hills, CA 91367
Attention: Legal Department

The letter must be postmarked within seven (7) days of the date that Employee signs this Agreement, and shall clearly indicate Employee’s intent to revoke.

7. No Lawsuits; Covenant Not to Sue. Employee represents that, prior to signing this Agreement, he/she has not filed or pursued any complaints, charges or lawsuits of any kind with any court, governmental or administrative agency or arbitrator against Youbet or its officers, directors, agents or employees asserting any claims that are released in this Agreement. To the extent permitted by law, at no time after the Effective Date will Employee file, maintain, or execute upon, or cause or permit the filing or maintenance or execution upon, in any state, federal or foreign court, or before any local, state, federal or foreign administrative agency, or any other tribunal, any judgment, charge, claim or action of any kind, nature and character whatsoever, known or unknown, which he/she may now have, has ever had, or may in the future have against Releasees which is based in whole or in part on any matter covered by paragraph 5 above.

8. No Representations. Employee represents and agrees that no promises, statements or inducements have been made to him/her which caused him/her to sign this Agreement, other than those expressly set forth in this Agreement.

9. No Assignment. Employee warrants and represents that he/she has not heretofore assigned to any person any released matter or any portion thereof, and shall defend, indemnify and hold harmless Youbet from and against any claim (including the payment of attorneys’ fees and costs actually incurred, whether or not litigation is commenced) based upon, in connection with or arising out of any such assignment made, purported or claimed.

10. No Reinstatement. Employee agrees that he/she will not at any future time seek employment or reemployment with Youbet or any of its subsidiaries for one year after the Separation Date. Employee further agrees that Releasees shall not be liable for any damages now or in the future because any Releasee refuses to employ Employee for any reason whatsoever.

- 5 -

11. Non-Disparagement. Youbet and Employee acknowledge and agree that they have mutual respect for one another. Accordingly, both parties agree as follows: Employee agrees not to make any statements, orally or in writing, that are intended to disparage or harm the reputation of Youbet, or any of its officers, directors, employees, or agents. Youbet agrees that none of its officers, directors, employees or agents who have knowledge of this Agreement shall make any statements, orally or in writing, that are intended to disparage or harm the reputation of Employee. This prohibition shall not apply to intra-company communications with a legitimate business purpose (including communications between Youbet and its Board members), or as expressly authorized by law or lawful process.

12. Successors. This Agreement shall be binding upon Employee and upon his/her heirs, administrators, representatives and executors, and shall inure to the benefit of the Releasees and their respective heirs, administrators, representatives, executors, successors and assigns.

13. Integration. This Agreement constitutes the entire agreement and understanding concerning Employee’s employment, his/her separation from the same and the other subject matters addressed herein, and supersedes and replaces all prior negotiations and all agreements, proposed or otherwise, whether written or oral, concerning the subject matter hereof.

14. Severability. If any provision of this Agreement or the application thereof to any situation is held invalid, the invalidity shall not affect the other provisions or applications of this Agreement which can be given effect without such invalid provisions or applications and, to this end, the provisions of this Agreement are declared to be severable.

15. Waiver. No waiver of any breach of any term or provision of this Agreement shall constitute a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

16. Amendments. This Agreement may be modified only by a written instrument signed by the parties.

17. Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the State of California (i.e., without reference to its conflict of law rules).

I have read the foregoing Agreement, I accept and agree to the provisions it contains, and I hereby execute it knowingly and voluntarily with full understanding of its consequences. I declare that the foregoing statement is true and correct.

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		/s/ James Burk	Date:	February 27	,	2009
		James A. Burk
Accepted and agreed to by: YOUBET.COM, INC.
By:	/s/ Michael Brodsky
	Name:	Michael Brodsky
	Title:	Chief Executive Officer	Date:	March 5	,	2009

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EX-10.16

Exhibit 10.16

YOUBET.COM, INC.

DIRECTOR INDEMNIFICATION AGREEMENT

TABLE OF CONTENTS

	Page
1. Indemnity of Indemnitee		2
2. Contribution		2
3. Advancement of Expenses		4
4. Procedures and Presumptions for Determination of Entitlement to Indemnification		4
5. Remedies of Indemnitee		7
6. Non-Exclusivity; Survival of Rights; Insurance; Primacy of Indemnification; Subrogation		8
7. Exception to Right of Indemnification		9
8. Duration of Agreement		9
9. Security		9
10. Enforcement		10
11. Definitions		10
12. Severability		11
13. Modification and Waiver		11
14. Notice By Indemnitee		11
15. Notices		12
16. Counterparts		12
17. Headings		12
18. Governing Law and Consent to Jurisdiction		12

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INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”) is made and entered into as of [DATE] between Youbet.com, Inc., a Delaware corporation (the “Company”), and [NAME] (“Indemnitee”).

WHEREAS, highly competent persons have become more reluctant to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

WHEREAS, the Amended and Restated Bylaws of the Company (the “Bylaws”) require indemnification of the directors and officers of the Company, and Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (“DGCL”);

WHEREAS, the Bylaws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the Company’s board of directors (the “Board”), officers and other persons with respect to indemnification;

WHEREAS, the Board has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities;

WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;

WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and

WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws and Certificate of Incorporation of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder;

NOW, THEREFORE, in consideration of Indemnitee’s agreement to serve as a director from and after the date hereof, the parties hereto agree as follows:

1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by law, as such may be amended from time to time. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his Corporate Status (as defined in Section 11 of this Agreement), the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (as defined in Section 11 of this Agreement) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as defined in Section 11 of this Agreement), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him, or on his behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal Proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful.

(b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.

(c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law, as such may be amended from time to time, against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section 1(c) and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

2. Contribution.

(a) Whether or not the indemnification provided in Section 1 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

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(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all directors, officers, employees and agents of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such Proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all directors, officers, employees and agents of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the applicable law may require to be considered. The relative fault of the Company and all directors, officers, employees and agents of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by directors, officers, employees or agents of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.

(d) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is determined by a court of competent jurisdiction to be unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s); provided, however, that such contribution shall not be required where such determination by a court of competent jurisdiction is due to (i) the failure of Indemnitee to meet the standard of conduct set forth in Section 1(a) of this Agreement, or (ii) any limitation on indemnification set forth in Section 6 or Section 7 of this Agreement.

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3. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee’s Corporate Status within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 3 shall be unsecured and interest free.

4. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the DGCL and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Notwithstanding the foregoing, any failure of Indemnitee to provide such a request to the Company, or to provide such a request in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee unless, and to the extent that, such failure actually and materially prejudices the interests of the Company.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 4(a) hereof, a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board: (1) by a majority vote of the Disinterested Directors, even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the stockholders of the Company.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4(b) hereof, the Independent Counsel shall be selected as provided in this Section 4(c). The Independent Counsel shall be selected by the Board. Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 11 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the

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Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 4(a) hereof, the Board does not select a method other than a determination by Independent Counsel and no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 4(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 4(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 4(c), regardless of the manner in which such Independent Counsel was selected or appointed.

(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by the Disinterested Directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(e) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise (as defined in Section 11 of this Agreement), including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, employee or agent of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 4(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(f) If the person, persons or entity empowered or selected under Section 4 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended

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for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 4(f) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 4(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

(g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or stockholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any Proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such Proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such Proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(i) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

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5. Remedies of Indemnitee.

(a) In the event that (i) a determination is made pursuant to Section 4 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 3 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section 4(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 4 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware of Indemnitee’s entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 5(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.

(b) In the event that a determination shall have been made pursuant to Section 4(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 5 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section 4(b).

(c) If a determination shall have been made pursuant to Section 4(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 5 absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section 5, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on his behalf, in advance, any and all Expenses actually and reasonably incurred by him in such judicial adjudication provided that the Company receives a written undertaking by or on behalf of Indemnitee to repay any Expenses so advanced if it shall ultimately be determined that Indemnitee is not entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 5 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, to the extent not prohibited by law, such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company provided that the Company receives a written undertaking by or on behalf of Indemnitee to repay any Expenses so advanced if it shall ultimately be determined that Indemnitee is not entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

(f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.

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6. Non-Exclusivity; Survival of Rights; Insurance; Primacy of Indemnification; Subrogation.

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders, a resolution of directors of the Company or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the DGCL, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Company’s Certificate of Incorporation, the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, managers, employees, agents or fiduciaries of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, manager, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

(e) The Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, manager, employee or agent of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise.

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7. Exception to Right of Indemnification. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or

(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or

(c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

8. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director or officer of the Company (or is or was serving at the request of the Company as a director, officer, manager, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 5 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

9. Security. To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

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10. Enforcement.

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

11. Definitions. For purposes of this Agreement:

(a) “Corporate Status” describes the status of a person who is or was a director, officer, manager, employee, agent or fiduciary of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other Enterprise that such person is or was serving at the express written request of the Company.

(b) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(c) “Enterprise” shall mean the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express written request of the Company as a director, officer, manager, employee, agent or fiduciary.

(d) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding, or responding to, or objecting to, a request to provide discovery in any Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(e) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

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(f) “Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any inaction on his part while acting as a director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, manager, employee, agent or fiduciary of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement, including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section 5 of this Agreement to enforce his rights under this Agreement.

12. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

13. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

14. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

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15. Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:

(a) To Indemnitee at the address set forth below Indemnitee signature hereto.

(b) To the Company at:

Youbet.com, Inc.
5901 Desoto Avenue
Woodland Hills, CA 91367
Attention: General Counsel

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

17. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

18. Governing Law and Consent to Jurisdiction. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the “Delaware Court”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

SIGNATURE PAGE TO FOLLOW

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.

YOUBET.COM, INC.
By:
	Name:
	Title:
INDEMNITEE
By:
	Name:
Address:

EX-21.1

Exhibit 21.1

Subsidiaries of Youbet.com, Inc.

Name	Jurisdiction of Organization
Youbet Services Corporation	Delaware
Youbet Nevada, Inc.	Nevada
Youbet Orgeon, Inc.	Delaware
UT Gaming, Inc.	Delaware
United Tote Company	Montana
United Tote Canada, Inc.	Ontario, Canada
IRG US Holdings Corp.	Delaware
IRG Holdings Curacao, N.V.	Curacao, Netherland Antilles
IRG Services, Inc.	Nevada

EX-23.1

Exhibit 23.1

CONSENT OF PIERCY BOWLER TAYLOR & KERN
CERTIFIED PUBLIC ACCOUNTANTS

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

We consent to the incorporation by reference in the registration statements of Youbet.com, Inc. on Forms S-3 (File Nos. 333-155746, 333-126131 and 333-39488) and on Forms S-8 (File Nos. 333-153463, 333-137061, 333-125576, 333-114390 and 333-88047) of our report dated March 3, 2009, included in this Annual Report on Form 10-K, on the consolidated financial statements of Youbet.com, Inc. and Subsidiaries as of December 31, 2008 and 2007, and for each of the three years ended December 31, 2008, 2007 and 2006, and on the effectiveness of internal control over financial reporting as of December 31, 2008.

PIERCY BOWLER TAYLOR & KERN

Certified Public Accountants
Las Vegas, Nevada
March 6, 2009

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Michael Brodsky, certify that:

1. I have reviewed this annual report on Form 10-K of Youbet.com, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 6, 2009

/s/ Michael Brodsky  

Michael Brodsky 

President and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, James A Burk, certify that:

1. I have reviewed this annual report on Form 10-K of Youbet.com, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 6, 2009

/s/ James A. Burk  

James A. Burk 

Chief Financial Officer 

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934

In connection with the annual report on Form 10-K (the “Report”) of Youbet.com, Inc. (the “Company”) for the year ended December 31, 2008, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Michael Brodsky, President and Chief Executive Officer of the Company, and I, James A. Burk, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 6, 2009	By:	/s/ Michael Brodsky
		Michael Brodsky
		President and Chief Executive Officer
March 6, 2009	By:	/s/ James A. Burk
		James A. Burk
		Chief Financial Officer

A signed original of this written statement required by Section 906, or other documentation authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Youbet.com, Inc. and will be retained by Youbet.com, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This certification “accompanies” the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing).