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Article by DailyStocks_admin    (06-02-08 09:54 AM)

Filed with the SEC from May 15 to May 21:

Youbet.com Inc. (UBET)
Youbet.com (UBET)
New World Opportunity Partners I, a shareholder group led by CEO Michael Brodsky, raised its stake to 5,302,347 shares (12.8%), after buying 1,388,204 shares on May 14 at $1.63 apiece.

BUSINESS OVERVIEW

Business Overview
We are a diversified provider of technology and pari-mutuel horse racing content for consumers through the Internet and a leading supplier of totalizator systems, terminals and other pari-mutuel wagering services and systems to the pari-mutuel industry. Youbet Express is a leading online advance deposit wagering (“ADW”) company focused on horse racing primarily in the United States.
Our website, www.youbet.com , enables our customers to securely wager on horse races at over 150 racetracks worldwide from the convenience of their homes or other locations. Our customers receive the same odds and expected payouts they would receive if they were wagering directly at the host track and their wagers are placed directly into the track betting pools.
We strive to appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop” experience. To place a wager, customers open an account and deposit funds with us via several convenient options, including our ExpressCash system, which links our customers’ wagering accounts directly to their personal checking accounts. To enable our customers to make informed wagers, we provide 24-hour access to up-to-the-minute track information, real-time odds and value-added handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality, live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our player service agents, who are available 15 hours a day, seven days a week to provide technical support and address any wagering or funding questions.
Our content partners provide us the same live satellite feeds that they normally broadcast at the track and to off-track betting facilities (“OTBs”). As a result, our partners have the opportunity to increase the total handle wagered on their racing signal, which we believe leads to higher revenues for the host track and a higher quality of racing through larger purses for the horse owners. In return, we receive a commission, or a percentage of the wager (handle) processed through Youbet Express.
Our acquisition of United Tote Company in February 2006 diversified our product offerings. United Tote is a leading supplier of totalizator systems (equipment and technology that processes wagers and payouts) and processed more than $7 billion in handle in 2007 on a global basis, approximately 90% of which is North American pari-mutuel handle. United Tote supplies pari-mutuel tote services to approximately 100 racing facilities in North America and additional facilities in a number foreign markets. As result of this acquisition, we now operate two business segments for financial accounting purposes, ADW and totalizator systems. For more information, see Note 15 “Segment Information” in our consolidated financial statements at the end of this report.
We were incorporated in Delaware on November 13, 1995. Our executive offices are located at 5901 De Soto Avenue, Woodland Hills, California 91367 and our telephone number is (818) 668-2100. Our website address is www.youbet.com .
Industry Overview
According to The Jockey Club, which is the breed registry for all thoroughbred horses in North America, total U.S. handle on thoroughbred racing, the most popular type of horse racing, was estimated at approximately $15 billion in 2007, of which 88% represented wagers made away from the host track, such as at OTBs, at other tracks, or via Internet and telephone wagering. We believe that the ADW segment has outpaced overall pari-mutuel industry growth in recent years and that the largest volume of ADW wagers in the U.S. were processed through entities licensed as multi-jurisdictional wagering hubs in Oregon. According to the Oregon Racing Commission (“ORC”), handle processed through multi-jurisdictional wagering hubs licensed in Oregon have stayed relatively flat year-over-year at $1.6 billion for the year ended December 31, 2007.
In 2000, the United States Congress amended the Interstate Horseracing Act of 1978 to clarify the legality of wagering across state lines via telephone or other electronic media and the commingling of pari-mutuel wagering pools.
In the fourth quarter of 2006, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006, which includes certain racing protective provisions by maintaining the status-quo with respect to wagering activities covered under the Interstate Horseracing Act of 1978, as amended. This Act prohibits the acceptance of credit cards, electronic funds transfers, checks, or the proceeds of other financial transactions by persons engaged in unlawful betting or wagering businesses; however, the Act specifically excludes from the definition of unlawful Internet gambling “any activity that is allowed under the Interstate Horseracing Act of 1978”.

Competitive Advantages
We are a leading ADW company focused on horse racing primarily in the U.S. and have processed over $2.5 billion in wagers from January 1, 2002 to December 31, 2007. We believe we have the following competitive advantages:
Extensive customer database and strong analytical capability
We utilize sophisticated data mining software, which generates detailed customer segmentation analyses based on variables such as wagering propensities and preferences. With this information, we are able to personalize our product offerings through targeted special offers, contests and promotions tailored to specific customer segments. This information also helps us maximize revenue yield by allowing us to target promotions and incentives to wager on tracks that generate greater revenue yield to us.
Highly scalable infrastructure
Our highly scalable technological infrastructure and automated online and telephonic wagering platform provide us with significant operating leverage. We typically operate at less than 33% of system capacity. This built-in excess capacity enables us to easily process significantly greater wagering volume at a low incremental cost. Additionally, we continuously build automation into our core online and interactive voice recognition wagering platform in order to minimize our incremental staffing requirements. With this operating leverage, we are well-positioned to capitalize on handle growth to increase earnings.
Growth Strategies
We aim to maintain our market-leading position in the ADW segment and build upon the strength of our brand. We have adopted the following key growth strategies to achieve these objectives:
Continue to develop high-quality wagering products
We intend to continue to develop industry-leading technology and to expand the diversity and breadth of our product offerings and services. We believe this will translate into a more enjoyable customer experience, and as a result, we believe our customers will place a greater portion of their wagering dollars through us. In 2007, we entered into a strategic alliance with Phantom Fiber Corporation to deliver a mobile phone wagering solution that is fully integrated with the totalizator systems used by United Tote customers. The mobile service, which can be delivered on a wide variety of cellular phones, will let players view race programs, place wagers, manage their accounts and view historical transactions.
Seek expansion opportunities
We intend to seek opportunities in the U.S. and abroad to leverage our highly scalable online and telephonic wagering platforms and to diversify our customer base, revenue streams and content. Domestically, opportunities may exist to grow handle and increase market share by targeting companies in the ADW sector. We also plan to target companies which provide strategic infrastructure components in order to become more vertically integrated and to diversify our product offerings and customer base. Internationally, we believe opportunities exist to increase our market presence and to offer different forms of wagering while simultaneously providing our customers with a more diverse array of content to view and upon which to wager.
Expand international presence
In 2007, we derived less than 3.8% of our handle from races outside of the U.S. and Canada. We hope to increase our penetration of the international market by entering into content agreements with leading international tracks. This will enable us to expand our customer base internationally, while simultaneously providing our domestic customers with a more diverse array of content to view and to wager upon. In addition, international jurisdictions permit a broader array of wagering activities than the U.S., including fixed-odds sports betting. With modifications, our robust operating platform can be adapted to facilitate such international opportunities.

Leverage our flexible wagering platform to provide online solutions for track operators and other gaming companies
Only a limited number of track operators currently operate a website that accepts ADW wagers. If track operators or other gaming companies decide to enter the online ADW segment, our experience and technological leadership make us highly qualified to assist in building and supporting such websites. In addition, with our technologically advanced, highly scalable and flexible online platform and our excess capacity, we are well-positioned to provide the technological infrastructure for the online initiatives of track operators or other gaming companies.
Revenue Sources
Pari-mutuel racetrack operators typically retain a portion of all wagers as their commission prior to distributing payoffs to the winners. In accordance with our arrangements with Television Games Network (“TVG”) and independent racetracks, we receive a commission from each racetrack calculated as a percentage of our customers’ wagers that are delivered to their respective pari-mutuel pools. In the aggregate, these commissions represented approximately 80% of our total revenue for 2007. We generate additional revenue primarily from processing fees, monthly subscription fees and the sale of handicapping information.
United Tote revenue is derived from contractual arrangements for the installation and maintenance of totalizator systems at horse and dog racing facilities. This revenue is supplemented by sales of the supplies and equipment used by the facilities.
Marketing
Using various media channels such as Youbet Express SM , the Internet, print advertising, radio and brand placement, we focus our integrated marketing efforts on both casual and more targeted marketing to horse racing enthusiasts. An integrated marketing approach allows us to cycle a series of targeted messages centered on product features and benefits, online tournaments and contests, and event-specific promotions.
Our marketing campaigns and customer retention strategies are supported with customer research and analysis and are intended to satisfy the needs of existing customers and drive new customers to Youbet Express SM . We frequently initiate communication with our customers via phone and e-mail. One-on-one messaging through the Youbet Express SM homepage allows us to tailor personalized messages and offers to our members based on their wagering propensity and preferences.
Acquisitions and Dispositions
Acquisition of United Tote
In February 2006, we completed the acquisition of United Tote for $31.9 million plus the assumption of approximately $14.7 million of United Tote debt (primarily related to the financing of equipment that had been placed with United Tote’s track customers). We financed the acquisition by delivering to UT Group, LLC, United Tote’s former owner, the following consideration:
•
Approximately $9.7 million in cash;

•
$5.2 million one-year, unsecured promissory note;

•
$3.2 million two-year, unsecured promissory note;

•
$1.8 million two-year, unsecured promissory note; and

•
2,181,818 shares of Youbet common stock, valued at $5.50 per share.
For more information, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations, Contingent Liabilities and Commitments.” We have streamlined the operations of United Tote, and we are evaluating strategic alternatives for this segment of our business, including a possible sale.

Disposition of Bruen Productions
In October 2006, Youbet acquired privately-held Bruen Productions International, Inc. We funded the acquisition with common stock held in treasury, payable in four installments over three years, and the assumption of approximately $0.2 million of debt. Youbet delivered 13,953 shares of common stock in October 2006 as the first installment. As of December 31, 2007, we sold Bruen Productions back to the original owner in exchange for return of the delivered shares, termination of future stock obligations and cash. The decision to sell the Bruen Productions was reached after management concluded that Bruen Productions was not a core business for Youbet, and that the sale would free up management resources to focus on our ADW platform and totalizator services. For more information regarding the sale of Bruen Productions, see Note 17 “Discontinued Operations” in our consolidated financial statements at the end of this report.
Shutdown of IRG
As further described in Item 3 “Legal Proceedings” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the IRG business was adversely impacted by a severe reduction in wagering activity following the commencement of an investigation involving the IRG business by the U.S. Attorney’s Office in Las Vegas, Nevada. Accordingly, on February 15, 2008, we stopped taking wagers and ceased all other operations associated with its business. In connection with the IRG shutdown, we surrendered IRG’s license with the ORC. For more information regarding the shutdown of IRG, see Note 18 “Subsequent Event” in our consolidated financial statements at the end of this report.
Competition
Web-based interactive gaming and wagering is a new and rapidly changing marketplace. We anticipate competition will become more intense as many web-based ventures focus on the gaming industry. Management believes that we are well-positioned to compete with these entities, as well as other established gaming companies seeking to enter the interactive, pari-mutuel gaming market.
TVG is a direct competitor in the domestic interactive pari-mutuel gaming market and currently accepts wagers from customers living in 13 states. TVG is a 24-hour national horse racing channel broadcast over cable and satellite.
In March 2007, Magna Entertainment Corp. (“Magna”) and Churchill Downs Incorporated (“Churchill Downs”) announced that they had formed a joint venture called TrackNet Media Group LLC (“TrackNet”) through which the companies’ horse racing content will be available to each other’s various distribution platforms, including Magna’s existing ADW platform, a Churchill Downs-owned ADW platform launched in May 2007, ADW platforms acquired by Churchill Downs in June 2007 and to third parties, including racetracks, casinos and other ADW providers. TrackNet will also purchase horse racing content to make available through its partners’ respective distribution platforms. Aside from its namesake, at which the Kentucky Derby is held, Churchill Downs also owns and operates Arlington Park and several other horse racetracks, and Magna owns horse racetracks throughout North America, including Santa Anita Park, Gulfstream Park and Pimlico Race Course, home of The Preakness Stakes. Magna also owns AmTote International, Inc., a provider of totalizator services.
In April 2007, TrackNet announced that it would not allow us to carry Magna and Churchill Downs content, including the 2007 Kentucky Derby, unless we agreed to stop offering the content we have been sublicensing from TVG. As a result, we were unable to offer wagering on the 2007 Kentucky Derby, and accordingly have been unable to offer wagering on Churchill Downs horse racing since the end of April 2007 and have lost certain other content, which has had an adverse effect on revenues.
Since that April 2007 announcement, we continue to negotiate with TrackNet to gain access to its horse racing content. In May 2007, TVG filed suit against Magna and its affiliates—Horse Racing Television and Xpressbet—for infringement of two interactive wagering system patents. TrackNet has announced that it is attempting to negotiate content-sharing arrangements with TVG, which may result in our ability to carry Magna and Churchill Downs content. The California Horse Racing Board recently has facilitated agreements that make most major racing signals in California available to the largest domestic account-wagering operations in the country, including Youbet, from November 2007 to July 2008. We cannot be certain that we will be able to secure TrackNet’s content in the near or long term.
In June 2007, Churchill Downs acquired one of our major competitors, AmericaTab, and incorporated its wagering product and member base into its ADW product, TwinSpires.com, making it the third largest ADW provider in terms of total gross handle. TwinSpires.com currently has access to all TrackNet-controlled content, as well as many major racetracks that were previously exclusive to TVG and licensed to us, such as Hollywood Park and the New York Racing Association (“NYRA”), as well as the Aqueduct, Belmont and Saratoga racetracks.

In January 2008, NYRA ended its exclusive relationship with TVG and negotiated directly with all major providers. Youbet Express and all other major ADW providers have secured rights to NYRA content through December 31, 2008.
Other competitors include The Racing Channel, doing business as Oneclickbetting.com.
We believe potential new domestic and international competitors looking to enter the interactive wagering marketplace may include large established interactive and online software companies, media companies and gaming companies. Our business strategies may be influenced by the timing of a competitor’s product releases and the similarity of such products to our products. Additional competition may result in significant pressure on our pricing and profit margins.
United Tote competes primarily on the basis of the design, performance, reliability and pricing of our products as well as contract services provided. To effectively compete, we expect to make continued investments in product development and/or acquisitions of technology. Our two principal competitors in this business segment are AmTote International, Inc. (owned by Magna) and Scientific Games Corporation. Our competition outside of North America is more fragmented, with competition also being provided by several international and regional companies.
Government Regulation and Legislation
Current licensing
In November 2007, the California Horse Racing Board renewed both of our in-state and out-of-state ADW licenses through the end of 2008. Terms for these one-year licenses began on January 1, 2008.
In June 2007, the ORC approved Youbet’s application to renew for one year our multi-jurisdictional simulcast and interactive wagering totalizator hub license to accept and place online and telephone horse racing pari-mutuel wagers. Also in June 2007, the Idaho State Racing Commission approved Youbet’s application to renew for one year our multi-jurisdictional simulcast and interactive wagering totalizator hub license to accept and place online and telephone horse racing and pari-mutuel wagers.
In June 2007, the Washington Horse Racing Commission approved Youbet’s application for a one-year ADW license to accept and place online and telephone horse racing and pari-mutuel wagers.
We intend to apply for renewal of each of the licenses described above and, at this time, we have no reason to believe that these licenses will not be renewed.
Other government regulation and licensing
Gaming activities are subject to extensive statutory and regulatory control by federal, state and foreign agencies and could be significantly affected by any changes in the political climate and changes to economic and regulatory policies. These changes may impact our operations in a materially adverse way. Our facilities are used by customers to place wagers and we receive commissions derived from such wagers; therefore various statutes and regulations could have a direct and material impact on our business and on the public demand for our products and services.
For a description of pertinent federal legislation, see “Industry Overview.”
From time to time, we receive correspondence from various governmental agencies inquiring into the legality of our activities. We believe that our activities conform to those federal and state laws and regulations applicable to our activities. However, we face the risk of either civil or criminal proceedings brought by governmental or private litigants who disagree with our interpretation of the applicable laws and therefore, we are at risk of losing such lawsuits or actions and may be subject to significant damages or civil or criminal penalties.
A number of states have enacted, considered or are considering interactive and Internet gaming legislation and regulations which may inhibit our ability to do business in such states, and anti-gaming conclusions and recommendations of other governmental or quasi- governmental bodies could form the basis for new laws, regulations and enforcement policies that could have a material adverse impact on our business.

Any expansion into international markets may subject us to additional regulation in those countries into which we expand. We believe that we can operate or license technology in numerous jurisdictions that allow telephone and account wagering. However, we may not be able to obtain the approvals necessary to market our services in such jurisdictions.
Seasonality and Backlog
Our business segments are subject to seasonal fluctuations in demand associated with racing schedules. The first and fourth quarters of the calendar year traditionally comprise the weakest seasons for our pari-mutual wagering business. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. This adversely affects the amounts wagered and the corresponding service revenues. However, due to the services we provide, we do not experience a material backlog in sales orders or the fulfillment of client services.
Employees
As of December 31, 2007, we had 338 full-time employees. We have never had a work stoppage. Twenty of our United Tote employees as of December 31, 2007, were represented by a labor union. We consider our relations with our employees and the union that represents some of them to be good.

CEO BACKGROUND

MICHAEL BRODSKY has served as a director since June 2007, as Chairman of the Board since February 2008 and as President and Chief Executive Officer since April 2008. Mr. Brodsky has been the Managing Partner of NWOP I, a public equity investment firm, since June 2005. From 1999 until January 2005, Mr. Brodsky was Chief Financial Officer of The Away Network, an online travel media company. Following the sale of Away.com to Orbitz and Cendant Corporation, Mr. Brodsky was Vice President, Finance and Administration of the TDS Division of Cendant Corporation and its subsidiary Orbitz.com, a travel e-commerce and online travel media company, from January 2005 to June 2005. Mr. Brodsky received a B.A. from Syracuse University, a J.D. from the Northwestern University School of Law, and an M.B.A. from Northwestern University’s JL Kellogg Graduate School of Management.

JAMES A. BURK joined Youbet.com as Chief Financial Officer in July 2007 and was subsequently named Corporate Secretary. Prior to joining Youbet, Mr. Burk served as Chief Financial Officer of Palace Entertainment Holdings, Inc., an operator of water parks and family entertainment centers, where he managed finance, treasury, information systems, business development analysis, planning and forecasting, as well as SEC reporting and compliance. Before joining Palace Entertainment in May 2006, Mr. Burk served in an executive capacity at Vivendi Universal from 2004 to 2005. Prior to Vivendi Universal, he served as Executive Vice President and Chief Financial Officer of United Cinemas International, an international film exhibition company, from 2000 to 2004. Mr. Burk was employed by MCA Inc./Universal Studios from 1979 to 1999, most recently as Senior Vice President of International Operations for Universal Pictures from 1996 to 1999, where he was responsible for supervising international film, video and exhibition joint venture operations.

GARY ADELSON has served as a director since April 2002. Mr. Adelson is a private consultant specializing in the media, sports and entertainment industries, and until September 2007, he was Managing Director with Houlihan, Lokey, Howard & Zukin, an international investment banking firm. Before joining Houlihan Lokey in June 2003, Mr. Adelson was a principal and cofounder of Media Connect Partners, a provider of financial and operating advisory services to media, entertainment, sports and communications companies, and prior to that, he was the Managing Partner of EastWest Venture Group. In 1993, Mr. Adelson founded Interactive Cable Systems, a private cable and telephony company that was acquired by MCI. Mr. Adelson began his career as producer of the long-running television series Eight is Enough. He went on to produce many other successful television series, television films, mini-series and feature films, including The Last Starfighter, a revolutionary film first utilizing reality-based CGI, Hook, Universal Soldier, It Could Happen to You and the Emmy-winning Sybil. He is a member of the Academy of Television Arts and Sciences, Academy of Motion Picture Arts and Sciences, the American Film Institute and the Directors Guild of America. Mr. Adelson also serves as a director of Small World Kids, Inc., a manufacturer and distributor of high-quality specialty toys and educational products for children.

JAMES EDGAR has served as a director since June 2002. Governor Edgar’s career in government spans 30 years. He served in the Illinois executive branch for 20 years, including two four-year terms as Illinois’s 38th Governor and ten years prior to that as Secretary of State. He worked in the legislative branch of government for ten years, which included his election to the Illinois House of Representatives. As Governor, he crafted legislation that allowed horse racing to remain competitive with the rapidly growing riverboat casino industry. He also created laws to improve housing conditions for workers and their families at Illinois tracks. Since leaving the Governor’s Office in January 1999, Governor Edgar and members of his family have engaged in raising and racing thoroughbreds and standardbreds. Governor Edgar is currently a Distinguished Fellow at the University of Illinois Institute of Government and Public Affairs and serves as senior advisor at Res Publica Group. Governor Edgar is also a director of Alberto-Culver Company, Horizon Group Properties, Inc., and John B. Sanfilippo & Son, Inc. and serves on a variety of not-for-profit boards of directors.

F. JACK LIEBAU has served as a director since June 2005. Mr. Liebau has served as the President of Bay Meadows Racing Association since July 2004 and the President of Hollywood Park Racing Association and Hollywood Park Fall Racing Association since September 2005. Prior to joining Bay Meadows, Mr. Liebau was the President of the California Operations of Magna Entertainment Corporation where he served as President of Santa Anita Racecourse, Golden Gate Fields Racecourse and Bay Meadows Racecourse. Mr. Liebau also served on Magna’s Board of Directors from 2001 to 2004. Prior to joining Magna, Mr. Liebau was the President of Bay Meadows Operating Company. From 1998 to 2004, Mr. Liebau served as the President of the Federation of California Racing Associations and as a director of CHRIMS — California Horse Racing Information Management Systems. Mr. Liebau is a member of the Jockey Club, the co-owner of Valley Creek Farm, a thoroughbred breeding farm, and has co-owned a number of graded stakes winners.

JAY R. PRITZKER has served as a director since June 2007. Mr. Pritzker has been the Managing Partner of The Pritzker Group, a private investment firm, since January 2002. He has been a Partner of New World Ventures, a venture capital firm focused on early stage and growth stage enterprises which he founded, since 1996. Mr. Pritzker has served as the Chief Executive Officer of AmSafe Partners, an aerospace industrial holding company, from November 2004 to September 2007. In addition to his role as President of the Pritzker Family Foundation, he serves on a variety of civic, philanthropic and private company boards including the Chicago 2016 Olympic Committee and the Northwestern University Board of Trustees. Mr. Pritzker received an A.B. from Duke University and a J.D. from the Northwestern University School of Law and is a member of the Chicago and Illinois Bar Associations.

MICHAEL D. SANDS has served as a director since December 2007. Mr. Sands is an independent marketing consultant, and until November 2007, he was managing partner of Ascenda Partners LLC, a consulting firm he co-founded. Prior to Ascenda, Michael Sands served as Chief Operating Officer of the Consumer Travel Americas Unit within Cendant Travel Distribution Services until November 2006, where he was responsible for overseeing the operations and management of the consumer websites, including Orbitz, CheapTickets, Away.com and Lodging.com. Mr. Sands joined Orbitz as Vice President, Marketing in September of 2000, was chief marketing officer from December 2001 until the summer of 2004, and then general manager of Orbitz Ventures until Orbitz was acquired by Cendant Corporation in November 2004.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
We are a diversified provider of technology and pari-mutuel horse racing content for consumers through Internet and telephone platforms and a leading supplier of totalizator systems, terminals and other pari-mutuel wagering services and systems to the pari-mutuel industry.
To date, we have focused on the United States pari-mutuel horse race wagering market through our main product, Youbet Express SM , which features online wagering, simulcast viewing, and in-depth, up-to-the-minute information on horse racing. Our customers receive interactive, real-time audio/video broadcasts, access to a comprehensive database of handicapping information, and, in most states, the ability to wager on a wide selection of horse races in the United States. We are working to expand the Youbet.Express SM brand, its products, and its services throughout the United States and in select international markets.
Based on information compiled by The Jockey Club, over 88% of pari-mutuel wagers, or handle, on thoroughbred racing in the United States were placed at locations away from the host track. We believe the shift toward off-track wagering has been driven by the betting public’s desire for convenience and access to a broader range of content. Our website, www.youbet.com , enables our customers to securely wager on horse races at over 150 racetracks worldwide from the convenience of their homes or other locations. Our customers receive the same odds and expected payouts they would receive if they were wagering directly at the host track and their wagers are placed directly into the track betting pools.
We strive to appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop” experience. To place a wager, customers open an account and deposit funds with us via several convenient options, including our ExpressCash system, which links our customers’ wagering accounts directly to their personal checking accounts. To enable our customers to make informed wagers, we provide 24-hour access to up-to-the minute track information, real-time odds and value-added handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality, live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our player service agents, who are available 15 hours a day, seven days a week to provide technical support and address any wagering or funding questions.
Our content partners provide us the same live satellite feeds that they normally broadcast at the track and to off-track betting facilities (“OTBs”). As a result, our partners have the opportunity to increase the total handle wagered on their racing signal, which we believe leads to higher revenues for the host track and a higher quality of racing through larger purses for the horse owners. In return, we receive a commission, or a percentage of their wager (handle), from the race tracks.
Our acquisition of United Tote Company in February 2006 diversified our product offerings and furthered our efforts to be the pari-mutuel industry’s leading end-to-end technology provider. United Tote is a leading supplier of totalizator systems (equipment and technology that processes wagers and payouts) and processes more than $7 billion in handle annually on a global basis, approximately 90% of which is North American pari-mutuel handle. United Tote supplies pari-mutuel tote services to approximately 100 racing facilities in North America and additional facilities in the Philippines and other foreign markets.
We have two reportable segments for accounting purposes. Our ADW segment consists of our core Youbet Express operations, as well as IRG which closed as of February 15, 2008, and Bruen Productions, which we sold in December 2007. For information on IRG and Bruen Productions, see Note 17 “Discontinued Operations” and Note 18 “Subsequent Event”, respectively, in our consolidated financial statements at the end of this report. United Tote operations constitute a separate totalizator segment. For information regarding results for each segment, see Note 15 “Segment Reporting” in our consolidated financial statements at the end of this report.

Results of Operations for 2007 Compared to 2006
Revenues
Total revenues increased $1.8 million, or 1.3%, for 2007 compared to 2006. ADW segment revenue increased $0.5 million, or 0.4%, and totalizator segment revenues increased $1.3 million largely due to including full year results for United Tote (acquired in mid-February 2006) in 2007. The increase in our ADW segment reflects a $5.9 million, or 6.4%, increase in Youbet Express revenues, offset by a $5.5 million, or 25%, decrease in IRG revenues. Following the commencement of the investigation involving IRG’s business by the U.S Attorney’s Office in Las Vegas, Nevada, the IRG business was adversely impacted by a reduction of its player base and wagering handle, eventually resulting in our decision to shut down IRG’s operations on February 16, 2008.
Total wagering handle for 2007 was $716.0 million, a decrease of $47.0 million, or 6.2%, with Youbet Express and IRG experiencing an increase (decrease) of 4.4% and (22.6%), respectively, when compared to 2006. We believe the increase in the Youbet Express handle was driven primarily by an increase in our marketing activity, including player award programs offered in 2007.
Youbet Express and IRG’s total blended yield (defined as commission revenue less track and licensing fees as a percentage of handle) was 5.6% in 2007, up from 4.7% in the prior year, reflecting our efforts to increase handle on higher yielding tracks and the significant revenue decline in the lower-yielding IRG handle. In 2007, we generated a 7.2% yield on Youbet Express handle and a 2.4% yield on IRG handle, compared to 6.1% and 2.4%, respectively, in the 2006 period. We believe that yield is a useful measure to evaluate operating results and profitability. Yield, however, should not be considered an alternative to operating income or net income as indicators of Youbet’s financial performance and may not be comparable to similarly titled measures used by other companies.
Revenue generated by our United Tote operations in 2007 included contract revenue associated with the service of totalizator systems of $23.3 million and equipment sales of $0.9 million, an increase of $1.7 million and a decrease of $0.4 million, respectively, compared to 2006.
Operational Expenses
Track Fees: Track fees primarily consist of amounts paid and payable to various tracks. Track fees decreased $2.3 million, or 4.4%, in 2007 compared to 2006. The decrease is consistent with decreased handle and relates primarily to a $3.8 million reduction of track fees associated with IRG’s operations.
Licensing Fees: Licensing fees represent amounts paid and payable under our license and content agreement with TVG. For 2007, these fees decreased $2.2 million, or 9.8%, compared to 2006, primarily due to changes in track mix and the decline in wagering handle at IRG.
Network Operations: Network operations expense decreased $0.2 million, or 3.2%, for 2007 compared to 2006, primarily due to reduced handle associated with the operations of IRG and improved cost control.
Contract Costs : Contract costs are from United Tote’s operations and represent those costs associated with earning totalizator servicing contract revenue at tracks. Contract costs increased $3.0 million, or 22.4%, for the year ended December 31, 2007 compared to 2006 largely because of the mid-February 2006 acquisition of our United Tote subsidiary, increased data communication costs of $0.5 million, professional fees for SOX compliance of $0.1 million and payroll related costs.
Equipment Costs: These costs relate to United Tote’s operations and represent those costs associated with earning equipment sales revenue. Equipment costs for 2007 declined $0.2 million or 36.3%, when compared with 2006, due to the decline in equipment sales.
Research and Development: Research and development expense increased $1.1 million or 33.0% for 2007, compared to 2006. The 2007 increase is primarily due to a full year’s research and development expense at United Tote, which was acquired in February 2006, reduced capitalization of research and development costs due to a fewer number of projects and the write-off of costs associated with several work-in-progress projects, including $0.3 million relating to a player activity tracking/accounting system for our IRG operations. We will continue to invest in the development of our network infrastructure and to support continued technology upgrades, which may increase our research and development expenses in the future.
Sales and Marketing: Sales and marketing expense increased $2.1 million, or 21.9%, for the year ended December 31, 2007 compared to the same period of 2006 largely due to increased marketing expenditures in the second and third quarters of 2007. This increase was primarily at Youbet Express and resulted from increased business development efforts and marketing programs, including expanded print and television advertising and race track promotional expenses, targeted at reducing the impact of the loss of TrackNet content.

General and Administrative: General and administrative expense increased $1.8 million, or 7.6%, for the year ended December 31, 2007 compared to the same period of 2006. While reductions in payroll and incentive compensation, and consulting costs as well as the nonrecurring legal expenses associated with a prior-year arbitration with TVG and bank debt refinancing accounted for approximately $0.8 million of expenses in 2006 that were not incurred in 2007. These reductions were offset by the full year impact of the 2006 acquisition of United Tote; a $0.8 million and $0.6 million increase to IRG’s and United Tote’s bad debt reserves, respectively; and a $1.5 million reserve established as a result of the U.S. Attorney’s seizing IRG funds from its Nevada’s bank accounts in October 2007. Approximately $1.0 million in legal expense was incurred in the fourth quarter relating to the IRG investigation. Additionally, in connection with restructuring the company’s cost structure and shutting down the IRG business, the company recorded severance/termination charges of $0.5 million and $2.0 million for IRG and Youbet Express, respectively, in the fourth quarter of 2007.
General and administrative expense, as a percentage of total revenues, increased to 18.3% for the year 2007 from 17.3% in the same period of 2006.
Depreciation and Amortization: Depreciation and amortization increased $3.5 million compared to the year ended December 31, 2006. This increase was primarily due to the impact of 2007 capital spending, a full years’ depreciation expense and intangible amortization expense at United Tote, which was acquired in the middle of the first quarter of 2006, the final purchase price allocation for that company, completed at year-end 2006 and the amortization of $0.5 million of capitalized software development costs associated with our King Contest product in the third quarter of 2007.
Impairment Write downs: As a result of substantially reduced business levels following the commencement in October 2007 of the U.S. government investigation involving the IRG business, we concluded that the intangible assets associated with the IRG business (attributable to customer lists and a non-competition agreement, as well as amounts accrued with respect to a potential earn-out payment based on IRG’s historic performance and due August 31, 2008) were impaired. In light of the future outlook for the IRG business under the continuing investigation, we recorded an impairment charge for the intangibles associated with the IRG business of $9.9 million, consisting of $6.7 million in the unamortized balance of prior earn-out payments and $3.2 million of earned but unpaid earn-out payments due August 31, 2008. In connection with our exploration of strategic alternatives for United Tote, we re-evaluated the goodwill related to United Tote. As part of this evaluation, we compared the current estimated fair value to the carrying value of goodwill, and on March 25, 2008, we concluded that United Tote goodwill was impaired as of December 31, 2007. The total amount of this non-cash impairment charge was $8.0 million.
Interest Expense : Interest expense decreased to $1.8 million in 2007 compared to $2.0 million in the same period of 2006. The decrease is primarily due the paydown of the Company’s bank debt. Interest expense is related to our credit facility and, to a lesser extent, the unsecured promissory notes issued in connection with our February 2006 acquisition of United Tote and capitalized leases.
Other Income : Other income decreased $0.6 million compared to 2006 primarily due to an early termination fee received by United Tote in the second quarter of 2006.
Income Taxes: Income taxes were negatively impacted by several permanent and non-permanent book/tax differences such as amortization of intangibles, asset impairments, stock based compensation and depreciation. Additionally, the company increased its valuation allowance relating to deferred tax assets for net operating loss carryforwards by $2.9 million. According to Statement of Financial Accounting Standards Board Statement (“SFAS”) No. 109, “ Accounting for Income Taxes ,” a deferred tax asset should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. For 2007, positive evidence we considered included future revenue and expenses, reversals of book to tax temporary differences, and the implementation of and/or ability to employ various tax planning strategies. Negative evidence included book and tax losses generated in prior periods, and the inability to achieve forecasted results for those periods. The company concluded that a valuation allowance was warranted against a portion of its net operating loss carry forwards. On January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, which had no effect on our financial statements or related disclosures.
Discontinued Operations: Effective December 31, 2007, we sold Bruen Productions back to the original owner (David Bruen). For the year ended December 31, 2007, Bruen generated a loss of $0.9 million, which includes a $0.4 million third quarter charge for the impairment of goodwill. For more information regarding the sale of Bruen Productions, see Item 1 “Business — Acquisitions and Dispositions”.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of continuing operations for the three months ended March 31, 2008 compared to the three months ended March 31, 2007
Revenues
Total revenues decreased $4.1 million, or 14%, for the first quarter of 2008 compared to the first quarter of 2007. Commissions on ADW decreased approximately $4.0 million, or 18%, resulting from a decline in handle. Totalizator segment revenues were flat at $5.3 million when compared to the first quarter of 2007.

Total handle for the three months ended March 31, 2008 was $95.5 million, a decrease of $18.7 million, or 16%, due to the loss of TrackNet content as well as changes in state legislation and regulatory oversight that resulted in our decision cease to accepting wagers in Arizona, Kansas and Washington D.C. This handle loss was partially offset by increased harness content in the first quarter of this year compared to first quarter of 2007.
Youbet Express yield, defined as commission revenue less track and licensing fees (each calculated in accordance with generally accepted accounting principles), increased 30 basis points to 8.4% in the first quarter of 2008 versus 8.1% in the first quarter 2007. The yield improvement reflects the impact of higher yielding harness content and changes in track mix favoring tracks with higher take-out rates, the loss of lower yielding TrackNet content and a reduction in lower yielding TVG content in 2008. We believe that yield is a useful measure to evaluate our operating results and profitability. Yield, however, should not be considered an alternative to operating income or net income as indicators of Youbet’s financial performance and may not be comparable to similarly titled measures used by other companies.
Operating expenses
Track fees : Track fees decreased $2.0 million, or 19%, in the first quarter of 2008 compared to the first quarter of 2007. This decrease is consistent with the lower handle and revenues. Track fees primarily consist of host and market access fees paid and payable to various tracks.
Licensing fees : For the three months ended March 31, 2008, these fees decreased $0.7 million, or 26%, compared to the first quarter of 2007, primarily due to decreased wagering on horse races at TVG tracks. Licensing fees represent amounts paid and payable under our licensing agreement with TVG.
Contract costs : United Tote contract costs decreased $0.2 million, or 6%, in the first quarter of 2008 compared to the first quarter of 2007 largely due to lower compensation costs resulting from the restructuring initiated during the second half of 2007. In addition, lower repair and maintenance costs were partially offset by higher data communication expenses. Contract costs are primarily the costs associated with providing totalizator services at race tracks.
Network operations : Network operations expense of $0.9 million was $0.3 million or 23.1% below the first quarter of 2007. This decrease is primarily attributable to lower data communication and audio/video streaming costs. Network operations expense consists of costs for salaries, data center management, telecommunications and various totalizator fees.
Research and development : Research and development expense for the first quarter of 2008 was relatively unchanged compared to the first quarter of 2007. We continue to invest in the development of our network infrastructure and to support continued technology upgrades as necessary, which may increase our research and development expenses in the future.
Sales and marketing : Sales and marketing expense decreased $0.9 million, or 42%, in the first quarter of 2008 compared to the first quarter of 2007. This decrease was primarily all in the Youbet Express business and resulted from an intentional management priority to reduce and more appropriately target marketing spend to specific initiatives including online customer acquisition, conversion and retention. In addition, salary costs are lower as we restructured the organization. Sales and marketing expense consists of costs for salaries, marketing and advertising, player services and business development.
General and administrative : General and administrative expense decreased $0.8 million, or 16%, in the first quarter of 2008 compared to the first quarter of 2007. This decrease was primarily due to lower salary costs resulting from the ongoing cost restructuring initiated in the fourth quarter of 2007, lower accounting related costs due to our improved internal control environment partially offset by higher legal fees associated with the Virginia lawsuit. For more information about this lawsuit, see Note 6 to our consolidated financial statements in Item 1 of this report.
Depreciation and amortization : Depreciation and amortization increased $0.2 million, or 12%, compared to the first quarter of 2007. This increase was primarily higher due to depreciation at United Tote.
Interest expense (income) : Interest expense of $0.4 million in the first quarter of 2008, decreased $0.1 million compared to $0.5 million in the first quarter of 2007. This decrease is primarily due to lower debt levels at the end of the first quarter of 2008. Interest income is $0.1 million lower than the comparable 2007 quarter primarily due to lower cash levels in 2008 compared with 2007.

Liquidity and capital resources
During the first three months of 2008, we funded our operations primarily with net cash provided by operating activities. As of March 31, 2008, we had net negative working capital of $15.6 million, compared to negative working capital of $13.3 million at December 31, 2007. As of March 31, 2008, we had $9.0 million in cash and cash equivalents, $7.7 million in restricted cash and $13.8 million in debt.
Net cash provided by operating activities for the three months ended March 31, 2008 of $4.7 million increased by $3.7 million from the $1.0 million provided by operating activities in the 2007 quarter, primarily due to a significant reduction in receivables in 2008 and a non-recurring payment of a $1.2 million arbitration award to TVG in the 2007 quarter.
Net cash used in investing activities for the first three months of 2008 was $0.3 milllion, compared to net cash used in investing activities of $5.9 million for the same period of 2007. The $5.6 million decline is attributable to reduced capital spending in 2008 and a non-recurring “make-whole” payment of $4.5 million to United Tote’s former owners pursuant to the term of the acquisition agreement in the first quarter of 2007.
Net cash used in financing activities in the first quarter of 2008 of $1.9 million increased $0.5 million when compared to that used in 2007, due to reduced borrowings and continued repayment of debt.
Our principal ongoing cash requirements consist of payroll and benefits, business insurance, real estate and equipment leases, legal fees, data center operations, telecommunications and debt service.
We have a credit agreement that provides for a revolving credit facility and under which we have a term loan. For more information regarding our credit agreement, as amended, see Note 4 to our condensed consolidated financial statements in Item 1 of this report.
We are currently withholding payment of the third and final promissory note issued in connection with our acquisition of United Tote. This promissory not had an aggregate principal amount of $3.2 million and accrued interest of $0.2 million as of March 31, 2008, pending resolution of several outstanding claims. We have four outstanding claims for indemnification against the former owners of United Tote, and we expect to offset some or all of the amounts owed under this promissory note based on these claims. While we expect these matters to be resolved in the near-term, we cannot predict the precise timing of resolution. In addition, the former owners of IRG are contractually entitled to a final earn-out payment as of June 30, 2008. At March 31, 2008, we had accrued approximately $3.2 million for a potential earn out payment. The earnout payment is subject to any rights of offset or claims that may arise prior to the date such payments are due which Youbet may assert to reduce the obligation to make the potential earn-out payment. Therefore the precise payment, if any, is not certain at this time.
Management believes that cash from operations and its on-going efforts to contain costs and operate efficiently, combined with the growth in handle and yield improvement at Youbet Express, will provide sufficient cash flow to adequately support operations. We believe that our cash flow from operations and our unrestricted cash and cash equivalents are sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may from time to time seek additional capital to fund our operations, and to reduce our liabilities in response to changes in the business environment. To raise capital, we may seek to sell additional equity securities, issue debt or convertible securities or seek to obtain credit facilities through financial institutions or other resources. We have an effective shelf registration statement under which we may from time to time issue and offer debentures, notes, bonds and other evidence of indebtedness, and forward contracts in respect of any such indebtedness, shares of preferred stock, shares of common stock, warrants, stock purchase contracts, stock purchase units and stock purchase rights for an original maximum aggregate offering amount of approximately $30 million, or up to approximately $36 million if we utilized our shelf for one offering. Unless otherwise described in future prospectus supplements, we intend to use the net proceeds from the sale of securities registered under this universal shelf registration statement for general corporate purposes, which may include additions to working capital, the repayment or redemption of existing indebtedness and the financing of capital expenditures and future acquisitions. The sale of additional equity or convertible securities would result in additional dilution to our stockholders.

CONF CALL

Garrett Edson
Thank you, Daryl and good morning, everybody. This call may contain forward-looking statements about future performance and results of operations and involve risks and uncertainties that are more completely described in the risk factors section of Youbet’s Form 10-K for the year December 31, 2007 and its subsequent filings with the SEC.
I would now like to introduce Mr. Gary Sproule, Interim CEO of Youbet.com. Gary.
Gary W. Sproule
Good morning and thank you for joining us. Also with me this morning is Jim Burk, our Chief Financial Officer. To start off today’s call, I would like to summarize our fourth quarter 2007 financial performance and then review the restructuring process we are currently implementing to turn the company around. Jim will then review the fourth quarter financial highlights in greater detail and then we’ll wrap up with a Q&A session.
Yesterday we reported a net loss of $28.7 million for the fourth quarter 2007, a net loss of $0.68 per share compared to a net loss of $5.1 million in the fourth quarter 2006, representing a net loss of $0.14 per share.
Included in the net loss for the fourth quarter 2007 were one-time charges that total $24.1 million, or $0.57 per share. On an adjusted basis, our loss from continued operations in the fourth quarter 2007 is $4.4 million, or a net loss of $0.10 per share, compared to a fourth quarter 2006 net loss of $0.06 per share, excluding one-time items. Jim will review in greater detail the specifics of these one-time charges.
With respect to our loss from continued operations in the fourth quarter 2007, there were several factors impacting our financial performance. Revenues were down 1% at United Tote year over year, while costs of revenue were up 16% year over year, primarily as a result of higher data communication and paper costs.
IRG handle for the fourth quarter 2007 was down over $50 million, resulting in a reduction of net track revenues of over $1 million year over year. This decline in performance was primarily the result of the investigation by the United States Attorney’s Office in Las Vegas. Handle at Youbet Express for the fourth quarter 2007 was down 9% year over year. Yield was 7.6% compared to an adjusted yield of 6.2% in the fourth quarter 2006.
While Jim’s further review of our 2007 financial performance will reinforce the fact that it was a challenging year, I believe that over the last several months we have made progress towards restructuring the company, including shedding non-core assets, streamlining operations, and reorganizing the senior management team.
Please keep in mind that we are still in the middle of this restructuring process and are hopeful that by mid-year, we will have emerged a stronger company poised to leverage the scaleable business model of Youbet Express.
As part of this restructuring process, we are focused on several key initiatives in 2008 that we believe will improve our financial and operating performance. One of the initiatives in this process is to continually evaluate our assets to determine if they are essential components of our business. One result of this process has been the sale of Bruen Productions back to the original owner. This sale helped free up management resources that have been reallocated to the core ADW business.
We announced in February that we ceased operations at IRG and in March, we executed a settlement agreement with the United States Attorney’s Office in Las Vegas. And yesterday, we announced that we are assessing our strategic options for United Tote, including the possible sale of this business unit.
We are hopeful that these restructuring efforts will result in our ability to refocus and reallocate our technical, human, and financial resources on our core ADW Youbet Express business.
Another initiative in our restructuring plan is focused on the three key drivers of ADW growth. First, content management -- developing programs that focus on increasing same track handle and revenues year over year. Second is yield management -- improving our revenue yield with more focus on revenue and yield growth. Although the loss of low yield content at Churchill and Magna accounted for some of our fourth quarter increase, we were able to partially offset the loss of their handle with higher yielding handle.
We have recently acquired the [NIRA] content on a direct basis rather than through a sub-license agreement, which has resulted in improved yields. And as we discussed on our last earnings call, the California experiment has also improved our yields in California.
Third is player management -- acquiring and retaining players in addition to increasing share of wallet of our existing customer base. We are addressing our player services weaknesses, have recognized that retaining customers is more cost-effective than acquiring new customers. At the core of this process, we are focused on improving player issue resolution as well as providing a personalized level of service for our elite player group.
And our third overall company initiative addresses the restructuring of the ADW organization, making it more efficient with the ability to adapt quickly to changes in the market, consolidating senior management positions and thereby reducing costs, introducing new skill sets and core competencies, and remaining focused on those priorities that add value.
We continue to concentrate on cost-cutting initiatives and organizational efficiencies and believe there are opportunities in marketing and corporate overhead. I would like to remind everyone that our efforts to reposition Youbet is still a work in progress. Although we have accomplished much in the last several months, we are hopeful to further improve the Youbet Express platform.
Now I would like to turn the call over to Jim who will go into depth on our fourth quarter 2007 financial results.
James A. Burk
Thank you, Gary. Good morning. Yesterday afternoon, we reported a new loss of $28.7 million, or $0.68 per share in the fourth quarter of 2007, compared to a net loss of $0.14 per share in the fourth quarter of 2006. Included in the net loss for the current quarter was a $9.9 million intangible asset impairment charge related to IRG and an $8 million good will impairment charge related to United Tote.
Other non-recurring charges in the quarter included a $1.5 million uncollectible reserve related to the seizure of the IRG accounts by the U.S. Attorney’s Office, $2 million in severance costs, and $1 million in legal costs associated with the IRG investigation and other costs aggregating $1.1 million.
Combined, these one-time items total $24.3 million, or $0.57 per share, of which $20.6 million represented non-cash charges. Thus, on an adjusted basis, our loss from continued operations in the fourth quarter of 2007 is $4.4 million, or a net loss of $0.10 per share, compared to a fourth quarter 2006 loss excluding one-time items of $0.06 per share.
Youbet Express handle for the fourth quarter of 2007 was $106.4 million, a decrease of $10.4 million or 9% from the prior year period. However, total Youbet Express revenue was down only 1% to $21.5 million from $21.6 million in the fourth quarter of 2006.
Youbet Express yield, defined as our commission revenue less track fees and licensing fees, as a percentage of handle was 7.6% in the fourth quarter of 2007 versus an adjusted 6.2% in the comparable quarter of 2006. This improvement in yield is attributable to the replacement of lower yield content with content from higher yielding independent tracks.
United Tote revenues for the fourth quarter were down 1% to $5.6 million when compared to the fourth quarter of 2006. Total contract revenue was down $100,000 and equipment sales were also down $100,000, below the prior year quarter.
Gross profit margin at United Tote declined -- 33% in the fourth quarter of 2006 to 23.9% primarily due to higher data communication and paper costs. Total company gross profit represents revenues less track fees, licensing fees, and network operations. Excluding the $1.1 million arbitration settlement with TVG in 2006, the quarterly gross profit in 2007 of $9.4 million was 3% lower than 2006. Declines in gross profit of $1.1 million in IRG and $500,000 at United Tote were primarily offset by yield improvement at Youbet Express.
Total company operating expenses, which include line items research and development, sales and marketing, general administrative, and depreciation and amortization, increased approximately $22.9 million to $35.3 million in the fourth quarter of 2007, up from $12.4 million in the fourth quarter of 2006. Adjusting for all the one-time items, operating expenses would have increased by approximately 9%, or $900,000. Research and development costs of $1.4 million were $700,000 higher than 2006, resulting from a $200,000 write-off of capitalized software at Youbet and fewer capitalized projects at United Tote.
Sales and marketing expense of $2.6 million was comparable to the prior year; however, excluding one-time IRG severances of $400,000, and $300,000 in business development project write-offs at Youbet in the fourth quarter of 2007, sales and marketing expenses were actually down $700,000, or 27% from 2006.
General and administrative expenses increased $3.1 million, or 42% from $7.4 million in the fourth quarter of 2006. The main cause of this increase was various one-time items totaling $5.2 million, including $2 million in severance costs, a $1.5 million reserve for IRG funds, and $1 million in IRG legal costs, as well as other one-time items. Offsetting this increase were one-time charges incurred in 2006 aggregating $2.1 million, including $900,000 related to the settlement of certain local tax matters, $400,000 of legal fees associated with the TVG litigation, and $400,000 in payments to the IRS for late filings of W2G forms, and $400,000 in SOX and monitor consulting fees.
We commenced cost control initiatives in the fourth quarter and expect to demonstrate the benefits from this program in upcoming quarter. Depreciation and amortization costs for the fourth quarter of 2007 were $2.9 million compared to $1.7 million in the fourth quarter of 2006, a 64% increase. This increase was primarily due to higher depreciation and intangible amortization expense at United Tote subsequent to the final purchase price allocation completed at the end of 2006. We also had net interest expense of $295,000 in the fourth quarter of 2007, down from $561,000 in 2006, principally due to lower debt balances.
Turning to cash flow, net cash provided by operating activities in 2007 was $2 million, down from 9.4 in 2006. The year-over-year decrease was primarily due to a $4 million shift of operating cash to restricted cash to be in compliance with the Oregon Racing Commission requirements, as well as decreases of $1.2 million and $3.7 million in accrued expenses and trade payables respectively, due to the timing of obligation requirements attributable to a 34% decline in wagering handled experienced in the fourth quarter of 2007 versus 2006. This decrease was partially offset by a small 1.3% revenue increase over 2006.
Our investment activities in the fourth quarter of 2007 were limited, consisting mainly of proceeds from the sale of property and equipment, disposable of our investment in Bruen, and movements in restricted cash balances.
No additional shares were repurchased during the quarter. For the year, the company has repurchased 586,766 shares for approximately $1 million. The company still has $9 million remaining in its share repurchase program, which allows the company to repurchase up to $2 million common shares as of March 2009.
As of December 31st, Youbet had total assets of $65 million. Total assets included $15.2 million in cash, cash equivalents, and restricted cash. Our total liabilities were $44 million. Stockholders equity was $21 million. As of December 31, 2007, we had negative net working capital of $13.3 million.
The decline in working capital primarily relates to a decline in year-over-year earnings, continued pay down of our term loan by $3 million, a one-time make-whole payment to the former owners of United Tote of $4.5 million, and a $1 million increase in performance earn-out payment to the former owners of IRG.
Our debt at the end of 2007 was $15.2 million. Included in debt is a subordinated promissory note of $3.2 million plus interest payable to United Tote’s former owners that is currently due but is subject to [inaudible] of indemnification and offset. The company has four outstanding claims for indemnification against the former owners of United Tote and will not pay the net balance due until those matters are resolved.
We believe that our ongoing efforts to contain costs and operate efficiently, combined with growth in handle and yield debt improvement that Youbet Express will generate sufficient cash to adequately support our operations.
We believe that cash flow from operations and unrestricted cash, cash equivalents, are sufficient to fund working capital and capital expenditure requirements for at least the next 12 months. On March 28, 2008, we entered into a second amendment to our credit agreement with Wells Fargo Foothill, the administrative agent under the credit facility. The more significant terms of this amendment included revising certain financial covenants, providing waivers of our non-compliance as of year-end, accelerating the maturity date to January 31, 2009, and providing new scheduled term loan prepayments.
Finally, we wanted to note that yesterday we received a letter from NASDAQ indicating that our stock price for the last 30 days had closed below the minimum $1 per share bid price required and is thus in non-compliance with NASDAQ rules. Youbet can regain compliance with a minimum bid price requirement if at any time before September 29, 2008, the bid price of the company common stock closes at above $1 per share or more for a minimum of 10 consecutive business days. NASDAQ may in its discretion require the company to maintain the bid price of at least $1 per share for a period in excess of 10 consecutive business days before determining that it has demonstrated the ability to maintain long-term compliance. No assurance can be given that the company will regain compliance during this period. We want to assure you that the company intends to take the actions required to regain compliance.
And now I would like to turn it back to Gary.
Gary W. Sproule
Thanks, Jim. I think Jim’s review of our financial performance reinforces the fact that 2007 was a challenging year for Youbet. However, as I outlined in my comments, we have identified a restructuring process built around key initiatives that will get this company back on track in 2008. We have shifted our focus to our core Youbet Express ADW platform and we’ll be looking to secure and introduce new content, as well as continuing to improve our customer service in order to retain and increase our customer base. Further, throughout the year we will keep a keen eye on our income statement, specifically the top line revenue and our cost structure.
Finally, we are making our ADW organization more efficient, which will enable it to adapt quickly to changing and very competitive environment. We believe 2008 will be key turnaround year for Youbet and we look forward to getting back to basics and providing long-term value for our shareholders.

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