<PAGE>

                  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549

                                    FORM 10-QSB

[X]  Quarterly Report under Section 13 or 15(d) of the Securities  
     Exchange Act of 1934

     For the quarterly period ended SEPTEMBER 30, 1998

[ ]  Transition Report under Section 13 or 15(d) of the Securities 
     Exchange Act of 1934

     For the transition period from _____________ to _____________

                        Commission file number:  33-13789LA

                       YOU BET INTERNATIONAL, INC.
------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

            Delaware                              95-4627253    
-------------------------------             ----------------------
(State or other jurisdiction of                (I.R.S. Employer 
incorporation or organization)              Identification Number)


1950 Sawtelle Boulevard, Suite 180, Los Angeles, California  90025
------------------------------------------------------------------
             (Address of principal executive offices)

Issuer's telephone number, including area code:  (310) 444-3300

                           Not applicable
------------------------------------------------------------------
        (Former name, former address and former fiscal year,
                   if changed since last report.)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

As of September 30, 1998, the issuer had 11,603,368 shares of common stock
issued and outstanding and issuable.

Transitional Small Business Disclosure Format:  Yes [ ]  No [X]

<PAGE>

                    YOU BET INTERNATIONAL, INC. AND SUBSIDIARIES
                                          
                                       INDEX

PART I.  FINANCIAL INFORMATION

      Item 1.  Financial Statements

               Consolidated Balance Sheets (Unaudited) - December 31,
               1997 and September 30, 1998

               Consolidated Statements of Operations (Unaudited) -  
               Three Months and Nine Months Ended September 30, 1997 
               and 1998, and 1995 to Date

               Consolidated Statements of Cash Flows (Unaudited) - Nine 
               Months Ended September 30, 1997 and 1998, and 1995 to 
               Date
 
               Notes to Consolidated Financial Statements (Unaudited) - 
               Nine Months Ended September 30, 1997 and 1998

      Item 2.  Management's Discussion and Analysis or Plan of  
               Operation


PART II.  OTHER INFORMATION

      Item 2.  Changes in Securities

      Item 6.  Exhibits and Reports on Form 8-K


SIGNATURES

<PAGE>

                    You Bet International, Inc. and Subsidiaries
                           (a Development Stage Company)
                      Consolidated Balance Sheets (Unaudited)
                      December 31, 1997 and September 30, 1998

<TABLE>
<CAPTION>
                                        December 31,   September 30, 
                                            1997           1998
                                            ----           ----
<S>                                     <C>            <C>
ASSETS 

Current assets:                               
Cash and cash equivalents                $   52,895     $2,545,553
Receivables                                   6,158         14,150
Prepaid expenses (Notes 2 and 3)             49,315        169,852     
Other current assets                          4,288         31,306
                                         ----------     ----------
  Total current assets                      112,656      2,760,861
                                         ----------     ---------- 

Property and equipment (Note 2)           1,260,411      1,528,873
Less:  Accumulated depreciation
  and amortization                         (423,177)      (667,502)
                                         ----------     ----------
  Property and equipment, net               837,234        861,371
                                         ----------     ----------

Other assets:
Deferred financing costs, net
  of amortization (Notes 2 and 4)                           39,242
Deposits (Note 2)                            53,963         19,032
                                         ----------     ----------         
  Total other assets                         53,963         58,274
                                         ----------     ----------
  Total assets                           $1,003,853     $3,680,506
                                         ==========     ==========
</TABLE>
 
                                          
                                    (continued)

                                         3
<PAGE>

                    You Bet International, Inc. and Subsidiaries
                           (a Development Stage Company)
                Consolidated Balance Sheets (Unaudited) (continued)
                      December 31, 1997 and September 30, 1998

<TABLE>
<CAPTION>
                                        December 31,   September 30,
                                            1997           1998
                                            ----           ----  
<S>                                     <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Accounts payable                         $  910,278     $  764,201
Accrued compensation and related
  items                                     503,467        101,145
Accrued interest payable                    116,892        
Other accrued expenses                      341,108        358,547
Advances and bridge loans payable 
  (Note 4) -
  Related parties                           390,000      
  Unrelated parties                         300,000              
State income taxes payable                    6,400          
Current portion of capitalized
  lease obligations (Note 2)                283,695        213,585
                                         ----------     ----------
  Total current liabilities               2,851,840      1,437,478

Capitalized lease obligations,
  less current portion (Note 2)                            117,806
                                         ----------     ----------
  Total liabilities                       2,851,840      1,555,284
                                         ----------     ----------

Stockholders' equity (deficiency)
  (Note 5):
Preferred stock, $.001 par value;
  authorized - 1,000,000 shares;
  issued and outstanding -
    Series A Senior Convertible
    Preferred Stock - 240,000
    shares at September 30, 1998
    (liquidation preference -
    $25.00 per share)                                          240
Common stock, $.001 par value;
  authorized - 50,000,000 shares;
  issued and outstanding and
  issuable - 9,603,994 shares at
  December 31, 1997 and 11,603,368
  shares at September 30, 1998                9,604         11,603
Additional paid-in capital               23,413,989     39,746,323
Accumulated deficit during
  development stage                     (23,964,394)   (35,214,377)
                                         ----------     ----------
  Total stockholders' equity
    (deficiency)                           (540,801)     4,543,789

Less:  Deferred compensation             (1,307,186)    (1,858,567)
       Stock notes receivable                             (560,000)
                                         ----------     ----------
  Net stockholders' equity 
    (deficiency)                         (1,847,987)     2,125,222
                                         ----------     ----------
  Total liabilities and
    stockholders' equity
    (deficiency)                         $1,003,853     $3,680,506
                                         ==========     ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                         4
<PAGE>

                  You Bet International, Inc. and Subsidiaries
                         (a Development Stage Company)
                Consolidated Statements of Operations (Unaudited)
                 Three Months Ended September 30, 1997 and 1998

<TABLE>
<CAPTION>
                                  1997          1998     
                                  ----          ----     
<S>                           <C>           <C>
Revenues                       $             $   76,382  
                               ----------    ----------  

Costs and expenses:
  Network operations              167,786       404,798
  Research and development        296,497       348,667
  Sales and marketing             143,218       499,587  
  General and administrative
    (Note 3)                      512,613       818,612    
  Depreciation and
    amortization                   79,631        86,192    
  Non-cash compensation
    (Note 5)                    1,169,196       707,283  
                               ----------    ----------  
  Total costs and expenses      2,368,941     2,865,139    
                               ----------    ----------  

Other income (expense):
  Interest expense               (198,289)      (79,116)
  Amortization of deferred
    financing costs (Note 4)                    (64,242)
  Fair value of warrants
    issued for financing
    costs (Note 5)             (2,800,220)     (161,962)  
  Interest income                     477        48,608   
  Consulting revenues               2,025                   
  Other                              (130)       (9,557)   
                               ----------    ----------  
  Total other expense, net     (2,996,137)     (266,269)

Loss before provision 
  for state income taxes       (5,365,078)   (3,055,026)
Provision for state
  income taxes                     (2,400)
                               ----------    ----------  
Net loss                      $(5,367,478)  $(3,055,026) 
                               ==========    ==========    

Net loss per common share          $(0.84)       $(0.28)    
                               ==========    ==========

Weighted average number
  of common shares              6,369,217    11,104,273
                               ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      5
<PAGE>

                You Bet International, Inc. and Subsidiaries
                        (a Development Stage Company)
              Consolidated Statements of Operations (Unaudited)
      Nine Months Ended September 30, 1997 and 1998, and 1995 to Date

<TABLE>
<CAPTION>
                                  1997          1998     1995 to Date
                                  ----          ----     ------------
                                                           (Note 1)
<S>                           <C>           <C>          <C>
Revenues                      $            $     98,407  $     98,407
                              -----------  ------------  ------------

Costs and expenses:
  Network operations              482,603       736,401     1,401,800
  Research and development        961,939       927,202     4,109,536
  Sales and marketing             465,635     1,190,751     2,564,855
  General and administrative
    (Note 3)                    1,288,050     2,044,488     5,483,448  
  Depreciation and
    amortization                  230,176       244,325       677,789  
  Non-cash compensation
    (Note 5)                    1,220,328     3,452,572     5,769,492
  Release of forfeiture
    restrictions on common 
    stock owned by officers/ 
    major stockholders                                      7,875,000
                              -----------  ------------  ------------
  Total costs and expenses      4,648,731     8,595,739    27,881,920
                              -----------  ------------  ------------

Other income (expense):
  Interest expense               (323,155)     (322,717)     (761,875)
  Amortization of deferred
    financing costs (Note 4)                   (111,698)     (111,698) 
  Discount on conversion of
    bridge loans, accounts
    payable and employee
    deferred salaries into
    common stock and 
    warrants (Note 5)                          (841,713)   (1,415,061)
  Fair value of warrants
    issued for financing
    costs (Note 5)             (2,800,220)   (1,405,684)   (5,061,886)
  Interest income                   1,100        49,380       142,727
  Consulting revenues               6,075                     164,602  
  Other                            (1,313)     (120,219)      (91,175) 
                              -----------  ------------  ------------
  Total other expense, net     (3,117,513)   (2,752,651)   (7,134,366) 
                              -----------  ------------  ------------
Loss before provision
  for state income taxes       (7,766,244)  (11,249,983)  (34,917,879)
Provision for state
  income taxes                     (2,400)                    (16,673)     
                              -----------  ------------  ------------
Net loss                      $(7,768,644) $(11,249,983) $(34,934,552)
                              ===========  ============  ============  

Net loss per common share          $(1.29)       $(1.10)    
                               ==========   ===========

Weighted average number
  of common shares              6,020,028    10,196,812
                               ==========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      6
<PAGE>

               You Bet International, Inc. and Subsidiaries
                       (a Development Stage Company)
             Consolidated Statements of Cash Flows (Unaudited)
       Nine Months Ended September 30, 1997 and 1998, and 1995 to Date

<TABLE>
<CAPTION>
                                   1997         1998      1995 to Date
                                   ----         ----      ------------
                                                            (Note 1) 
<S>                           <C>          <C>           <C>
Increase (Decrease) in Cash
  and Cash Equivalents

Cash flows from operating
  activities:
  Net loss                    $(7,768,644) $(11,249,983)  $(34,934,552)          
  Adjustments to reconcile
   net loss to net cash
   provided by (used in)
   operating activities:
    Depreciation and
      amortization                230,176       244,325        677,789
    Amortization of 
      deferred financing
      costs                                     111,698        111,698
    Other                                        70,645         70,645
    Reduction of loan from
      settlement agreement                                     (20,000)  
    Settlements of accounts
      payable and accrued
      liabilities                 263,127       556,079        836,517           
    Non-cash compensation       4,020,548     4,866,969     10,840,091
    Discount on conversion
      of bridge loans,
      accounts payable and
      employee deferred
      salaries into common
      stock and warrants                        841,713      1,415,061
    Release of forfeiture
      restrictions on
      common stock owned
      by officers/major
      stockholders                                           7,875,000
    Changes in operating
      assets and liabilities:
      (Increase) decrease in -
        Receivables                  (675)       (7,992)        15,850
        Prepaid expenses           73,935      (137,213)      (186,528)
        Other current assets                    (12,487)       (16,775)
        Deposits                      734       (19,032)       (72,995) 
      Increase (decrease) in -
        Accounts payable           (5,216)     (146,077)       764,201
        Accrued compensation
          and related items       304,473      (402,322)        87,739
        Accrued interest
          payable                  69,780       (94,663)         5,150
        Other accrued
          expenses               (176,081)       17,439        358,547 
        State income taxes
          payable                  (2,020)       (6,400)          (800)
                               ----------   -----------    -----------
Net cash used in operating
  activities                   (2,989,863)   (5,367,301)   (12,173,362)
                               ----------   -----------    -----------
</TABLE>
                                          
                                    (continued)

                                         7
<PAGE>

                    You Bet International, Inc. and Subsidiaries
                           (a Development Stage Company)
           Consolidated Statements of Cash Flows (Unaudited) (continued)
          Nine Months Ended September 30, 1997 and 1998, and 1995 to Date

<TABLE>
<CAPTION>
                                   1997         1998      1995 to Date
                                   ----         ----      ------------
                                                            (Note 1)  
<S>                            <C>         <C>            <C>
Increase (Decrease) in Cash
  and Cash Equivalents

Cash flows from investing
  activities:
  Purchases of property
    and equipment                 (81,881)     (188,462)    (1,191,980)
                               ----------   -----------    -----------
Net cash used in investing
  activities                      (81,881)     (188,462)    (1,191,980) 
                               ----------   -----------    -----------

Cash flows from financing
  activities:
  Proceeds from lease
    financing                     150,261                      150,261
  Proceeds from sale of
    securities, net of
    offering costs              1,208,411     5,143,954     10,498,449
  Proceeds from advances
    and bridge loans -
    Related parties               379,000       888,875      2,218,862 
    Unrelated parties           1,450,000     1,190,000      2,505,000
  Repayments of advances -
    Related parties              (104,000)      (23,875)      (127,875)
    Unrelated parties             (40,000)      (30,000)      (135,000)
  Payments on 
    capitalized lease
    obligations                   (58,795)      (54,533)      (188,279)
  Increase in deferred
    financing costs                             (96,000)       (96,000)
  Proceeds from exercise
    of stock options and
    warrants                                  1,030,000      1,030,000
                               ----------   -----------    -----------
Net cash provided by
  financing activities          2,984,877     8,048,421     15,855,418
                               ----------   -----------    ----------- 

Cash and cash equivalents:
  Net increase (decrease)         (86,867)    2,492,658      2,490,076
  At beginning of period           87,318        52,895         55,477
                               ----------   -----------    -----------
  At end of period             $      451   $ 2,545,553    $ 2,545,553
                               ==========   ===========    ===========
</TABLE>

            See accompanying notes to consolidated financial statements.

                                      8
<PAGE>

                    You Bet International, Inc. and Subsidiaries
                           (a Development Stage Company)
               Notes to Consolidated Financial Statements (Unaudited)
                   Nine Months Ended September 30, 1997 and 1998
                                          

1.  ORGANIZATION AND BASIS OF PRESENTATION

Principles of Consolidation -

The consolidated financial statements include the accounts of You Bet 
International, Inc., a Delaware corporation, its wholly-owned subsidiary, You 
Bet!, Inc., a Delaware corporation, and Middleware Telecom Corporation, a 
California corporation and a wholly-owned subsidiary of You Bet!, Inc. 
(collectively, the "Company").  All intercompany accounts and transactions 
have been eliminated in consolidation.  

Business -

Since mid-1995, the Company has been engaged in developing PC-based 
proprietary communications software technology to be utilized by consumers 
for online entertainment purposes.  The Company's first service being offered 
to consumers is The You Bet Racing Network, a horse racing network broadcast 
over the Company's secure closed-loop network.

Development Stage -

As of September 30, 1998, the Company is considered to be a development stage 
entity, as it had not realized significant revenues from planned principal 
operations.  During 1995, the Company shifted its business strategy by 
de-emphasizing consulting services and software licensing, as a result of 
which the Company became a development stage company.  Accordingly, the 
Company has provided cumulative consolidated statements of operations and 
consolidated statements of cash flows for the period from January 1, 1995 
through September 30, 1998.  

Going Concern -

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.  The Company has had recurring losses, has periodically experienced
significant continuing liquidity problems from late 1996 through mid-1998, and
has financed its operations during such period from the sale of its securities
and short-term debt.  As a result of these factors, the Company's independent
certified public accountants have expressed substantial doubt about the
Company's ability to continue as a going concern.  During June and July 1998,
the Company completed the sale of $6,000,000 of preferred stock that provided
net proceeds of approximately $5,144,000 (Note 5).  However, the proceeds from
this financing are not expected to be sufficient to support the continuing
development and expansion of the Company's operations until revenues reach the
level necessary to fund operations.  The Company is currently attempting to 

                                      9
<PAGE>

sell an additional $4,000,000 of preferred stock, but there can be no 
assurances that the Company will be successful in this regard.  As a result 
of the sale of preferred stock (Note 5) and the conversion of advances and 
bridge loans into common stock during the nine months ended September 30, 
1998 (Note 4), the Company had net working capital of $1,323,383 at September 
30, 1998, as compared to a working capital deficit of $2,739,184 at December 
31, 1997.  The advances and bridge loans were utilized to fund the Company's 
operations.  
 
During the year ended December 31, 1997 and the nine months ended September 
30, 1998, the Company relied on the proceeds from short-term loans, primarily 
from related parties, bridge loans from both related and unrelated parties, 
the exercise of stock options and warrants, and the private placement of its 
common stock, preferred stock and stock purchase warrants, which aggregated 
approximately $3,903,000 and $8,199,000, respectively, to fund its operating 
requirements during such periods.  During the nine months ended September 30, 
1998, the Company received net advances of $560,000 and bridge financing of 
$1,465,000, as well as the net proceeds from the preferred stock financing of 
$5,144,000, to fund its estimated 1998 cash requirements of $7,000,000, which 
includes estimated discretionary costs related to marketing and promotion 
activities of $2,000,000.  The Company is continuing to evaluate various 
opportunities to raise additional capital during the remainder of 1998 and 
1999, which includes the sale of the additional $4,000,000 of preferred stock 
discussed above.   

The Company is dependent on the proceeds from the previously described 
financing activities for the continuation of its marketing efforts related to 
The You Bet Racing Network, as well as for the continuation and expansion of 
the Company's development activities.  The Company expects that its cash on 
hand at September 30, 1998 will be sufficient to fund operating and capital 
expenditures at least through early 1999.  However, there can be no 
assurances that the Company will be able to complete such additional debt or 
equity financings as may be required to fund the Company's operations on a 
timely basis and/or under acceptable terms and conditions.  

The Company's need for financing during 1999 and subsequently will vary based 
upon a number of factors, some of which are outside the control of the 
Company. These factors include the scope of the Company's development and 
marketing efforts, consumer reaction/acceptance and the development of 
operating revenues, the time and cost to develop and commercialize additional 
applications, competition from similar wagering systems and from competing 
interactive gaming/leisure time systems and activities, and potential 
political and legal issues.  

The consolidated financial statements do not include any adjustments that 
might result from the outcome of these uncertainties.    

Basis of Presentation -

The accompanying consolidated financial statements are unaudited, but in the 
opinion of management of the Company, contain all adjustments necessary to 
present fairly the financial position at September 30, 1998, the results of 
operations for the three months and nine months ended September 30, 1997 and 
1998, and the cash flows for the nine months ended September 30, 1997 and 
1998. These adjustments are of a 

                                      10
<PAGE>

normal recurring nature.  The consolidated balance sheet as of December 31, 
1997 is derived from the Company's audited financial statements.

Certain information and footnote disclosures normally included in financial 
statements that have been prepared in accordance with generally accepted 
accounting principles have been condensed or omitted pursuant to the rules 
and regulations of the Securities and Exchange Commission, although 
management of the Company believes that the disclosures contained in these 
financial statements are adequate to make the information presented therein 
not misleading.  For further information, refer to the consolidated financial 
statements and notes thereto included in the Company's Annual Report on Form 
10-KSB for the fiscal year ended December 31, 1997, as filed with the 
Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the reported amounts of assets and liabilities at the date of the 
financial statements and the reported amounts of revenues and expenses during 
the reporting period.  Actual results could differ from those estimates.  The 
results of operations for the three months and nine months ended September 
30, 1998 are not necessarily indicative of the results of operations to be 
expected for the full fiscal year ending December 31, 1998.

Certain prior period amounts have been reclassified to conform to the current 
year presentation.

Loss Per Share -

Effective December 31, 1997, the Company adopted Statement of Financial 
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which 
establishes standards for computing and presenting earnings per share.  SFAS 
No. 128 replaces the presentation of primary earnings per share and fully 
diluted earnings per share with basic earnings per share and diluted earnings 
per share, respectively.  Basic earnings per share excludes the dilutive 
effects of options, warrants and convertible securities, if any, and is 
computed by dividing net income (loss) available to common shareholders by 
the weighted average number of common shares outstanding during the period.  
Diluted earnings per share is computed assuming the exercise or conversion of 
common equivalent shares, if dilutive, consisting of unissued shares under 
stock options, warrants, convertible notes and preferred stock.  In 
accordance with SFAS No. 128, all prior periods presented have been restated 
to conform to the new presentation. 

As of September 30, 1998, potential dilutive securities representing 
12,097,168 shares of common stock were not included in the earnings per share 
calculation since their effect would be anti-dilutive.  Potential dilutive 
securities consisted of 1,906,442 outstanding stock options, 7,790,726 
outstanding common stock purchase warrants, and 240,000 shares of preferred 
stock convertible into 2,400,000 shares of common stock.  Basic and diluted 
earnings per share are the same for all periods presented.

During the three months and nine months ended September 30, 1997, 2,500,000
shares of common stock issued and outstanding to two 

                                      11
<PAGE>

officers/major stockholders and a stockholder related to one of the officers 
were subject to forfeiture under certain specified conditions, and were 
excluded from the calculation of net loss per share in 1997.  The forfeiture 
provisions were released effective December 31, 1997, in exchange for the 
return to the Company and cancellation of 750,000 of such shares.

2.  Restructuring of Capital Leases

Effective March 31, 1998, the Company restructured a capital lease obligation 
aggregating $170,516 into a new capital lease bearing interest at 
approximately 14% per annum.  In conjunction with this transaction, the 
Company increased the outstanding lease obligation by $80,000 to reflect the 
acquisition of office and computer equipment from the lessor.  The Company 
agreed to pay the lessor eighteen monthly payments of $15,500 commencing July 
1, 1998 under the restructured lease agreement.  The Company also issued 
20,000 shares of common stock to the lessor with an approximate fair market 
value of $79,000.  The effective interest rate on the restructured lease 
agreement is approximately 41% per annum.  In conjunction with the 
restructuring of this capital lease, during the nine months ended September 
30, 1998, the Company recorded a charge to operations of $64,750 for the 
write-off of lease deposits of $53,963 and lease prepayments of $10,787 
relating to the original lease.  The Company also recorded deferred financing 
costs of $54,941 as a result of the issuance of the 20,000 shares of common 
stock to the lessor, which are being amortized to operations through December 
31, 1999.   

Effective September 1, 1998, the Company restructured a capital lease 
obligation aggregating $120,286 into a new capital lease bearing interest at 
approximately 7% per annum.  The Company agreed to pay the lessor $21,000, 
and thirty monthly payments of $4,495 commencing September 15, 1998 under the 
restructured lease agreement.  In conjunction with the restructuring of this 
capital lease, during the three months and the nine months ended September 
30, 1998, the Company recorded a charge to operations of $5,889 for the 
write-off of lease prepayments relating to the original lease. 

3.  Prepaid Expenses

During March 1998, the Company entered into a supplemental agreement with a 
financial and marketing consulting firm to develop and manage an expanded 
investor relations program to publicize the Company to stockholders, 
investors, brokerages, and industry professionals.  This program is designed 
to continue during 1998 and 1999, and requires that the Company make advance 
payments to the consulting firm to fund the program's costs and expenses.  
During April 1998, the consulting firm was issued warrants to purchase an 
aggregate of 300,000 shares of the Company's common stock valued at 
$1,444,000 (Note 5).

                                      12
<PAGE>

4.  Advances and Bridge Loans Payable

Advances and bridge loans consisted of the following at December 31, 1997 and 
September 30, 1998:

<TABLE>
<CAPTION>
                                       Related       Unrelated
                                       Parties        Parties
                                       -------        -------
Advances
--------
<S>                                   <C>            <C>
Balance, December 31, 1997            $390,000        $
 
Add:  New loans                        410,000

Less:  Converted into 1998
        bridge financing              (185,000)  
                                     ---------        --------
Balance, March 31, 1998                615,000       

Add:  New loans                         98,875         105,000

Less:  Repayments                                      (30,000)
                                     ---------        --------
Balance, June 30, 1998                 713,875          75,000    

Less:  Repayments                      (23,875)
       Converted into 1998 
        bridge financing              (690,000)        (75,000) 
                                     ---------        --------
Balance, September 30, 1998          $                $
                                     =========        ========
</TABLE>

                                     13
<PAGE>

<TABLE>
<CAPTION>
                                       Related       Unrelated
                                       Parties        Parties
                                       -------        -------
Bridge Loans Payable
--------------------
<S>                                 <C>             <C>
Balance, December 31, 1997          $               $  300,000  

Add:  New loans                                        865,000
      Converted from advances          185,000                 
                                    ----------      ----------
Balance, March 31, 1998                185,000       1,165,000  

Add:  New loans                        380,000         220,000 
      
Less:  Conversion of 1997
        bridge loan into
        common stock and
        warrants                                       (25,000)
                                    ----------      ----------
Balance, June 30, 1998                 565,000       1,360,000

Add:  Converted from advances          690,000          75,000

Less:  Conversion of 1997
        bridge loans into
        common stock and
        warrants                                      (275,000)
       Conversion of 1998
        bridge loans into
        common stock                (1,255,000)     (1,160,000)
                                    ----------      ----------
                                    $               $
                                    ==========      ==========
</TABLE>

The 1997 bridge loans were secured by substantially all the assets of the 
Company, and were due December 1998.  The holders of the 1997 bridge loans 
had the option of converting such loans, including accrued interest, into the 
lesser of units, consisting of 10,000 shares of common stock and 5,000 Series 
D warrants, at the rate of $18,750 per unit, or 75% of the next private 
placement offering price of an offering over $5,000,000.  During the nine 
months ended September 30, 1998, as a result of the completion of the 
preferred stock financing, the holders of the bridge loans aggregating 
$300,000 at December 31, 1997 and $275,000 at June 30, 1998, converted such 
loans, plus accrued interest, at the rate of $1.875 per unit, into common 
stock and Series D common stock purchase warrants.  Accordingly, during the 
three months ended September 30, 1998, the Company issued 193,965 shares of 
common stock and 96,983 Series D common stock purchase warrants, and during 
the nine months ended September 30, 1998, the Company issued 210,232 shares 
of common stock and 105,117 Series D common stock purchase warrants.

In January 1998, the Company commenced a new bridge financing, consisting of a
secured note with interest at 12% due December 1998, secured by a junior lien on
substantially all the assets of the 

                                     14
<PAGE>

Company.  The Company issued a total of $2,415,000 of bridge notes (including 
$950,000 converted from advances), of which $1,255,000 were to related 
parties.  At the option of the holder, each note was convertible into the 
securities of a subsequent private placement (or the equivalent amount of 
common stock, if such financing was not a common stock financing) at the 
lower of $2.75 or 80% of the private placement price.  During the three 
months and nine months ended September 30, 1998, as a result of the 
completion of the preferred stock financing, the holders of the $2,415,000 of 
bridge notes payable converted such notes, plus accrued interest, at the rate 
of $2.00 per share, into 1,303,319 shares of common stock, including 683,176 
shares allocable to related parties.  During the three months and nine months 
ended September 30, 1998, as a result of the conversion of the 1998 bridge 
financing into common stock, the Company issued 79,312 Series E common stock 
purchase warrants, which had an aggregate fair value of $210,915, to certain 
finders with respect to such bridge financing.  These warrants are 
exercisable at $3.125 per share for a period of three years.  Finders fees 
paid in cash with respect to such bridge notes aggregating $96,000 were 
recorded as deferred financing costs and were being amortized through the 
earlier of December 31, 1998 or the conversion of the bridge notes into 
common stock.  Accordingly, the unamortized portion of such deferred 
financing costs of $56,391 at June 30, 1998 was charged to operations as 
financing costs during the three months and nine months ended September 30, 
1998.

As of June 30, 1998, advances payable totaled $788,875, including $713,875 to 
related parties, of which $23,875 was repaid during July 1998.  The holders 
of the advances had the right to convert such amounts into the 1998 bridge 
financing until such time as the bridge notes were either called or repaid. 
During the three months ended March 31, 1998, $185,000 of advances converted 
into the 1998 bridge financing, and during July 1998, as a result of the 
completion of preferred stock financing, the holders of the remaining 
$765,000 of advances converted into the 1998 bridge financing.

As a result of the previously described conversion discounts, which were part 
of the initial consideration for such financings, the Company recognized 
aggregate discounts of $841,713 as a charge to operations for financing costs 
during the nine months ended September 30, 1998 (Note 5).

5.  Stockholders' Equity (Deficiency)

Issuance of Stock Options -

The Company accounts for stock options issued to employees under Accounting
Principles Board Opinion No. 25, under which no compensation cost is recognized,
except when the exercise price is less than fair market value.  The Company
accounts for stock options and warrants issued to non-employees pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires that non-cash compensation be
recognized over the expected period of benefit.  Under SFAS 123, the fair value
of stock options and warrants, calculated according to the Black-Scholes pricing
model, is charged to operations, generally over the vesting period.    

                                      15
<PAGE>

On February 6, 1998, the Company's Board of Directors adopted a program to 
compensate employees of the Company pursuant to a stock option plan.  The 
Company issued options to purchase 500,000 shares of common stock at $2.50 
per share.  Such options were fully vested upon issuance, but are not 
exercisable until February 1999, and expire on February 6, 2003.  The Company 
has recorded the difference between the fair market value of the Company's 
common stock on February 6, 1998 of $4.125 and the $2.50 exercise price as 
deferred compensation cost.  The aggregate amount of deferred compensation 
cost of $812,500 is being amortized through December 31, 1998.
  
On April 21, 1998, the Company issued a stock option to the non-employee 
director of the Company at that time under the 1995 Stock Option Plan for 
Non-Employee Directors to purchase 5,000 shares of common stock at an 
exercise price of $5.50 per share, the fair market value on the date of 
grant.  The stock option was fully vested upon issuance, and is exercisable 
for a period of ten years.  The fair value of the stock option of $19,350 was 
charged to operations during the nine months ended September 30, 1998.

On April 22, 1998, the Company issued a stock option to an employee under the 
1995 Stock Option Plan to purchase 10,000 shares of common stock at $5.50 per 
share, the fair market value on the date of grant.  The stock option vests in 
four equal annual installments, and is exercisable for a period of 10 years.

On May 1, 1998, the Company issued a stock option to its newly-appointed 
Executive Vice President and Chief Financial Officer under the 1995 Stock 
Option Plan to purchase 75,000 shares of common stock at an exercise price of 
$2.50 per share.  The stock option vests in four equal annual installments 
commencing one year after the grant date, and is exercisable for a period of 
ten years.  The Company has recorded a charge to deferred compensation of 
$323,438 to reflect the difference between the fair market value of the 
Company's common stock on the grant date of $6.81 per share and the exercise 
price of $2.50 per share. The Company is amortizing this amount to operations 
over the four year period beginning May 1, 1998.     

During July 1998, the Company issued various stock options under the 1998 
Stock Option Plan, as follows:

(1)  The Company issued stock options to three employees to purchase 3,000 
     shares of common stock at an exercise price of $5.50 per share, the fair 
     market value on the date of grant, which vest in equal annual installments 
     over four years.  The stock options are exercisable for a period of 
     10 years.

(2)  The Company issued a stock option to a consultant to purchase 15,000 
     shares of common stock at an exercise price of $5.4375 per share, the fair 
     market value on the date of grant.  The stock option vests monthly over the
     one year period beginning July 1998, and is exercisable for a period of 5 
     years.  The fair value of the stock option of $63,150 is being charged to 
     operations over the one year period beginning July 1998.

(3)  The Company issued a stock option to a consultant to purchase 4,000 
     shares of common stock at an exercise price of $2.50 per share.  

                                     16
<PAGE>

     The stock option was fully vested upon issuance, and is exercisable for 
     a period of 10 years. The fair value of the stock option of $17,960 was 
     charged to operations during the three months and nine months ended 
     September 30, 1998.  

(4)  The Company issued a stock option to the Company's legal counsel, in his 
     capacity as Secretary of the Company, to purchase 40,000 shares of common 
     stock at an exercise price of $2.50 per share.  The stock option vests 
     monthly over the two year period beginning July 1998, and is exercisable 
     for a period of 10 years.  The fair value of the stock option of $179,600 
     is being charged to operations over the two year period beginning July 
     1998.

(5)  The Company issued stock options to four of the Company's non-employee 
     directors to purchase an aggregate of 160,000 shares of common stock at an 
     exercise price of $2.50 per share.  The stock options vest monthly over the
     one year period beginning July 1998, and are exercisable for a period of 10
     years. The fair value of the stock options of $868,800 is being charged to 
     operations over the one year period beginning July 1998.

Issuance of Common Stock -

During the nine months ended September 30, 1998, in conjunction with the 
restructuring of a capital lease obligation, the Company issued 20,000 shares 
of common stock to the lessor with an approximate fair market value of 
$79,000 (Note 2).  

During the nine months ended September 30, 1998, the Company issued 2,500 
shares of common stock to a former employee for services rendered which were 
valued at $15,469 and charged to operations.

During the three months ended September 30, 1998, the Company issued 193,965 
shares of common stock (and 96,983 Series D common stock purchase warrants) 
in conjunction with the conversion of 1997 bridge financing notes with a 
principal balance of $275,000 and accrued interest of $88,688.  During the 
nine months ended September 30, 1998, the Company issued 210,232 shares of 
common stock (and 105,117 Series D common stock purchase warrants) in 
conjunction with the conversion of 1997 bridge financing notes with a 
principal balance of $300,000 and accrued interest of $94,188 (see "Issuance 
of Warrants" below).

During the three months and nine months ended September 30, 1998, the Company 
issued 1,303,319 shares of common stock in conjunction with the conversion of 
1998 bridge financing notes with a principal balance of $2,415,000 and 
accrued interest of $191,682. 

During the nine months ended September 30, 1998, the Company issued 342,000 
shares of common stock to three individuals, including one officer, in 
conjunction with the exercise of warrants and stock options with exercise 
prices ranging from $2.50 to $3.125 per share, generating gross proceeds to 
the Company of $1,030,000.

During the nine months ended September 30, 1998, the Company issued 11,200 
shares of common stock (and 5,600 Series D common stock purchase 

                                      17
<PAGE>

warrants) in conjunction with the conversion of vendor debt of $28,000 into 
common stock (see "Issuance of Warrants" below).

During the nine months ended September 30, 1998, the Company issued 110,123 
shares of common stock (and 55,063 Series C and 55,063 Series D common stock 
purchase warrants), including 96,220 shares to two officers/major 
stockholders, in conjunction with the conversion of employee deferred 
compensation of $206,483 into common stock (see "Issuance of Warrants" 
below).   

Issuance of Warrants -

During April 1998, the Company issued warrants to a financial and marketing 
consulting firm to purchase an aggregate of 300,000 shares of common stock, 
of which 200,000 warrants are exercisable at $3.125 per share and 100,000 
warrants are exercisable at $5.25 per share, for additional services rendered 
during January through June 1998.  The warrants are exercisable through March 
2003. The aggregate fair value of the 300,000 warrants of $1,444,000 was 
recorded as a charge to operations during the six months ended June 30, 1998 
and the nine months ended September 30, 1998.

During April 1998, the Company issued a warrant to purchase 25,000 shares of 
common stock exercisable at $3.00 per share to the Company's Chief Financial 
Officer at that time for services rendered through June 1998.  The warrant is 
exercisable through April 1999.  The fair value of the warrant was 
approximately $75,000, which was charged to operations during the six months 
ended June 30, 1998 and the nine months ended September 30, 1998.    

During the nine months ended September 30, 1998, the Company issued Series C 
common stock purchase warrants for 254,593 shares of common stock to various 
parties.  The Series C common stock purchase warrants are exercisable at 
$2.50 per share through June 2003.  The Company issued 5,000 warrants to a 
vendor which deferred an amount due it, 55,063 warrants (including 48,110 
warrants to two officers/major stockholders) in conjunction with the 
conversion into common stock of employee deferred compensation of $206,483, 
and 177,000 warrants (including 134,000 warrants to related parties) as 
additional consideration for short-term advances of $440,000, all of which 
were considered financing costs. The Company also issued 17,530 warrants for 
legal fees.  Aggregate fair value of the warrants issued for financing costs 
was $1,119,891, which was charged to operations as financing costs during the 
six months ended June 30, 1998 and the nine months ended September 30, 1998.  
The warrant issued for legal fees had an aggregate fair value of $100,447, of 
which $37,668 was charged to operations during the three months ended 
September 30, 1998 and $62,780 was charged to operations during the nine 
months ended September 30, 1998.  The remaining $37,667 will be charged to 
operations during the three months ended December 31, 1998.  

During the three months and nine months ended September 30, 1998, a Series C 
common stock purchase warrant for 20,000 shares of common stock, originally 
issued in 1997, was returned to the Company and cancelled.  The fair value of 
such warrant was $95,200, which was recognized as a credit to operations 
during the three months and nine months ended September 30, 1998.  

                                      18
<PAGE>

During the nine months ended September 30, 1998, the Company issued Series D 
common stock purchase warrants for 165,780 shares of common stock to various 
parties.  The Series D common stock purchase warrants are exercisable at 
$5.25 per share through September 2000.  The Company issued 105,117 warrants 
in conjunction with the conversion into common stock of 1997 bridge financing 
notes with a principal balance of $300,000, 5,600 warrants in conjunction 
with the conversion into common stock of vendor debt of $28,000, and 55,063 
warrants (including 48,110 warrants to two officers/major stockholders) in 
conjunction with the conversion into common stock of employee deferred 
compensation of $206,483, all of which were considered financing costs.  The 
aggregate fair value of such warrants of $386,240 was charged to operations 
as financing costs during the nine months ended September 30, 1998.  During 
the three months ended September 30, 1998, the Company issued 96,983 warrants 
in conjunction with the conversion into common stock of 1997 bridge financing 
notes with a principal balance of $275,000.  The aggregate fair value of such 
warrants of $161,962 was charged to operations as financing costs during the 
three months ended September 30, 1998.  

During the nine months ended September 30, 1998, the Company issued Series E 
common stock purchase warrants to various parties.  The Series E common stock 
purchase warrants are exercisable at $3.125.  During April 1998, the Company 
issued a Series E common stock purchase warrant for 50,000 shares of common 
stock to a consulting firm exercisable through April 2001.  The fair value of 
the warrant of $251,000 was charged to operations during the nine months 
ended September 30, 1998.  During the July 1998, the Company issued a Series 
E common stock purchase warrant for 1,000 shares to a placement agency 
exercisable through July 2001.  The fair value of the warrant of $3,440 was 
charged to operations during the three months and nine months ended September 
30, 1998. 

During the nine months ended September 30, 1998, in conjunction with the 1997 
private placement, the Company issued 8,532 Series E common stock purchase 
warrants exercisable through June 2001, which had an aggregate fair value of 
$32,336.  During the three months and nine months ended September 30, 1998, 
in conjunction with the conversion of the 1998 bridge financing into common 
stock, the Company issued 79,312 Series E common stock purchase warrants 
exercisable through September 2001, which had an aggregate fair value of 
$210,915.

Conversion Discount -

As part of the consideration for making the advances and bridge loans 
described at Note 3, the Company granted the investors the option to convert 
their bridge loans, including accrued interest, into the securities offered 
in any subsequent private placement (or the equivalent amount of common 
stock, if such financing is not a common stock financing), at 75% to 80% of 
the private placement offering price, representing discounts of 20% to 25%.  
As a result of the sale of preferred stock on June 29, 1998 as described 
below, the difference between the fair value of the Company's common stock of 
$2.50 per share on June 29, 1998 (as determined by an investment and merchant 
banking firm) and the effective conversion rates ranging from $1.875 to $2.00 
per share, was recognized as a charge to operations.  Accordingly, the 
Company recorded the aggregate discount of $841,713 as a charge to 

                                      19
<PAGE>

operations for financing costs during the nine months ended September 30, 
1998. 

Preferred Stock Financing -

On June 29, 1998, the Company entered into a Stock Purchase Agreement with 
certain private and institutional investors.  Pursuant to the Stock Purchase 
Agreement, the Company sold 200,000 shares of Series A Senior Convertible 
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00 
per share, resulting in gross proceeds to the Company of $5,000,000.  Robert 
M. Fell, David M. Marshall and Jess Rifkind purchased 445 shares, 445 shares 
and 400 shares, respectively, of Preferred Stock.  

On July 31, 1998, the Company sold an additional 20,000 shares of Preferred 
Stock under the same terms for gross proceeds of $500,000.  The Company is 
seeking to sell an additional 160,000 shares of Preferred Stock to private 
and institutional investors on the same terms, but there can be no assurances 
that the Company will be successful in this regard.

The Preferred Stock has a liquidation preference of $25.00 per share and will 
rank senior to all other series of preferred stock that may be issued in the 
future.  Each share of Preferred Stock is convertible into ten shares of 
common stock of the Company, and will be automatically converted into common 
stock at the then prevailing conversion rate at such time as the Company has 
completed a secondary public offering which raises not less than $15,000,000 
in gross proceeds and has its common stock listed on the New York Stock 
Exchange, the American Stock Exchange or the NASDAQ National Market System.  
The holders of the Preferred Stock are not entitled to dividends, except that 
if dividends are paid on the Company's common stock, holders of Preferred 
Stock will be entitled to dividends on the basis of the number of shares of 
common stock into which the Preferred Stock is then convertible.  The 
Preferred Stock will vote together with the holders of common stock on all 
matters presented to stockholders for a vote on the basis of the number of 
shares of common stock into which the Preferred Stock is then convertible.  
The holders of the Preferred Stock have unlimited piggyback registration 
rights and certain demand registration rights.

Based on a valuation report prepared by an investment and merchant banking 
firm dated July 31, 1998, the Company has determined that the Preferred Stock 
was sold at fair market value.  

In addition, on June 29, 1998, the Company entered into a Securities Purchase 
Agreement with the Robert M. Fell Living Trust (the "Fell Trust").  Pursuant 
to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares 
of Preferred Stock and a warrant to purchase 1,200,000 shares of the 
Company's common stock (the "Fell Warrant").  The purchase price of the 
Preferred Stock acquired by the Fell Trust was $25.00 per share, or an 
aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was 
paid in the form of a promissory note (the "$490,000 Note").  The purchase 
price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and 
$70,000 was paid in the form of a promissory note (the "$70,000 Note").  The 
Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to 
purchase 

                                     20
<PAGE>

1,200,000 shares of common stock at $2.50 per share.  The Fell Warrant is 
exercisable one-sixth on June 29, 1998, and one-sixth thereafter on each six 
month anniversary date.  The $490,000 Note bears interest at the rate of 8% 
per annum, which may, at the option of the Fell Trust, be paid currently or 
added to the principal amount of the note.  The $490,000 Note is due June 29, 
2002, provided that the Fell Trust is required to prepay the note, without 
penalty, as soon as possible consistent with its other cash requirements.  
The $70,000 Note bears interest at the rate of 6% per annum, which may, at 
the option of the Fell Trust, be paid currently or added to the principal 
amount of the note.  The $70,000 Note is due on June 29, 2008.  The Fell 
Trust has pledged the Fell Warrant and the Preferred Stock acquired pursuant 
to the Securities Purchase Agreement to secure its obligations under the 
$490,000 Note and the $70,000 Note.  

The $490,000 Note and the $70,000 Note were recorded as reductions to 
stockholders' equity at September 30, 1998.  Based on a valuation report 
prepared by an investment and merchant banking firm dated July 31, 1998, the 
Company has determined that the exercise price of the Fell Warrant was at not 
less than fair market value.      

In connection with the Stock Purchase Agreement and the Securities Purchase 
Agreement, the parties to such agreements and David M. Marshall and Russell 
M. Fine entered into a Stockholders Agreement.  Pursuant to the Stockholders 
Agreement, the parties agreed to vote all shares of Preferred Stock and 
common stock owned by them (including any stock acquired in the future) for 
election to the Board of Directors of four persons designated by Robert M. 
Fell and three persons designated by David M. Marshall and Russell M. Fine.  
The Stockholders Agreement terminates on June 29, 2000.

In connection with the Stock Purchase Agreement and the Securities Purchase 
Agreement, the Company entered into a Services Agreement with Fell & Company, 
Inc. ("FCI"), pursuant to which Robert M. Fell will serve as Chairman of the 
Board of Directors for a period of three years.  Mr. Fell will also serve as 
interim Chief Executive Officer until a new Chief Executive Officer is 
appointed, provided that if an employment agreement is not entered into with 
a new Chief Executive Officer within six months from June 29, 1998, or such 
person does not commence employment within eight months of June 29, 1998, the 
position of Chief Executive Officer will become the Office of the Chief 
Executive and will consist of Mr. Fell, Mr. Marshall and Mr. Fine.  For 
making Mr. Fell's services available to the Company, FCI will receive 
$150,000 per annum, subject to cost of living increases, plus the amount of 
payroll taxes the Company would pay if Mr. Fell were an employee of the 
Company.

The Company also entered into new employment agreements with David M. 
Marshall and Russell M. Fine pursuant to which they will serve as Vice 
Chairman and Chief Technology Officer, respectively.  In addition, until a 
permanent Chief Executive Officer is appointed, Mr. Marshall will serve as 
President and Chief Operating Officer of the Company.  Both employment 
agreements provide for terms of five years and compensation of $150,000 per 
annum, subject to cost of living increases. 

                                      21
<PAGE>

Effective June 29, 1998, the number of directors of the Company was increased 
to seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel 
were elected to the Board of Directors of the Company.  Such persons were 
designated by Mr. Fell pursuant to the Stockholders Agreement.  David M. 
Marshall, Russell M. Fine and Jess Rifkind remain as directors of the 
Company, as the designees of Mr. Marshall and Mr. Fine.  At such time as the 
Company retains a permanent Chief Executive Officer, the number of directors 
of the Company will be increased to eight and the Chief Executive Officer 
will be elected to the Board of Directors.  As a result of the ability to 
designate four directors as provided in the Stockholders Agreement, Mr. Fell 
may be deemed to have acquired control of the Company.     

In conjunction with the Preferred Stock financing, the Company incurred 
direct costs related to such financing of $360,903, which were charged to 
additional paid-in capital.  Of such amount, $217,493 was paid to a firm for 
investment advisory services.  In addition, this firm has the right to 
acquire warrants to purchase 72,498 shares of common stock for $.0625 per 
warrant, consisting of 24,166 warrants exercisable at $.01 per share and 
48,332 warrants exercisable at $2.50 per share.  The warrants are exercisable 
through June 2003, and have certain piggyback registration rights.  The 
aggregate fair value of such warrants was $401,639.  The Company also paid 
cash finder's fees to other parties aggregating $28,500.

                                     22
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private 
Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-QSB for the three months ended September 30, 
1998 contains "forward-looking" statements within the meaning of the Federal 
securities laws.  These forward-looking statements include, among others, 
statements concerning the Company's expectations regarding its financing 
requirements and efforts to raise additional financing, its development and 
marketing efforts, consumer reaction/acceptance to the Company's services, 
and the development of operating revenues, and other statements of 
expectations, beliefs, future plans and strategies, anticipated events or 
trends, and similar expressions concerning matters that are not historical 
facts.  The forward-looking statements in this Quarterly Report on Form 
10-QSB for the three months ended September 30, 1998 are subject to risks and 
uncertainties that could cause actual results to differ materially from those 
results expressed in or implied by the statements contained herein.

Overview:

Since mid-1995, the Company has been engaged in developing PC-based 
proprietary communications software technology to be utilized by consumers 
for online entertainment purposes.  The Company's first service being offered 
to consumers is The You Bet Racing Network, a horse racing network broadcast 
over the Company's secure closed-loop network.  The Company has incurred 
substantial software development costs during 1995 through September 30, 
1998, which have been charged to operations as research and development 
costs.  Management is of the opinion that technological feasibility of the 
Company's proprietary software technology had been established during the 
nine months ended September 30, 1998.

Business Plan:

The Company's original short-term goal, established in 1995, was to maximize 
customer subscription levels.  However, in 1997, the Company decided to 
de-emphasize its original short-term goal in order to focus on certain 
long-term goals.  The Company's revised marketing strategy, which management 
is seeking to implement during 1998 and 1999, is focused on building a brand 
name and becoming a market leader, acquiring and retaining a large and loyal 
customer base, and maximizing long-term profitability.  In order to do so, 
the Company has begun to concentrate on marketing to existing horse players 
during the initial phase of operations.  By being the first to deliver an 
interactive product, the Company believes that it will fill a significant 
market need and establish itself as the leading brand in the horse racing 
industry.  Marketing activities will then be expanded to focus on a variety 
of additional potential users, including sports gamblers and casino and 
lottery customers.  The Company then intends to move its products into the 
mainstream online community through a mass marketing campaign. 

                                     23
<PAGE>

Liquidity and Capital Resources - September 30, 1998:

The Company has had recurring losses, has periodically experienced 
significant continuing liquidity problems from late 1996 through mid-1998, 
and has financed its operations during such period from the sale of its 
securities and short-term debt.  As a result of these factors, the Company's 
independent certified public accountants have expressed substantial doubt 
about the Company's ability to continue as a going concern.  During June and 
July 1998, the Company completed the sale of $6,000,000 of preferred stock 
that provided net proceeds of approximately $5,144,000, as described below.  
However, the proceeds from this financing are not expected to be sufficient 
to support the continuing development and expansion of the Company's 
operations until revenues reach the level necessary to fund operations.  The 
Company is currently attempting to sell an additional $4,000,000 of preferred 
stock, but there can be no assurances that the Company will be successful in 
this regard.  As a result of the sale of preferred stock and the conversion 
of advances and bridge loans into common stock during the nine months ended 
September 30, 1998, the Company had net working capital of $1,323,383 at 
September 30, 1998, as compared to a working capital deficit of $2,739,184 at 
December 31, 1997.  The advances and bridge loans were utilized to fund the 
Company's operations.

During the year ended December 31, 1997 and the nine months ended September 
30, 1998, the Company relied on the proceeds from short-term loans, primarily 
from related parties, bridge loans from both related and unrelated parties, 
the exercise of stock options and warrants, and the private placement of its 
common stock, preferred stock and stock purchase warrants, which aggregated 
approximately $3,903,000 and $8,199,000, respectively, to fund its operating 
requirements during such periods.  During the nine months ended September 30, 
1998, the Company received net advances of $560,000 and bridge financing of 
$1,465,000, as well as the net proceeds from the preferred stock financing of 
$5,144,000, to fund its estimated 1998 cash requirements of $7,000,000, which 
includes estimated discretionary costs related to marketing and promotion 
activities of $2,000,000.  The Company is continuing to evaluate various 
opportunities to raise additional capital during the remainder of 1998 and 
1999, which includes the sale of the additional $4,000,000 of preferred stock 
discussed above.

The Company is dependent on the proceeds from the previously described 
financing efforts for the continuation of its marketing efforts related to 
The You Bet Racing Network, as well as for the continuation and expansion of 
the Company's development activities.  The Company expects that its cash on 
hand at September 30, 1998 will be sufficient to fund operating and capital 
expenditures at least through early 1999.  However, there can be no 
assurances that the Company will be able to complete such additional debt or 
equity financings as may be required to fund the Company's operations on a 
timely basis and/or under acceptable terms and conditions.  

The Company's need for financing during 1999 and subsequently will vary based 
upon a number of factors, some of which are outside the control of the 
Company. These factors include the scope of the Company's development and 
marketing efforts, consumer reaction/acceptance and the development of 
operating revenues, the time and cost to develop and 

                                     24
<PAGE>

commercialize additional applications, competition from similar wagering 
systems and from competing interactive gaming/leisure time systems and 
activities, and potential political and legal issues.

During the nine months ended September 30, 1998, the Company's operations 
used $5,367,301 of cash, as compared to using $2,989,863 of cash during the 
nine months ended September 30, 1997, reflecting a general increase in all 
levels of activity as the Company completed the development of The You Bet 
Racing Network and commenced commercial marketing activities.  

During the nine months ended September 30, 1998, cash flows used in investing 
activities aggregated $188,462 for purchases of property and equipment.  In 
addition, effective March 31, 1998, in conjunction with the restructuring of 
a capital lease obligation, the Company increased the outstanding lease 
obligation by $80,000 to reflect the acquisition of office and computer 
equipment from the lessor.  

On June 29, 1998, the Company entered into a Stock Purchase Agreement with 
certain private and institutional investors.  Pursuant to the Stock Purchase 
Agreement, the Company sold 200,000 shares of Series A Senior Convertible 
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00 
per share, resulting in gross proceeds to the Company of $5,000,000.  Robert 
M. Fell, David M. Marshall and Jess Rifkind purchased 445 shares, 445 shares 
and 400 shares, respectively, of Preferred Stock.

On July 31, 1998, the Company sold an additional 20,000 shares of Preferred 
Stock under the same terms for gross proceeds of $500,000.  The Company is 
seeking to sell an additional 160,000 shares of Preferred Stock to private 
and institutional investors on the same terms, but there can be no assurances 
that the Company will be successful in this regard.

The Preferred Stock has a liquidation preference of $25.00 per share and will 
rank senior to all other series of preferred stock that may be issued in the 
future.  Each share of Preferred Stock is convertible into ten shares of 
common stock of the Company, and will be automatically converted into common 
stock at the then prevailing conversion rate at such time as the Company has 
completed a secondary public offering which raises not less than $15,000,000 
in gross proceeds and has its common stock listed on the New York Stock 
Exchange, the American Stock Exchange or the NASDAQ National Market System.  
The holders of the Preferred Stock are not entitled to dividends, except that 
if dividends are paid on the Company's common stock, holders of Preferred 
Stock will be entitled to dividends on the basis of the number of shares of 
common stock into which the Preferred Stock is then convertible.  The 
Preferred Stock will vote together with the holders of common stock on all 
matters presented to stockholders for a vote on the basis of the number of 
shares of common stock into which the Preferred Stock is then convertible.  
The holders of the Preferred Stock have unlimited piggyback registration 
rights and certain demand registration rights.

Based on a valuation report prepared by an investment and merchant banking firm
dated July 31, 1998, the Company has determined that the Preferred Stock was
sold at fair market value.  

                                     25
<PAGE>

In addition, on June 29, 1998, the Company entered into a Securities Purchase 
Agreement with the Robert M. Fell Living Trust (the "Fell Trust").  Pursuant 
to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares 
of Preferred Stock and a warrant to purchase 1,200,000 shares of the 
Company's common stock (the "Fell Warrant").  The purchase price of the 
Preferred Stock acquired by the Fell Trust was $25.00 per share, or an 
aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was 
paid in the form of a promissory note (the "$490,000 Note").  The purchase 
price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and 
$70,000 was paid in the form of a promissory note (the "$70,000 Note").  The 
Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to 
purchase 1,200,000 shares of common stock at $2.50 per share.  The Fell 
Warrant is exercisable one-sixth on June 29, 1998, and one-sixth thereafter 
on each six month anniversary date.  The $490,000 Note bears interest at the 
rate of 8% per annum, which may, at the option of the Fell Trust, be paid 
currently or added to the principal amount of the note.  The $490,000 Note is 
due June 29, 2002, provided that the Fell Trust is required to prepay the 
note, without penalty, as soon as possible consistent with its other cash 
requirements.  The $70,000 Note bears interest at the rate of 6% per annum, 
which may, at the option of the Fell Trust, be paid currently or added to the 
principal amount of the note.  The $70,000 Note is due on June 29, 2008.  The 
Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired 
pursuant to the Securities Purchase Agreement to secure its obligations under 
the $490,000 Note and the $70,000 Note.  

The $490,000 Note and the $70,000 Note were recorded as reductions to 
stockholders' equity at September 30, 1998.  Based on a valuation report 
prepared by an investment and merchant banking firm dated July 31, 1998, the 
Company has determined that the exercise price of the Fell Warrant was at not 
less than fair market value.      

In connection with the Stock Purchase Agreement and the Securities Purchase 
Agreement, the parties to such agreements and David M. Marshall and Russell 
M. Fine entered into a Stockholders Agreement.  Pursuant to the Stockholders 
Agreement, the parties agreed to vote all shares of Preferred Stock and 
common stock owned by them (including any stock acquired in the future) for 
election to the Board of Directors of four persons designated by Robert M. 
Fell and three persons designated by David M. Marshall and Russell M. Fine.  
The Stockholders Agreement terminates on June 29, 2000.

In connection with the Stock Purchase Agreement and the Securities Purchase 
Agreement, the Company entered into a Services Agreement with Fell & Company, 
Inc. ("FCI"), pursuant to which Robert M. Fell will serve as Chairman of the 
Board of Directors for a period of three years.  Mr. Fell will also serve as 
interim Chief Executive Officer until a new Chief Executive Officer is 
appointed, provided that if an employment agreement is not entered into with 
a new Chief Executive Officer within six months from June 29, 1998, or such 
person does not commence employment within eight months of June 29, 1998, the 
position of Chief Executive Officer will become the Office of the Chief 
Executive and will consist of Mr. Fell, Mr. Marshall and Mr. Fine.  For 
making Mr. Fell's services available to the Company, FCI will receive 
$150,000 per annum, subject to cost of living increases, plus the 

                                     26
<PAGE>

amount of payroll taxes the Company would pay if Mr. Fell were an employee of 
the Company.

The Company also entered into new employment agreements with David M. 
Marshall and Russell M. Fine pursuant to which they will serve as Vice 
Chairman and Chief Technology Officer, respectively.  In addition, until a 
permanent Chief Executive Officer is appointed, Mr. Marshall will serve as 
President and Chief Operating Officer of the Company.  Both employment 
agreements provide for terms of five years and compensation of $150,000 per 
annum, subject to cost of living increases. 

Effective June 29, 1998, the number of directors of the Company was increased 
to seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel 
were elected to the Board of Directors of the Company.  Such persons were 
designated by Mr. Fell pursuant to the Stockholders Agreement.  David M. 
Marshall, Russell M. Fine and Jess Rifkind remain as directors of the 
Company, as the designees of Mr. Marshall and Mr. Fine.  At such time as the 
Company retains a permanent Chief Executive Officer, the number of directors 
of the Company will be increased to eight and the Chief Executive Officer 
will be elected to the Board of Directors.  As a result of the ability to 
designate four directors as provided in the Stockholders Agreement, Mr. Fell 
may be deemed to have acquired control of the Company.     

In conjunction with the Preferred Stock financing, the Company incurred 
direct costs related to such financing of $360,903, which were charged to 
additional paid-in capital.  Of such amount, $217,493 was paid to a firm for 
investment advisory services.  In addition, this firm has the right to 
acquire warrants to purchase 72,498 shares of common stock for $.0625 per 
warrant, consisting of 24,166 warrants exercisable at $.01 per share and 
48,332 warrants exercisable at $2.50 per share.  The warrants are exercisable 
through June 2003, and have certain piggyback registration rights.  The 
aggregate fair value of such warrants was $401,639.  The Company also paid 
cash finder's fees to other parties aggregating $28,500.

The Company does not currently have any existing capital expenditure 
commitments.  However, subject to the continuing development of The You Bet 
Racing Network and the availability of sufficient capital resources, the 
Company's business plan includes a capital expenditure of approximately 
$2,000,000 during 1999 in order to expand the Company's facilities to support 
the anticipated increase in activity on The You Bet Racing Network.  

Consolidated Results of Operations:

Three Months Ended September 30, 1997 and 1998 -

Network operations increased by $237,012 or 141.3%, to $404,798 in 1998, as 
compared to $167,786 in 1997, reflecting the expansion of operations of The 
You Bet Racing Network. 

Research and development costs increased by $52,170 or 17.6%, to $348,667 in 
1998, as compared to $296,497 in 1997, reflecting the continuing development 
of The You Bet Racing Network.

                                     27
<PAGE>

Sales and marketing expense increased by $356,369 or 248.8%, to $499,587 in 
1998, as compared to $143,218 in 1997, reflecting the expansion of the 
Company's marketing activities with respect to The You Bet Racing Network.

General and administrative expenses increased by $305,999 or 59.7%, to 
$818,612 in 1998, as compared to $512,613 in 1997, reflecting an increase in 
personnel related costs, legal and accounting fees, and general operating 
activities, and the implementation of an expanded stockholder relations 
program, as described below.

During March 1998, the Company entered into a supplemental agreement with a 
financial and marketing consulting firm to develop and manage an expanded 
investor relations program to publicize the Company to stockholders, 
investors, brokerages, and industry professionals.  This program is designed 
to continue during the remainder of 1998 and 1999, and requires that the 
Company make advance payments to the consulting firm to fund the program's 
costs and expenses.  During the three months ended September 30, 1998, the 
Company charged approximately $189,000 to operations for this program.    

The Company is continuing development efforts with respect to The You Bet 
Racing Network, including the recruiting and hiring of management and 
entering into agreements with strategic partners. 

Interest expense decreased by $119,173 or 60.1%, to $79,116 in 1998, as 
compared to $198,289 in 1997, as a result of the conversion of advances and 
bridge loans into common stock during the three months ended September 30, 
1998.

The Company records the fair value of various stock options and warrants 
issued for services rendered and as financing costs as a charge to 
operations.  During the three months ended September 30, 1998, the Company 
incurred non-cash expenses related to the issuance of stock options and 
warrants of $869,245, including $480,948 for stock options issued in 1998 to 
non-officer directors, employees and consultants at less than fair market 
value.  The recognition of these expenses did not have any effect on working 
capital, net stockholders' equity (deficiency) or cash flows.  

Nine Months Ended September 30, 1997 and 1998 -

Network operations increased by $253,798 or 52.6%, to $736,401 in 1998, as 
compared to $482,603 in 1997, reflecting the expansion of operations of The 
You Bet Racing Network.

Research and development costs decreased by $34,737 or 3.6%, to $927,202 in 
1998, as compared to $961,939 in 1997, reflecting the Company's reallocation 
of resources to its marketing programs.

Sales and marketing expenses increased by $725,116 or 155.7%, to $1,190,751 
in 1998, as compared to $465,635 in 1997, reflecting the expansion of the 
Company's marketing activities with respect to The You Bet Racing Network.

General and administrative expenses increased by $756,438 or 58.7%, to 
$2,044,488 in 1998, as compared to $1,288,050 in 1997, reflecting an 

                                     28
<PAGE>

increase in personnel related costs, legal and accounting fees, and general 
operating activities, and the implementation of an expanded stockholder 
relations program, as described below. 

During March 1998, the Company entered into a supplemental agreement with a 
financial and marketing consulting firm to develop and manage an expanded 
investor relations program to publicize the Company to stockholders, 
investors, brokerages, and industry professionals.  This program is designed 
to continue during the remainder of 1998 and 1999, and requires that the 
Company make advance payments to the consulting firm to fund the program's 
costs and expenses.  During the nine months ended September 30, 1998, the 
Company charged approximately $453,000 to operations for this program.  

The Company is continuing development efforts with respect to The You Bet 
Racing Network, including the recruiting and hiring of management and 
entering into agreements with strategic partners.

Interest expense did not change significantly, from $322,717 in 1998, as 
compared to $323,155 in 1997, primarily as a result of advances and bridge 
loans being outstanding during both such periods.  The Company expects that 
interest expense will decrease significantly subsequent to September 30, 
1998, as a result of the conversion of advances and bridge loans into common 
stock during the three months ended September 30, 1998.

The Company records the fair value of various stock options and warrants 
issued for services rendered and as financing costs as a charge to 
operations.  During the nine months ended September 30, 1998, the Company 
incurred non-cash expenses related to the issuance of stock options and 
warrants of $4,858,256, including $900,944 for stock options issued in 1998 
to non-officer directors, employees and consultants at less than fair market 
value.  The Company also incurred non-cash expenses related to the discount 
on conversion of various obligations into common stock and warrants of 
$841,713.  The recognition of these expenses did not have any effect on 
working capital, net stockholders' equity (deficiency) or cash flows.  The 
Company does not expect that these types of costs will continue at these 
levels in the future.  However, approximately $1,859,000 of deferred 
compensation at September 30, 1998 will be recognized as non-cash 
compensation, primarily during the remainder of 1998 and during 1999, which 
is expected to provide commensurate benefit during such periods.   

Year 2000 Issue:

The Year 2000 Issue is the result of computer programs being written using 
two digits rather than four digits to define the applicable year.  Computer 
programs that have sensitive software may recognize a date using "00" as the 
year 1900 rather than the year 2000.  This could result in a system failure 
or miscalculations causing disruptions of operations, including, among other 
things, a temporary inability to process transactions, send invoices or 
engage in similar normal business activities.  

Based on a recent internal assessment, the Company has determined that its 
software programs, both developed internally and purchased from 

                                     29
<PAGE>

outside vendors, are already Year 2000 compliant, or that the cost of any 
needed modifications will not have a material effect on the Company's 
consolidated financial position, results of operations or cash flows.  
However, the Company is currently unable to determine if its strategic 
partners have fully addressed the Year 2000 Issue as it relates to their 
respective operating systems.  A Year 2000 system failure by a strategic 
partner of the Company could have a material adverse effect on the Company's 
results of operations.      

                                     30
<PAGE>

                         PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

(c)  Equity securities of the registrant sold by the registrant during the 
three months ended September 30, 1998 that were not registered under the 
Securities Act of 1933, as amended, other than unregistered sales made in 
reliance on Regulation S, were as follows:

During the three months ended September 30, 1998, the Company issued 
1,303,319 shares of common stock in conjunction with the conversion of 1998 
bridge financing notes with a principal balance of $2,415,000 and accrued 
interest of $191,682.  The shares of common stock were issued under Section 
4(2) of the Securities Act of 1933, as amended, based on the representations 
of the recipients. 

During the three months ended September 30, 1998, the Company issued 193,965 
shares of common stock (and 96,983 Series D common stock purchase warrants) 
in conjunction with the conversion of 1997 bridge financing notes with a 
principal balance of $275,000 and accrued interest of $88,688 into common 
stock.  The shares of common stock were issued under Section 4(2) of the 
Securities Act of 1933, as amended, based on the representations of the 
recipients.

During July 1998, the Company issued various stock options under the 1998 
Stock Option Plan, as follows:

(1) The Company issued stock options to three employees to purchase 3,000 
shares of common stock at an exercise price of $5.50 per share, the fair 
market value on the date of grant, which vest in equal annual installments 
over four years. The stock options are exercisable for a period of 10 years.

(2) The Company issued a stock option to a consultant to purchase 15,000 
shares of common stock at an exercise price of $5.4375 per share, the fair 
market value on the date of grant.  The stock option vests monthly over the 
one year period beginning July 1998, and is exercisable for a period of 5 
years.

(3) The Company issued a stock option to a consultant to purchase 4,000 
shares of common stock at an exercise price of $2.50 per share.  The stock 
option was fully vested upon issuance, and is exercisable for a period of 10 
years.       

(4) The Company issued a stock option to the Company's legal counsel, in his 
capacity as Secretary of the Company, to purchase 40,000 shares of common 
stock at an exercise price of $2.50 per share.  The stock option vests 
monthly over the two year period beginning July 1998, and is exercisable for 
a period of 10 years.

(5) The Company issued stock options to four of the Company's non-employee 
directors to purchase an aggregate of 160,000 shares of common stock at an 
exercise price of $2.50 per share.  The stock options vest monthly over the 
one year period beginning July 1998, and are exercisable for a period of 10 
years. 

                                     31
<PAGE>

All such stock options were issued under Section 4(2) of the Securities Act 
of 1933, as amended, based on the representations of the recipients.

During the three months ended September 30, 1998, the Company issued Series D 
common stock purchase warrants for 96,983 shares of common stock to various 
parties in conjunction with the conversion of 1997 bridge financing notes 
into common stock, as described above, which were considered financing costs. 
The Series D common stock purchase warrants are exercisable at $5.25 per 
share through September 2000.  The warrants were issued under Section 4(2) of 
the Securities Act of 1933, as amended, based on the representations of the 
recipients.  

During the three months ended September 30, 1998, the Company issued Series E 
common stock purchase warrants for 80,312 shares of common stock to various 
parties, primarily as finders fees with respect to the conversion of 1998 
bridge financing notes into common stock.  The Series E common stock purchase 
warrants are exercisable at $3.125 per share through September 2001.  The 
warrants were issued under Section 4(2) of the Securities Act of 1933, as 
amended, based on the representations of the recipients.  

On June 29, 1998, the Company entered into a Stock Purchase Agreement with 
certain private and institutional investors.  Pursuant to the Stock Purchase 
Agreement, the Company sold 200,000 shares of Series A Senior Convertible 
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00 
per share, resulting in gross proceeds to the Company of $5,000,000.  On July 
31, 1998, the Company sold an additional 20,000 shares of Preferred Stock 
under the same terms and conditions for gross proceeds of $500,000.  The 
Preferred Stock was sold as a private placement pursuant to Regulation D of 
Section 4(2) of the Securities Act of 1933, as amended.    

The Preferred Stock has a liquidation preference of $25.00 per share and will 
rank senior to all other series of preferred stock that may be issued in the 
future.  Each share of Preferred Stock is convertible into ten shares of 
common stock of the Company, and will be automatically converted into common 
stock at the then prevailing conversion rate at such time as the Company has 
completed a secondary public offering which raises not less than $15,000,000 
in gross proceeds and has its common stock listed on the New York Stock 
Exchange, the American Stock Exchange or the NASDAQ National Market System.  
The holders of the Preferred Stock are not entitled to dividends, except that 
if dividends are paid on the Company's common stock, holders of Preferred 
Stock will be entitled to dividends on the basis of the number of shares of 
common stock into which the Preferred Stock is then convertible.  The 
Preferred Stock will vote together with the holders of common stock on all 
matters presented to stockholders for a vote on the basis of the number of 
shares of common stock into which the Preferred Stock is then convertible.  
The holders of the Preferred Stock have unlimited piggyback registration 
rights and certain demand registration rights.

Based on a valuation report prepared by an investment and merchant banking 
firm dated July 31, 1998, the Company has determined that the Preferred Stock 
was sold at fair market value.  

                                     32
<PAGE>

In addition, on June 29, 1998, the Company entered into a Securities Purchase 
Agreement with the Robert M. Fell Living Trust (the "Fell Trust").  Pursuant 
to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares 
of Preferred Stock and a warrant to purchase 1,200,000 shares of the 
Company's common stock (the "Fell Warrant").  The purchase price of the 
Preferred Stock acquired by the Fell Trust was $25.00 per share, or an 
aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was 
paid in the form of a promissory note (the "$490,000 Note").  The purchase 
price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and 
$70,000 was paid in the form of a promissory note (the "$70,000 Note").  The 
Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to 
purchase 1,200,000 shares of common stock at $2.50 per share.  The Fell 
Warrant is exercisable one-sixth on June 29, 1998, and one-sixth thereafter 
on each six month anniversary date.  The $490,000 Note bears interest at the 
rate of 8% per annum, which may, at the option of the Fell Trust, be paid 
currently or added to the principal amount of the note.  The $490,000 Note is 
due June 29, 2002, provided that the Fell Trust is required to prepay the 
note, without penalty, as soon as possible consistent with its other cash 
requirements.  The $70,000 Note bears interest at the rate of 6% per annum, 
which may, at the option of the Fell Trust, be paid currently or added to the 
principal amount of the note.  The $70,000 Note is due on June 29, 2008.  The 
Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired 
pursuant to the Securities Purchase Agreement to secure its obligations under 
the $490,000 Note and the $70,000 Note.  The 20,000 shares of Preferred Stock 
and the Fell Warrant were issued under Section 4(2) of the Securities Act of 
1933, as amended, based on the representations of the recipient.  

Based on a valuation report prepared by an investment and merchant banking 
firm dated July 31, 1998, the Company has determined that the exercise price 
of the Fell Warrant was at not less than fair market value.    

Effective June 29, 1998, the number of directors of the Company was increased 
to seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel 
were elected to the Board of Directors of the Company.  Such persons were 
designated by Mr. Fell pursuant to a Stockholders Agreement entered into in 
conjunction with the sale of the Preferred Stock.  David M. Marshall, Russell 
M. Fine and Jess Rifkind remain as directors of the Company, as the designees 
of Mr. Marshall and Mr. Fine.  At such time as the Company retains a 
permanent Chief Executive Officer, the number of directors of the Company 
will be increased to eight and the Chief Executive Officer will be elected to 
the Board of Directors. As a result of the ability to designate four 
directors as provided in the Stockholders Agreement, Mr. Fell may be deemed 
to have acquired control of the Company.     

In conjunction the Preferred Stock financing, the Company incurred direct 
costs related to such financing of $360,903, which were charged to additional 
paid-in capital.  Of such amount, $217,493 was paid to a firm for investment 
advisory services.  In addition, this firm has the right to acquire warrants 
to purchase 72,498 shares of common stock for $.0625 per warrant, consisting 
of 24,166 warrants exercisable at $.01 per share and 48,332 warrants 
exercisable at $2.50 per share.  The warrants are exercisable through June 
2003, and have certain piggyback 

                                     33
<PAGE>

registration rights.  The warrants were issued under Section 4(2) of the 
Securities Act of 1933, as amended, based on the representations of the 
recipient.  The Company also paid cash finder's fees to other parties 
aggregating $28,500.

                                     34
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

     27 Financial Data Schedule (electronic filing only)

(b)  Reports on Form 8-K - Three Months Ended September 30, 1998: 

     The Company filed a Current Report on Form 8-K on July 13, 1998, to 
     report a change in control of the Company in conjunction with a $5,500,000 
     preferred stock financing, consisting of the sale of 220,000 shares of 
     Series A Senior Convertible Preferred Stock at $25.00 per share on June 29,
     1998 (Item 1).

                                     35
<PAGE>


                                  SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
    
    
                                        YOU BET INTERNATIONAL, INC.
                                        ---------------------------
                                                (Registrant)
    
    
    
                                        
Date:  November 10, 1998            By:  /s/ ROBERT M. FELL
                                        ---------------------------
                                        Robert M. Fell
                                        Chief Executive Officer
                                        (Duly Authorized Officer)
    
    
    
                                        
Date:  November 10, 1998            By:  /s/ PHILLIP HERMANN
                                        ---------------------------
                                        Phillip Hermann
                                        Executive Vice President 
                                          and Chief Financial Officer    
                                        (Principal Financial Officer)

                                      36