In the bottom reaches of the stock market, some investors are truly in a gambling mood. They're placing wagers on outfits like

Youbet.com

(UBET)

,

Play and Win

(PWIN.OB:OTC BB) and

Total Entertainment

(TTLN.OB:OTC BB).

What's the lure? It's online betting, one of the hottest businesses on the Web and a new play for investors drawn to the hurly-burly of emerging markets. Three years ago, playing blackjack or betting on professional football online, to name just two kinds of action, were confined to a handful of sites; now there are about 650. Revenue, doubling annually, is expected to surpass $3 billion a year by 2003, according to

River City Group

, an industry consultant.

"The prospects are phenomenal," says Brian Haggerty, who invests in e-gambling stocks and edits

eGaming News

, an industry newsletter in New Jersey. "And the reason is, this industry is virtually unknown in terms of investment potential."

But for investors drawn to the hype, potential may be as good as it gets. This is an industry with so many question marks that shares of most of the 60 publicly owned online-wagering companies are trading right where they apparently belong -- in the penny-stock market.

Low Stock Prices

Tiny Total Entertainment, which runs a string of Web casinos and licenses software to other operators, is an object lesson in the dangers that face investors trolling for jackpots. Followers of the industry are often touting the company, but its stock has languished on the

OTC Bulletin Board

and company and legal documents raise questions about its founder's past. The shares haven't surpassed $2 in the company's two years of existence and recently sat at around 34 cents, giving the company a paltry

market capitalization of $19 million. It has no profits, and revenue didn't surpass $1 million last year.

The struggle isn't Total Entertainment's alone. Youbet.com's stock has fallen from $25 to around $2 as it strives to make a profit, mostly from users placing horse-racing bets.

Poker.com

(PKER.OB:OTC BB) hasn't gotten much financial mileage yet from player accolades that it's the best card site online. Its stock is at 33 cents.

The industry suffers problems ranging from questions of integrity to clunky technology. But nothing hinders the business more right now than challenges to its very existence. The industry is at war with the U.S. government, which has prosecuted some operators for violating a law against betting over the telephone. That has driven the industry offshore and put it under a cloud while

Congress

deliberates whether to approve an outright ban on Internet gambling.

Many operators say they aren't fazed. Despite the feds, business goes on from places like the Dominican Republic and Venezuela. And the operators point out that even if the U.S. market remains in limbo, world business is a growing market, with more and more countries allowing regulated Web gambling.

Severe Test

But with the field growing increasingly crowded, many operators could get squeezed out. And even if online gambling eventually wins U.S. sanctions, the business faces a severe test. Old-line casinos, with huge financial muscle, are likely to jump into the market, possibly trampling many players.

More doubts inhibit online gambling. Its integrity is under fire because of bettor complaints of alleged theft and cheating at sites. Some market watchers, noting that the traditional casino business is 10 times as large as the online market, wonder if gambling on a PC is too sterile to ever grow significantly.

In the midst of this turmoil sits Total Entertainment, a company that was created from a dormant pet food business. The company, founded by Sandy J. Masselli Jr., a former stockbroker, operates a series of its own gambling sites, including one called

theonlinecasino.com

, and collects fees from other operators for the proprietary wagering software it licenses.

Total Entertainment has struggled from the outset. And now the situation is so dicey that its auditor,

Grant Thornton

, said in a federal filing last December that the future of the business is in doubt. The accountants blamed continued operating losses, the regulatory uncertainties and the possibility that the company could be forced to pay substantial damages if it loses a legal fight with large shareholders over the stock deal that created Total Entertainment.

The Finances

For the quarter ended June 30, the company lost money on operations but was able to report a narrow net profit of $41,111 because it completed the sale of one of its sites for $400,000. It did report a 244% increase in revenue to $155,611, but surging expenses left the company with a negative operating cash flow of $379,982 for the period. (A negative cash flow means a company is spending more than it's bringing in.)

Mitchell Brown, Total Entertainment's chief operating officer, predicts the company will vault out of its gloomy predicament and post positive cash flow by year-end. He says the middle of the year is traditionally slow in the company's largest business, sports betting, and he predicts that the company's efforts to improve its software and offer bettors more services and options will soon begin paying off.

Meanwhile, founder Masselli's history is as turbulent as the company's. He filed for bankruptcy in New York in 1991, saying he had only $500 in the bank and that a creditor had seized a Manhattan co-op apartment he owned, according to court records. A year later, according to

National Association of Securities Dealers'

records,

Dunhill Securities

, a Long Island brokerage house, fired him for allegedly drawing $127,000 in unearned commissions and failing to give the money back.

Other brokerage houses where he worked also said he owed them money and filed arbitration cases against him, according to NASD records.

Prudential Bache

and

Shearson Lehman Brothers

, where he was employed in the late 1980s and early 1990s, won judgments totaling more than $760,000.

No Big Deal

Masselli downplays the problems, saying they were caused by employment disputes over his compensation. All his troubles, including the bankruptcy, were settled after negotiations with the firms, he says. In the Dunhill case, he asserted that he was the real victim because he lost $300,000 when he invested in a failed merger of Dunhill and another company.

Meanwhile, an ethics expert has raised questions about Masselli's professional credentials. In a December filing by Total Entertainment, Masselli reported he has a law degree from "

LaSalle University

." That's not the widely respected institution in Philadelphia, but a correspondence school with a nearly identical spelling in Mandeville, La.

John Desmond, a retired corporate attorney and executive fellow at

Bentley College's Center for Business Ethics

in Massachusetts, says he's troubled that Masselli's description of the school was "stated in such a way that it misleads."

He adds, "I think that there would be an ethical obligation to avoid the confusion that this can create by indicating where the school is located."

"I worked hard for that degree," Masselli says, adding he had no intent to mislead anyone.

A Company to Watch

Despite Total Entertainment's troubles, Haggerty, the newsletter editor, recently promoted the company's shares in a report on the industry,

eGaming: The Next Pot of Gold

. And the operation got a mention as a "company to watch" in a recent appraisal of online gambling by

Bear Stearns

.

In the report, analysts Jason Ader and Marc Falcone describe an industry in great flux. Hope for operators, they say, rests in sorting out regulatory and trustworthiness questions and to what extent, if ever, established casino operators get into the business.

"We expect Internet gambling firms to create ... bricks-and-mortar alliances to create the strongest and most loyal customer base by providing excitement and safe and secure transactions and fair playing odds," the report says. "It will be necessary for these companies to form alliances in an effort to survive a mass consolidation in an extremely dense industry."

Ventures with just such apparent potential were arranged recently by

MGM Mirage

(MGG)

and

Harrah's Entertainment

(HET)

. MGM's is with

Silicon Gaming

, a company that develops interactive gambling software, while Harrah's took a minority stake in

iwin.com

, a site where visitors can play games and win prizes.

Both are promotional deals for the casinos now. But if Internet gambling is ever legitimized in the U.S., the alliances could have the ground floor staked out.