UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED
September 30, 2009

Commission File Number: 001-34276

YOUBET.COM, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4627253
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

2600 West Olive Avenue, 5^th Floor

Burbank, Ca. 91505
(Address of principal executive offices)

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

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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 (Do not check if a smaller reporting company) Smaller reporting company þ

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

As of November 11, 2009, the issuer had approximately 41,726,835 shares of common stock, par value $0.001 per share, outstanding (net of treasury shares).

YOUBET.COM, INC.
INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED
September 30, 2009

	Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements:
Balance sheets as of September 30, 2009 (unaudited) and December 31, 2008		2
Statements of operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)		3
Statements of cash flows for the nine months ended September 30, 2009 and 2008 (unaudited)		4
Notes to unaudited financial statements		5
Item 2. Management’s discussion and analysis of financial condition and results of operations		10
Item 3. Quantitative and qualitative disclosures about market risk		21
Item 4. Controls and procedures		21
PART II. OTHER INFORMATION
Item 1. Legal proceedings		22
Item 1A. Risk factors		22
Item 2. Unregistered sales of equity securities and use of proceeds		22
Item 3. Defaults upon senior securities		22
Item 4. Submission of matters to a vote of security holders		22
Item 5. Other information		22
Item 6. Exhibits		22
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Preliminary Note

This quarterly report on Form 10-Q is for the three-month and nine-month periods ended September 30, 2009. This quarterly report updates reports previously filed with the Securities and Exchange Commission, which allows Youbet to “incorporate by reference” information that Youbet files with it, which means that Youbet can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this quarterly report. In addition, information that Youbet files with the Securities and Exchange Commission in the future will update and, to the extent inconsistent, supersede information contained in this quarterly report.

Part I. Financial Information

Item 1. Consolidated Financial Statements

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

	September 30,			December 31,
	2009			2008
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	16,895		$	16,538
Current portion of restricted cash		4,770			4,698
Accounts receivable, net of allowance for doubtful collections of $815 and $541		3,121			3,031
Inventories		1,628			1,937
Prepaid expenses and other		1,493			1,066
		27,907			27,270
Property and equipment, net of accumulated depreciation and amortization of $33,691 and $28,623		13,674			16,218
Intangible assets, net of amortization of $2,642 and $2,162		4,108			4,588
Other assets		435			804
	$	46,124		$	48,880
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	8,484		$	8,704
Trade payables		5,097			6,484
Accrued expenses		6,504			8,287
Customer deposits		4,689			4,445
Deferred revenues		170			121
		24,944			28,041
Long-term debt, net of current portion		37			3,996
		24,981			32,037
Stockholders’ equity
Preferred stock, $0.001 par value, authorized 1,000,000 shares, none issued or outstanding
Common stock, $0.001 par value, authorized 100,000,000 shares, 42,626,170 shares issued		43			43
Additional paid-in capital		136,915			135,732
Accumulated other comprehensive loss		(162	)		(129	)
Deficit		(113,274	)		(116,424	)
Less treasury stock, 1,099,335 common shares		(2,379	)		(2,379	)
		21,143			16,843
	$	46,124		$	48,880

The accompanying notes are an integral part of these consolidated financial statements.

2

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenues
Commissions	$	21,842		$	22,570		$	68,911		$	62,784
Contract revenues		5,364			5,613			15,146			17,076
Equipment sales		26			340			177			837
Other		644			795			1,873			2,371
		27,876			29,318			86,107			83,068
Costs and expenses
Track fees		12,807			10,599			39,656			29,075
Licensing fees		705			2,482			3,365			6,958
Network costs		999			985			2,985			2,893
Contract costs		4,052			3,906			11,134			11,302
Equipment costs		14			159			112			389
		18,577			18,131			57,252			50,617
Gross profit		9,299			11,187			28,855			32,451
Operating expenses
General and administrative		4,256			3,633			12,701			12,813
Sales and marketing		1,547			1,351			4,441			3,753
Research and development		769			796			2,472			2,592
Depreciation and amortization of intangibles		1,807			2,197			5,426			5,975
		8,379			7,977			25,040			25,133
Income from continuing operations before other income (expense) and income tax		920			3,210			3,815			7,318
Other income (expense)
Interest income		8			52			41			169
Interest expense		(192	)		(275	)		(607	)		(947	)
Other		194			101			399			37
Income from continuing operations before income tax		930			3,088			3,648			6,577
Income tax		52			286			480			362
Net income from continuing operations		878			2,802			3,168			6,215
Discontinued operations
Loss from discontinued operations, without tax effect					(120	)		(18	)		(743	)
Net income	$	878		$	2,682		$	3,150		$	5,472
Basic income (loss) per share
Income from continuing operations	$	0.02		$	0.07		$	0.08		$	0.15
Loss from discontinued operations		0.00			(0.01	)		0.00			(0.02	)
Net income		0.02			0.06			0.08			0.13
Diluted income (loss) per share
Income from continuing operations	$	0.02		$	0.07		$	0.07		$	0.15
Loss from discontinued operations		0.00			(0.01	)		0.00			(0.02	)
Net income		0.02			0.06			0.07			0.13
Weighted average shares outstanding
Basic		41,517,236			41,519,024			41,482,476			41,519,024
Diluted		44,564,870			42,405,151			43,801,948			42,171,337

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

	Nine Months Ended
	September 30,
	2009			2008
Operating activities
Net income	$	3,150		$	5,472
Loss from discontinued operations		(18	)		(743	)
Income from continuing operations		3,168			6,215
Adjustments to reconcile income from continuing operations to net cash provided by operating activities, continuing operations
Depreciation and amortization of property and equipment		4,946			5,419
Amortization of intangibles		480			556
Stock-based compensation		1,082			913
Provision for bad debt		346			477
Increase in operating (assets) and liabilities		(3,342	)		2,294
Net cash provided by continuing operations		6,680			15,874
Net cash used in discontinued operations		(27	)		(2,653	)
Net cash provided by operating activities		6,653			13,221
Investing activities
Purchase of property and equipment		(2,433	)		(1,098	)
Decrease (increase) in restricted cash (other than Players Trust SM)		217			(5	)
Other		31			34
Net cash used in investing activities		(2,185	)		(1,069	)
Financing activities
Proceeds from the exercise of options		101
Proceeds from borrowings					630
Repayment of borrowings		(4,179	)		(6,743	)
Net cash used in financing activities		(4,078	)		(6,113	)
Foreign currency translation adjustments		(33	)		(58	)
Net increase in cash and cash equivalents		357			5,981
Cash and cash equivalents at the beginning of period		16,538			6,551
Cash and cash equivalents at the end of period	$	16,895		$	12,532

The accompanying notes are an integral part of these consolidated financial statements.

4

YOUBET.COM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED September 30, 2009

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) relating to interim information. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. For further information, please refer to the consolidated financial statements and the related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

The unaudited consolidated financial statements include the accounts of Youbet.com, Inc. (“Youbet”) and its wholly-owned subsidiaries (collectively, the “Company”). Youbet’s UT Gaming, Inc. subsidiary and its wholly-owned subsidiaries, United Tote Company and United Tote Canada, Inc., are collectively referred to as “United Tote,” unless the context requires otherwise. The group of Youbet’s subsidiaries consisting of IRG U.S. Holdings Corp., IRG Holdings Curacao, N.V., International Racing Group N.V., and IRG Services, Inc. are collectively referred to herein as “IRG,” unless the context requires otherwise. The operations of IRG were shutdown effective February 15, 2008. Accordingly, IRG has been deconsolidated and retroactively reported as discontinued operations (Note 10). All significant inter-company accounts and transactions have been eliminated in consolidation.

Preparation of these unaudited consolidated financial statements involves and requires the use of estimates and judgments where appropriate. Events through the date these consolidated financial statements were issued November 12, 2009 were evaluated by management to determine if adjustments to or disclosure in these consolidated financial statements were necessary. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results for current interim periods are not necessarily indicative of the results to be expected for the full year.

Note 2: Earnings Per Share

Basic earnings 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. Following is a reconciliation of the numerators and denominators of the continuing operations computations for the periods presented (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Numerator:
Income from continuing operations	$	878	$	2,802	$	3,168	$	6,215
Denominator:
Basic weighted average shares outstanding		41,517		41,519		41,482		41,519
Effect of dilutive stock options		3,048		886		2,320		652
Diluted weighted average shares outstanding		44,565		42,405		43,802		42,171
Earnings per share — basic	$	0.02	$	0.07	$	0.08	$	0.15
Earnings per share — diluted	$	0.02	$	0.07	$	0.07	$	0.15

5

Note 3: Debt

Debt at September 30, 2009 consisted of the following:

	(in thousands)
Promissory notes	$	3,200
Bank term loan		5,000
Capital lease obligations and other		321
		8,521
Less: short-term debt and current portion of long-term debt		8,484
Long-term debt, less current maturities	$	37

The Company’s 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. The term loan and the revolving credit facility each mature on November 30, 2010. At September 30, 2009, the Company owed $5.0 million under the term loan and no amount was outstanding under the revolving credit facility.

Any indebtedness under the term loan and the revolving credit facility bears interest at a variable rate equal to either, at the Company’s discretion, prime plus 200 to 250 basis points or LIBOR plus 325 to 375 basis points. The applicable basis point margin is determined by the Company’s 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 the Company. LIBOR loans may have a one, two or three month term. At September 30, 2009, the interest rate on the term loan was 5.75% per annum.

The loan and security agreement relating to the credit facility provides for mandatory prepayment upon the occurrence of certain specified events. The Company’s indebtedness under the loan and security agreement is guaranteed by certain of the Companies subsidiaries and is secured by substantially all of the Company’s assets. The loan and security agreement contains customary covenants, including restrictions on the Company’s 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 September 30, 2009, the Company was in compliance with the financial covenants under the loan and security agreement.

Note 4: Income Taxes

The Company has federal and state net operating loss carry forwards in the amount of $54,320,000 and $56,777,000, respectively at September 30, 2009, which are expected to expire between 2012 and 2028. 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 the event of an ownership change in future periods. The Company does not have any known limits under IRC Section 382 at this time. However, a portion of the carry forwards may expire before being applied to reduce future income tax liabilities. In addition, on September 30, 2008, for the tax years 2008 and 2009, the State of California suspended the ability of corporations to offset taxable income for state income tax purposes with net operating loss carry forwards. The Company has California income tax credit carry forwards totaling $342,000. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carry forwards that may expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.

6

Management believes there are no significant uncertain tax positions requiring recognition in its financial statements or related disclosures. Accordingly, as of September 30, 2009, there is no liability recorded for income taxes associated with uncertain tax positions.

The Company’s Federal return was selected for examination by the Internal Revenue Service (“IRS”) for prior tax year ended December 31, 2006. In the first quarter of 2009, the IRS concluded its examination with no proposed adjustments to the Company’s tax positions. All tax years since 2006 remain open for Federal and California examination.

Note 5: Contingencies

The Company is a party to legal proceedings that are ordinary and incidental to its business. Management is unable to estimate any minimum losses from these matters. Accordingly, no losses have been accrued with respect to these matters.

The United States is currently experiencing a widespread recession accompanied by, among other things, reduced credit availability and highly curtailed gaming and other recreational activities. The effects and duration of these developments and related risks and uncertainties on the Company’s future operations and cash flows cannot be estimated at this time but may 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 likewise be substantial as a result of recent economic developments as discussed in the preceding paragraph. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions, if any, is not subject to estimation at this time.

Note 6: Stockholders’ Equity

The following table summarizes the status of the Company’s equity plan at September 30, 2009:

Options available per the equity incentive plan	13,750
Stock options outstanding	7,082
Options available for grant	1,225

Information with respect to stock option activity for the nine months ended September 30, 2009 is summarized below:

				Weighted
				Average
	Stock			Option
	Options			Price
	(in thousands)
Balance at January 1, 2009		5,559		$	1.99
Options granted		2,210			1.33
Options exercised		(63	)		1.59
Options cancelled		(624	)		3.08
Balance at September 30, 2009		7,082		$	1.69

7

Additional information about outstanding options to purchase the Company’s common stock at September 30, 2009 is as follows:

	Options Outstanding						Options Exercisable
					Weighted
			Weighted		Average				Weighted
			Average		Remaining				Average
			Exercise		Contractual				Exercise
Range of Exercise Prices:	Number of Shares		Price		Life (years)		Number of Shares		Price
	(in thousands)						(in thousands)
$0.50 to $0.95		869	$	0.55		2.86		844	$	0.53
$1.10 to $1.95		4,211		1.33		8.10		1,432		1.33
$2.23 to $2.81		1,324		2.36		5.23		1,183		2.33
$3.04 to $3.92		374		3.63		6.74		225		3.58
$4.00 to $4.91		227		4.51		6.00		197		4.52
$5.03 to $5.62		77		5.32		5.60		77		5.32
Total at September 30, 2009		7,082		1.69		6.76		3,958		1.82

Note 7: Fair Value of Financial Instruments

The carrying value of financial instruments, including cash and cash equivalents, restricted cash, approximate fair value due to the short maturities of these financial instruments. The estimated fair value of long-term receivables and debt approximates their carrying value based on Level 2 inputs, as defined in Accounting Standards Codification (“ASC”) topic 820, Fair Value Measurements and Disclosures (formerly Statement of Financial Accounting Standards No. 157, Fair Value Measurements).

Note 8: Segment Reporting

The Company operates as two reportable segments. The Company’s advance deposit wagering (ADW) segment consists of the operations of Youbet Express, Youbet Services Corporation and IRG. Its totalizator services segment consists of the operations of United Tote. Each segment operates independently, under separate management and provides distinctly separate services. The ADW segment provides internet wagering services and caters to the general public, whereas the totalizator segment provides totalizator equipment and services to racetracks, as well as off-track betting facilities and ADWs, including the company’s ADW segment. Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is more immune to track closures due to inclement weather, etc. as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by the company’s totalizator segment to the company’s ADW segment are eliminated in the Company’s consolidated financial statements. 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.

8

In the second quarter of 2009, the Company began charging United Tote for its share of executive management services approximating $0.2 million per quarter. The three and nine month periods ended September 2008, were retroactively adjusted for $0.2 million and $0.5 million, respectively, for comparability purposes in the tables below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(in thousands)
	2009			2008			2009			2008
Revenue
Advance deposit wagering segment	$	22,485		$	23,365		$	70,784		$	65,154
Totalizator services segment		5,563			6,297			15,991			18,861
		28,048			29,662			86,775			84,015
Intersegment eliminations		(172	)		(344	)		(668	)		(947	)
	$	27,876		$	29,318		$	86,107		$	83,068
Revenue by Geographic Area
United States	$	27,238		$	28,643		$	84,575		$	82,018
International		638			675			1,532			1,050
	$	27,876		$	29,318		$	86,107		$	83,068
Reconciliation to Income Before Income Tax
Income (loss) from operations, before other income (expense) and income tax (benefit)
Advance deposit wagering segment	$	1,840		$	3,847		$	6,666		$	9,070
Totalizator service segment		(920	)		(637	)		(2,851	)		(1,752	)
		920			3,210			3,815			7,318
Interest income		8			52			41			169
Interest expense		(192	)		(275	)		(607	)		(947	)
Other		194			101			399			37
Income from continuing operations before income tax		930			3,088			3,648			6,577
Income from discontinued operations before income tax		0			(120	)		(18	)		(743	)
Income before income tax	$	930		$	2,968		$	3,630		$	5,834
Capital Spending, includes capital leases (non-cash)
Advance deposit wagering segment	$	947		$	476		$	2,000		$	1,369
Totalizator services segment		142			323			433			508
	$	1,089		$	799		$	2,433		$	1,877
Depreciation and Amortization
Advance deposit wagering segment	$	598		$	405		$	1,666		$	1,234
Totalizator services segment		1,209			1,792			3,760			4,741
	$	1,807		$	2,197		$	5,426		$	5,975

	September 30,		December 31,
	2009		2008
	(in thousands)
Total Assets
Advance deposit wagering segment	$	27,955	$	25,431
Totalizator services segment		18,169		23,449
	$	46,124	$	48,880

9

Note 9: Impairment of Intangibles

Intangibles and long-term assets 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 assets is typically estimated using the expected present value of future cash flows. If expected future cash flows 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.

During the third quarter of 2009, the Company conducted its annual impairment test in accordance with ASC topic 350 Intangibles-Goodwill and Other (formerly Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets) and ASC topic 360 “Property, Plant and Equipment” (formerly Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets) and concluded that there was no impairment.

The Company is continuing its evaluation of strategic alternatives, including a possible sale of United Tote, following a write-down of goodwill, computer equipment and intangible assets in the fourth quarter of 2008. However, the Company has not resolved to dispose of United Tote and, accordingly, reports its activities among continuing operations.

Note 10: Discontinued Operations

Effective February 15, 2008, the Company ceased operations at IRG and, accordingly, has accounted for such operations retroactively as discontinued. The following results of IRG have been treated as discontinued operations for the three-month and nine-month periods ended September 30, 2009 and 2008:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009	2008			2009			2008
Revenues	$	$			$			$	46
Cost of Revenues			(3	)					75
Gross profit (loss)			3						(29	)
Operating expenses			123			18			714
Net loss	$	$	(120	)	$	(18	)	$	(743	)
Impact on the Company’s earning (loss) per share:
- Basic	$	$	(0.00	)	$	(0.00	)	$	(0.02	)
- Diluted	$	$	(0.00	)	$	(0.00	)	$	(0.02	)

Note 11: Subsequent Event

On November 11, 2009, the Company entered into an Agreement and Plan of Merger with Churchill Downs Incorporated (“Churchill”), Tomahawk Merger LLC, a wholly-owned subsidiary of Churchill, and Tomahawk Merger Corp., a wholly-owned subsidiary of Churchill, pursuant to which Churchill would acquire all of the outstanding shares of the Company. Under the terms of the merger, the Company’s shareholders would receive a fixed ratio of 0.0598 shares of Churchill’s common stock plus $0.97 in cash for each share of the Company’s common stock they own, subject to possible future adjustment to the exchange ratio in limited circumstances to increase the cash consideration and correspondingly decrease the stock consideration, to ensure that the transaction does not require Churchill to issue more than 19.6% of its outstanding common stock prior to the transaction. The merger is conditioned upon, among other things, the approval of the Company’s shareholders, the receipt of required regulatory approvals, and other customary closing conditions.

10

Item 2. Management’s discussion and analysis of financial condition and results of operations

Forward-looking statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included in Item 1 of this report. This discussion and other sections of this report contain forward-looking statements that are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Such statements include those regarding general economic and e-gaming industry trends. Such statements involve risks and uncertainties including, without limitation: the timely development and market acceptance of new products and technologies; our ability to achieve further cost reductions; our assessment of strategic alternatives for United Tote, including a possible sale, as to which there can be no assurance of success; increased competition in the advance deposit wagering business; a decline in the public acceptance of wagering; wagering ceasing to be legal in jurisdictions where we currently operate; the limitation, conditioning, or suspension of any of our licenses; increases in or new taxes imposed on wagering revenues; the adoption of future industry standards; the loss or retirement of key executives; our ability to meet our liquidity requirements and maintain our financing arrangements; and general economic and market conditions; and other factors described in our annual report on Form 10-K for the year ended December 31, 2008 and from time to time in our other filings with the Securities and Exchange Commission. Actual actions and strategies and the timing and expected results may differ materially from those expressed or implied by such forward-looking statements, and our future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. 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.

Overview

We are a diversified provider of technology and pari-mutuel horse racing content for consumers through the Internet 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 Turf day 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 wagers 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 supplies pari-mutuel tote services to approximately 100 racing facilities in North America and additional facilities in a number of foreign markets.

As result of the United Tote acquisition, we operate two business segments for financial accounting purposes: ADW and totalizator services. Our ADW segment consists of the operations of Youbet Express and Youbet Services Corporation. Our totalizator services segment consists of the operations of United Tote. Each segment operates independently, under separate management and provides distinctly separate services. The ADW segment provides internet wagering services and caters to the general public, whereas the totalizator segment provides totalizator equipment and services to racetracks, as well as off-track betting facilities and ADWs, including the our ADW segment. Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is more immune to track closures due to inclement weather, and other factors as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by our totalizator segment to our ADW segment are eliminated in our consolidated financial statements. Our reporting segments follow the same accounting policies used for our consolidated financial statements. Management evaluates each segment’s performance based upon its individual financial results of operations. For more information about our segment reporting, see Note 8 to our consolidated financial statements in Item 1 of this report.

As previously disclosed, we shutdown our IRG business effective February 15, 2008. As a result, IRG is treated as discontinued operations, and the revenues and expenses associated with IRG have been excluded from the particular revenue and expense line items on our consolidated financial statements and are reported as a net amount in discontinued operations. For more information about our discontinued operations, see Note 10 to our consolidated financial statements in Item 1 of this report.

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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 estimates and judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Our critical accounting estimates and policies are set forth in management’s discussion and analysis of financial condition and results of operations in annual report on Form 10-K for the year ended December 31, 2008. There have been no material changes to our critical accounting policies or estimates.

Recent Accounting Pronouncements

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

Results of continuing operations for the three months ended September 30, 2009 compared to the three months ended September 30, 2008

The segment discussions below are based upon the following table, which sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $0.2 million and $0.3 million in the third quarter of 2009 and 2008, respectively. Additionally, in the second quarter of 2009, the ADW segment began charging the totalizator segment for its share of executive management services approximating $0.2 million per quarter. The data for the 2008 period in the table below has been adjusted to include a similiar $0.2 million charge for comparability purposes:

	ADW Segment												Totalizator Segment
	Three months ended September 30,												Three months ended September 30,
							Increase			%									Increase			%
	2009			2008			(Decrease)			Change			2009			2008			(Decrease)			Change
										(in thousands)
Revenues	$	22,485		$	23,365		$	(880	)		-3.8	%	$	5,563		$	6,297		$	(734	)		-11.7	%
Gross profit		7,802			8,956			(1,154	)		-12.9	%		1,497			2,231			(734	)		-32.9	%
As % of revenues		34.7	%		38.3	%								26.9	%		35.4	%
Operating expenses		5,962			5,109			853			16.7	%		2,417			2,868			(451	)		-15.7	%
As % of revenues		26.5	%		21.9	%								43.4	%		45.5	%
Income from continuing operations before other income (expense) and income tax	$	1,840		$	3,847		$	(2,007	)		-52.2	%	$	(920	)	$	(637	)	$	(283	)		-44.4	%
As % of revenues		8.2	%		16.5	%								-16.5	%		-10.1	%

Revenues

Total revenues decreased $1.4 million, or approximately 5%, for the third quarter of 2009 when compared with the third quarter of 2008. Excluding the impact of intersegment eliminations, the revenue decrease was the result of a decrease in our ADW segment revenues of $0.9 million, or approximately 4%, and a decrease in our totalizator segment revenues of $0.7 million, or approximately 12%, over those periods. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our revenues on an operating segment basis.

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ADW Segment Revenues

ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net of player incentives, decreased by approximately $0.9 million, or 4%, in the third quarter of 2009 compared to the third quarter of 2008. Gross commissions revenues, before deduction of player incentives, during the third quarter of 2009 increased $0.3 million compared to the same period in 2008 due to changes in track mix favoring higher commission tracks. Changes in track mix are driven by player track preferences due to such things as race type, time of day and wagering pool size. However, the increase in gross commissions was more than offset by an increase in player incentives during the third quarter of 2009. Player incentives increased $1.0 million or approximately 41% when compared with the third quarter of 2008 due to an increase in player promotions and a $0.3 million prospective change in estimate relating to the value of player reward points.

Total handle for the three months ended September 30, 2009 was $121.3 million versus handle for the comparative period of 2008 of $121.7 million. The $0.4 million or approximately 0.3% decline, despite a general industry wagering decline of approximately 10% during the quarter due to the effects of the current economy, was minimized by our efforts to attract handle via our incentive and marketing activities.

Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage of handle” (each calculated in accordance with generally accepted accounting principles), decreased 0.9% to 6.9% in the third quarter of 2009 versus 7.8% in the third quarter of 2008. The lower yield reflects the impact of an increase in player incentives and track fees.

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

	Three months ended September 30, 2009
							Favor
	2009			2008			(Unfavor)			%
	(in thousands)
Handle	$	121,254		$	121,675		$	(421	)		-0.3	%
Commissions		21,842			22,570			(728	)		-3.2	%
Less:
Track fees		12,807			10,599			2,208			20.8	%
License fees		705			2,482			(1,777	)		-71.6	%
Net revenue	$	8,330		$	9,489		$	(1,159	)		-12.2	%
Yield %		6.9	%		7.8	%

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

Totalizator Segment Revenues

Totalizator segment revenues, which consist of contract revenues associated with the service of totalizator systems and equipment sales, decreased $0.7 million, or approximately 12%, in the third quarter of 2009 when compared to the third quarter of 2008 due to a decrease in service revenues and a significant reduction in equipment sales, as described below. Contract revenues from the service of totalizator systems, which is driven by wagering handle at tracks serviced, were $5.5 million in the third quarter of 2009, representing a decrease of $0.4 million, or approximately 7%, compared to the third quarter of 2008, primarily as a result of track closures, a general industry decline in wagering and reduced racing days. Equipment sales in the third quarter of 2009 were $26,000, representing a decrease of $0.3 million, or approximately 92%, compared to the third quarter of 2008 due to reluctance of track owners to invest in new equipment in the current world economy.

Costs and Expenses

Consolidated costs and expenses increased $0.5 million, or approximately 3%, in the third quarter of 2009 compared to the third quarter of 2008 primarily as a result of increased track fees and contract costs, which were partially offset by decreases in licensing fees and totalizator equipment costs, as discussed below. As a percentage of revenues, consolidated costs and expenses increased from approximately 62% in the third quarter of 2008 to 67% in the third quarter of 2009. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our costs and expenses on an operating segment basis.

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ADW Segment Costs and Expenses

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

Track fees: Track fees, which primarily consist of host and market access fees paid and payable to various tracks increased $2.2 million or approximately 21% in the third quarter of 2009 compared to the third quarter of 2008. The quarter-over-quarter increase is primarily attributable to a shift of costs from license fees to tracks fees resulting from a reduced number of TVG exclusive tracks. Expense increases were experienced in television fees ($0.8 million); host fees ($0.8 million); source market fees ($0.5 million). These increases were supplemented by $0.8 million in revenue share payments relating to our co-branding agreement with tracks in Illinois that did not exist in the third quarter of 2008. These increases were partially offset by a $0.6 million reduction in California market access fees, due to reduced wagering at California tracks.

Licensing fees: Licensing fees, which represent amounts paid and payable under our licensing agreement with TVG, decreased $1.8 million, or approximately 72%, in the third quarter of 2009 compared to the third quarter of 2008, primarily due to fewer TVG exclusive tracks.

Network operations: Network operations expense, which consists of costs for salaries, data center management, telecommunications and various totalizator fees in the third quarter of 2009 remained flat when compared to third quarter of 2008.

As a percentage of ADW segment revenues, costs and expenses in our ADW segment increased from approximately 62% in the third quarter of 2008 to 65% in the third quarter of 2009.

Totalizator Segment Costs and Expenses

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

Contract costs: Contract costs, which represent costs of United Tote associated with providing totalizator services at racetracks, increased $0.1 million , in the third quarter of 2009 when compared to the third quarter of 2008, due to a $0.2 million inventory write-down, $0.1 increase in ticket paper expense, offset by reductions in freight, maintenance expense, supplies and outside labor expenses.

Equipment Costs: Equipment costs, which represent costs of United Tote that are associated with earning equipment sales revenue, declined significantly, from $0.2 million in the third quarter of 2008 to $14 thousand in third quarter of 2009, due to a significant decrease in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment increased from approximately 65% in the third quarter of 2008 to 73% in the third quarter of 2009.

Gross Profit

Consolidated gross profit decreased $1.9 million, or approximately 17%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to changes in wagering track mix to tracks on which we pay higher fees, revenue share expense associated with our co-branding agreement with tracks in Illinois, increased player incentives and revenue decline experienced by the Totalizator segment. As a percentage of revenues, consolidated gross profit decreased from approximately 38% in the third quarter of 2008 to 33% in the third quarter of 2009. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our gross profit on an operating segment basis.

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ADW Segment Gross Profit

Gross profit in our ADW segment was $7.8 million for the three month period ended September 30, 2009, as compared to $9.0 million for the same period in 2008, a $1.2 million or 13% decline. The decline was primarily due to the increased player incentives and track fees described above. As a percentage of ADW segment revenues, gross profit in our ADW segment decreased from approximately 38% in the third quarter of 2008 to 35% in the third quarter of 2009.

Totalizator Segment Gross Profit

Gross profit in our totalizator segment was $1.5 million for the three month period ended September 30, 2009, representing a decrease of $0.7 million, or approximately 33%, compared to the same period in 2008. This decline is primarily attributable to the 12% decline in revenue, coupled with increases in ticket paper expense and increases to inventory obsolescence reserves. Due to the nature of the totalizator business and contractual obligation to provide equipment and totalizator services, its cost structure is fairly rigid and less variable to fluctuations in handle processed and reduction in race days. As a percentage of totalizator segment revenues, gross profit in our totalizator segment decreased from approximately 35% in the third quarter of 2008 to 27% in the third quarter of 2009.

Operating Expenses

Research and development: Research and development expense of $0.8 million remained flat when compared with the third quarter of 2008.

Sales and marketing: Sales and marketing expense of $1.5 million in the third quarter of 2009 increased $0.2 million, or approximately 15%, compared to the third quarter of 2008. This increase was primarily in the Youbet Express business and resulted from an increase in sales and marketing personnel and management’s priority to develop and target marketing efforts to specific initiatives including online customer acquisition, conversion and retention.

General and administrative: General and administrative expense of $4.3 million in the third quarter of 2009 increased $0.6 million or approximately 17%, when compared to the third quarter of 2008 and represented 15% of total revenue for the third quarter of 2009 versus 12% of total revenue in the third quarter of 2008. The increase is primarily due to increased legal fees and other costs associated with the investigation of various strategic opportunities of $0.4 million; increased bad debt associated with our Totalizator segment of $0.1 million and travel costs.

Depreciation and amortization: Depreciation and amortization in the third quarter of 2009 decreased $0.4 million when compared to the third quarter of 2008, primarily due to the continued aging of totalizator assets and reduced capital investment in our totalizator segment.

Interest expense (income): Interest expense of $0.2 million in the third quarter of 2009, decreased $0.1 million compared to $0.3 million in the third quarter of 2008. This decrease is primarily due to lower interest rates and lower debt levels. Interest income decreased slightly when compared to the three months ended September 30, 2008.

Other income: Other income increased $0.1 million when compared to the three months ended September 30, 2008, due to the recovery by United Tote of pre-acquisition receivables previously written off to expense.

Income Taxes: The combined estimated annual effective income tax rate used for the quarter ended September 30, 2009, was lower than in the comparable prior year period due to a retroactive tax adjustment relating to State of California in 2008. In the third quarter of 2008, the State of California suspended the use of net operating loss carry forwards, resulting in additional tax of $0.3 million being recognized in the third quarter of 2008.

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Results of continuing operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

The segment discussions below are based upon the following table, which sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $0.7 million and $0.9 million in the first nine months of 2009 and 2008, respectively. Additionally, in the second quarter of 2009, the ADW segment began charging the totalizator segment for its share of executive management services approximating $0.2 million per quarter. The data for the 2008 period in the table below, has been adjusted to include a charge of $0.5 million for comparability purposes:

		ADW Segment												Totalizator Segment
		Nine months ended September 30,												Nine months ended September 30,
								Increase			%									Increase			%
		2009			2008			(Decrease)			Change			2009			2008			(Decrease)			Change
	(in thousands)
Revenues		$	70,784		$	65,154		$	5,630			8.6	%	$	15,991		$	18,861		$	(2,870	)		-15.2	%
Gross profit			24,110			25,281			(1,171	)		-4.6	%		4,745			7,170			(2,425	)		-33.8	%
As % of revenues			34.1	%		38.8	%								29.7	%		38.0	%
Operating expenses			17,444			16,211			1,233			7.6	%		7,596			8,922			(1,326	)		-14.9	%
As % of revenues			24.6	%		24.9	%								47.5	%		47.3	%
Income from continuing operations before other income (expense) and income tax		$	6,666		$	9,070		$	(2,404	)		-26.5	%	$	(2,851	)	$	(1,752	)	$	(1,099	)		-62.7	%
As % of revenues			9.4	%		13.9	%								-17.8	%		-9.3	%

Note: Revenues exclude intersegment eliminations of $0.7 million in 2009 and $0.9 million in 2008, respectively.

Revenues

Total revenues increased $3.0 million, or 4%, for the nine months ended September 30, 2009 when compared with the comparable period of 2008. Excluding the impact of intersegment eliminations, the revenue increase was the result of an increase in our ADW segment revenues of $5.6 million, or approximately 9%, and a decrease in our totalizator segment revenues of $2.9 million, or approximately 15%, over those periods. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our revenues on an operating segment basis.

ADW Segment Revenues

ADW segment revenue, which consists primarily of commissions on wagers placed by our customers, net of player incentives, increased approximately $5.6 million, or 9% in the nine month period ended September 30, 2009, when compared to the same period in 2008. Gross commissions, before deduction of player incentives, during the first nine months of 2009 increased $9.3 million compared to the same period of 2008 due primarily to a 13% improvement in handle resulting from increased track content. However, the increase in gross commissions was partially offset by higher customer incentives in the first nine months of 2009 of $3.2 million, a 57% increase compared to the first nine months of 2008. Approximately $0.4 million of the increase relates to the redemption of expired player reward points in the first quarter of 2009, $0.3 million relates to a prospective change in estimate of the value of outstanding reward points and the remainder is associated with the impact of our more aggressive incentive marketing efforts.

Total handle for the nine months ended September 30, 2009 was $373.7 million, an increase of $42.8 million, or 13%, compared to the first nine months of 2008 primarily due to the return of all TrackNet content and aggressive marketing.

Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage of handle” (each calculated in accordance with generally accepted accounting principles), decreased 1.2% to 6.9% in the first nine months of 2009 versus 8.1% in the first nine months of 2008. The lower yield reflects the impact of increased track fees due to changes in track mix resulting from the return of certain lower yielding TrackNet content, revenue sharing expense associated with our co-branding agreement with tracks in Illinois and the increase in player incentives.

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

	Nine months ended September 30, 2009
							Favor
	2009			2008			(Unfavor)			%
				(in thousands)
Handle	$	373,683		$	330,920		$	42,763			12.9	%
Commissions		68,911			62,784			6,127			9.8	%
Less:
Track fees		39,656			29,075			10,581			36.4	%
License fees		3,365			6,958			(3,593	)		-51.6	%
Net Revenue	$	25,890		$	26,751		$	(861	)		-3.2	%
Yield %		6.9	%		8.1	%

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

Totalizator Segment Revenues

Totalizator segment revenues decreased $2.9 million, or 15%, when compared to the first nine months of 2008. Revenue generated by our United Tote operations in the first nine of 2009 included contract revenue associated with the service of totalizator systems of $15.8 million and equipment sales of $0.2 million, resulting in a decrease of $2.2 million and $0.7 million, respectively, compared to the same period in 2008. Service revenue declined primarily as a result of reduced handle processed due to track closures, a general industry decline in wagering and reduced racing days. Equipment sales declined due to the reluctance of track owners to invest in new equipment in the current world economy.

Costs and Expenses

Consolidated costs and expenses increased $6.6 million, or approximately 13%, in the first nine months of 2009 compared to the same period in 2008 primarily as a result of increased track fees and contract costs, which were partially offset by decreases in licensing fees and totalizator equipment costs, as discussed below. As a percentage of revenues, consolidated costs and expenses increased from approximately 61% in the first nine months of 2008 to 67% in the first nine months of 2009. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our costs and expenses on an operating segment basis.

ADW Segment Costs and Expenses

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

Track fees: Track fees, which primarily consist of host and market access fees paid and payable to various tracks increased $10.6 million or 36% in the first nine months of 2009 compared to the first nine months of 2008. The increase is partially attributable to the 13% increase in handle and host fee rate increases, a shift of costs from license fees to tracks fees resulting from a reduced number of TVG exclusive tracks and revenue sharing expense associated with the Company’s co-branding agreement with tracks in Illinois.

Licensing fees: Licensing fees, which represent amounts paid and payable under our licensing agreement with TVG, decreased $3.6 million, or 52%, in the first nine months of 2009 compared to the same period of 2008, primarily due to decrease in the number of TVG exclusive tracks.

Network operations: Network operations expense, which consists of costs for salaries, data center management, telecommunications and various totalizator fees, increased $0.1 million or 3% in the first nine months of 2009 compared to first nine months of 2008. This increase was primarily attributable to higher decoder, and AV expenses of $0.1 million, increased salaries of $0.1 million, offset by a reduction of totalizator fees of $0.3 million and computer supplies.

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As a percentage of ADW segment revenues, costs and expenses in our ADW segment increased from approximately 61% in the third quarter of 2008 to 66% in the third quarter of 2009.

Totalizator Segment Costs and Expenses

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

Contract costs: Contract costs, which represent costs of United Tote associated with providing totalizator services at racetracks, decreased $0.2 million, or 2%, in the first nine months of 2009 compared to the first nine months of 2008, largely due to further hub consolidation and related $0.2 million reduction is salaries.

Equipment Costs: Equipment costs, which represent costs of United Tote associated with earning equipment sales revenue, decreased from $0.4 million in the first nine months of 2008 to $0.1 million for the comparable period in 2009, due to a decrease in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment increased from approximately 62% in the third quarter of 2008 to 70% in the third quarter of 2009.

Gross Profit

Consolidated gross profit decreased $3.6 million, or approximately 11%, in the first nine months of 2009 compared to the first nine months of 2008 primarily due to increased track fees and incentives in our ADW segment and the decline in revenues and flat cost structure of our Totalizator segment. As a percentage of revenues, consolidated gross profit decreased from approximately 39% in the first nine months of 2008 to 34% in the first nine months of 2009. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our gross profit on an operating segment basis.

ADW Segment Gross Profit

The ADW segment gross profit was $24.1 million for the nine month period ended September 30, 2009, as compared to $25.3 million for the same period in 2008, a $1.2 million or 5% decline. The decline was primarily due to the increase in track fees attributable to the change in track mix associated with player track preference, revenue share expense associated with our co-branding agreement with tracks in Illinois and the increase in player incentives, the total of which offset the revenue gains experienced as a result of increased handle. As a percentage of ADW segment revenues, gross profit in our ADW segment decreased from approximately 39% in the first nine months of 2008 to 34% in the first nine months of 2009.

Totalizator Segment Gross Profit

The totalizator segment gross profit was $4.7 million for the nine month period ended September 30, 2009, as compared to $7.2 million for the same period in 2008, a $2.4 million or 34% decline. This decline is primarily attributable to the 15% decline in revenue. Due to the nature of the totalizator business and contractual obligation to provide equipment and totalizator services, its cost structure is fairly rigid and less variable to fluctuations in handle processed and reduction in race days. As a percentage of segment revenues, gross profit in our Totalizator segment decreased from approximately 38% in the first nine months of 2008 to 30% in the first nine months of 2009.

Operating Expenses

Research and development: Research and development expense of $2.5 million decreased slightly in the first nine months of 2009 when compared with the first nine months of 2008.

Sales and marketing: Sales and marketing expense of $4.4 million in the first nine months of 2009 increased $0.7 million, or approximately 18%, compared to the first nine months of 2008. This increase was primarily in the Youbet Express business and resulted from an increase in sales and marketing personnel and management’s priority to more appropriately develop and target marketing efforts to specific initiatives including online customer acquisition, conversion and retention.

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General and administrative: General and administrative expense of $12.7 million in the first nine months of 2009 decreased $0.1 million when compared to the first nine months of 2008 and represented 15% of total revenue for the first nine months of 2009 and 2008 respectively. The decrease is primarily due to the incurrence of $0.6 million in legal fees in the first quarter of 2008 in connection with litigation preceding the settlement finalized in May 2008 involving the Company, Colonial Downs, L.P., the Virginia Horsemen’s Benevolent and Protective Association the Virginia Racing Commission (VRC), and the Commonwealth of Virginia and the incurrence of a $0.8 million severance payment to our former interim chief executive officer in the second quarter of 2008. Expense increases in the first nine months of 2009 related to a severance payment to our former chief financial officer, non-cash compensation ($0.2 million), Youbet bad debt expense ($0.2 million), costs associated with the exploration of strategic opportunities ($0.2 million) and utility expenses ($0.1 million), were partially offset by reductions in labor costs ($0.2 million) and business taxes ($0.3 million).

Depreciation and amortization: Depreciation and amortization in the first nine months of 2009 decreased $0.5 million when compared to the first nine months of 2008 due to the aging of equipment and software in our totalizator segment offset by the impact of capital spending requirements.

Interest expense (income): Interest expense of $0.6 million in the first nine months of 2009, decreased $0.3 million compared to $0.9 million in the first nine months of 2008. This decrease is primarily due to lower interest rates and lower debt levels. Interest income decreased slightly when compared to the nine months ended September 30, 2008.

Other income: Other income increased $0.4 million when compared to the nine months ended September 30, 2008, due to the recovery by United Tote of pre-acquisition receivables previously written off to expense.

Income Taxes: The combined estimated annual effective income tax rate used in the nine months ended September 30, 2009, was higher than in the comparable prior year period primarily due to the impact of alternative minimum tax (“AMT”). In 2008, the Company was able to offset the impact of alternative minimum tax with NOLs earned during the 9/11 crisis. The Company has since exhausted such NOLs and is now subject to the full impact of AMT, resulting in $0.2 million in additional tax being recognized in 2009. Additionally, in the second quarter of 2009, the Canadian Revenue Agency completed its audit United Tote’s Canadian subsidiary’s operations for the tax years 2002, 2003 and 2004, which resulted in an assessment of additional taxes of $0.2 million in the second quarter of 2009.

Discontinued Operations: Effective February 15, 2008, we ceased operations at IRG and, accordingly, have accounted for such operations retroactively as discontinued operations. For the nine months ended September 30, 2009, IRG sustained a loss of $41 thousand compared to a loss of $0.7 million in the same period in 2008.

Liquidity and capital resources

As of September 30, 2009, the Company had net working capital of $3.0 million, compared to negative working capital of $0.8 million at December 31, 2008, a $3.8 million improvement. During the first nine months of 2009, the Company funded operations primarily with net cash provided by operating activities. 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.

As of September 30, 2009, we had $16.9 million in cash and cash equivalents, $4.8 million in restricted cash and $8.5 million in debt.

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

	For the Nine Month Period Ended
	September 30,
	2009			2008
	(in thousands)
Net cash provided (used) by operating activities, from continuing operations	$	6,680		$	15,874
Net cash used in investing operations		(2,185	)		(1,069	)
Net cash used in financing activities		(4,078	)		(6,113	)
Net cash used in discontinued operations		(27	)		(2,653	)
Foreign currency translation adjustments		(33	)		(58	)
Net increase in cash and cash equivalents	$	357		$	5,981

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2009 of $6.7 million decreased by $9.2 million from the $15.9 million provided by operating activities in the same 2008 period, primarily due to unfavorable working capital fluctuations related to a $0.4 million increase in totalizator segment receivables associated with cash flow shortfalls in tracks serviced and payment of various accruals, including the December 31, 2008 bonus accrual of $1.8 million, TVG license accrual of $1.4 million and accrued severance of $0.3 million.

Investing Activities

Net cash used in investing activities for the first nine months of 2009 was $2.2 million, compared to net cash used in investing activities of $1.1 million for the same period of 2008. The $1.1 million increase is attributable to increased capital spending in 2009, associated with the continued improvement of our ADW platform, including functionality, product offering and social communication. Capital spending in the ADW and Totalizator segments was $2.0 million and $0.4 million for the nine month period ending September 30, 2009, respectively. We continue to invest in the development of our network infrastructure and to support continued technology upgrades as necessary.

Financing Activities

Net cash used in financing activities in the first nine months of 2009 of $4.1 million decreased $2.0 million when compared to that used in the same period in 2008, due to higher loan repayments in 2008 in accordance with the terms of the related debt.

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

Nevertheless management presently believes that our borrowing capacity, as well as on-going efforts to contain costs and operate efficiently, and growth in handle and associated commissions 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.

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Item 3. Quantitative and qualitative disclosures about market risk

We do not undertake any specific actions to diminish our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in our annual report on Form 10-K for the year ended December 31, 2008, as amended.

Item 4. Controls and procedures

Evaluation of Disclosure Controls and Procedures

We maintain 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”)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As reported in our Form 10-Q/A for the six month period ended June 30, 2009 (filed on September 8, 2009), management identified a control deficiency in the Youbet Player Incentive accruals which management concluded constituted a material weakness in our internal control over financial reporting as of June 30, 2009. As a result of this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of June 30, 2009.

In order to remediate the previously reported material weakness, our management has implemented the following measures: (i) expanded management review of the calculation of accruals under the player incentive program on a monthly basis; and (ii) formalized additional technological processes designed to identify expired points under the program that affect the accrual and were related to the error and (iii) revised roll-forward procedures to analyze and compare the Youbet Advantage player incentive program accrual with points outstanding, as verification of the completeness and accuracy of the accruals.

As of September 30, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, which evaluation took into consideration the remediation measures implemented as described above. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

Other than as noted above in this Item 4, there has been no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other information

Item 1. Legal proceedings

Refer to Note 5: “Contingencies” in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk factors

We have included in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2008, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes in the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our common stock.

Item 2. Unregistered sales of equity securities and use of proceeds

None.

Item 3. Defaults upon senior securities

None.

Item 4. Submission of matters to a vote of security holders

None

Item 5. Other information

None

Item 6. Exhibits

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1	Certification Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934.

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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.
November 12, 2009	By:	/s/ David Goldberg
		David Goldberg
		President and Chief Executive Officer
November 12, 2009	By:	/s/ Susan Bracey
		Susan Bracey
		Chief Financial Officer

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EXHIBIT INDEX

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1	Certification Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934.