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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, 2004 COMMISSION FILE NUMBER: 0-26015    YOUBET.COM, INC. DELAWARE
    
    95-4627253
 5901 De Soto Avenue, Woodland Hills, California 91367 (818) 668-2100 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 x   No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o   No x As of June 30, 2004, the issuer had 30,641,230 shares of common stock, par
value $0.001 per share, issued and outstanding. The aggregate market value of
the issuers common stock held by non-affiliates (assuming that the
Registrants only affiliates are its officers, directors and 10% or greater
stockholders) of the issuer as of June 30, 2004 was approximately $102,058,503
based upon the closing market price of $4.13 per common share on that date as
reported on the Nasdaq SmallCap Market.




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YOUBET.COM, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2004  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheet as of June 30, 2004 (unaudited) and December 31, 2003
    
    3Condensed Consolidated Statements of Operations for the three months ended June 30, 2004 and June 30, 2003 (unaudited)
    
    4Condensed Consolidated Statements of Operations for the six months ended June 30, 2004 and June 30, 2003 (unaudited)
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 30, 2003 (unaudited)
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    22Item 4. Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    23Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    23Item 3. Defaults Upon Senior Securities
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    23Item 5. Other Information
    
    23Item 6. Exhibits and Reports on Form 8-K
    
    24Employment Agreement - Charles BearchellEmployment Agreement - Gary W. SprouleSeparation Agreement - Michael VeitchCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  Preliminary Note This quarterly report on Form 10-Q is for the three-month period ended June 30,
2004. This quarterly report modifies and supersedes documents filed prior to
this quarterly report. The SEC 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 SEC in
the future will automatically update and supersede information contained in
this quarterly report. 2




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Part I. Financial Information 
 Item 1. Financial
Statements
 Youbet.com, Inc.
Condensed Consolidated Balance Sheets June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETS:Current Assets:Cash and Cash Equivalents
    
    
    11,390,402
    
    
    
    8,273,926Restricted Cash, current (Note 2)
    
    
    3,567,140
    
    
    
    3,518,016Receivables (Note 3)
    
    
    108,834
    
    
    
    140,657Interest and Other Receivables (Note 3)
    
    
    1,741,079
    
    
    
    1,270,759Prepaid Expenses
    
    
    774,005
    
    
    
    884,409Total Current Assets
    
    
    17,581,460
    
    
    
    14,087,767Prepaids Expenses
    
    
    5,000
    
    
    
    Property and Equipment, net
    
    
    2,560,873
    
    
    
    2,731,922Licensing Rights, net of amortization (Note 4)
    
    
    
    
    
    
    1,407,447Deferred Lease Costs
    
    
    27,236
    
    
    
    29,331Deposits (Note 6)
    
    
    96,820
    
    
    
    595,650TOTAL ASSETS
    
    $
    20,271,389
    
    
    $
    18,852,117LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable  Trade
    
    
    673,979
    
    
    
    439,559Fees and Commissions Payable to Related Party (Note 4)
    
    
    4,219,494
    
    
    
    3,426,076Accounts
Payable - Track Related (Note 5)
    
    
    1,600,709
    
    
    
    2,539,534Accrued Expenses
    
    
    861,582
    
    
    
    1,756,918Customer Deposits
    
    
    2,978,369
    
    
    
    2,356,004Accrued Compensation and Related Items
    
    
    610,231
    
    
    
    524,197Deferred Revenues
    
    
    85,631
    
    
    
    79,519TOTAL CURRENT LIABILITIES
    
    $
    11,029,995
    
    
    $
    11,121,807Stockholders Equity:Preferred Stock, $0.001 par value, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common Stock, $0.001 par value, authorized 100,000,000 shares
30,641,230 and 28,377,443 shares outstanding as of June 30,
2004 and December 31, 2003, respectively
    
    
    30,641
    
    
    
    28,377Treasury Stock (623,683 shares at cost)
    
    
    (1,828,709
    )
    
    
    (1,828,709
    )Additional Paid In Capital
    
    
    102,831,182
    
    
    
    101,377,238Accumulated Deficit
    
    
    (91,791,720
    )
    
    
    (91,846,596
    )TOTAL STOCKHOLDERS EQUITY
    
    
    9,241,394
    
    
    
    7,730,310TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    20,271,389
    
    
    $
    18,852,117
 See Accompanying Notes to Financial Statements 3




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Youbet.com, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) Three Months Ended June 30,2004
    
    2003Revenues (Notes 4 and 5)Commissions
    
    $
    16,055,799
    
    
    $
    13,540,751Subscription and Transaction Fees
    
    
    200,652
    
    
    
    157,785Race Information
    
    
    101,630
    
    
    
    83,140Total Revenues
    
    
    16,358,081
    
    
    
    13,781,676Operating Expenses:Track Fees
    
    
    6,822,613
    
    
    
    6,266,436Licensing
Fees - Related Party (Note 4)
    
    
    3,852,035
    
    
    
    2,864,017Network Operations
    
    
    538,215
    
    
    
    437,551Research and Development
    
    
    440,361
    
    
    
    434,193Sales and Marketing
    
    
    969,020
    
    
    
    755,727General and Administrative
    
    
    2,992,804
    
    
    
    2,417,719Depreciation and Amortization
    
    
    714,317
    
    
    
    1,499,382Total Operating Expenses
    
    $
    16,329,365
    
    
    $
    14,675,025Profit (Loss) From Operations
    
    
    28,716
    
    
    
    (893,349
    )Other Income (Expense):Interest Income
    
    
    29,375
    
    
    
    11,719Interest Expense
    
    
    (1,071
    )
    
    
    (120,568
    )Other Income (Expense)
    
    
    (17,254
    )
    
    
    19,652Total Other Income (Expense)
    
    
    11,050
    
    
    
    (89,197
    )Net Profit (Loss)
    
    $
    39,766
    
    
    $
    (982,546
    )Earnings (Loss) per share  basic
    
    $
    0.00
    
    
    $
    (0.04
    )Earnings (Loss) per share  diluted
    
    $
    0.00
    
    
    
    (0.04
    )
 See Accompanying Notes to Financial Statements 4




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Youbet.com, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) Six Months Ended June 30,2004
    
    2003Revenues (Notes 4 and 5)Commissions
    
    $
    30,315,836
    
    
    $
    24,385,970Subscription and Transaction Fees
    
    
    382,974
    
    
    
    242,659Race Information
    
    
    186,376
    
    
    
    159,454Total Revenues
    
    $
    30,885,186
    
    
    $
    24,788,083Operating Expenses:Track Fees
    
    
    13,955,704
    
    
    
    11,888,576Licensing Fees  Related Party (Note 4)
    
    
    5,825,071
    
    
    
    4,454,195Network Operations
    
    
    1,059,825
    
    
    
    816,203Research and Development
    
    
    856,202
    
    
    
    827,480Sales and Marketing
    
    
    1,638,112
    
    
    
    1,137,161General and Administrative
    
    
    5,704,110
    
    
    
    4,593,435Depreciation and Amortization
    
    
    1,839,749
    
    
    
    2,883,642Total Operating Expenses
    
    $
    30,878,773
    
    
    $
    26,600,692Profit (Loss) From Operations
    
    $
    6,413
    
    
    $
    (1,812,609
    )Other Income (Expense):Interest Income
    
    
    63,364
    
    
    
    20,505Interest Expense
    
    
    (2,506
    )
    
    
    (515,718
    )Other Income (Expense)
    
    
    (12,395
    )
    
    
    77,597Total Other Income (Expense)
    
    $
    48,463
    
    
    $
    (417,616
    )Net Profit (Loss)
    
    $
    54,876
    
    
    $
    (2,230,225
    )Earnings (Loss) per share  basic
    
    $
    0.00
    
    
    $
    (0.09
    )Earnings (Loss) per share  diluted
    
    $
    0.00
    
    
    
    (0.09
    )
 See Accompanying Notes to Financial Statements 5




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Youbet.com, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited) Six Months Ended June 30,2004
    
    2003Increase In Cash and Cash EquivalentsCash Flows from Operating Activities:Net Income (Loss)
    
    $
    54,876
    
    
    $
    (2,230,225
    )Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:Depreciation and Amortization
    
    
    1,839,749
    
    
    
    2,883,642Non-Cash Interest Expense
    
    
    
    
    
    
    423,416Stock-Based Compensation
    
    
    65,006
    
    
    
    183,393Loss on Sale of Property and Equipment
    
    
    7,891
    
    
    
    Change in Operating Assets and Liabilities:Restricted Cash  Players TrustSM
    
    
    (308,712
    )
    
    
    (915,415
    )Receivables
    
    
    31,823
    
    
    
    (106,696
    )Interest and Other Receivables
    
    
    (470,320
    )
    
    
    2,401Prepaid Expenses
    
    
    105,404
    
    
    
    (259,213
    )Deposits
    
    
    500,926
    
    
    
    2,095Account Payable  Trade
    
    
    234,420
    
    
    
    (11,434
    )Fees Payable
- Related Parties
    
    
    793,418
    
    
    
    883,605Accounts
Payable - Track Related
    
    
    (938,825
    )
    
    
    (1,957,107
    )Accrued Expenses
    
    
    (479,454
    )
    
    
    1,067Customer Deposits
    
    
    622,365
    
    
    
    1,145,525Accrued Compensation and Related Items
    
    
    86,034
    
    
    
    (92,266
    )Deferred Revenues
    
    
    6,112
    
    
    
    39,159Net Cash Provided by (Used in) Operating Activities
    
    
    2,150,713
    
    
    
    (8,053
    )Cash Flows From Investing Activities:Restricted Cash  Other
    
    
    259,588
    
    
    
    285,061Purchases of Property and Equipment
    
    
    (269,144
    )
    
    
    (248,615
    )Net Cash Provided by (Used in) Investing Activities
    
    
    (9,556
    )
    
    
    36,446Cash Flows from Financing Activities:Proceeds from Exercise of Stock Options and Warrants
    
    
    975,319
    
    
    
    1,439,179Proceeds from Notes Payable
    
    
    
    
    
    
    2,000,000Payments of Notes Payable
    
    
    
    
    
    
    (750,000
    )Net Cash Provided By Financing Activities
    
    
    975,319
    
    
    
    2,689,179Net Increase in Cash and Cash Equivalents
    
    
    3,116,476
    
    
    
    2.717,572Cash and Cash Equivalents at the Beginning of the Period
    
    
    8,273,926
    
    
    
    4,559,897Cash and Cash Equivalents at the End of the Period
    
    $
    11,390,402
    
    
    $
    7,277,469Supplemental Disclosure of Cash Flow Information:Cash Paid for Interest
    
    $
    2,506
    
    
    $
    117,903Non-Cash Investing and Financing Activities:Issuance of Warrants for $2 million note
    
    $
    
    
    
    $
    518,223Stock Issuance for Surrender of TVGs Additional Warrant (Note 9)
    
    
    3,640,000
    
    
    
    Stock Issuance for TVG Legal Expense Reimbursement (Note 9)
    
    
    415,882
    
    
    
    
 See Accompanying Notes to Financial Statements 6




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YOUBET.COM, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2004 Note 1: Organization and Basis of Presentation Business  Youbet.com, Inc. has established itself as a leading global brand name
for online, live event sports entertainment and wagering. Wagering on
live events, such as horse racing, car racing, soccer, football, and
other sporting events is a large global industry which adapts well to the
Internet. Youbet has focused on the United States horse race wagering
market through its main product, Youbet ExpressSM, which features online
wagering, simulcast, and in-depth, up-to-the-minute information on horse
racing. Youbet is working to expand the Youbet brand, its products, and
its services throughout the United States and in select international
markets. Youbet currently provides its customers with the ability to
receive interactive, real-time audio/video broadcasts directly on their
computers, access a comprehensive database of handicapping information
and, in most states, wager on a wide selection of U.S. and international
horse races.On August 2, 2001, Youbet received a multi-jurisdictional simulcasting
and interactive wagering totalizator hub license from the State of Oregon
Racing Commission (ORC) to accept and place online and telephone horse
racing pari-mutuel wagers. In each of August 2002 and 2003, Youbet
obtained a one year renewal of its Oregon license. On May 11, 2004,
Youbet filed an application to renew our license for another one year
term, which was subsequently approved by the ORC on May 20, 2004. During
June 2004, with the approval of the ORC, Youbet began the process of
transferring its Oregon operations to Woodland Hills, California. It is
estimated that the transition will be completed by September 2004.On February 21, 2002, Youbet received a one-year, out-of-state,
multi-jurisdictional wagering hub Advance Deposit Wagering (ADW)
license from the State of California Horse Racing Board (CHRB). On
February 22, 2003, Youbet received a two-year renewal of this license.
On June 6, 2002, Youbet received a two-year, in-state,
multi-jurisdictional wagering hub ADW license from the State of
California. On April 22, 2004, Youbet received a renewal of its
in-state, multi-jurisdictional wagering hub ADW license through the end
of 2004. All wagers are processed through Youbet Oregon, Inc., a
wholly-owned subsidiary of Youbet.On July 19, 2004, Youbet applied to the Washington Horse Racing
Commission for a license to conduct Advance Deposit Wagering in the state
of Washington. The application is currently pending Basis of Presentation  In the opinion of management, the accompanying unaudited condensed
consolidated financial statements for the three and six months ended June
30, 2004 and 2003 include all adjustments (consisting of normal recurring
accruals) which management considers necessary to present fairly the
financial position of the Company as of June 30, 2004, the results of its
operations for the three and six months ended June 30, 2004 and June 30, 7




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2003, and its cash flows for the six months ended June 30, 2004 and 2003
in conformity with accounting principles generally accepted in the United
States (GAAP). These financial statements have been prepared
consistently with the accounting policies described in the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2003, as
filed with the Securities and Exchange Commission on March 10, 2004, and
should be read in conjunction with this Quarterly Report on Form 10-Q.
The results of operations for the three and six months ended June 30,
2004 are not necessarily indicative of the consolidated results of
operations to be expected for the full fiscal year ending December 31,
2004. Certain information and footnote disclosures normally included in
the financial statements presented in accordance with GAAP have been
condensed or omitted.Youbet.com, Inc., a Delaware corporation, and its wholly owned
subsidiary, Youbet Oregon, Inc., are collectively referred to herein as
Youbet.com, Youbet, or the Company. All intercompany accounts and
transactions have been eliminated in consolidation. Reclassifications  Certain prior period amounts have been reclassified to conform to the
current period presentation. Use of Estimates  The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could materially
differ from these estimates. Basic and Diluted Earnings Per Share  Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
basic shares outstanding and all dilutive securities, including stock
options, warrants, convertible notes, and preferred stock, but does not
include the impact of potential common shares which would be
anti-dilutive. As of June 30, 2004, total warrants outstanding were
840,928 with exercise prices between $0.50 and $7.93 and total stock
options outstanding were 6,284,820 with exercise prices between $0.26 and
$10.50. As of June 30, 2004 and 2003, because the average market price
for Youbets common shares was greater than the weighted average exercise
prices for both the warrants and stock options, there were no dilutive
securities excluded from the computation of diluted EPS. Concentration of Credit Risk  The Company maintains cash balances at various financial institutions.
Deposits are insured up to $100,000 per account by the Federal Deposit
Insurance Corporation. At June 30, 2004 and December 31, 2003, the
Company had uninsured cash and cash equivalents and restricted cash of
$14,938,647 and $10,320,727, respectively. 8




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Note 2: Restricted Cash, Current Players TrustSM  As of June 30, 2004, the balance of customer accounts maintained in
Players TrustSM was $2,944,224, all of which is recorded as restricted
cash, current. This amount was $76,894 in excess of customer deposits.
As of December 31, 2003, the balance of customer accounts maintained in
the Players TrustSM was $2,634,585, which was $116,427 in excess of
customer deposits. Obligations Under Facility Leases  As required under a lease agreement that expires March 15, 2010, for
Youbets executive and operating offices, Youbet posted a letter of
credit supported by restricted cash account in the amount of $707,804 in
September 2003. As of June 30, 2004 and December 31, 2003, the cash
required to support the letter of credit was $597,896 and $707,804,
respectively, and is classified as restricted cash, current. Credit Card Reserves  The Company uses outside vendors to process its credit card and check
transactions. These vendors require the Company to keep in reserve, for
up to six months, a certain percentage of the total amounts processed as
a reserve against any future potential losses. As of June 30, 2004 and
December 31, 2003, these reserves amounted to $25,020 and $175,627,
respectively, all of which is recorded as restricted cash, current. Note 3: Receivables  As of June 30, 2004, Receivables of $108,834 primarily consisted of $97,111
due from various tracks for settlement of wagers processed through the
Companys Oregon hub.As of June 30, 2004, Interest and Other Receivables of $1,741,079 included a
net receivable of $1,149,368 due from Youbets directors and officers
(D&O) liability insurance carrier for reimbursement of litigation and
arbitration expenses. The net D&O receivable reflects a $244,489 non-cash
reserve applied during the quarter. Also included is a net receivable of
$346,000 due from Magna Entertainment Corporation (Magna) for
underreported handle amounts to Youbet (See Note 5) and a $280,457
reimbursement for expenses incurred on behalf of a new international
business venture for which a majority has been reserved.As of December 31, 2003, Receivables of $140,657 primarily consisted of
$29,202 due from Magna for fees earned on wagers processed through Magnas
Call-A-Bet system (exclusive of the audit receivable described in Note 5)
and $109,996 due from various tracks for settlement of wagers processed
through Youbets Oregon hub.As of December 31, 2003, Interest and Other Receivables of $1,270,759
primarily consisted of $851,653 due from Youbets directors and officers
liability insurance carrier for reimbursement of litigation and arbitration
expenses, and $138,400 due from Magna for underreported handle amounts and a
$280,457 reimbursement for expenses incurred on behalf of a new
international business venture for which a majority has been reserved. 9




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We periodically review the carrying value of all receivables to assess their
recoverability and, if appropriate, the Company adjusts the reserves or
carrying values. Note 4: Licensing Rights - Related Party  In May 2001, Youbet entered into a track content and patent license
agreement (the License Agreement) and a warrant issuance agreement with
ODS Technologies, L.P., a subsidiary of Gemstar-TV Guide International
(Gemstar), doing business as Television Games Network (TVG). These
agreements relate to the grant by TVG to Youbet of a non-exclusive license
to use telephones and certain simulcast audio, video, and data content for
the purpose of streaming such content online and the agreement of racetracks
to accept wagers based on such content, and to use TVGs patented systems
for making pari-mutuel wagers on horse races online.The License Agreement remains in effect until May 2011 (subject to certain
extensions), but may be terminated prior to that time should Youbet cease to
operate its Oregon account wagering hub or another account wagering facility
approved by TVG or in the event Youbet brings any legal action against TVG
or any of TVGs affiliate. Either TVG or Youbet may terminate the License
Agreement in the event that the other party materially breaches the License
Agreement without cure upon notice.In consideration of the rights granted to Youbet under the License
Agreement, Youbet has agreed to pay to TVG fees based on the handle
generated by Youbet from wagering activity and issued to TVG warrants to
purchase Youbet common stock, as described below.Youbet pays three distinct types of fees to TVG. First, Youbet pays to TVG
fees based on wagers made by Youbet customers. These fees are calculated as
a percentage of total handle wagered by Youbet customers and vary based on
where such customer wagers are processed. Second, Youbet pays TVG certain
milestone payments. These payments are calculated based on transaction or
subscription fees charged by Youbet to its customers. Third, Youbet pays a
portion of TVGs host track fees and racing association fees with respect to
account wagers placed by Youbet customers on races conducted at TVG
exclusive tracks or within a certain distance of TVG exclusive tracks.Youbet issued to TVG an initial warrant (the Initial TVG Warrant), on May
18, 2001, and recorded the fair value of the Initial TVG Warrant ($2,910,000
using the Black-Scholes method) as an asset captioned Licensing Rights.
Accumulated amortization as of June 30, 2004 and December 31, 2003 was
$2,910,000 and $2,531,413, respectively. The Initial TVG Warrant was
exercised during the quarter ended June 30, 2002, resulting in cash proceeds
to Youbet of $3,885 and issuance of 3,884,650 shares of Youbet common stock
to TVG.Youbet also issued to TVG an additional warrant (the Additional Warrant),
on September 20, 2001, and recorded the fair value of the Additional Warrant
($7,054,000 using the Black-Scholes method) as an asset captioned Licensing
Rights. Accumulated amortization as of June 30, 2004 and December 31, 2003
was $7,054,000 and $6,025,497, respectively.In February 2004, Youbet and TVG agreed to settle their disputes, with
Youbet agreeing not to seek stockholder approval of certain charter and
bylaws provisions and TVG stopping all pending litigation and the related
arbitration. Pursuant to rights granted under the settlement agreement dated
February 23, 2004, on March 31, 2004, TVG notified Youbet that
it was surrendering the Additional Warrant. In accordance with the
settlement agreement, 10




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Youbet issued to TVG one million shares of its common stock valued at $3.64
per share, the fair value on the date of issuance, in consideration for the
tendered unexercised warrant. Finally, the settlement called for Youbet to
reimburse TVG for the legal expenses it incurred during the dispute. Youbet
issued 124,144 shares of common stock to TVG valued at $3.35 per share, the
fair value on the date of issuance, for a total value of $415,882 in
February 2004 towards partial satisfaction of such legal expense
reimbursement. In accordance with the settlement agreement, in July 2004,
Youbet paid TVG $362,500 in cash to satisfy its TVG legal expense
reimbursement obligation. Youbet elected to exercise its right to pay the
remaining settlement payment in cash, as opposed to the issuance of
additional shares of common stock. Note 5: Agreement with Magna and Independent Tracks  In addition to revenue generated from its relationship with TVG as discussed
in Note 4, Youbet generates revenue under agreements with Magna, one of the
largest owner/operators of premier horse racetracks in the United States and
various other independent tracks.In June 1997, Youbet entered into a Telecommunication Facilitation Agreement
with Magna. Under the Telecommunication Facilitation Agreement, Youbet
provided Magna with an interactive graphics interface into Youbet ExpressSM
through which Youbet customers who have established accounts with Magnas
Call-A-Bet System could communicate with Magna to transmit wagering
information. Effective December 26, 2003, the arrangement with Magna was
modified to restrict wagering through Youbet only to Magnas California
tracks, Santa Anita, Bay Meadows, and Golden Gate Fields. During May 2004,
Youbet exercised its right to terminate the Call-A-Bet interface and
discontinue support of that system.Pursuant to the terms of the Telecommunication Facilitation Agreement,
Youbet audited Magnas records for proper accounting of commissions owed to
Youbet and determined that Magna underreported handle amounts and, as a
result, underpaid Youbet in excess of $692,000. Youbet has recorded a
receivable for this amount and has reserved a major portion of the
receivable. At June 30, 2004 and December 31, 2003, approximately $346,000
and $138,000 of this receivable was recorded as cumulative revenue,
respectively (See Note 3).Pari-mutuel racetrack operators typically retain a portion of all wagers as
their commission prior to distributing payoffs to the winners. In
accordance with various agreements with Magna and independent racetracks,
Youbet receives a pre-arranged fee from each racetrack for wagers delivered
to their respective pari-mutuel pools. Through the introduction of the
Total Access product, Youbet currently has independent simulcast agreements
with over 90 tracks that are paid a host fee for their signal. These host
fees are based on handle generated by Youbet members to the respective
tracks.For the three months ended June 30, 2004 and 2003, $66,027 and $118,004,
respectively, of the Companys revenues were generated through the Magna
Telecommunication Facilitation Agreement.For the six months ended June 30, 2004 and 2003, $267,921 and $356,815,
respectively, of the Companys revenues were generated through the Magna
Telecommunication Facilitation Agreement. 11




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##### Table of Contents



Note 6: Deposits  As of June 30, 2004, deposits primarily included a (1) $60,078 security
deposit for Youbets Woodland Hills office, (2) $10,000 charge back deposit
for credit card processing, (3) $15,835 deposit for satellite equipment, and
(4) $10,906 for miscellaneous deposits.As of December 31, 2003, deposits primarily included a (1) $500,000 deposit
for licensing with the California Horse Racing Board, (2) $60,078 security
deposit for Youbets Woodland Hills office, (3) $10,000 charge back deposit
for credit card processing, and (4) $15,835 deposit for satellite equipment. Note 7: Earnings per share The following table is a reconciliation of the weighted average shares used in
the computation of basic and diluted earnings per share for the periods
presented: Three Months Ended June 30,2004
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    Average
    
    
    
    
    
    Net
    
    AverageIncome
    
    Shares
    
    EPS
    
    (Loss)
    
    Shares
    
    EPSEarnings
per share -
basic
    
    $
    39,766
    
    
    
    30,432,173
    
    
    $
    0.00
    
    
    $
    (982,546
    )
    
    
    25,708,819
    
    
    $
    (0.04
    )Effect of
dilutive
securities
    
    
    
    
    
    
    5,113,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings
per share -
diluted
    
    $
    39,766
    
    
    
    35,545,848
    
    
    $
    0.00
    
    
    $
    (982,546
    )
    
    
    25,708,819
    
    
    $
    (0.04
    )
 Six Months Ended June 30,2004
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    Average
    
    
    
    
    
    Net
    
    AverageIncome
    
    Shares
    
    EPS
    
    (Loss)
    
    Shares
    
    EPSEarnings
per share -
basic
    
    $
    54,876
    
    
    
    29,490,973
    
    
    $
    0.00
    
    
    $
    (2,230,225
    )
    
    
    24,614,029
    
    
    $
    (0.09
    )Effect of
dilutive
securities
    
    
    
    
    
    
    4,760,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings
per share -
diluted
    
    $
    54,876
    
    
    
    34,251,723
    
    
    $
    0.00
    
    
    $
    (2,230,225
    )
    
    
    24,614,029
    
    
    $
    (0.09
    )
 For the three and six months ended June 30, 2003, there were no dilutive
securities as the effect on the computation of earnings per share would be
anti-dilutive. 12




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##### Table of Contents



Note 8: Stockholders Equity  The Company has issued various stock options and warrants in non-capital
raising transactions for services rendered and to be rendered, and as
financing costs. The Company accounts for stock options and warrants
granted to employees and non-employees in accordance with Statement of
Financial Accounting Standards No. 123 (SFAS No. 123). The Company has
calculated the fair value of such warrants and stock options according to
the Black-Scholes pricing model.All securities described below were issued under an exemption to the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof and Regulation D.Issuance of Warrants Information with respect to common stock purchase warrants issued is
summarized as follows: WeightedAverage ExerciseWarrants
    
    PriceBalance, December 31, 2003
    
    
    17,861,874
    
    
    $
    2.54Warrants Terminated
    
    
    (16,651,236
    )
    
    
    2.65Warrants Exercised
    
    
    (369,710
    )
    
    
    1.09Warrants Exercisable at June 30, 2004
    
    
    840,928
    
    
    $
    1.04
 Additional information about outstanding warrants to purchase the
Companys common stock at June 30, 2004 is as follows: Warrants Outstanding and ExercisableWeighted Avg.
    
    WeightedRemaining
    
    AverageNumber
    
    Contractual Life
    
    Exerciseof Shares
    
    (in years)
    
    PriceRange of Exercise Prices:$0.50  0.99
    
    
    795,928
    
    
    
    0.95
    
    
    $
    0.76$2.00  4.99
    
    
    20,000
    
    
    Not determinable
    
    
    3.70$5.00  7.93
    
    
    25,000
    
    
    
    0.17
    
    
    
    7.93Total
    
    
    840,928
    
    
    
    
    
    
    $
    1.04
  Stock Option Arrangements As of June 30, 2004, under the Companys 1998 Stock Option Plan, there
were 8,350,730 stock options granted out of a total approved pool of
8,500,000 options.  Issuance of Stock Options During the six months ended June 30, 2004, the Company granted various
stock options, as follows: Stock options were granted to an officer of the Company to purchase
300,000 shares of 13




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##### Table of Contents



common stock at exercise price of $2.49, the fair market values at the
dates of grant. These options vest immediately. Stock options were granted to employees and an officer of the Company, to
purchase 249,000 shares of common stock at an exercise prices ranging
from $2.49 to $5.49, the fair market value at the date of grant. These
options vest ratably over four years and are exercisable for a period of
five years. Stock options were granted to an employee of the Company to purchase
50,000 shares of common stock at exercise price of $5.10, the fair market
value at the date of grant. Total options granted vest ratably on June
16, 2005 and June 16, 2006. Information with respect to activity under the Companys Stock Option
Plans is summarized below. Weighted AverageStock Options
    
    Exercise PriceBalance, December 31, 2003
    
    
    6,581,704
    
    
    $
    1.15Options Granted
    
    
    599,000
    
    
    
    3.18Options Exercised
    
    
    (769,933
    )
    
    
    0.74Options Cancelled
    
    
    (10,800
    )
    
    
    2.99Options Forfeited
    
    
    (115,151
    )
    
    
    0.55Balance, June 30, 2004
    
    
    6,284,820
    
    
    
    1.41Options Exercisable (Vested) at June 30, 2004
    
    
    5,053,104
    
    
    $
    1.24
 Additional information about outstanding options to purchase the
Companys common stock at June 30, 2004 is as follows: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of Exercise
    
    
    
    
    
    Contractual Life
    
    Exercise
    
    Number of
    
    ExercisePrices
    
    Number of Shares
    
    (in years)
    
    Price
    
    Shares
    
    Price$0.26 - $0.99
    
    
    3,658,111
    
    
    
    6.60
    
    
    $
    0.65
    
    
    
    3,164,782
    
    
    $
    0.65$1.00 - $1.99
    
    
    305,636
    
    
    
    2.31
    
    
    
    1.27
    
    
    
    191,536
    
    
    
    1.11$2.00 - $4.99
    
    
    2,240,673
    
    
    
    6.59
    
    
    
    2.53
    
    
    
    1,666,786
    
    
    
    2.29$5.00 - $10.50
    
    
    80,400
    
    
    
    3.11
    
    
    
    5.18
    
    
    
    30,000
    
    
    
    5.31TOTAL
    
    
    6,284,820
    
    
    
    6.34
    
    
    $
    1.41
    
    
    
    5,053,104
    
    
    $
    1.24
 On August 1, 2001, the Board of Directors approved an option repricing
plan whereby each current non-executive employees previously issued
stock options at a strike price above $1.00, were repriced to the then
current market price of the common stock ($1.00). The Board of Directors
believed that many of the stock options previously granted by the Company
no longer provided the performance incentive intended by the option
because the exercise price of many of the Companys outstanding stock
options was well in excess of the market price of the common stock.
Pursuant to the repricing plan, 378,774 options 14




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##### Table of Contents



were repriced to $1.00. Each repriced option retained its expiration
date and vesting schedule. As of June 30, 2004, 105,505 of the $1.00
repriced options remain vested and unexercised and 22,650 of the $1.00
repriced options remain unvested. In accordance with the election available under SFAS No. 123, the Company
accounts for stock options issued to officers and employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. However,
certain repriced options resulted in compensation adjustments which have
been reflected in net income. If compensation expense for stock options issued to officers and
employees had been determined based upon the fair value at the grant date
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, the net loss and basic loss per share would
have been as shown below. The fair value of stock options granted under
the Companys plan was estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions for grants in the respective periods. Six Months Ended June 30,2004
    
    2003Expected Life in Years
    
    
    4.18
    
    
    
    5.3Risk Free Interest Rate
    
    
    3.8
    %
    
    
    4.3
    %Dividend Yield
    
    
    0
    %
    
    
    0
    %Expected Volatility
    
    
    57.6
    %
    
    
    78.3
    %
 The weighted average fair value at the date of grant for stock options
granted during the six months ended June 30, 2004 was $2.75. No warrants
were granted during the six month period ended June 30, 2004. Six Months Ended June 30,2004
    
    2003As Reported Net Income (Loss)
    
    $
    54,876
    
    
    $
    (2,230,225
    )Add: Stock-based
employee
compensation
expense included in
reported income,
net of related tax
effects
    
    
    65,006
    
    
    
    147,638Less: Total stock
based employee
compensation
expense determined
under fair value
based methods for
all awards, net of
related tax effects
    
    
    (1,460,662
    )
    
    
    (830,514
    )Pro Forma Net Loss
    
    $
    (1,340,780
    )
    
    $
    (2,913,101
    )Net Loss per Share:As Reported
    
    $
    0.00
    
    
    $
    (0.09
    )Pro Forma
    
    $
    (0.05
    )
    
    $
    (0.12
    )
 15




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##### Table of Contents



Note 9: Legal Proceedings  Youbet from time to time is involved in litigation arising in the ordinary
course of its business. At June 30, 2004, Youbet was not a party to any
material litigation outside the ordinary course of business. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.  Forward Looking Statements The following discussion and analysis of Youbets financial condition and
results of operations should be read in conjunction with Youbets
Consolidated Financial Statements and other financial information
included herein. This Managements Discussion and Analysis of Financial
Condition and Results of Operations 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 the timely
development and market acceptance of products and technologies,
successful integration of acquisitions, the ability to secure external
sources of financing on acceptable terms, the ability to reduce operating
expense and other factors described in our 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 Youbets future results,
performance or achievements could differ materially from those expressed
in, or implied by, any such forward-looking statements. Future events
and actual results could differ materially from those set forth in or
underlying the forward-looking statements.  Overview Youbet has established itself as a leading, global brand name for online,
live event sports entertainment and wagering. Wagering on live events,
such as horse racing, car racing, soccer, football, and other sporting
events is a large global industry, which adapts well to the Internet.
Youbet has focused on the United States horse race wagering market
through its main product, Youbet ExpressSM, which features online
wagering, simulcast, and in-depth, up-to-the-minute information on horse
racing. Youbet is working to expand the Youbet.comSM brand, its
products, and its services throughout the United States and in select
international markets. Youbet currently provides its customers with the
ability to receive interactive, real-time audio/video broadcasts directly
on their computers, access a comprehensive database of handicapping
information and, in most states, wager on a wide selection of U.S. and
international horse races. Since the introduction of simulcasting in 1978 and the passage of the
Interstate Horse Wagering Act, horse wagering has migrated away from the
horse track. Handicappers prefer to place wagers at either remote sites
or by phone because it is more convenient. This trend is expected to
continue for the foreseeable future. Currently, approximately 16




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##### Table of Contents



84% of all horse racing wagers are placed from remote locations. Off-track wagering is typically captured through intertrack simulcasts,
off-track betting (OTB) facilities, telephone-based live operator and
interactive voice recognition (IVR), and PC-based and wireless
transmissions. This shift from at-the-track to off-track wagering was
driven by racing enthusiasts desire for convenient, remote access to a
wide range of horse racing events, the ability to deliver this service
through developments in electronic systems, and the concept of advance
deposit wagering (ADW). ADW is accomplished when a customer opens an
account with a state-licensed entity and then deposits funds into that
account for future wagering. Customers may then use their funds plus any
realized winnings for on-going wagering. Customers using OTB facilities,
including our ADW service, receive the same odds as they would receive if
they were physically at the track. Similar to most forms of gaming, live event wagering is most enjoyable
when there are a wide variety of wagering options available.
Simultaneously covering the action at more than one hundred domestic and
international horse tracks, Youbet exhibits dozens of races every day.
Through personal computers, our web-based technology provides
substantially more gaming action than is possible through any other live
event wagering alternative. Our proprietary interactive system completes
the wagering process, including exotic selections, much faster than
face-to-face or phone transactions with winning outcomes instantly
credited to the customers account for future events or prompt
disbursement. As we consider expansion into gaming venues beyond horse
racing, these advanced gaming platforms and wagering products may be
leveraged into new markets. The convenience of remote wagering has encouraged new and existing
customers to become more engaged with the sport of horse racing. We
believe that its marketing activities and user-friendly products have
attracted consumers who have rarely or never wagered, but have now found
an efficient, friendly method in which to experiencing the thrill of
wagering.  Critical Accounting Policies Revenues Youbet records gross commission proceeds as Revenues and records the
related costs under operating expenses as Track Fees and Licensing Fees
 Related Party. In addition, Youbet recognizes net commissions earned
on wagers placed at third-party wagering facilities as Revenue. Youbet
records on a monthly basis the current portion of paid audio and video
streaming subscriptions as Revenue. Youbet also records as Revenue
sales of handicapping information on a per use basis. Licensing Rights The Company recorded deferred licensing rights based on the fair value
of the initial and additional TVG warrants issued, using the
Black-Scholes option pricing model (see Note 4 to the accompanying
consolidated financial statements). The licensing rights were amortized
over a three year period. These licensing rights became fully amortized
in May 2004 and the accumulated amortization of the license rights was
$9,964,000 at June 30, 2004. 17




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##### Table of Contents



Results of Operations for the Three Months Ended June 30, 2004 Compared to the
Three Months Ended June 30, 2003  Revenues increased 19% to $16,358,082 for the quarter ended June 30, 2004
compared to $13,781,676 in the second quarter of 2003. Gross handle grew
13% from $73,338,576 for the second quarter 2003 to $83,065,112 for the
three months ended June 30, 2004. Our handle growth was primarily due to
increases in new customer accounts, targeted marketing campaigns and
promotions, enhancements in Web content and functionality, and our robust
content offering. Although Magna contractually prevented Youbet from
carrying this years Preakness, the second event of the Triple Crown, Youbet
was still able to achieve an increase in total handle year-over-year in the
second quarter of 2004. Our revenue improvement was driven by our growth in
handle and the maximization of revenue yield by offering our customers
incentives to wager on tracks that generate the greatest revenue yield to
Youbet. Revenue from subscription packages increased 27% to $200,652 for
the quarter ended June 30, 2004 compared to $157,785 for the quarter ended
June 30, 2003.  Operating Expenses TRACK FEES: Track Fees increased 9% to $6,822,613 in 2004, compared to
$6,266,436 in the second quarter of 2003. The increase was primarily due
to an increase in handle and revenues. Track Fees consist of amounts
paid and payable to various tracks, the California Horse Racing Board,
the Oregon Racing Commission, and various tote fees. LICENSING
FEES - RELATED PARTY: Licensing Fees  Related Party
represents amounts paid and payable as a result of our licensing
agreement with TVG (See Note 4 to the accompanying consolidated financial
statements). For the three months ended June 30, 2004, these fees
increased 35% to $3,852,035 compared to $2,864,017 for the second quarter
of 2003 primarily due to increased wagering on TVG tracks. NETWORK OPERATIONS: Network Operations expense increased 23% to $538,215
in 2004, compared to $437,551 in the second quarter of 2003. The
increase was due to increased number of personnel and data center
expenses. Network Operations expense consists of costs for salaries,
data center management, and telecommunications. RESEARCH AND DEVELOPMENT: Research and Development expense remained
relatively flat, increasing 1% to $440,361 in 2004, compared to $434,193
in the second quarter of 2003. The increase was primarily due to
increased personnel costs, partially offset by reduced consulting fees.
We will continue to invest in the development of our network
infrastructure and to support continued technology upgrades, which could
further increase our Research and Development expenses in the future. SALES AND MARKETING: Sales and Marketing expense increased 28% to
$969,020 in 2004, compared to $755,727 in the second quarter of 2003. The
increase was primarily due to increased efforts to advertise Youbet
products. Sales and Marketing expense consists of costs for salaries,
marketing and advertising, racing operations, and member services. 18




---



##### Table of Contents



GENERAL AND ADMINISTRATIVE: General and Administrative expense increased
24% to $2,992,804 in 2004, compared to $2,417,718 in the second quarter
of 2003. The increase was primarily due to increases in fully burdened
salaries, performance related bonuses, our 401(k) matching program,
outside legal and consulting expenses, and investor relations; partially
offset by decreased bad debt expense. General and administrative expense
consists primarily of salaries, benefits, insurances, facilities
expenses, legal, accounting, and investor relations. DEPRECIATION AND AMORTIZATION: Depreciation and Amortization decreased
52% to $714,317 in 2004 compared to $1,499,382 in the second quarter of
2003. Depreciation and Amortization primarily consists of amortization
of licensing rights related to the TVG license agreement, which was fully
amortized in May 2004 (See Note 4).  Other Income (Expense) INTEREST INCOME: Interest Income increased 151% to $29,375 in 2004
compared to $11,719 in the second quarter of 2003. The balance of the
increase was due to higher balances of cash in interest bearing accounts. INTEREST EXPENSE: Interest Expense decreased 99% to $1,071 in 2004,
compared to $120,568 in the second quarter of 2003. The decrease was
primarily due to the retirement of previously issued unsecured notes and
the amortization of the related note discount during the second quarter
of 2003. OTHER INCOME / (EXPENSE): Other expense of $17,254 primarily represents a
settlement payment made to an unrelated party during the second quarter
of 2004, compared to $19,652 other income related to a recovery of a
legal matter in the second quarter of 2003. Results of Operations for the Six Months Ended June 30, 2004 Compared to the
Six Months Ended June 30, 2003  Revenues increased 25% to $30,885,185 for the six months ended June 30, 2004
compared to $24,788,083 for the six months ended June 30, 2003. Gross
handle grew 15% from $134,304,817 for the six months ended June 30, 2003 to
$154,831,603 for the six months ended June 30, 2004. The handle growth was
primarily due to increases in new customer accounts, successfully targeted
marketing campaigns and promotions, enhancements in web content and
functionality, and our robust content offering. Our revenue improvement was
driven by our growth in handle and the maximization of revenue yield by
offering our customers incentives to wager on tracks that generate the
greatest revenue yield to Youbet. Revenue from subscription packages
increased 58% to $382,974 for the six months ended June 30, 2004 compared to
$242,659 for the six months ended June 30, 2003.Operating Expenses TRACK FEES: Track Fees increased 17% to $13,955,704 in 2004, compared to
$11,888,576 for the six months ended June 30, 2003. The increase was
primarily due to an increase in handle and revenues. Track Fees consist
of amounts paid and payable to 19




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##### Table of Contents



various tracks, the California Horse Racing Board, the Oregon Racing
Commission, and various tote fees. LICENSING
FEES - RELATED PARTY: Licensing Fees  Related Party
represents amounts paid and payable as a result of our licensing
agreement with TVG (See Note 4 to the accompanying consolidated financial
statements). For the six months ended June 30, 2004, these fees
increased 31% to $5,825,071 compared to $4,454,195 for the six months
ended June 30, 2003 primarily due to increased wagering on TVG tracks. NETWORK OPERATIONS: Network Operations expense increased 30% to
$1,059,825 in 2004, compared to $816,203 for the six months ended June
30, 2003. The increase was due to increased number of personnel and data
center expenses. Network Operations expense consists of costs for
salaries, data center management, and telecommunications. RESEARCH AND DEVELOPMENT: Research and Development expense increased 4%
to $856,202 in 2004, compared to $827,480 for the six months ended June
30, 2003. The increase was primarily due to increased personnel costs,
partially offset by reduced consulting fees. SALES AND MARKETING: Sales and Marketing expense increased 44% to
$1,638,112 in 2004, compared to $1,137,161 for the six months ended June
30, 2003. The increase was primarily due to increased efforts to
advertise Youbet products. Sales and Marketing expense consists of costs
for salaries, marketing and advertising, racing operations, and member
services. GENERAL AND ADMINISTRATIVE: General and Administrative expense increased
24% to $5,704,110 in 2004, compared to $4,593,435 for the six months
ended June 30, 2003. The increase was primarily due to increases in
fully burdened salaries, performance related bonuses, our 401(k) matching
program, outside legal, and investor relations; partially offset by
decreased bad debt expense. General and administrative expense consists
primarily of salaries, benefits, insurances, facilities expenses, legal,
accounting, and investor relations. DEPRECIATION AND AMORTIZATION: Depreciation and Amortization decreased
36% to $1,839,749 in 2004 compared to $2,883,642 for the six months ended
June 30, 2003. Depreciation and Amortization primarily consists of
amortization of licensing rights related to the TVG license agreement
which was fully amortized in May 2004 (See Note 4).  Other Income (Expense) INTEREST INCOME: Interest Income increased 209% to $63,364 in 2004
compared to $20,504 for the six months ended June 30, 2003. The balance
of the increase was due to higher balances of cash in interest bearing
accounts. INTEREST EXPENSE: Interest Expense decreased 100% to $2,506 in 2004,
compared to $515,718 for the six months ended June 30, 2003. The
decrease was primarily due to the retirement of previously issued
unsecured notes and the amortization of the related note discount during
the second quarter of 2003. 20




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##### Table of Contents



OTHER INCOME / (EXPENSE): Other expense of $12,395 primarily represents a
settlement payment made to an unrelated party during the second quarter
of 2004, compared to $77,597 other income related to the write-off of
$57,945 related to a settlement of a disputed invoice and recovery of a
legal matter in 2003. Liquidity and Capital Resources During the first six months of 2004, we funded our operations primarily
through working capital, in addition to proceeds received from the exercise
of stock option and warrants. As of June 30, 2004, we had net working
capital of $6,551,466, compared to $2,965,960 at December 31, 2003. As of
June 30, 2004, we had $11,390,402 in cash and cash equivalents and
$3,567,140 in restricted cash. Our principal recurring cash commitments
consist of payroll and benefits, business insurance, real estate leases,
data center operations, and telecommunications. Management believes that
its ongoing efforts to reduce costs and operate more efficiently, combined
with the growth in gross handle, has improved cash flow to a level needed to
support future operations. However, we may from time to time seek
additional capital to fund operations, reduce our liabilities, and fund our
expansion plans consistent with our anticipated changes in operations and
infrastructure. Net cash provided by operating activities was $2,150,713 for the six months
ended June 30, 2004, and the net cash used in operating activities was
$8,053 for the six months ended June 30, 2003. The year-over-year increase
of $2,158,766 for net cash provided by operating activities was primarily
due to (1) net income of $54,876 reported in the first six months of 2004,
representing an increase of $2,285,101 from a net loss of $2,230,225
reported in 2003 for the same period, (2) changes in accounts payable 
track related, which decreased $938,825 for the six months ended June 30,
2004, representing a variance of $1,018,282 from the decrease in the same
period of 2003, (3) changes in the Players TrustSM restricted cash, which
increased $308,712 for the six months ended June 30, 2004, representing a
variance of $606,703 from the increase in the Players TrustSM restricted
cash noted in the same period of 2003, (4) changes in deposits, which
decreased $500,926 for the six months ended June 30, 2004, representing a
variance of $498,831 from the increase in deposits noted in the same period
of 2003, and (5) changes in accounts payable - trade, which increased
$234,420 for the six months ended June 30, 2004, representing a variance of
$245,854 from the decrease in accounts payable  trade noted in the same
period of 2003. These variances were partially offset by (1) a variance of
$1,043,893 from a decrease in depreciation and amortization from the prior
year, (2) changes in interest and other receivables, which increased
$470,320 for the six months ended June 30, 2004, representing a variance of
$472,721 from the decrease in interest and other receivables noted in the
same period of 2003, (3) changes in customer deposits, which increased
$622,365 for the six months ended June 30, 2004, representing a variance of
$523,160 from the increase in customer deposits noted in the same period of
2003, (4) changes in accrued expenses, which decreased $479,454 for the six
months ended June 30, 2004, representing a variance of $480,521 from the
increase in accrued expenses noted in the same period of 2003, and (5) a
variance of $423,416 from a decrease in non-cash interest expense from the
prior year. The decrease in deposits since December 31, 2003 was the result of Youbet
obtaining in February 2004 a surety bond secured by a letter of credit. Upon
receipt of this surety bond, the California Horse Racing Board, released a
$500,000 cash deposit, plus interest, back to Youbet. Accounts payable 
track related decreased mostly due to a decrease in the Magna payable caused
by Magna restricting our access to only their California tracks. The
increase in interest 21




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and other receivables was primarily due to an increase in our directors and
officers liability policy insurance claim, related to our TVG litigation and
arbitration expenses (See Note 3 to the accompanying consolidated financial
statements). Accrued expenses decreased primarily due to a decrease in
accrued bonuses and legal expenses. Net cash used in investing activities for the six months ended June 30, 2004
was $9,556 compared to $36,446 of net cash provided by investing activities
in the same period of 2003. The year-over-year decrease of $46,002 relates
to (1) changes in property plant and equipment, which decreased $269,144 in
the current period, representing a variance of $20,529 from the prior year
period, and (2) changes in non-Players TrustSM restricted cash, which
decreased $259,588 in the current six-month period, representing a variance
of $25,473 from the decrease in non-Players TrustSM restricted cash noted
in the prior year period. Net cash provided by financing activities was $975,319 and $2,689,179 for
the six months ended June 30, 2004 and 2003, respectively. The
year-over-year decrease of $1,713,860 in cash provided by financing
activities was due to (1) the decrease of notes payable of $2,000,000 from
the 6 months ended June 30, 2003, (2) changes in proceeds from exercise of
stock options and warrants which increased $975,319 for the six months ended
June 30, 2004, representing a variance of $463,860 from the increase noted
in the same period of 2003, and (3) the decrease of payments of notes
payable of $750,000 from the same period of 2003. Youbet settled a dispute with its largest stockholder, TVG, in February
2004. This settlement called for Youbet to reimburse TVG for the legal
expenses it incurred during the dispute up to $725,000. Youbet issued
124,144 shares of common stock as partial satisfaction of this obligation in
Februray 2004 and on July 2, 2004, Youbet paid TVG $362,500 to satisfy its
TVG legal expense reimbursement obligation. We have filed an insurance claim
to recover these amounts. TVG held a warrant to acquire 51% of Youbets common stock. In connection
with the February 2004 settlement, TVG agreed, on March 31, 2004, to
surrender this warrant to Youbet in exchange for one million shares of
Youbet common stock. On March 31, 2004, TVG also requested that Youbet file
a registration statement covering all five million shares of common stock
held by TVG. Youbet has filed a registration statement in accordance with
TVGs registration rights set forth in the warrant issuance agreement, and
at this time, TVG has not advised us of any specific method of distribution
or of its timing for any sales of Youbet common stock. During the first six months of 2004, Youbet entered into employment
agreements with Gary Sproule, Chief Operating Officer, and Chuck Bearchell,
Chief Financial Officer, which expire on January 1, 2006 and March 26, 2006,
respectively. Also, Youbet entered into a separation agreement and release
of claims with Michael Veitch, Chief Marketing Officer, whose employment
with Youbet will continue through December 31, 2004. As of June 30, 2004,
the total contracted obligations under employment agreements amounted to
$2,529,567. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our exposure to market risk and related changes in interest rates relates
primarily to our investment portfolio. As of June 30, 2004, our portfolio
of investments included $11,390,402 in cash and cash equivalents and
$3,567,140 of restricted cash. Due to the conservative nature of our
investment portfolio, we believe that a sudden 10% change in interest rates
would not 22




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have a material effect on the value of the portfolio since the average yield
on our investments was less than 1% at June 30, 2004. The impact on our
future interest income will depend largely on the gross amount of our
investment portfolio. We do not expect our operating results or cash flows
to be affected to any significant degree by a sudden change in market
interest rates. 
 Item 4. Controls and Procedures As of June 30, 2004, our management, including our Chief Executive Officer
and our Chief Financial Officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended). Based on that evaluation, our management, including the Chief
Executive Officer and our Chief Financial Officer, concluded that our
disclosure controls and procedures are: effective to ensure that information
required to be disclosed by Youbet in the reports filed or submitted by it
under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by Youbet in such reports
is accumulated and communicated to the companys management, including the
Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure. There have been no changes in our internal control over financial reporting
that occurred during the quarter ended June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting. However, BDO Seidman, LLP
(BDO), our independent auditors, has identified a matter
which they believe to be a reportable condition under standards
established by the American Institute of Certified Public Accountants.
BDO and management have reported to the audit committee
that this matter is not believed to be a material weakness. The matter
involves internal controls over certain limited aspects of our
quarterly closing process. Management has addressed this item by
adding an additional procedure and providing additional oversight with
respect to recording certain specified material transactions. 
 Part II. Other Information 
 Item 1. Legal Proceedings Youbet from time to time is involved in litigation arising in the ordinary
course of its business. At June 30, 2004, Youbet was not a party to any
material litigation outside the ordinary course of business. 
 Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities 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 23




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Item 6. Exhibits and Reports On Form 8-K (a) Exhibits Exhibit 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).Exhibit 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).Exhibit 10.1
    
    Employment Agreement, dated as of March 29, 2004, by and
between Youbet.com, Inc. and Charles Bearchell.Exhibit 10.2
    
    Employment Agreement, dated as of January 1, 2004, by and
between Youbet.com, Inc. and Gary W. Sproule.Exhibit 10.3
    
    Separation Agreement, dated as of May 28, 2004, by and
between Youbet.com, Inc. and Michael Veitch.Exhibit 31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934Exhibit 31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934Exhibit 32.1
    
    Certification Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934
 (b) Reports on Form 8-K Form 8-K, dated March 31, 2004 and filed April 1, 2004, reporting under
Items 5 and 7 TVGs decision not to exercise a warrant issued to TVG. Form 8-K, dated and furnished April 27, 2004, reporting under Items 7
and 12 Youbets financial results for the first quarter ended March 31,
2004. Form 8-K, dated May 4, 2004 and filed May 5, 2004, reporting under Items
5 and 7 certain information relating to the Kentucky Derby operational
milestones experienced by Youbet. Form 8-K, dated May 11, 2004 and filed May 18, 2004, reporting under
Items 5 and 7 two executive officer appointments involving key operating
and financial functions of the Youbet. Form 8-K, dated June 10, 2004 and filed June 11, 2004, reporting under
Items 5 and 7 certain information relating to the Belmont Stakes
operational milestones experienced by Youbet. 24




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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.August 13, 2004
    By:  /s/
    Charles F. ChampionCharles F. ChampionPresident and Chief Executive Officer August 13, 2004
    By:  /s/
    Charles R. BearchellCharles R. BearchellChief Financial Officer 25