##### Table of Contents



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 JUNE 30, 2006
 COMMISSION FILE NUMBER: 0-26015
 
 YOUBET.COM, INC.
 DELAWARE
    
    95-4627253
 5901 De Soto Avenue, Woodland Hills, California 91367
 (818) 668-2100
 þ o
  o þ o
 o þ




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##### 



YOUBET.COM, INC.
 INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2006
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated financial statements
    
    
    3Balance sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    3Statements of operations for the three months ended June 30, 2006 and 2005 (unaudited)
    
    
    4Statements of operations for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    5Statements of cash flows for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    6Notes to unaudited financial statements
    
    
    7Item 2. Managements discussion and analysis of financial condition and results of operations
    
    
    15Item 3. Quantitative and qualitative disclosures about market risk
    
    
    24Item 4. Controls and procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal proceedings
    
    
    24Item 1A. Risk factors
    
    
    24Item 2. Unregistered sales of equity securities and use of proceeds
    
    
    25Item 3. Defaults upon senior securities
    
    
    25Item 4. Submission of matters to a vote of security holders
    
    
    25Item 5. Other information
    
    
    25Item 6. Exhibits
    
    
    25EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  Preliminary Note
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Consolidated Financial Statements
 YOUBET.COM, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    14,159,971
    
    
    $
    16,685,787Current portion of restricted cash
    
    
    5,005,755
    
    
    
    5,185,115Accounts receivable, net of allowance for doubtful collection of $564,104 and $346,000
    
    
    12,776,423
    
    
    
    2,504,427Other receivables
    
    
    139,586
    
    
    
    27,493Inventory
    
    
    2,975,598
    
    
    
    Current portion of notes receivable
    
    
    213,452
    
    
    
    Prepaid expenses
    
    
    1,760,831
    
    
    
    1,290,849Current portion of deferred tax asset
    
    
    5,110,000
    
    
    
    4,088,00042,141,616
    
    
    
    29,781,671Property and equipment, net of accumulated depreciation and amortization of $10,481,984
and $8,675,956
    
    
    22,448,339
    
    
    
    4,418,872Restricted cash, net of current portion
    
    
    381,962
    
    
    
    381,962Notes receivable, net of current portion, net of allowance of $76,742
    
    
    269,759
    
    
    
    Intangibles and other, net of accumulated amortization of $1,246,269 and $338,388
    
    
    17,625,936
    
    
    
    5,025,339Goodwill
    
    
    10,447,106
    
    
    
    Deferred tax asset, net of current portion
    
    
    1,221,000
    
    
    
    1,221,000$
    94,535,718
    
    
    $
    40,828,844LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    3,216,787
    
    
    $
    620,000Short term debt
    
    
    5,200,000
    
    
    
    Trade payables, TVG
    
    
    6,175,989
    
    
    
    4,805,642Trade payables, track related
    
    
    7,543,891
    
    
    
    2,337,709Trade payables, other
    
    
    3,519,426
    
    
    
    783,621Accrued expenses and other
    
    
    8,636,197
    
    
    
    3,193,625Customer deposits
    
    
    7,032,710
    
    
    
    5,905,099Deferred revenues
    
    
    344,156
    
    
    
    121,02741,669,156
    
    
    
    17,766,723Long-term debt, net of current portion
    
    
    15,990,900
    
    
    
    177,65557,660,056
    
    
    
    17,944,378Stockholders equityPreferred stock, $0.001 par value, authorized 1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, authorized 100,000,000 shares, 35,904,270 and
33,451,809 shares outstanding
    
    
    35,904
    
    
    
    33,452Additional paid-in capital
    
    
    116,195,741
    
    
    
    105,715,395Deficit
    
    
    (77,979,376
    )
    
    
    (81,524,009
    )Accumulated other comprehensive loss
    
    
    (36,235
    )
    
    
    Treasury stock (457,015 and 457,015 common shares at cost)
    
    
    (1,340,372
    )
    
    
    (1,340,372
    )36,875,662
    
    
    
    22,884,466$
    94,535,718
    
    
    $
    40,828,844
 See notes to unaudited consolidated financial statements
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YOUBET.COM, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended June 30,2006
    
    
    2005RevenuesCommissions
    
    $
    30,891,756
    
    
    $
    22,587,863Contract revenues
    
    
    6,862,779
    
    
    
    Equipment sales
    
    
    815,869
    
    
    
    Other
    
    
    1,019,563
    
    
    
    894,55739,589,967
    
    
    
    23,482,420Operating costs and expensesTrack fees
    
    
    14,782,838
    
    
    
    9,620,276Licensing, TVG
    
    
    6,175,989
    
    
    
    5,745,376Contract costs
    
    
    3,857,811
    
    
    
    Equipment costs
    
    
    443,844
    
    
    
    Network operations
    
    
    1,516,724
    
    
    
    1,090,615Research and development
    
    
    908,242
    
    
    
    414,352Sales and marketing
    
    
    2,482,235
    
    
    
    1,799,563General and administrative
    
    
    5,574,203
    
    
    
    3,324,887Depreciation and amortization
    
    
    1,729,754
    
    
    
    317,86937,471,640
    
    
    
    22,312,938Income from operations
    
    
    2,118,327
    
    
    
    1,169,482Other income (expense)Interest income
    
    
    128,301
    
    
    
    133,818Interest expense
    
    
    (532,734
    )
    
    
    (20,232
    )Other
    
    
    442,884
    
    
    
    54,014Equity in net income of joint venture
    
    
    50,155
    
    
    
    88,606
    
    
    
    167,600Income before income taxes
    
    
    2,206,933
    
    
    
    1,337,082Income taxes
    
    
    11,703
    
    
    
    Net income
    
    $
    2,195,230
    
    
    $
    1,337,082Income per share  basic
    
    $
    0.06
    
    
    $
    0.04Income per share  diluted
    
    $
    0.06
    
    
    $
    0.04
 See notes to unaudited consolidated financial statements
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YOUBET.COM, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Six Months Ended June 30,2006
    
    
    2005RevenuesCommissions
    
    $
    54,813,347
    
    
    $
    40,350,910Contract revenues
    
    
    9,714,670
    
    
    
    Equipment sales
    
    
    951,520
    
    
    
    Other
    
    
    1,866,384
    
    
    
    1,646,86867,345,921
    
    
    
    41,997,778Operating costs and expensesTrack fees
    
    
    26,360,454
    
    
    
    18,245,409Licensing, TVG
    
    
    9,279,729
    
    
    
    8,757,233Contract costs
    
    
    5,791,946
    
    
    
    Equipment costs
    
    
    533,098
    
    
    
    Network operations
    
    
    2,800,157
    
    
    
    2,085,816Research and development
    
    
    1,674,512
    
    
    
    734,229Sales and marketing
    
    
    4,553,104
    
    
    
    3,075,711General and administrative
    
    
    9,991,564
    
    
    
    6,507,325Depreciation and amortization
    
    
    2,869,968
    
    
    
    549,69463,854,532
    
    
    
    39,955,417Income from operations
    
    
    3,491,389
    
    
    
    2,042,361Other income (expense)Interest income
    
    
    285,506
    
    
    
    223,240Interest expense
    
    
    (720,952
    )
    
    
    (39,059
    )Other
    
    
    520,559
    
    
    
    140,537Equity in net income of joint venture
    
    
    74,227
    
    
    
    159,340
    
    
    
    324,718Income before income taxes
    
    
    3,650,729
    
    
    
    2,367,079Income taxes
    
    
    106,096
    
    
    
    Net income
    
    $
    3,544,633
    
    
    $
    2,367,079Income per share  basic
    
    $
    0.10
    
    
    $
    0.07Income per share  diluted
    
    $
    0.09
    
    
    $
    0.07
 See notes to unaudited consolidated financial statements
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YOUBET.COM, INC. AND SUBSIDIARIES,
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six Months Ended June30,2006
    
    
    2005Operating activitiesNet income
    
    $
    3,544,633
    
    
    $
    2,367,079Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization of property
    
    
    1,962,087
    
    
    
    527,642Amortization of intangibles
    
    
    907,881
    
    
    
    25,072Equity in net income of joint venture
    
    
    74,227
    
    
    
    Stock-based compensation expense (benefit)
    
    
    405,474
    
    
    
    (115,753
    )Provision for doubtful accounts
    
    
    
    
    
    
    131,791Change in operating assets and liabilitiesRestricted cash
    
    
    (583,757
    )
    
    
    (653,276
    )Receivables
    
    
    (5,675,799
    )
    
    
    (472,213
    )Other receivables
    
    
    (109,532
    )
    
    
    235,802Inventory
    
    
    (798,284
    )
    
    
    Prepaid expenses
    
    
    (168,840
    )
    
    
    (861,921
    )Income tax benefit from change in deferred tax asset valuation allowance
    
    
    (360,957
    )Deposits and others
    
    
    774,430
    
    
    
    Unamortized intangibles and other
    
    
    
    
    
    
    (205,983
    )Trade payables, TVG
    
    
    1,370,347
    
    
    
    1,954,171Trade payables, track related
    
    
    5,206,182
    
    
    
    1,226,209Trade payables, other
    
    
    1,265,237
    
    
    
    43,208Accrued expenses and other
    
    
    1,636,128
    
    
    
    928,774Customer deposits
    
    
    1,127,611
    
    
    
    477,876Deferred revenues
    
    
    (175,668
    )
    
    
    17,245Net cash provided by operating activities
    
    
    10,401,400
    
    
    
    5,625,723Investing activitiesPurchases of property and equipment
    
    
    (2,156,217
    )
    
    
    (790,697
    )Notes receivable
    
    
    97,290
    
    
    
    Cash paid for United Tote Company acquisition, net of cash acquired of $159,762
    
    
    (10,094,105
    )
    
    
    Investments in intangibles and other
    
    
    
    
    
    
    (1,610,838
    )Decrease in restricted cash
    
    
    1,013,117
    
    
    
    112,239Increase in restricted cash
    
    
    (250,000
    )
    
    
    Net cash used in investing activities
    
    
    (11,389,915
    )
    
    
    (2,289,296
    )Financing activitiesProceeds from exercise of stock options and warrants, net
    
    
    259,143
    
    
    
    1,931,429Repayment of long term debt
    
    
    (1,760,209
    )
    
    
    (263,112
    )Net cash provided (used) by financing activities
    
    
    (1,501,066
    )
    
    
    1,668,317Foreign currency translation adjustment
    
    
    (36,235
    )
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    (2,525,816
    )
    
    
    5,004,744Cash and cash equivalents, beginning of period
    
    
    16,685,787
    
    
    
    13,287,492Cash and cash equivalents, end of period
    
    $
    14,159,971
    
    
    $
    18,292,236
 See notes to unaudited consolidated financial statements
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YOUBET.COM, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2006
 Note 1: Basis of presentation
    Note 2: Adoption of SFAS 123R
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Share-Based Payment
  Expected life in years
    
    
    3.03Risk free interest rate
    
    
    6.25
    %Dividend yield
    
    
    0.0
    %Expected volatility
    
    
    53.5
    %
 For the Three
    
    
    For the SixMonths Ended
    
    
    Months EndedJune 30, 2005
    
    
    June 30, 2005As reported net income
    
    $
    1,337,082
    
    
    $
    2,367,079Add stock-based employee
compensation expense
included in reported
income, net of related
tax effects
    
    
    (63,027
    )
    
    
    (115,753
    )Less total stock based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects
    
    
    (831,303
    )
    
    
    (944,318
    )Pro forma net income
    
    $
    442,752
    
    
    $
    1,307,008Net income per share:As reported, fully diluted
    
    $
    0.04
    
    
    $
    0.07Pro forma, fully diluted
    
    $
    0.01
    
    
    $
    0.04
 Note 3: Accounts receivable
  June 30,
    
    
    December 31,2006
    
    
    2005Track receivables, net of allowance for doubtful collection of $218,104 and $0
    
    $
    10,191,424
    
    
    $
    671,720Player receivables
    
    
    1,659,641
    
    
    
    1,421,458Magna receivable, net of allowance for doubtful collection of $346,000 and $346,000
    
    
    346,000
    
    
    
    346,000Other
    
    
    579,358
    
    
    
    65,249$
    12,776,423
    
    
    $
    2,504,427
 Note 4: Inventories
  7




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June 30,2006Totalizator components
    
    $
    2,534,966Work in process
    
    
    168,244Ticket stock
    
    
    310,008Finished goods
    
    
    356,4063,369,624Less: Allowance
    
    
    394,026$
    2,975,598
 Note 5: Property and equipment
  June 30,
    
    
    December 31,2006
    
    
    2005Computer equipment, owned
    
    $
    4,946,127
    
    
    $
    5,571,870Computer equipment under capital lease
    
    
    1,008,531
    
    
    
    755,302Pari-mutuel equipment
    
    
    18,548,059
    
    
    
    Software
    
    
    3,478,548
    
    
    
    2,512,252Office furniture, fixtures and equipment
    
    
    1,609,276
    
    
    
    1,222,991Leasehold improvements
    
    
    3,095,922
    
    
    
    3,032,413Building
    
    
    220,708
    
    
    
    Land
    
    
    23,152
    
    
    
    32,930,323
    
    
    
    13,094,828Less: Accumulated depreciation
    
    
    10,481,984
    
    
    
    8,675,956$
    22,448,339
    
    
    $
    4,418,872
 Note 6: Intangibles and other
  June 30,
    
    
    December 31,2006
    
    
    2005Intangibles, other than goodwill, net of accumulated amortization of $1,246,269 and $338,388
    
    $
    16,684,408
    
    
    $
    3,209,687Unamortizing intangibles
    
    
    154,134
    
    
    
    65,094Investments
    
    
    392,111
    
    
    
    1,512,243Long term deposits
    
    
    259,417
    
    
    
    134,426Trademark and trade names
    
    
    94,357
    
    
    
    Investment in joint venture
    
    
    17,654
    
    
    
    Other
    
    
    23,855
    
    
    
    103,889$
    17,625,936
    
    
    $
    5,025,339
 Note 7: Debt
  June 30,
    
    
    December 31,2006
    
    
    2005Capital lease obligations and other financing arrangements
    
    $
    590,616
    
    
    $
    797,655Promissory notes
    
    
    10,200,000
    
    
    
    Revolving line of credit
    
    
    1,861,675
    
    
    
    Bank equipment term loan
    
    
    11,238,756
    
    
    
    Bank mortgage term loan
    
    
    500,250
    
    
    
    Notes payable
    
    
    16,390
    
    
    
    24,407,687
    
    
    
    797,655Short-term debt and current portion of long-term debt
    
    
    8,416,787
    
    
    
    620,000Long-term debt, less current maturities
    
    $
    15,990,900
    
    
    $
    177,655
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United Tote Credit Facility
      Note 8: Other income
  Note 9: Income taxes
     9




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Note 10: Income per share
  Three Months Ended June 30,2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    2,195,230
    
    
    
    35,362,263
    
    
    $
    0.06
    
    
    $
    1,337,082
    
    
    
    31,915,699
    
    
    $
    0.04Effect of dilutive securities
    
    
    
    
    
    
    3,224,523
    
    
    
    
    
    
    
    
    
    
    
    2,717,208
    
    
    
    EPS  Diluted
    
    $
    2,195,230
    
    
    
    38,586,786
    
    
    $
    0.06
    
    
    $
    1,337,082
    
    
    
    34,632,907
    
    
    $
    0.04
 Six Months Ended June 30,2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    3,544,633
    
    
    
    34,748,221
    
    
    $
    0.10
    
    
    $
    2,367,079
    
    
    
    31,226,976
    
    
    $
    0.07Effect of dilutive securities
    
    
    
    
    
    
    3,274,621
    
    
    
    (0.01
    )
    
    
    
    
    
    
    2,643,447
    
    
    
    EPS  Diluted
    
    $
    3,544,633
    
    
    
    38,022,842
    
    
    $
    0.09
    
    
    $
    2,367,079
    
    
    
    33,870,423
    
    
    $
    0.07
 Note 11: Stockholders equity
 Stock options
   Weighted AverageStock Options
    
    
    Exercise PriceBalance, December 31, 2005
    
    
    4,394,372
    
    
    $
    2.30Options granted
    
    
    193,167
    
    
    
    4.32Options exercised
    
    
    (245,643
    )
    
    
    1.00Options cancelled
    
    
    (132,375
    )
    
    
    4.43Options forfeited
    
    
    
    
    
    
    Balance, June 30, 2006
    
    
    4,209,521
    
    
    
    2.40Options exercisable (vested) at June 30, 2006
    
    
    3,441,410
    
    
    $
    2.03
 10




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Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life (in years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.49  $0.99
    
    
    1,322,702
    
    
    
    4.21
    
    
    $
    0.60
    
    
    
    1,290,187
    
    
    $
    0.60$1.00  $1.99
    
    
    134,882
    
    
    
    1.52
    
    
    
    1.57
    
    
    
    109,657
    
    
    
    1.53$2.00  $4.99
    
    
    2,579,362
    
    
    
    6.67
    
    
    
    3.17
    
    
    
    1,991,566
    
    
    
    2.89$5.00  $10.50
    
    
    172,575
    
    
    
    8.99
    
    
    
    5.36
    
    
    
    50,000
    
    
    
    5.57TOTAL
    
    
    4,209,521
    
    
    
    
    
    
    $
    2.40
    
    
    
    3,441,410
    
    
    $
    2.03
 Note 12: United Tote Acquisition
  
    
    $9.75 million in cash (including the release of $1.0 million previously held in escrow and net of a $0.25 million
adjustment due to an increase in United Totes secured debt and certain other indebtedness);
    
    Three unsecured promissory notes with an aggregate principal amount of $10.2 million; and
    
    2,181,818 shares of Youbet common stock that are subject to certain make-whole provisions
which value such shares at $5.50 per share.
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    39,589,967
    
    
    $
    31,016,303
    
    
    $
    69,696,203
    
    
    $
    54,711,210Net income
    
    $
    2,195,230
    
    
    
    1,987,399
    
    
    
    3,294,990
    
    
    
    2,346,786EPS  Basic
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.08EPS  Diluted
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.07
 Note 13: Segment reporting
  11




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##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005RevenueADW segment
    
    $
    31,926,703
    
    
    $
    23,482,420Totalizator services segment
    
    
    7,983,113
    
    
    
    39,909,816
    
    
    
    23,482,420Intercompany elimination of totalizator services
    
    
    (319,849
    )
    
    
    $
    39,589,967
    
    
    $
    23,482,420
 Six Months Ended June 30,2006
    
    
    2005ADW segment
    
    $
    56,695,115
    
    
    $
    41,997,778Totalizator services segment
    
    
    11,057,500
    
    
    
    67,752,615
    
    
    
    41,997,778Intercompany elimination of totalizator services
    
    
    (406,695
    )
    
    
    $
    67,345,920
    
    
    $
    41,997,778
 Three Months Ended June 30,2006
    
    
    2005Revenue by Geographic AreaUnited States
    
    $
    38,468,809
    
    
    $
    23,482,420International
    
    
    1,121,158
    
    
    
    $
    39,589,967
    
    
    $
    23,482,420
 Six Months Ended June 30,2006
    
    
    2005United States
    
    $
    65,407,250
    
    
    $
    41,997,778International
    
    
    1,938,670
    
    
    
    $
    67,345,920
    
    
    $
    41,997,778
 Three Months Ended June 30,2006
    
    
    2005Reconciliation of Income Before Income TaxesIncome from operationsADW segment
    
    $
    740,325
    
    
    $
    1,169,482Totalizator services segment
    
    
    1,378,002
    
    
    
    2,118,327
    
    
    
    1,169,482Interest income
    
    
    128,301
    
    
    
    133,818Interest expense
    
    
    (532,734
    )
    
    
    (20,232
    )Other
    
    
    442,884
    
    
    
    54,014Equity in net income of joint venture
    
    
    50,155
    
    
    
    Income before income taxes
    
    $
    2,206,933
    
    
    $
    1,337,082
 Six Months Ended June 30,2006
    
    
    2005Income from operationsADW segment
    
    $
    2,331,533
    
    
    $
    2,042,361Totalizator services segment
    
    
    1,159,856
    
    
    
    3,491,389
    
    
    
    2,042,361Interest income
    
    
    285,506
    
    
    
    223,240Interest expense
    
    
    (720,952
    )
    
    
    (39,059
    )Other
    
    
    520,559
    
    
    
    140,537Equity in net income of joint venture
    
    
    74,227
    
    
    
    Income before income taxes
    
    $
    3,650,729
    
    
    $
    2,367,079
 12




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##### Table of Contents



As of June 30,
    
    
    As of December 31,2006
    
    
    2005Total AssetsADW segment
    
    $
    44,459,737
    
    
    $
    40,828,844Totalizator services segment
    
    
    50,075,981
    
    
    
    $
    94,535,718
    
    
    $
    40,828,844
 Note 14: Contingencies
  TVG Arbitration
    Note and Warrant Litigation
  13




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##### Table of Contents



Other
  Note 15: Subsequent event
      14




---



##### Table of Contents



Item 2. Managements discussion and analysis of financial condition and results of operations
 Forward looking statements
  Overview
 www.youbet.com
      15




---



##### Table of Contents



Critical accounting estimates and policies
 Use of estimates.
 Revenue recognition.
 Cash equivalents.
 Accounts receivable and allowance for doubtful accounts.
 Fair value of financial instruments. Accounting for Derivative Instruments and Hedging Activities
 Foreign currency.
 Inventories and obsolescence.
 16




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##### Table of Contents



Property and equipment.
 Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use
 Legal defense costs.
 Basic and diluted earnings (loss) per share.
 Stock based compensation. Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Segment reporting.
 17




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##### Table of Contents



Results of operations for the three months ended June 30, 2006 compared to the three months ended
June 30, 2005
     Operating expenses
       18




---



##### Table of Contents



19




---



##### Table of Contents



Results of operations for the six months ended June 30, 2006 compared to the six months ended June
30, 2005
    Operating expenses
       20




---



##### Table of Contents



Liquidity and capital resources
      Principal
    
    
    Maturity
    
    
    Interest Rate
    
    PaymentsShort-term promissory note
    
    $
    5,200,000
    
    
    
    2/9/2007
    
    
    
    5.02
    %
    
    Principal due at maturity and interest due quarterly.Long-term promissory note
    
    
    3,200,000
    
    
    
    2/8/2008
    
    
    
    5.02
    %
    
    Principal and accrued interest due at maturity.Long-term promissory note
    
    
    1,800,000
    
    
    
    2/8/2008
    
    
    
    5.02
    %
    
    Principal and accrued interest due at maturity.10,200,000Less short-term promissory note
    
    
    (5,200,000
    )Long-term debt less short-term
promissory note
    
    $
    5,000,000
 21




---



##### Table of Contents



Other
  Regulatory considerations
 Legal issues concerning online wagering that may adversely effect our business.
  22




---



##### Table of Contents



Various state legislatures, Congress and federal and state executive authorities have proposed laws
and regulations directly applicable to online and Internet gaming which could have a material
adverse effect on our business .
    23




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##### Table of Contents



Item 3. Quantitative and qualitative disclosures about market risk
  
 Item 4. Controls and procedures
    Internal Control-Integrated
Framework
 
 Part II. Other information
 
 Item 1. Legal proceedings
  
 Item 1A. Risk factors
  
    
    An adverse ruling on one or more claims in our arbitration proceedings with TVG could
adversely affect our liquidity and operating performance.
    
    If credit card companies, as a policy, refuse to process wagering account transactions
due to perceived legal uncertainty surrounding online, live event wagering, our business and
results of operations could be adversely affected.
    
    If, in response to allegations brought before the WTO, the U.S. government amends
existing laws to exempt foreign providers of online gambling from, or restricts domestic
service providers, our business could be adversely affected.
 24




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##### Table of Contents



Item 2. Unregistered sales of equity securities and use of proceeds
  
 Item 3. Defaults upon senior securities
  
 Item 4. Submission of matters to a vote of security holders
   Nominee:
    
    Votes For
    
    Votes AgainstCharles F. Champion
    
    32,149,818
    
    305,785David M. Marshall
    
    31,766,268
    
    689,335Gary Adelson
    
    32,179,498
    
    276,105Joseph Barletta
    
    32,063,198
    
    392,405R. Douglas Donn
    
    32,177,498
    
    278,105James Edgar
    
    31,654,118
    
    801,485Steven C. Good
    
    31,641,868
    
    813,735F. Jack Liebau
    
    32,059,758
    
    395,845
  
 Item 5. Other information
  
 Item 6. Exhibits
 3.1
    
    Certificate of Incorporation of Youbet.com, as amended through November 12,
2001 (incorporated by reference to Exhibit 3.1 to the Form 10-Q of Youbet.com.
Inc. for the quarter ended September 30, 2003).3.2
    
    Amended and Restated Bylaws of Youbet.com (incorporated by reference to Exhibit
3.1 to the Form 8-K of Youbet.com, Inc. filed February 23, 2004).4.1
    
    Stockholder Rights Agreement, dated as of February 10, 2006, by and between
Youbet.com, Inc. and UT Group LLC (incorporated by reference to Exhibit 4.1 to
the Form 8-K of Youbet.com dated February 10, 2006 and filed February 13,
2006).4.2
    
    Amendment No. 1, dated as of May 3, 2006, to Stockholder Rights Agreement,
dated as of February 10, 2006, by and between Youbet.com, Inc. and UT Group LLC
(incorporated by reference to Exhibit 4.2 to the Form 8-K of Youbet.com dated
May 3, 2006 and filed May 4, 2006).4.3
    
    Waiver Letter, dated as of April 11, 2006, by and among Youbet.com, Inc., UT
Gaming, Inc., UT Group LLC, and United Tote Company (incorporated by reference
to Exhibit 4.5 to the Registration Statement of Form S-3 of Youbet.com (File
No. 333-133478) filed April 21, 2006).
 25




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##### Table of Contents



10.1
    
    Credit Agreement, dated as of September 5, 2003, between United Tote Company
and Manufacturers and Traders Trust Company, as amended (incorporated by
reference to Exhibit 10.1 to the Form 8-K of Youbet.com dated February 10, 2006
and filed February 13, 2006).10.2
    
    Continuing Guarantee, dated as of February 9, 2006, of Youbet.com, Inc. in
favor of Manufacturers and Traders Trust Company (incorporated by reference to
Exhibit 10.2 to the Form 8-K of Youbet.com dated February 10, 2006 and filed
February 13, 2006).10.3
    
    Forbearance Letter Agreement, dated as of February 9, 2006, among Manufacturers
and Traders Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote
Company (incorporated by reference to Exhibit 10.3 to the Form 8-K of
Youbet.com dated February 10, 2006 and filed February 13, 2006).10.4
    
    Forbearance Letter Agreement, dated as of April 19, 2006, among Manufacturers
and Traders Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote
Company (incorporated by reference to Exhibit 10.3 to the Form 8-K of
Youbet.com dated April 19, 2006 and filed April 25, 2006).10.5
    
    Modification Agreement, dated June 30, 2006, among Manufacturers and Traders
Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote Company.10.6
    
    Credit Agreement dated as of July 27, 2006, by and among Youbet.com, Inc. and
United Tote Company, as borrowers, the lenders signatory thereto, as lenders,
and Wells Fargo Foothill, Inc., as arranger and administrative agent
(incorporated by reference to Exhibit 10.1 to the Form 8-K of Youbet.com dated
July 27, 2006 and filed July 28, 2006).10.7
    
    Youbet.com, Inc. Equity Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Form S-3 of Youbet.com SEC File No.333-126131).*10.8
    
    Amendment Number 1 to Youbet.com, Inc. Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Form 8-K of Youbet.com dated June 15, 2006 and
filed June 16, 2006).*31.1
    
    Certification of President and Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer and Treasurer 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.
 
 *
    
    Management contract or compensatory plan. 26




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##### Table of Contents



SIGNATURES
  YOUBET.COM, INC.August 9, 2006
    
    By:
    
    /s/ Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerAugust 9, 2006
    
    By:
    
    /s/ Gary W. SprouleGary W. SprouleChief Financial Officer
 27




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##### Table of Contents



EXHIBIT INDEX
 EXHIBIT
NO.
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Youbet.com, as amended through November 12,
2001 (incorporated by reference to Exhibit 3.1 to the Form 10-Q of Youbet.com.
Inc. for the quarter ended September 30, 2003).3.2
    
    Amended and Restated Bylaws of Youbet.com (incorporated by reference to Exhibit
3.1 to the Form 8-K of Youbet.com, Inc. filed February 23, 2004).4.1
    
    Stockholder Rights Agreement, dated as of February 10, 2006, by and between
Youbet.com, Inc. and UT Group LLC (incorporated by reference to Exhibit 4.1 to
the Form 8-K of Youbet.com dated February 10, 2006 and filed February 13,
2006).4.2
    
    Amendment No. 1, dated as of May 3, 2006, to Stockholder Rights Agreement,
dated as of February 10, 2006, by and between Youbet.com, Inc. and UT Group LLC
(incorporated by reference to Exhibit 4.2 to the Form 8-K of Youbet.com dated
May 3, 2006 and filed May 4, 2006).4.3
    
    Waiver Letter, dated as of April 11, 2006, by and among Youbet.com, Inc., UT
Gaming, Inc., UT Group LLC, and United Tote Company (incorporated by reference
to Exhibit 4.5 to the Registration Statement of Form S-3 of Youbet.com (File
No. 333-133478) filed April 21, 2006).




---



##### Table of Contents



10.1
    
    Credit Agreement, dated as of September 5, 2003, between United Tote Company
and Manufacturers and Traders Trust Company, as amended (incorporated by
reference to Exhibit 10.1 to the Form 8-K of Youbet.com dated February 10, 2006
and filed February 13, 2006).10.2
    
    Continuing Guarantee, dated as of February 9, 2006, of Youbet.com, Inc. in
favor of Manufacturers and Traders Trust Company (incorporated by reference to
Exhibit 10.2 to the Form 8-K of Youbet.com dated February 10, 2006 and filed
February 13, 2006).10.3
    
    Forbearance Letter Agreement, dated as of February 9, 2006, among Manufacturers
and Traders Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote
Company (incorporated by reference to Exhibit 10.3 to the Form 8-K of
Youbet.com dated February 10, 2006 and filed February 13, 2006).10.4
    
    Forbearance Letter Agreement, dated as of April 19, 2006, among Manufacturers
and Traders Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote
Company (incorporated by reference to Exhibit 10.3 to the Form 8-K of
Youbet.com dated April 19, 2006 and filed April 25, 2006).10.5
    
    Modification Agreement, dated June 30, 2006, among Manufacturers and Traders
Trust Company, Youbet.com, Inc., UT Gaming, Inc. and United Tote Company.10.6
    
    Credit Agreement dated as of July 27, 2006, by and among Youbet.com, Inc. and
United Tote Company, as borrowers, the lenders signatory thereto, as lenders,
and Wells Fargo Foothill, Inc., as arranger and administrative agent
(incorporated by reference to Exhibit 10.1 to the Form 8-K of Youbet.com dated
July 27, 2006 and filed July 28, 2006).10.7
    
    Amendment Number One to the Youbet.com, Inc. Equity Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Form 8-K of Youbet.com dated
June 15, 2006 and filed June 16, 2006).10.8
    
    Amendment No. 1 to Youbet.com, Inc. Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Form 8-K of Youbet.com dated June 15, 2006 and
filed June 16, 2006).31.1
    
    Certification of President and Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer and Treasurer 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.