##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
SEPTEMBER 30, 2006
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated financial statementsBalance sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Statements of operations for the three months ended September 30, 2006 and 2005 (unaudited).
    
    
    4Statements of operations for the nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    5Statements of cash flows for the nine months ended September 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
    
    
    25Item 4. Controls and procedures
    
    
    25PART II. OTHER INFORMATIONItem 1. Legal proceedings
    
    
    26Item 1A. Risk factors
    
    
    26Item 2. Unregistered sales of equity securities and use of proceeds
    
    
    26Item 3. Defaults upon senior securities
    
    
    26Item 4. Submission of matters to a vote of security holders
    
    
    26Item 5. Other information
    
    
    26Item 6. Exhibits
    
    
    27Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Preliminary Note
   2




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Part I. Financial Information
 
 Item 1. Consolidated Financial Statements
 
 YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    8,362,601
    
    
    $
    16,685,787Current portion of restricted cash
    
    
    5,051,799
    
    
    
    5,185,115Accounts receivable, net of allowance for doubtful collection of $1,593,560 and $346,000
    
    
    13,031,039
    
    
    
    2,504,427Current portion of notes receivable
    
    
    196,343
    
    
    
    Other receivables
    
    
    68,467
    
    
    
    27,493Inventory, net of reserve of $418,506
    
    
    3,213,774
    
    
    
    Prepaid expenses
    
    
    1,353,315
    
    
    
    1,290,849Current portion of deferred tax asset
    
    
    4,996,000
    
    
    
    4,088,00036,273,338
    
    
    
    29,781,671Property and equipment, net of accumulated depreciation and amortization of $12,439,990
and $8,675,956
    
    
    29,792,796
    
    
    
    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 $1,399,705 and $338,388
    
    
    14,574,202
    
    
    
    5,025,339Goodwill
    
    
    8,275,749
    
    
    
    Deferred tax asset, net of current portion
    
    
    1,221,000
    
    
    
    1,221,000$
    90,788,806
    
    
    $
    40,828,844LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    305,738
    
    
    $
    620,000Short-term debt
    
    
    8,200,000
    
    
    
    Trade payables, TVG
    
    
    6,020,352
    
    
    
    4,805,642Trade payables, track related
    
    
    4,539,763
    
    
    
    2,337,709Trade payables, other
    
    
    3,459,416
    
    
    
    783,621Accrued expenses and other
    
    
    6,374,049
    
    
    
    3,193,625Customer deposits
    
    
    7,980,283
    
    
    
    5,905,099Deferred revenues
    
    
    241,616
    
    
    
    121,02737,121,217
    
    
    
    17,766,723Long-term debt, net of current portion
    
    
    17,094,532
    
    
    
    177,65554,215,749
    
    
    
    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, 35,916,540 and
33,451,809 shares outstanding
    
    
    35,917
    
    
    
    33,452Additional paid-in capital
    
    
    116,323,219
    
    
    
    105,715,395Deficit
    
    
    (78,419,346
    )
    
    
    (81,524,009
    )Accumulated other comprehensive loss
    
    
    (26,361
    )
    
    
    Treasury stock (457,015 and 457,015 common shares)
    
    
    (1,340,372
    )
    
    
    (1,340,372
    )36,573,057
    
    
    
    22,884,466$
    90,788,806
    
    
    $
    40,828,844
 See notes to unaudited consolidated financial statements
  3




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YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended September 30,2006
    
    
    2005RevenuesCommissions
    
    $
    29,627,536
    
    
    $
    25,225,696Contract revenues
    
    
    6,374,413
    
    
    
    Equipment sales
    
    
    136,740
    
    
    
    Other
    
    
    911,241
    
    
    
    853,18237,049,930
    
    
    
    26,078,878Operating costs and expensesTrack fees
    
    
    14,170,699
    
    
    
    11,176,452Licensing, TVG
    
    
    6,043,150
    
    
    
    5,972,759Contract costs
    
    
    4,149,809
    
    
    
    Equipment costs
    
    
    56,952
    
    
    
    Network operations
    
    
    1,335,279
    
    
    
    1,508,495Research and development
    
    
    813,499
    
    
    
    397,631Sales and marketing
    
    
    2,398,830
    
    
    
    1,642,618General and administrative
    
    
    6,192,235
    
    
    
    3,229,873Depreciation and amortization
    
    
    2,204,181
    
    
    
    506,99937,364,634
    
    
    
    24,434,827Income (loss) from operations
    
    
    (314,704
    )
    
    
    1,644,051Other income (expense)Interest income
    
    
    137,152
    
    
    
    165,859Interest expense
    
    
    (550,598
    )
    
    
    (19,609
    )Other
    
    
    161,068
    
    
    
    57,369(252,378
    )
    
    
    203,619Income (loss) before income taxes
    
    
    (567,082
    )
    
    
    1,847,670Income tax benefit
    
    
    127,109
    
    
    
    Net income (loss)
    
    $
    (439,973
    )
    
    $
    1,847,670Income (loss) per share  basic
    
    $
    (0.01
    )
    
    $
    0.06Income (loss) per share  diluted
    
    $
    (0.01
    )
    
    $
    0.05
 See notes to unaudited consolidated financial statements
  4




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YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005RevenuesCommissions
    
    $
    84,440,883
    
    
    $
    65,576,607Contract revenues
    
    
    16,089,083
    
    
    
    Equipment sales
    
    
    1,088,261
    
    
    
    Other
    
    
    2,777,625
    
    
    
    2,500,049104,395,852
    
    
    
    68,076,656Operating costs and expensesTrack fees
    
    
    40,531,153
    
    
    
    29,421,861Licensing, TVG
    
    
    15,322,879
    
    
    
    14,729,993Contract costs
    
    
    9,941,755
    
    
    
    Equipment costs
    
    
    590,049
    
    
    
    Network operations
    
    
    4,135,436
    
    
    
    3,594,311Research and development
    
    
    2,488,011
    
    
    
    1,131,859Sales and marketing
    
    
    6,951,934
    
    
    
    4,718,328General and administrative
    
    
    16,183,799
    
    
    
    9,737,198Depreciation and amortization
    
    
    5,074,148
    
    
    
    1,056,692101,219,164
    
    
    
    64,390,242Income from operations
    
    
    3,176,688
    
    
    
    3,686,414Other income (expense)Interest income
    
    
    422,658
    
    
    
    389,098Interest expense
    
    
    (1,271,550
    )
    
    
    (58,668
    )Other
    
    
    755,854
    
    
    
    197,905(93,038
    )
    
    
    528,335Income before income taxes
    
    
    3,083,650
    
    
    
    4,214,749Income tax benefit
    
    
    21,013
    
    
    
    Net income
    
    $
    3,104,663
    
    
    $
    4,214,749Income per share  basic
    
    $
    0.09
    
    
    $
    0.13Income per share  diluted
    
    $
    0.08
    
    
    $
    0.12
 See notes to unaudited consolidated financial statements
  5




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YOUBET.COM, INC. AND SUBSIDIARIES,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005Operating activitiesNet income
    
    $
    3,104,661
    
    
    $
    4,214,749Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization of property
    
    
    3,843,359
    
    
    
    874,808Amortization of intangibles
    
    
    1,232,189
    
    
    
    181,884Equity in net income of joint venture
    
    
    (75,295
    )
    
    
    Stock-based compensation expense (benefit)
    
    
    525,468
    
    
    
    (164,609
    )Provision for doubtful accounts
    
    
    
    
    
    
    131,791Change in operating assets and liabilitiesRestricted cash
    
    
    (637,216
    )
    
    
    (1,151,778
    )Receivables
    
    
    (6,932,360
    )
    
    
    (167,849
    )Other receivables
    
    
    (38,413
    )
    
    
    251,982Inventory
    
    
    (1,236,266
    )
    
    
    Prepaid expenses
    
    
    238,676
    
    
    
    (634,223
    )Income tax benefit from change in deferred tax asset valuation allowance
    
    
    (246,957
    )
    
    
    Deposits and others
    
    
    2,195,198
    
    
    
    (234,359
    )Trade payables, TVG
    
    
    1,214,710
    
    
    
    2,164,047Trade payables, track related
    
    
    2,202,054
    
    
    
    (57,116
    )Trade payables, other
    
    
    1,205,227
    
    
    
    (250,483
    )Accrued expenses and other
    
    
    1,097,320
    
    
    
    693,245Customer deposits
    
    
    2,075,184
    
    
    
    941,274Deferred revenues
    
    
    (278,207
    )
    
    
    1,115Net cash provided by operating activities
    
    
    9,489,332
    
    
    
    6,794,478Investing activitiesPurchases of property and equipment
    
    
    (4,098,866
    )
    
    
    (1,184,967
    )Collections on notes receivable
    
    
    114,399
    
    
    
    Cash paid for United Tote Company, net of cash acquired of $159,762
    
    
    (10,094,105
    )
    
    
    Investments in intangibles and other
    
    
    (1,177,132
    )
    
    
    (1,806,449
    )Increase in restricted cash
    
    
    770,532
    
    
    
    487,003Net cash used in investing activities
    
    
    (14,485,172
    )
    
    
    (2,504,413
    )Financing activitiesProceeds from exercise of stock options and warrants
    
    
    266,641
    
    
    
    2,059,176Repayment of long-term debt
    
    
    (3,567,626
    )
    
    
    (508,198
    )Net cash provided by (used in) financing activities
    
    
    (3,300,985
    )
    
    
    1,550,978Foreign currency translation adjustment
    
    
    (26,361
    )
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    (8,323,186
    )
    
    
    5,841,043Cash and cash equivalents, beginning of period
    
    
    16,685,787
    
    
    
    13,287,492Cash and cash equivalents, end of period
    
    $
    8,362,601
    
    
    $
    19,128,535
 See notes to unaudited consolidated financial statements
  6




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YOUBET.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 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
   7




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For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2005As reported net income
    
    $
    1,847,670
    
    
    $
    4,214,749Add stock-based employee
compensation expense included
in reported income, net of
related tax effects
    
    
    (48,856
    )
    
    
    (164,609
    )Less total stock-based
employee compensation expense
determined under fair value
methods for all awards, net
of related tax effects
    
    
    (917,597
    )
    
    
    (1,090,403
    )Pro forma net income
    
    $
    881,217
    
    
    $
    2,959,737Net income per share:As reported, fully diluted
    
    $
    0.05
    
    
    $
    0.12Pro forma, fully diluted
    
    $
    0.02
    
    
    $
    0.09
  Expected life in years
    
    
    7.33Risk free interest rate
    
    
    6.75
    %Dividend yield
    
    
    0.0
    %Expected volatility
    
    
    38.9
    %
 Note 3: Accounts receivable
  September 30,
    
    
    December 31,2006
    
    
    2005Track receivables, net of allowance for doubtful collection of $1,247,560 and $0
    
    $
    11,378,559
    
    
    $
    671,720Player receivables
    
    
    1,026,064
    
    
    
    1,421,458Magna receivable, net of allowance for doubtful collection of $346,000 and $346,000
    
    
    346,000
    
    
    
    346,000Other
    
    
    280,416
    
    
    
    65,249$
    13,031,039
    
    
    $
    2,504,427
 Note 4: Inventories
   September 30,2006Totalizator components
    
    $
    2,185,491Work in process
    
    
    179,044Ticket stock
    
    
    349,768Finished goods
    
    
    917,9773,632,280Less: Allowance
    
    
    418,506$
    3,213,774
  8




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Note 5: Property and equipment
  September 30,
    
    
    December 31,2006
    
    
    2005Computer equipment owned
    
    $
    8,529,896
    
    
    $
    5,571,870Computer equipment under capital lease
    
    
    1,223,916
    
    
    
    755,302Pari-mutuel equipment
    
    
    16,362,007
    
    
    
    Software
    
    
    10,705,590
    
    
    
    2,512,252Office furniture, fixtures and equipment
    
    
    1,683,934
    
    
    
    1,222,991Leasehold improvements
    
    
    3,159,904
    
    
    
    3,032,413Building
    
    
    427,539
    
    
    
    Land
    
    
    140,000
    
    
    
    42,232,786
    
    
    
    13,094,828Less: Accumulated depreciation
    
    
    12,439,990
    
    
    
    8,675,956$
    29,792,796
    
    
    $
    4,418,872
 Note 6: Intangibles and other
  September 30,
    
    
    December 31,2006
    
    
    2005Intangibles, other than goodwill, net of accumulated amortization of $1,399,705 and $338,388
    
    $
    12,347,020
    
    
    $
    3,209,687Unamortizing intangibles
    
    
    154,134
    
    
    
    65,094Investments
    
    
    991,121
    
    
    
    1,512,243Long term deposits
    
    
    289,157
    
    
    
    134,426Trademark and trade names
    
    
    90,177
    
    
    
    Investment in joint venture
    
    
    17,654
    
    
    
    Other
    
    
    684,939
    
    
    
    103,889$
    14,574,202
    
    
    $
    5,025,339
 Note 7: Debt
  September 30,
    
    
    December 31,2006
    
    
    2005Capital lease obligations and other financing arrangements
    
    $
    391,419
    
    
    $
    797,655Promissory notes
    
    
    10,200,000
    
    
    
    Bank mortgage term loan
    
    
    15,000,000
    
    
    
    Notes payable
    
    
    8,851
    
    
    
    25,600,270
    
    
    
    797,655Short-term debt and current portion of long-term debt
    
    
    8,505,738
    
    
    
    620,000Long-term debt, less current maturities
    
    $
    17,094,532
    
    
    $
    177,655
 Credit facility
    9




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Note 8: Income taxes
     Note 9: Income per share
  Three Months Ended September 30,2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    (439,973
    )
    
    
    35,449,618
    
    
    $
    (0.01
    )
    
    $
    1,847,670
    
    
    
    32,883,310
    
    
    $
    0.06Effect of dilutive securities
    
    
    
    
    
    
    3,713,451
    
    
    
    
    
    
    
    
    
    
    
    2,664,930
    
    
    
    EPS  Diluted
    
    $
    (439,973
    )
    
    
    39,163,069
    
    
    $
    (0.01
    )
    
    $
    1,847,670
    
    
    
    35,548,240
    
    
    $
    0.05
  10




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Nine Months Ended September 30,2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    3,104,663
    
    
    
    35,017,986
    
    
    $
    0.09
    
    
    $
    4,214,749
    
    
    
    31,779,087
    
    
    $
    0.13Effect of dilutive securities
    
    
    
    
    
    
    3,370,848
    
    
    
    
    
    
    
    
    
    
    
    2,557,526
    
    
    
    EPS  Diluted
    
    $
    3,104,663
    
    
    
    38,388,834
    
    
    $
    0.08
    
    
    $
    4,214,749
    
    
    
    34,336,613
    
    
    $
    0.12
 Note 10: Stock options
 Stock options
   Weighted AverageStock Options
    
    
    Exercise PriceBalance, December 31, 2005
    
    
    4,394,372
    
    
    $
    2.30Options granted
    
    
    353,767
    
    
    
    4.40Options exercised
    
    
    (257,819
    )
    
    
    0.99Options cancelled
    
    
    (137,124
    )
    
    
    4.43Options forfeited
    
    
    
    
    
    
    Balance, September 30, 2006
    
    
    4,353,196
    
    
    
    2.48Options exercisable (vested) at September 30, 2006
    
    
    3,570,700
    
    
    $
    2.08
  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
    
    
    1,311,422
    
    
    
    3.99
    
    
    $
    0.60
    
    
    
    1,310,704
    
    
    $
    0.60$1.00 - $1.99
    
    
    133,487
    
    
    
    1.27
    
    
    
    1.58
    
    
    
    108,262
    
    
    
    1.54$2.00 - $4.99
    
    
    2,738,212
    
    
    
    6.62
    
    
    
    3.25
    
    
    
    2,079,252
    
    
    
    2.92$5.00 - $10.50
    
    
    170,075
    
    
    
    8.73
    
    
    
    5.35
    
    
    
    72,482
    
    
    
    5.49TOTAL
    
    
    4,353,196
    
    
    
    
    
    
    $
    2.48
    
    
    
    3,570,700
    
    
    $
    2.08
 Note 11: United Tote acquisition
  
    
    $9.75 million in cash;
    
    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.
  11




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    37,049,930
    
    
    $
    32,919,449
    
    
    $
    104,378,578
    
    
    $
    87,643,019Net income
(loss)
    
    
    (439,973
    )
    
    
    1,874,106
    
    
    
    2,904,130
    
    
    
    4,154,594EPS Basic
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12EPS Diluted
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.11
 Note 12: Segment reporting
  Three Months Ended September 30,Revenue
    
    2006
    
    
    2005ADW segment
    
    $
    30,538,778
    
    
    $
    26,078,878Totalizator services segment
    
    
    6,822,625
    
    
    
    37,361,403
    
    
    
    26,078,878Intercompany elimination of totalizator services
    
    
    (311,473
    )
    
    
    $
    37,049,930
    
    
    $
    26,078,878
 Nine Months Ended September 30,2006
    
    
    2005ADW segment
    
    $
    87,233,892
    
    
    $
    68,076,656Totalizator services segment
    
    
    17,880,125
    
    
    
    105,114,017
    
    
    
    68,076,656Intercompany elimination of totalizator services
    
    
    (718,165
    )
    
    
    $
    104,395,852
    
    
    $
    68,076,656
 Three Months Ended September 30,Revenue by Geographic Area
    
    2006
    
    
    2005United States
    
    $
    36,322,493
    
    
    $
    26,078,878International
    
    
    727,437
    
    
    
    $
    37,049,930
    
    
    $
    26,078,878
 Nine Months Ended September 30,2006
    
    
    2005United States
    
    $
    102,777,288
    
    
    $
    68,076,656International
    
    
    1,618,564
    
    
    
    $
    104,395,852
    
    
    $
    68,076,656
  12




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Three Months Ended September 30,Reconciliation of income (loss) before income taxes
    
    2006
    
    
    2005Income (loss) from operationsADW segment
    
    $
    (44,866
    )
    
    $
    1,644,051Totalizator services segment
    
    
    (269,838
    )
    
    
    (314,704
    )
    
    
    1,644,051Interest income
    
    
    137,152
    
    
    
    165,859Interest expense
    
    
    (550,598
    )
    
    
    (19,609
    )Other
    
    
    161,068
    
    
    
    57,369Income (loss) before income taxes
    
    $
    (567,082
    )
    
    $
    1,847,670
 Nine Months Ended September 30,2006
    
    
    2005Income from operationsADW segment
    
    $
    2,286,669
    
    
    $
    3,686,414Totalizator services segment
    
    
    890,019
    
    
    
    3,176,688
    
    
    
    3,686,414Interest income
    
    
    422,658
    
    
    
    389,098Interest expense
    
    
    (1,271,550
    )
    
    
    (58,668
    )Other
    
    
    755,854
    
    
    
    197,905Income before income taxes
    
    $
    3,083,650
    
    
    $
    4,214,749
 As of September 30,
    
    
    As of December 31,2006
    
    
    2005Total AssetsADW segment
    
    $
    40,013,736
    
    
    $
    40,828,844Totalizator services segment
    
    
    50,775,070
    
    
    
    $
    90,788,806
    
    
    $
    40,828,844
 Note 13: Contingencies
 TVG Arbitration
    13




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Note and Warrant Litigation
  IRS Tax Lien
  UT Group Make-Whole Provision
 make-whole make-whole
  14




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##### Table of Contents



make whole
 Other
  Note 14: Subsequent event
 Bruen Productions International, Inc.
  NYRA bankruptcy
  
 Item 2. Managements discussion and analysis of financial condition and results of operations
 Forward looking statements
   15




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##### Table of Contents



Overview
 www.youbet.com
       Critical accounting estimates and policies
 Use of estimates.
 Revenue recognition.
  16




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##### Table of Contents



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.
 Property and equipment.
 Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use
  17




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##### Table of Contents



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.
 Recent Accounting Pronouncements. Accounting for Uncertainly in Income Taxes,
 Results of operations for the three months ended September 30, 2006 compared to the three months
ended September 30, 2005
    18




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Operating expenses
          19




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##### Table of Contents



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




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21




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##### Table of Contents



Liquidity and capital resources
  Cash flows
     22




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##### Table of Contents



Working Capital
  Promissory Notes
  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.$
    10,200,000
 Credit Facility
    IRG earn out
  UT Group make-whole provisions
 make-whole
  23




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##### Table of Contents



make-whole
 NYRA bankruptcy
  Other
  Regulatory considerations
 Legal issues concerning online wagering that may adversely effect our business.
   24




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##### Table of Contents



The Unlawful Internet Gambling Enforcement Act of 2006.
  unlawful Internet wagering Sense of the Congress
  Laws and regulations proposed by various state legislatures or federal or state authorities that
are directly applicable to online and Internet gambling could have a material adverse effect on our
business.
  
 Item 3. Quantitative and qualitative disclosures about market risk
  
 Item 4. Controls and procedures
    25




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##### Table of Contents



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.
  
 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
  
 Item 5. Other information
   26




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##### Table of Contents



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).10.1
    
    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).10.2
    
    Employment Agreement, dated as of July 20, 2004 by and between Youbet.com, Inc.
and Scott A. Solomon, as amended as of July 20, 2004 and supplemented as of
January 25, 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.  27




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##### Table of Contents



SIGNATURES
  YOUBET.COM, INC.
 November 9, 2006
    By:
    /s/ Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerNovember 9, 2006
    By:
    /s/ Gary W. SprouleGary W. SprouleChief Financial Officer  28




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EXHIBIT INDEX
 ExhibitNo.
    
    Description10.2
    
    Employment Agreement, dated as of July 20, 2004 by and between Youbet.com, Inc.
and Scott A. Solomon, as amended as of July 20, 2004 and supplemented as of
January 25, 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  29