** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-Q**

** **

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the quarterly periodended April 1, 2007**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For thetransition period from                                   to                                  **

**Commission FileNo. 0-24993**

** **

**WPT ENTERPRISES, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | ** ** | **77-0639000**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **5700  Wilshire Boulevard**                                     | ** ** | ** **                            |
| **Suite  350**                                                   | ** ** | ** **                            |
| **Los  Angeles, California**                                     | ** ** | **90036**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

**(323) 330-9900**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. 

| Yes x | No o |
|-------|------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated  filer x | Non-accelerated  filer o |
|---------------------------|----------------------|--------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

Asof May 7, 2007 there were 20,378,333 shares of Common Stock, $0.001 par valueper share, outstanding.

 

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**WPTENTERPRISES, INC.**

**INDEX**
|            | ** ** | ** **            | ** ** | ** **                                                                                                                                                      | ** ** | **Page of**  | ** ** |   |
|------------|------------|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------|
| ** ** | ** ** | ** **            | ** ** | ** **                                                                                                                                                      | ** ** | **Form 10Q** | ** ** |   |
| PART  I.   |       | FINANCIAL INFORMATION |       |                                                                                                                                                            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM  1.              |       | FINANCIAL STATEMENTS                                                                                                                                            |       |         |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       |                  |       | Condensed Consolidated Balance Sheets as of April 1,  2007 (unaudited) and December 31, 2006                                                                    |       | 3            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       |                  |       | Condensed Consolidated Statements of Earnings (Loss)  and Comprehensive Earnings (Loss) for the three months ended April 1, 2007  and April 2, 2006 (unaudited) |       | 4            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       |                  |       | Condensed Consolidated Statements of Stockholders’  Equity for the three months ended April 1, 2007 and April 2, 2006 (unaudited)                          |       | 5            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       |                  |       | Condensed Consolidated Statements of Cash Flows for  the three months ended April 1, 2007 and April 2, 2006 (unaudited)                                         |       | 6            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       |                  |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                               |       | 7            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM 2.               |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                                                                     |       | 11           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM 3.               |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                                                                     |       | 19           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM 4.               |       | CONTROLS AND PROCEDURES                                                                                                                                         |       | 19           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
| PART II.   |       | OTHER INFORMATION     |       |                                                                                                                                                            |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM  1.              |       | LEGAL  PROCEEDINGS                                                                                                                                              |       | 20           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM  1A.             |       | RISK  FACTORS                                                                                                                                                   |       | 20           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM  5.              |       | OTHER  INFORMATION                                                                                                                                              |       | 28           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
|       |       | ITEM 6.               |       | EXHIBITS                                                                                                                                                        |       | 28           |       |
|       |       |                  |       |                                                                                                                                                            |       |         |       |
| SIGNATURES |       |                  |       |
|            |            |                       |            |                                                                                                                                                                 |            |              |            |        |  |  |  |

 

2

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**WPTENTERPRISES, INC.**

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                        | ** ** | **April 1, 2007  (unaudited)** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **(In thousands)**                  | ** ** |
| **Assets**                                                                                        |       |                                     |       |                            |       |
| Current assets:                                                                                   |       |                                     |       |                            |       |
| Cash and cash  equivalents                                                                        |       | $                                        | 7,364      |                            | $          | 8,360 |   |
| Investments in  marketable securities                                                             |       | 29,682                                   |       | 31,263                          |       |
| Accounts  receivable, net of return allowance of $18                                              |       | 1,959                                    |       | 2,353                           |       |
| Deferred  television costs                                                                        |       | 1,971                                    |       | 1,722                           |       |
| Other                                                                                             |       | 918                                      |       | 735                             |       |
|                                                                                              |       | 41,894                                   |       | 44,433                          |       |
|                                                                                              |       |                                     |       |                            |       |
| Property and equipment,  net                                                                      |       | 3,549                                    |       | 3,375                           |       |
| Restricted cash                                                                                   |       | 456                                      |       | 453                             |       |
| Investments                                                                                       |       | 2,923                                    |       | 2,923                           |       |
| Other                                                                                             |       | 156                                      |       | 156                             |       |
|                                                                                              |       | $                                        | 48,978     |                            | $          | 51,340 |   |
|                                                                                              |       |                                     |       |                            |       |
| **Liabilities and Stockholders’  Equity**                                                    | ** ** | ** **                               | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                              |       |                                     |       |                            |       |
| Accounts payable                                                                                  |       | $                                        | 709        |                            | $          | 674 |   |
| Accrued payroll  and related                                                                      |       | 699                                      |       | 1,205                           |       |
| Other accrued  expenses                                                                           |       | 748                                      |       | 1,076                           |       |
| Deferred revenue                                                                                  |       | 5,142                                    |       | 4,740                           |       |
| Income taxes  payable                                                                             |       | 97                                       |       | 394                             |       |
|                                                                                              |       | 7,395                                    |       | 8,089                           |       |
|                                                                                              |       |                                     |       |                            |       |
| **Commitments and Contingencies**                                                                 | ** ** | ** **                               | ** ** | ** **                      | ** ** |
|                                                                                              |       |                                     |       |                            |       |
| Stockholders’ equity:                                                                        |       |                                     |       |                            |       |
| Preferred stock,  $0.001 par value; authorized 20,000 shares; none issued and outstanding         |       | —                                   |       | —                          |       |
| Common stock,  $0.001 par value; authorized 100,000 shares; 20,378 shares issued and  outstanding |       | 20                                       |       | 20                              |       |
| Additional  paid-in capital                                                                       |       | 42,307                                   |       | 41,719                          |       |
| Retained  earnings (deficit)                                                                      |       | (718                                     | )          | 1,561                           |       |
| Accumulated  other comprehensive loss                                                             |       | (26                                      | )          | (49                             | )          |
|                                                                                              |       | 41,583                                   |       | 43,251                          |       |
|                                                                                              |       | $                                        | 48,978     |                            | $          | 51,340 |   |

 

Seenotes to condensed consolidated financial statements

3

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**WPT ENTERPRISES, INC.Condensed Consolidated Statements of Earnings (Loss) (unaudited)**

 

 
| ** **                                                    | ** ** | **Three months ended**                                   | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **April 1, 2007**                                        | ** ** | **April 2, 2006** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| **Revenues:**                                                 |       |                                                               |       |   |   |
| License fees:                                                 |       |                                                               |       |   |   |
| Domestic television                                           |       | $                                                                  | 2,402      |   | $ | 3,045 |   |
| International television                                      |       | 455                                                                |       | 907 |   |
| Product licensing                                             |       | 879                                                                |       | 713 |   |
|                                                          |       | 3,736                                                              |       | 4,665 |   |
|                                                          |       |                                                               |       |   |   |
| Online gaming                                                 |       | 550                                                                |       | 911 |   |
| Event hosting and sponsorship fees                            |       | 125                                                                |       | 797 |   |
| Other                                                         |       | 80                                                                 |       | 81 |   |
|                                                          |       | 4,491                                                              |       | 6,454 |   |
|                                                          |       |                                                               |       |   |   |
| **Cost of  revenues**                                         |       | 2,152                                                              |       | 2,420 |   |
|                                                          |       |                                                               |       |   |   |
| **Gross  profit**                                             |       | 2,339                                                              |       | 4,034 |   |
|                                                          |       |                                                               |       |   |   |
| **Selling,  general and administrative expense**              |       | 5,267                                                              |       | 5,150 |   |
|                                                          |       |                                                               |       |   |   |
| **Loss  from operations**                                     |       | (2,928                                                             | )          | (1,116 | ) |
|                                                          |       |                                                               |       |   |   |
| **Other  income:**                                            |       |                                                               |       |   |   |
| Gain on sale of investment                                    |       | —                                                             |       | 5,675 |   |
| Interest                                                      |       | 663                                                                |       | 325 |   |
| **Earnings  (loss) before income taxes**                      |       | (2,265                                                             | )          | 4,884 |   |
|                                                          |       |                                                               |       |   |   |
| **Income  taxes**                                             |       | (14                                                                | )          | (1,294 | ) |
|                                                          |       |                                                               |       |   |   |
| **Net  earnings (loss)**                                      |       | (2,279                                                             | )          | 3,590 |   |
| ** **                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **Unrealized  gains on securities**                           |       | 23                                                                 |       | 429 |   |
| ** **                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **Comprehensive  earnings (loss)**                            |       | $                                                                  | (2,256     | ) | $ | 4,019 |   |
|                                                          |       |                                                               |       |   |   |
| **Net  earnings (loss) per common share - basic and diluted** |       | $                                                                  | (0.11      | ) | $ | 0.18 |   |
|                                                          |       |                                                               |       |   |   |
| **Weighted-average  common shares outstanding - basic**       |       | 20,603                                                             |       | 20,017 |   |
|                                                          |       |                                                               |       |   |   |
| Dilutive effect  of options                                   |       | —                                                             |       | 19 |   |
|                                                          |       |                                                               |       |   |   |
| **Weighted-average common shares  outstanding - diluted**     |       | 20,603                                                             |       | 20,036 |   |

 

Seenotes to condensed consolidated financial statements

4

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**WPTENTERPRISES, INC.**

**Condensed Consolidated Statements of Stockholders’ Equity**

**ThreeMonths ended April 1, 2007 and April 2, 2006**

**(unaudited)**

 
| ** **                                    | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | **Accumlated**    | ** ** | ** **          | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|---------------|------------|-------------------|------------|---------------------|------------|
| ** **                                    | ** ** | ** **            | ** ** | **Additional** | ** ** | **Retained** | ** ** | ** **    | ** ** | **Other**         | ** ** | ** **          | ** ** |
| ** **                                    | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Earnings** | ** ** | **Deferred**  | ** ** | **Comprehensive** | ** ** | ** **          | ** ** |
| ** **                                    | ** ** | **Shares**            | ** ** | **Dollars**    | ** ** | **Capital**  | ** ** | **(Deficit)** | ** ** | **Compensation**  | ** ** | **Earnings/(Loss)** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**    | ** ** |
| **2007**                                      | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES AT JANUARY 1, 2007**               | ** ** | **20,378**            | ** ** | **$**          | **20**     | ** **   | **$**      | **41,719**    | ** ** | **$**             | **1,561**  | ** **          | **$**      | **—** | ** ** | **$** | **(49** | **)** | **$** | **43,251** | ** ** |
| Share-based  compensation                     |       |                  |       |           |       | 588          |       |          |       |              |       |                |       | 588 |   |
| Other  comprehensive gain                     |       |                  |       |           |       |         |       |          |       |              |       | 23                  |       | 23 |   |
| Net  loss                                     |       |                  |       |           |       |         |       | (2,279        | )          |              |       |                |       | (2,279 | ) |
| **BALANCES AT APRIL 1, 2007**                 | ** ** | **20,378**            | ** ** | **$**          | **20**     | ** **   | **$**      | **42,307**    | ** ** | **$**             | **(718**   | **)**               | **$**      | **—** | ** ** | **$** | **(26** | **)** | **$** | **41,583** | ** ** |
| ** **                                    | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **2006**                                      | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES AT JANUARY 2, 2006**               | ** ** | **20,158**            | ** ** | **$**          | **20**     | ** **   | **$**      | **34,113**    | ** ** | **$**             | **(6,208** | **)**               | **$**      | **(1** | **)** | **$** | **10,449** | ** ** | **$** | **38,373** | ** ** |
| Reduction  of deferred compensation           |       |                  |       |           |       |         |       |          |       | 1                 |       |                |       | 1 |   |
| Common  stock issued                          |       | 115                   |       |           |       | 1            |       |          |       |              |       |                |       | 1 |   |
| Share-based  compensation                     |       |                  |       |           |       | 1,731        |       |          |       |              |       |                |       | 1,731 |   |
| Income  tax benefit of stock option exercises |       |                  |       |           |       | 1,293        |       |          |       |              |       |                |       | 1,293 |   |
| Sale  of investment                           |       |                  |       |           |       |         |       |          |       |              |       | (5,675              | )          | (5,675 | ) |
| Other  comprehensive gain                     |       |                  |       |           |       |         |       |          |       |              |       | 429                 |       | 429 |   |
| Net  earnings                                 |       |                  |       |           |       |         |       | 3,590         |       |              |       |                |       | 3,590 |   |
| **BALANCES AT APRIL 2, 2006**                 | ** ** | **20,273**            | ** ** | **$**          | **20**     | ** **   | **$**      | **37,138**    | ** ** | **$**             | **(2,618** | **)**               | **$**      | **—** | ** ** | **$** | **5,203** | ** ** | **$** | **39,743** | ** ** |

 

Seenotes to condensed consolidated financial statements

5

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**WPT ENTERPRISES, INC.Condensed Consolidated Statements of Cash Flows(unaudited)**

** **
| ** **                                                                                            | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                            | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| ** **                                                                                            | ** ** | **(In thousands)**          | ** ** |
|                                                                                                  |       |                             |       |   |   |
| **OPERATING  ACTIVITIES:**                                                                            |       |                             |       |   |   |
| Net earnings (loss)                                                                                   |       | $                                | (2,279     | ) | $ | 3,590 |   |
| Adjustments to reconcile net earnings (loss) to net  cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                                          |       | 181                              |       | 120 |   |
| Share-based compensation                                                                              |       | 586                              |       | 1,712 |   |
| Gain on sale of investment                                                                            |       | —                           |       | (5,675 | ) |
| Income tax benefit of stock option exercises                                                          |       | —                           |       | 1,294 |   |
| Increase in operating (assets) liabilities:                                                           |       |                             |       |   |   |
| Accounts receivable                                                                                   |       | 394                              |       | 649 |   |
| Income taxes payable                                                                                  |       | (297                             | )          | — |   |
| Deferred television costs                                                                             |       | (247                             | )          | (459 | ) |
| Other                                                                                                 |       | (183                             | )          | 152 |   |
| Accounts payable                                                                                      |       | 35                               |       | (715 | ) |
| Accrued expenses                                                                                      |       | (834                             | )          | 529 |   |
| Deferred revenue                                                                                      |       | 402                              |       | 4,250 |   |
| Net cash  provided by (used in) operating activities                                                  |       | (2,242                           | )          | 5,447 |   |
|                                                                                                  |       |                             |       |   |   |
| **INVESTING  ACTIVITIES:**                                                                            |       |                             |       |   |   |
| Purchase of property and equipment                                                                    |       | (355                             | )          | (13 | ) |
| Purchases of short-term investments in marketable  securities                                         |       | (20,831                          | )          | (14,593 | ) |
| Sales/redemptions of short-term investments in  marketable securities                                 |       | 22,435                           |       | 5,410 |   |
| Proceeds from sale of investment                                                                      |       | —                           |       | 5,686 |   |
| Net cash  provided by (used in) investing activities                                                  |       | 1,249                            |       | (3,510 | ) |
|                                                                                                  |       |                             |       |   |   |
| **FINANCING  ACTIVITIES:**                                                                            |       |                             |       |   |   |
| Increase in restricted cash                                                                           |       | (3                               | )          | (4 | ) |
| Proceeds from stock option exercises                                                                  |       | —                           |       | 1 |   |
| Net cash used in  financing activities                                                                |       | (3                               | )          | (3 | ) |
|                                                                                                  |       |                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                 |       | $                                | (996       | ) | $ | 1,934 |   |
| Cash and cash  equivalents - beginning of period                                                      |       | 8,360                            |       | 1,737 |   |
| **Cash and cash equivalents - end  of period**                                                        |       | $                                | 7,364      |   | $ | 3,671 |   |

 

Seenotes to condensed consolidated financial statements

6

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**WPTENTERPRISES, INC.Notes to Condensed Consolidated Financial Statements (Unaudited)**

**1. BASIS OF PRESENTATION**

These condensedconsolidated financial statements have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commission (SEC)applicable to interim financial information. Accordingly, certain informationnormally included in the annual financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahas been condensed or omitted.  Forfurther information, please refer to the annual audited financial statements ofthe Company, and the related notes, included within the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2006, previously filed withthe SEC, from which the information as of that date is derived.

Inthe opinion of management, all adjustments considered necessary for a fairpresentation have been included. The results for the current interim period arenot necessarily indicative of the results to be expected for the full year.

Certain minor reclassifications to amounts previouslyreported have been made to conform to the current period presentation. Thesereclassifications had no effect on net earnings (loss) or shareholders’ equityas previously presented.

**2.EARNINGS (LOSS) PER SHARE**

Basic earnings (loss) percommon share is calculated by dividing net earnings (loss) by theweighted-average number of common shares outstanding during the period. Sharesfor certain stock options granted to employees and consultants of the Companyare included in the computation after the options have vested when the sharesare issuable for relatively minimal cash consideration in relation to the fairvalue of the options (Note 3). Diluted earnings per common share is calculatedby adjusting weighted-average outstanding shares, assuming conversion of allpotentially dilutive stock options and awards (common stock equivalents).However, common stock equivalents are not considered in the calculation forloss periods because to do so would be anti-dilutive.

**3.SHARE-BASED COMPENSATION**

The Company usesthe Black-Scholes option-pricing model to estimate the fair value andcompensation cost associated with employee incentive stock options in accordancewith SFAS 123(R).  The bases for the keyassumptions included in the model are as follows:

·                  Annualizedvolatility — As the Company has a relatively short operating history and nodefinitive peer or peer groups, expected volatility was based on historicalvolatility of the Company’s stock since it began trading in August 2004.

·                  Forfeiturerate — The Company uses historical data to estimate employee departure behaviorin estimating future forfeitures.

·                  Expectedterm — Due to the Company’s limited operating history including stock optionexercises and forfeitures, the Company calculated expected term using the “SimplifiedMethod” in accordance with SAB 107.

·                  Riskfree interest rate - For periods within the expected term of the share option,risk free interest rate is based on the U.S. Treasury yield curve in effect atthe time of grant.

Following is asummary of the assumptions used to estimate the weighted-average fair value ofthe stock options granted during the periods presented using the Black-Scholespricing model:
| ** **                   | ** ** | **Three months ended  April 1, 2007** | ** ** | **Three months ended  April 2, 2006** | ** ** |
|------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Risk free  interest rate     |       | 4.47                                                      | %          | 4.31                                                      | %          |
| Expected life                |       | 6 years                                                   |       | 6.5 years                                                 |       |
| Expected  dividend yield     |       | 0                                                         | %          | 0                                                         | %          |
| Weighted-average  fair value |       | $                                                         | 3.27       |                                                      | $          | 4.68 |   |
| Annualized volatility        |       | 73.84                                                     | %          | 84.22                                                     | %          |
|                              |            |                                                           |            |                                                           |            |  |  |

 

7

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Thetable below summarizes share-based compensation expense, net of tax, related toemployee stock options under SFAS 123(R), which was allocated as follows (inthousands):
| ** **                                                 | ** ** | **Three months ended  April 1, 2007** | ** ** | **Three months ended  April 2, 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(in thousands)**                                        | ** ** |
| Total cost of  share-based payment plans                   |       | $                                                         | 588        |                                                      | $          | 1,602 |   |
| Amounts  capitalized in deferred television costs          |       | 6                                                         |       | 34                                                        |       |
| Amounts charged against  income, before income tax benefit |       | $                                                         | 582        |                                                      | $          | 1,568 |   |

 

For the threemonths ended April 1, 2007 and April 2, 2006, no income tax benefit wasrecognized in the statement of earnings (loss) for share-based compensationarrangements.  Management assessed thelikelihood that the deferred tax assets relating to future tax deductions fromshare-based compensation will be recovered from future taxable income anddetermined that a valuation allowance is necessary, to the extent thatmanagement currently believes it is more likely than not that tax benefits willnot be realized. Management’s determination is based primarily on historicalearnings volatility, and the Company’s relatively short operating history andexpected taxable losses for fiscal 2007.

The following tablesummarizes stock option activity through the three months ended April 1, 2007and April 2, 2006:
| ** **                              | ** ** | ** **               | ** ** | **Number of Common Shares** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Options  outstanding** | ** ** | **Exercisable**             | ** ** | **Available  for grant** | ** ** | **Weighted-avg.  exercise  price** | ** ** |
| **2007**                                |       |                     |       |                        |       |   |   |   |   |
| **Balance  at January 1, 2007**         |       | 2,318,166                |       | 1,050,200                   |       | 983,501 |   | $ | 6.76 |   |
| Granted                                 |       | 287,000                  |       |                        |       | (287,000 | ) | $ | 4.80 |   |
| Forfeited  /cancelled/expired           |       | (90,466                  | )          |                        |       | 90,466 |   | $ | 8.49 |   |
| **Balance  at April 1, 2007**      |       | 2,514,700                |       | 1,010,533                   |       | 786,967 |   | $ | 6.47 |   |
| **2006**                                |       |                     |       |                        |       |   |   |   |   |
| **Balance  at January 2, 2006**         |       | 2,158,000                |       | 620,333                     |       | 283,667 |   | $ | 7.14 |   |
| Granted                                 |       | 219,000                  |       |                        |       | (219,000 | ) | $ | 6.20 |   |
| Forfeited  /cancelled/expired           |       | (159,333                 | )          |                        |       | 159,333 |   | $ | 8.13 |   |
| Exercised                               |       | (115,000                 | )          |                        |       |   |   | $ | 0.0049 |   |
| ** Balance at April 2, 2006** |       | 2,102,667                |       | 785,500                     |       | 224,000 |   | $ | 7.36 |   |

 

The following tablesummarizes significant ranges of outstanding and exercisable options as ofApril 1, 2007**:**

 
| **Options outstanding**                           | ** ** | **Options exercisable** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| **Range of  exercise prices**           | ** ** | **Number  outstanding** | ** ** | **Weighted-avg.  remaining  contractual  life** | ** ** | **Weighted-avg.  exercise  price** | ** ** | **Aggregate  intrinsic  value** | ** ** | **Number  exercisable** | ** ** | **Weighted-avg.  price** | ** ** | **Aggregate  intrinsic  value** | ** ** |
| $       0.0049 |       | 225,000                 |       | 4.91 |   | $ | 0.0049 |   | $ | 1,155,398 |   | 225,000 |   | $ | 0.0049 |   | $ | 1,155,398 |   |
| $ 3.93 —  4.80                     |       | 713,000                 |       | 9.71 |   | 4.43 |   | 503,600 |   | — |   | — |   | — |   |
| $** **5.18 —   9.92                |       | 1,333,366               |       | 7.73 |   | 7.56 |   | — |   | 720,533 |   | 7.95 |   | — |   |
| $11.95 — 14.51                               |       | 224,000                 |       | 8.36 |   | 12.22 |   | — |   | 56,000 |   | 12.70 |   | — |   |
| $15.05 — 19.50                               |       | 19,334                  |       | 8.36 |   | 15.28 |   | — |   | 9,000 |   | 15.38 |   | — |   |
|                                              |       | 2,514,700               |       | 8.10 |   | $ | 6.47 |   | $ | 1,658,998 |   | 1,010,533 |   | $ | 6.51 |   | $ | 1,155,398 |   |

 

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The aggregateintrinsic value in the preceding table****representsthe total pre-tax intrinsic value, based on the Company’s closing stock priceof $5.14 on March 30, 2007, which would have been received by the optionholders had they exercised their options as of that date.  As of April 1, 2007, the total number of “in-the-money”options exercisable was 225,000. No options were exercised during the threemonths ended April 1, 2007.

For the three months ended April 1, 2007 and April 2,2006, total compensation cost related to SFAS 123(R) was approximately $0.6million and $1.6 million, respectively. The total annual fair annual value compensationexpense of the shares vested during the three months ended April 1, 2007 andApril 2006 equal approximately $0.2 million and $21,000, respectively.  As of April 1, 2007, total compensation costrelated to non-vested share-based options not yet recognized was $4.0 million,which is expected to be recognized over the next 31 months on aweighted-average basis.

**4.CONTINGENCIES**

On July 19, 2006, a legal action was commencedagainst the Company by seven poker players that alleges, among other things, anunfair business practice of the Company. On March 14, 2007 Plaintiffsfiled a motion for summary judgment in the case and on April 12, 2007 we filedour opposition to the motion. The parties are currently engaged in discovery anda trial date has been set for April 1, 2008. We do not expect any materialadverse consequences from this action. Accordingly, no provision has been madein the financial statements for any such losses.

TheCompany is also involved in various inquiries, administrative proceedings andlitigation relating to other matters arising in the normal course of theCompany’s business. While any proceeding or litigation has an element ofuncertainty, management currently believes that the final outcome of these mattersis not likely to have a material adverse effect upon the Company’s futurefinancial position or results of operations and accordingly, no provision forloss has been recorded in connection therewith.

**5.SEGMENT INFORMATION**

The operatingsegments reported below are the segments of the Company for which separatefinancial information is available and for which operating results areevaluated by the chief operating decision maker in deciding how to allocateresources and in assessing performance.

**Threemonths ended April 1, 2007 (in thousands):**
| ** **       | ** ** | ** **  | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **          | ** ** | ** **    | ** ** |
|------------------|------------|-------------|------------|----------------|------------|-------------|------------|---------------------|------------|---------------|------------|
| ** **       | ** ** | **WPT**     | ** ** | ** **     | ** ** | ** **  | ** ** | **WPT Global** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Studios** | ** ** | **Gaming**     | ** ** | **Content** | ** ** | **Marketing**       | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $           | 2,868      |           | $          | 550         |       | $                   | 48         |          | $          | 1,025 |   | $ | — |   | $ | 4,491 |   |
| Cost of revenues |       | 1,669       |       | 301            |       | 26          |       | 156                 |       | —        |       | 2,152 |   |
| Gross profit     |       | 1,199       |       | 249            |       | 22          |       | 869                 |       | —        |       | 2,339 |   |
| Total assets     |       | 3,261       |       | 2,912          |       | 55          |       | 1,273               |       | 41,477        |       | 48,978 |   |
| Depreciation     |       | 85          |       | 12             |       | —      |       | —              |       | 84            |       | 181 |   |
|                  |            |             |            |                |            |             |            |                     |            |               |            |  |  |  |  |  |  |  |  |

 

**Threemonths ended April 2, 2006 (in thousands):**
| ** **       | ** ** | ** **  | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **          | ** ** | ** **    | ** ** |
|------------------|------------|-------------|------------|----------------|------------|-------------|------------|---------------------|------------|---------------|------------|
| ** **       | ** ** | **WPT**     | ** ** | ** **     | ** ** | ** **  | ** ** | **WPT Global** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Studios** | ** ** | **Gaming**     | ** ** | **Content** | ** ** | **Marketing**       | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $           | 4,455      |           | $          | 911         |       | $                   | 56         |          | $          | 1,032 |   | $ | — |   | $ | 6,454 |   |
| Cost of revenues |       | 1,832       |       | 408            |       | 32          |       | 148                 |       | —        |       | 2,420 |   |
| Gross profit     |       | 2,623       |       | 503            |       | 24          |       | 884                 |       | —        |       | 4,034 |   |
| Total assets     |       | 3,229       |       | 725            |       | 38          |       | 1,711               |       | 45,991        |       | 51,694 |   |
| Depreciation     |       | 72          |       | —         |       | —      |       | —              |       | 48            |       | 120 |   |
|                  |            |             |            |                |            |             |            |                     |            |               |            |  |  |  |  |  |  |  |  |

 

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**6. INCOME TAXES**

The income tax provision was $0 and $1.3 million for thefirst quarter of 2007 and 2006, respectively, and the effective tax rate forthe first quarter of 2007 and 2006 was approximately 0% and 26%, respectively.Management expects the Company to generate a net operating loss for 2007, and avaluation allowance has been recorded for the net deferred tax asset related tothe net loss generated in the first quarter.

In July 2006, the FASB issued Interpretation 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), which became effective for the Company beginning in 2007. FIN 48addressed the determination of how tax benefits claimed or expected to beclaimed on a tax return should be recorded in the financial statements. UnderFIN 48, the Company must recognize the tax benefit from an uncertain taxposition only if it is more likely than not that the tax position will besustained on examination by the taxing authorities, based on the technicalmerits of the position. The tax benefits recognized in the financial statementsfrom such a position are measured based on the largest benefit that has agreater than fifty percent likelihood of being realized upon ultimateresolution.  Based on the Company’sassessment of its tax positions in accordance with FIN 48, there was no impacton the results of operations, financial condition or liquidity and accordingly,there was no cumulative effect adjustment recorded for the change in accountingprinciple. Furthermore,  the income taxprovision was not impacted by the implementation of FIN 48 in the first quarterof 2007.

**7. SUBSEQUENT EVENTS**

**Change in broadcast partner for Season Six of the WouldPoker Tour****® (“WPT”) television series.**  Pursuant to various agreements with theTravel Channel, LLC (“Travel”), Travel had until April 1, 2007, to exercise itsoption to broadcast the sixth season of the WPT television series .  Travel did not exercise its option. On April2, 2007, the Company entered into an agreement with the Game Show Network, LLC(“GSN”), pursuant to which GSN agreed to license Season Six for $300,000 perepisode.  The agreement also provides GSNoptions for Seasons Seven and Eight.

**Online gaming software andsupport agreement.**  OnApril 23, 2007, the Company entered into a three year software supply andsupport agreement (the “Agreement”) with CryptoLogic Inc., and its wholly-ownedsubsidiary WagerLogic Limited, (collectively referred to as “CryptoLogic”).Pursuant to the Agreement, CryptoLogic will operate an online gaming site forthe Company featuring a poker room and casino games utilizing its proprietarysoftware, in exchange for a percentage of the revenue generated from thesite.  The Company will be entitled to approximately80% of net gaming revenues, from the operation of the site.  Under the Agreement, the Company will also bea member in a centralized online gaming network (the “Network”) with severalother licensees of CryptoLogic pursuant to which players will be able to playon the Company’s branded gaming site on the Network.

The Agreement providesfor the poker room to be operational and accessible by players by June 14,2007, and by September 30, 2007, CryptoLogic is required to have five casinogames available .  The Company also hasan option, exercisable at any time prior to July 1, 2008, to requireCryptoLogic to provide the Company’s customers with access to a full suite ofcasino games within three months of such notice.

There is a one-time feeof $50,000 payable by the Company for the initial preparation and launch of thesite, and the Company is required to pay a monthly fee of $7,500 for themanagement of tournaments, collusion detection, customer support and overallmanagement of the poker room.  Inaddition, the Company is obligated to contribute 4% of poker room revenue forcertain marketing initiatives.

As a result of the recent decision to moveaway from the internally-developed online gaming platform, the Company willwrite off certain property, equipment and other capitalized costs of approximately$2.0-$3.0 million during the second quarter of 2007.  These assets consist primarily of softwareand computer equipment related to the online gaming site that the Company wasdeveloping based on the CyberArts software platform.

 

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**WPTENTERPRISES, INC.****Management’s Discussion and Analysis ofFinancial Condition****And Results of Operations**

 

**ITEM 2.****                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Financial Overview**

We had a net loss in the first quarter of 2007 of $2.3million, or $0.11 per fully diluted share, compared to net income of $3.6million, or $0.18 per fully diluted share, in the 2006 period. The primaryreasons for the net loss in the 2007 period compared to the net earnings in2006 were the following factors:

·               Revenues decreased by $2.0 million,principally because of the delivery of fewer television episodes in 2007.

·               Gross margins werelower in 2007, principally because of the delivery of an episode of ourProfessional Poker Tour series in 2006 for which the production costs had beenexpensed in an earlier period. Inaddition, online gaming contributed to the overall lower margin in the firstquarter of 2007 as a result of an amendment of the agreement with the serviceprovider that was effective in July 2006, which significantly increased thepercentage of revenues paid to that party.

·               Selling, general and administrativeexpenses increased slightly year-over-year to $5.3 million. The increase wasprimarily due to the Company’s efforts to develop its own online gamingsoftware and support prior to entering into an agreement with CryptoLogicrelating to our online poker room and casino.  This increasewas offset by reduced sales and marketing expenses as we have reduced ourmarketing efforts associated with the online gaming site until the re-launch inJune 2007.

**Business Overview**

We create internationallybranded entertainment and consumer products driven by the development,production and marketing of televised programming based on gaming themes. OurWorld Poker Tour®,or WPT, television series, based on a series of high-stakes poker tournaments,currently airs on the Travel Channel in the United States and has been licensedto telecast in more than 150 markets globally. We also operate a real-money online gaming website which prohibitswagers from players in the U.S. and other restricted jurisdictions.  We currently license our brand to companiesin the business of poker equipment and instruction, apparel, publishing,electronic and wireless entertainment, DVD/home entertainment, casino games andgiftware.  We are also engaged in thesale of corporate sponsorship.  We have threeoperating units:

*WPT Studios*, ourmulti-media entertainment division, generates revenue through the domestic andinternational licensing of broadcast and telecast rights and through casinohost fees. Since our inception, the WPT Studios division has been responsiblefor approximately 74% of our total revenue. We licensed the WPT series SeasonsOne through Five to The Travel Channel, L.L.C. (“TRV” or “Travel Channel”) fortelecast in the United States under an exclusive license agreement (“WPTAgreement”). On April 2, 2007, we entered into an agreement (the “GSN Agreement”)with Game Show Network, LLC (“GSN”), pursuant to which GSN agreed to licensefrom us the sixth season of the Show for the payment of a $300,000 license feeper episode.  Under the TRV agreement, wereceived an average of $477,000 per episode for Season Five.  We also have license agreements for thedistribution of our World Poker Tour episodes into international territoriesfor which we receive license fees, net of our agent’s sales fee and agreed uponsales and marketing expenses.  We alsocollect annual host fees from the member casinos that host World Poker Tourevents (our member casinos).

Since ourinception, fees from TRV under the WPT Agreement and an agreement with TRVrelating to the Professional Poker Tour® (“PPT”) series have been responsiblefor approximately 59% of our total revenue. For each season covered by the WPTAgreement and related options, TRV has exclusive rights to exhibit the episodesin that season an unlimited number of times on its television network in theU.S. for four years (three years for the episodes in Season One). We haveproduced five complete seasons of the World Poker Tour series under the WPTAgreement.

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Under the WPT Agreement,TRV pays fixed license fees for each episode we produce, which are payable atvarious times during the pre-production, production and post-production processand are recognized upon TRV’s receipt and acceptance of the completed episode.Television production costs related to WPT episodes are generally capitalizedand charged to the cost of revenues as revenues are recognized. Therefore, thetiming and number of episodes involved in the various seasons of the seriesaffect the timing of the revenues and expenses of the WPT Studios business. Thefollowing table describes the timing of Seasons One through Five of the WorldPoker Tour series, including the delivery and exhibition of the episodes eachseason:
| **World Poker  Tour Season** | ** ** | **Date of TRV  Agreement or  Option for  Season** | ** ** | **Number of  episodes  (including  specials)** | ** ** | **Production Period and  Delivery of Episodes to TRV** | ** ** | **Initial Telecast of  Episodes in Season** |
|----------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|
| Season  One                            |       | January 2003                                                          |       | 15                                                  |       | February 2002 — June 2003                                                       |       | March 2003 — June 2003                                     |
| Season  Two                            |       | August 2003                                                           |       | 25                                                  |       | July 2003— June 2004                                                            |       | December 2003 — September 2004                             |
| Season  Three                          |       | May 2004                                                              |       | 21                                                  |       | May 2004 — April 2005                                                           |       | October 2004 — August 2005                                 |
| Season  Four                           |       | March 2005                                                            |       | 21                                                  |       | May 2005 — April 2006                                                           |       | October 2005 — June 2006                                   |
| Season Five                            |       | March  2006                                                           |       | 22                                                  |       | May  2006 — April 2007                                                          |       | August  2006 — August 2007 (expected)                      |

 

The agreement withTRV relating to the PPT series, which continues to cover the broadcast rightsto Season One was substantially similar in structure to the WPT Agreement, withthe following exceptions: First, the PPT agreement has a different mechanismfor selecting corporate sponsors that grants us more flexibility than we havein the WPT agreement. Second, upon termination of the agreement, Travel Channel’srevenue share percentage declines over the following four years. There is norevenue share percentage beginning in the fifth year following the terminationof the agreement.

Under the WPT andPPT Agreements, TRV has the right to receive a percentage of our adjusted grossrevenues from international television licenses, product licensing andpublishing, merchandising and certain other sources, after specified minimumamounts are met.  For the three monthsended April 1, 2007, we recognized $0.1 million of Travel Channel participationexpense that was recorded in cost of revenues.

*WPT Global Marketing*, includes branded consumerproducts, sponsorship, and event management divisions. Our branded consumer productsdivision generates revenue principally through royalties from the licensing ofour brand to companies seeking to use the World Poker Tour brand and logo inthe retail sales of their consumer products. In addition, this business unitgenerates revenue from direct sales of company-produced branded merchandise. Wehave generated significant revenues from existing licensees, including Hands-OnMobile, US Playing Card,  and MDI. Wealso have a number of licensees that are developing new licensed products includingelectronic, casino-based, poker-related gaming machines from IGT, andinteractive television games from Pixel Play.

Our sponsorship and event management division generatesrevenue through corporate sponsorship and management of televised and liveevents. Our sponsorship program uses the professional sports model as a methodto foster entitlement sponsorship opportunities and naming rights to majorcorporations.  Anheuser-Busch has beenthe largest source of revenues through its sponsorship of Seasons Two, Three,Four and Five of the World Poker Tour series on TRV. We also have a sponsorshipagreement with Xyience, Inc., a non-alcoholic energy drink developer anddistributor, to promote its product as the “official energy drink” for SeasonFive of the WPT.  In addition, we had anagreement with Blue Diamond Almonds to sponsor the WPT Season Five Championshipin April 2007 at the Bellagio.  We willrecognize revenues from these agreements as the Season Five programs arebroadcast, which began in April 2007. 

*WPT Online.* OurWPT-branded online gaming website, currently located at WPTonline.com, featuresan online poker room and an online casino with a broad selection of slots andtable games. Although any Internet user can access WPTonline.com via the WorldWide Web, the website does not permit bets to be made from players in the U.S.and other restricted jurisdictions. This site showcases a WPT-branded pokerroom featuring ring games, as well as Sit and Go and multi-table tournamentsfor poker games including Texas Hold ‘Em, Omaha, 7 Card Stud, and 7 Card Hi-Lo.Additionally, the site features an online casino with a broad selection ofslots and table games, including WagerWorks’ exclusive online titles MonopolyTM,Wheel of Fortune®, and The Price is RightTM.

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Since 2005 we have operated WPTonline.com through a licenseagreement with WagerWorks, Inc., under which we license our brand to WagerWorksand WagerWorks shares with us a percentage of all net revenue it collects fromthe operation of the online poker room and online casino. WPTonline.comgenerated approximately $0.6 million in revenues, which are presented gross ofWagerWorks costs, for the three months ended April 1, 2007, compared to costsof revenues of approximately $0.3 million.

In 2006, we decided todevelop our own software for our online poker room. We licensed a softwareplatform from CyberArts Licensing, LLC, and hired thirty employees in Israel todevelop software and a support operation. On April 23, 2007, we entered into athree year software supply and support agreement (the “Agreement”) withCryptoLogic Inc., and its wholly-owned subsidiary WagerLogic Limited,(collectively referred to as “CryptoLogic”). Pursuant to the Agreement,CryptoLogic will operate an online gaming site for us featuring a poker roomand casino games utilizing its proprietary software, in exchange for apercentage of the revenue generated from the site.  We will be entitled to approximately 80% ofnet gaming revenues, as defined below, from the operation of the site. Underthe Agreement, we will also be a member in a centralized online gaming network(the “Network”) with several other licensees of CryptoLogic pursuant to whichplayers will be able to play on our branded gaming site on the Network.

The Agreement providesfor the poker room to be operational and accessible by players by June 14,2007, and by September 30, 2007, CryptoLogic is required to have five casinogames available (the “Initial Casino”). We also has an option, exercisable at any time prior to July 1, 2008, torequire CryptoLogic to provide our customers with access to a full suite ofcasino games within three months of such notice.

We are entitled to thefollowing percentages of net gaming revenue: (a) Seventy-eight percent (78%) ofthe first $150,000 per month, (b) Seventy-nine percent (79%) of revenue inexcess of $150,000 but less than $500,000 per month; and (c) Eighty percent(80%) of the revenue in excess of $500,000 per month.  CryptoLogic is entitled to earn the followingannual minimum guaranteed revenues associated with our online casino: $500,000for the Initial Casino and $2,500,000 for the full suite of casino games.  There is a one-time fee of $50,000 payable byus for the initial preparation and launch of the site, and we are required topay a monthly fee of $7,500 for the management of tournaments, collusiondetection, customer support and overall management of the poker room.  In addition, we are obligated to contribute4% of poker room revenue for certain marketing initiatives.

If, at any time after thenine (9) month anniversary of the go-live date, monthly gaming revenues fallbelow $500,000 for three (3) consecutive months, CryptoLogic has the right toterminate the Agreement on ninety (90) days written notice.  However, we may prevent any such terminationthrough payment of the shortfall of CryptoLogic’s percentage of such gamingrevenue within thirty (30) days of receipt of CryptoLogic’s notice of termination.If at any time during the term of the Agreement the average daily grossrevenue, over a ninety (90) day period, derived by CryptoLogic through theNetwork falls below $125,000, we have the right to terminate the Agreement.

As a result of the decision to move awayfrom the online gaming platform we were developing based on the CyberArtssoftware and stop development of our own online gaming site, and sign anagreement with CryptoLogic, we will write off certain propertyand equipment and related capitalized costs of approximately $2.0-$3.0 millionduring the second quarter of 2007.

** **

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**Results of Operations**

**Three Months Ended April 1, 2007Compared to the Three Months Ended April 2, 2006**

*Revenues.*Ourtotal revenues decreased by $2.0 million (30%) during the three months endedApril 1, 2007, compared to the three months ended April 2, 2006. Domestictelevision licensee fees decreased $0.6 million (21%) in the first quarter of2007 compared to the 2006 period. The decrease was primarily a result ofthe delivery of five episodes of Season Five of the WPT television series inthe first quarter versus six episodes of Season Four of the WPT and one episodeof the PPT delivered in the 2006 period. Online gaming, sponsorship and international televisionlicense revenues also decreased a combined $1.5 million (57%) in the firstquarter of 2007 compared to the 2006 period. The decrease of $0.4 million fromonline gaming revenue during 2007 primarily was due to lower levels of playeractivity versus the prior year period. Sponsorship and event revenues decreased $0.7 million primarily due tothe timing of not airing any Season Five episodes in the first quarter of 2007versus the airing of five episodes of Season Four in the prior yearperiod.  International televisionlicensing revenues decreased by $0.5 million as a result of fewer distributionagreements in the international marketplace. Product licensing revenues increased by approximately $0.2 million (23%)in the first quarter of 2007 compared to the 2006 period. The increase wasprimarily due to higher  revenues fromHands-On Mobile.

*Cost of revenues*. Cost of revenues decreasedby approximately $0.3 million (11%) in the first quarter of 2007 compared tothe 2006 period.  The decrease wasprimarily a result of a decrease in production costs of $0.2 million as wedelivered fewer episodes in the 2007 period versus the 2006 period, as notedabove.

*Gross margins.*  Overall gross margins were 52% in the first quarter of 2007compared to 63% in the first quarter of 2006.   Domestic television licensing margins were 37% in the first quarter of2007 compared to 44% in the same period in 2006.  This decrease was principally becauseof the delivery of an episode of our Professional Poker Tour series in 2006 forwhich the production costs had been expensed in an earlier period.   In addition, online gaming contributed tothe overall lower margin in the first quarter of 2007 as a result of anamendment of the agreement with the service provider that was effective in July2006, which significantly increased the percentage of revenues paid to thatparty.

*Selling, general and administrativeexpense.*Selling, general and administrative expensesincreased slightly year-over-year to $5.3 million. The increase was primarilydue to the Company’s efforts to develop its own online gaming software andsupport prior to entering into an agreement with CryptoLogic relating to ouronline poker room and casino.   This increase was offset byreduced sales and marketing expenses as we have reduced our marketing effortsassociated with the online gaming site until the re-launch expected in June2007.

*Other income*. Other income decreasedprimarily as a result of recognizing $5.7 million in gain on sale of investmentin the first quarter of 2006, relating to the sale of the stock in PokerTek,Inc. Interest income increased by $0.3 million (104%) for the first quarter of2007 compared to the 2006 period, primarily due to higher cash equivalents andshort-term investment balances.

*Income taxes*.  The income tax provision was $0 and $1.3million for the first quarter of 2007 and 2006, respectively, and the effectivetax rate for the first quarter of 2007 and 2006 was approximately 0% and 26%,respectively. We expect to generate a net operating loss for 2007, and avaluation allowance has been recorded for the net deferred tax asset related tothe net loss generated in the first quarter.

In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”), which became effectivefor the Company beginning in 2007. FIN 48 addressed the determination of howtax benefits claimed or expected to be claimed on a tax return should berecorded in the financial statements. Under FIN 48, we must recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized in thefinancial statements from such a position are measured based on the largestbenefit that has a greater than fifty percent likelihood of being realized uponultimate resolution.  Based on ourassessment of our tax positions in accordance with FIN 48, there was nomaterial impact on the results of operations, financial condition orliquidity.  As such there was nocumulative effect, for the change in accounting principle, recorded to openingretained earnings on January 1, 2007. Furthermore, in the first quarter of2007, the provision for income taxes was not materially impacted by theimplementation of FIN 48.

 

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**Liquidity and Capital Resources**

During the first three months of 2007, cash and cashequivalents and investments in marketable securities decreased by $2.6 millionto a combined balance of $37.0 million. Cash flows were used to supportoperating activities and to purchase property and equipment. Our principal cashrequirements consist of the following costs: online, television production,payroll and benefits, professional fees, marketing, business insurance andoffice lease. We intend to use funds currently on hand for working capital andcapital expenditures associated with the expansion of our media, online gamingand other businesses and for general corporate purposes. We anticipate thatsales and marketing costs will increase significantly starting in June 2007 aswe aggressively market our re-launched online gaming website. We expect thatcash, cash equivalents and investments in marketable securities on hand andgenerated from operations will be sufficient to fund our working capital andcapital expenditure requirements for at least the next twelve months.

However, we may from time to time seek additional capitalto fund our operations or fund our expansion plans as circumstances arise. Toraise capital, we may seek to sell additional equity securities, issue debt orconvertible securities, or seek to obtain credit facilities through financialinstitutions.

The table below sets forth our known contractualobligations as of April 1, 2007 (in thousands):
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Year 1** | ** ** | **Years 2-3** | ** ** | **Years 4-5** | ** ** | **Years 6  and beyond** | ** ** |
| Operating lease  obligations (1) |       | $                                         | 3,779      |   | $ | 864 |   | $ | 1,804 |   | $ | 1,111 |   | $ | — |   |
| Purchase obligations  (2)        |       | $                                         | 3,144      |   | $ | 1,021 |   | $ | 1,828 |   | $ | 295 |   |   |   |
| Employee obligations  (3)        |       | 875                                       |       | 500 |   | 375 |   | — |   | — |   |
|                             |       | $                                         | 7,798      |   | $ | 2,385 |   | $ | 4,007 |   | $ | 1,406 |   | $ | — |   |

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(1)          Operating leaseobligations include rent payments for our corporate offices pursuant to twolease agreements. For the first lease, monthly lease payments began atapproximately $38,000 and escalate to approximately $45,000 over the six-yearlease term. For the second lease, monthly payments began at $28,000approximately and escalate up to approximately $33,000 over the five-year leaseterm. The lease obligations presented include rent payments for our Israeloffice facilities in Nahariya and Jerusalem. The amounts set forth in the tableabove assume monthly lease payments through June 2011.

(2)          Purchase obligationsinclude the operational expenses associated with the development of WorldPokerTour.com.  These       expenses relate to the gaming (includes commitments for the internallycreated software platform and the CryptoLogic Network) and non-gaming aspectsof the website.  Additionally, includedin purchase obligations are open purchase orders of approximately $265,000 asof April 1, 2007.  These liabilities areincluded in Other Accrued Expenses.

(3)          Employee obligationsinclude the base salary payable to Steven Lipscomb under his employmentagreement.

**CriticalAccounting Estimates and Policies**

Althoughour financial statements necessarily make use of certain accounting estimatesby management, except as described below, we believe there are no matters thatare the subject of such estimates that are so highly uncertain or susceptible tochange as to present a significant risk of a material impact on our financialcondition or operating performance. Moreover, except as described below, we donot employ any critical accounting policies that are selected from amongavailable alternatives or require the exercise of significant managementjudgment to apply.

*Revenuerecognition:*  Revenuefrom the domestic and international distribution of our television series isrecognized as earned under the following criteria established by the AmericanInstitute of Certified Public Accountants Statement of Position (SOP) No. 00-2,*Accounting by Producers or Distributors ofFilms*(SOP 00-2):

·             Persuasive evidence of an arrangementexists;

·             The show/episode is complete, and inaccordance with the terms of the arrangement, has been delivered or isavailable for immediate and unconditional delivery;

·             The license period has begun and thecustomer can begin its exploitation, exhibition or sale;

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·             The seller’s price to the buyer is fixedand determinable; and

·             Collectibility is reasonably assured.

In accordance with the terms of the WPT Agreements, werecognize domestic television license revenues upon the receipt and acceptanceof completed episodes.  However, due torestrictions and practical limitations applicable to our operatingrelationships with foreign networks, we currently do not considercollectibility of international television license revenues to be reasonablyassured, and accordingly, we do not recognize such revenue until thedistributor has received payment. Additionally, we presentinternational distribution license fee revenues net of the distributor’s fees,as the distributor is the primary obligor in the transaction with the ultimatecustomer pursuant to Emerging Issues Task Force (EITF) 99-19, *Reporting Revenue Gross as a Principal versus Net as an Agent*(EITF 99-19).

Product licensingrevenues are recognized when the underlying royalties from the sales of therelated products are earned. We recognize minimum revenue guarantees ratablyover the term of the license or as earned royalties based on actual sales ofthe related products, if greater.  Wepresent product licensing fees gross of licensing commissions, which arerecorded as selling and administrative expenses as we are the primary obligorin the transaction with the ultimate customer pursuant to EITF 99-19.

Online gaming revenues are recognized monthly based on detailedstatements received from WagerWorks, our online gaming service provider, foronline poker and casino activity during the previous month.  In accordance with EITF 99-19, wepresent online gaming revenues gross of WagerWorks costs, including WagerWorksmanagement fee, royalties, credit card processing and chargebacks that arerecorded as cost of revenues, since we have the ability to adjust price andspecifications of the online gaming site, we bear the majority of the creditrisk and we are responsible for the sales and marketing of the gaming site.**We include certain promotional expenses related to freebets and deposit bonuses along with customer chargebacks as deductions ofrevenue. All other promotional expenses are generally recorded as sales andmarketing expenses.

Event hosting feesare paid by host casinos for the privilege of hosting the events and arerecognized as the episodes that feature the host casino are aired. Sponsorshiprevenues are recognized as the episodes that feature the sponsor areaired.  Licensing advances and guaranteedpayments collected, but not yet earned, by us, as well as casino host fees andsponsorship receipts collected prior to the airing of episodes, are classifiedas deferred revenue in the accompanying balance sheets.

*TravelChannel (“TRV”) Participation:  *We account for royalty payments to TRV inaccordance with the WPT and PPT agreements, in which TRV retains a right to 15%of adjusted gross revenues from the exploitation of the World Poker Tourbrand.  We record these amounts in costof revenues as revenues from international television, consumer productslicensing, home entertainment and merchandise are recognized.

*Deferred television costs:*  We account for deferred television costs inaccordance with SOP 00-2.  Deferredtelevision costs include capitalizable direct costs, production overhead anddevelopment costs and are stated at the lower of cost or net realizable valuebased on anticipated revenue. We have not currently anticipated any revenues inexcess of those subject to existing contractual relationships, since we haveinsufficient operating history to enable such anticipation.  Marketing, distribution and general andadministrative costs are expensed as incurred. Capitalized televisionproduction costs for each episode are expensed as revenues are recognized upondelivery and acceptance by the Travel Channel of the completed episode.Management currently estimates that 100% of the approximately $2.0 million incapitalized deferred television costs at April 1, 2007, are expected to beexpensed in connection with episode deliveries by the end of fiscal 2007.

*Investments:  *On July 31, 2006, weacquired an approximate 10% ownership interest in Cecure Gaming (“Cecure”) forapproximately $2.9 million.  Cecuredesigns and operates software and products which enable Cecure or its licenseesto offer gaming services to customers via mobile devices.   As we have less then 20% ownership interestand do not have the ability to exercise significant influence over Cecure, weaccount for this investment under the cost method and adjust only forother-than-temporary declines in fair value. Management is currently unaware of any change in circumstance that mighttrigger such a decline.

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*Income taxes:*  We must assess the likelihood that deferredtax assets will be recovered from future taxable income and to the extent webelieve that recovery is not likely, we must establish a valuationallowance.  Our current growth planspotentially may include international expansion, primarily related to ouronline gaming business, expansion of our television and product licensingbusinesses, industry consolidation and acquisitions and entry into new brandedgaming businesses.  Although weanticipate that all potential strategies will be accretive to earnings, we areaware of the risks involved with an aggressive growth strategy.  Therefore, based on our limited and volatileearnings history combined with our cautious optimism, we have determined that a valuation allowance is necessary to the extentthat management currently believes it is more likely than not that deferred taxassets will not be recovered in the forseeable future.

##### **RecentlyIssued Accounting Pronouncements**

In February 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) 155, Accounting for Certain HybridInstruments amending the guidance in SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFASNo. 140, *Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities*.SFAS 155 will allow financial instruments with embedded derivatives to beaccounted for as a whole (eliminating the need to bifurcate the derivative fromits host) on a fair value basis. SFAS 155 will be effective for financialinstruments acquired or issued during our fiscal year 2007. We presently do notexpect SFAS 155 to be applicable to any instruments likely to be acquired orissued by us.

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements,*which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS No. 157 willbecome effective for financial statements issued for fiscal years beginningafter November 15, 2007. In February 2007, the FASB issued SFAS 159, *The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115,*whichwill permit the option of choosing to measure certain eligible items at fairvalue at specified election dates and report unrealized gains and losses inearnings. We are currently evaluating the effect that SFAS 157 and 159 mighthave on our future financial position, results of operations and operating cashflows.

**Off-BalanceSheet Arrangements**

We have nooff-balance sheet arrangements that have or are reasonably likely to have acurrent or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

**Private SecuritiesLitigation Reform Act**

The foregoingdiscussion and other statements in this report contain various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-looking statements are based on our current expectations orbeliefs concerning future events. These statements can be identified by the useof terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”“may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similarwords or expressions.

Forward-lookinginformation involves important risks and uncertainties that could significantlyaffect our anticipated future results and, accordingly, actual results maydiffer materially from those expressed in any forward-looking statement.  Our forward-looking statements generallyrelate to plans for future expansion and other business development activities,expected levels of capital spending, potential sources of future financing andthe possible effects on our business of gaming, tax and other regulation and ofcompetition.  Although it is not possibleto foresee all of the factors that may cause actual results to differ from ourforward-looking statements, these factors include, among others, the followingrisk:

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·             Our business arrangements with CryptoLogic(with respect to online gaming) and the Game Show Network (with respect to thebroadcast of the WPT television series) are new arrangements that will likelybe the main source of our future revenue, and there is no guarantee that ourrelationships with either of them will be successful or long-term;

·             The termination or impairment of ourrelationships with key licensing and strategic partners could harm our businessperformance;

·             Our television programming may fail tomaintain a sufficient audience for a variety of reasons, many of which arebeyond our control;

·             Our ability to create and license ourtelevision programming profitably may be negatively affected by adverse trendsthat apply to the television production business generally;

·             Our competitors (many of whom have greaterfinancial resources or marketplace presence) may develop television programmingthat would directly compete with our television programming;

·             A decline in general economic conditionsor the popularity of our brand of televised poker tournaments may negativelyimpact our business;

·             We may be unable to protect ourentertainment concepts, our current and future brands and our otherintellectual property rights;

·             We may be unable to successfully expandinto foreign markets or into new or complementary businesses;

·             The regulatory environment for onlinegaming is currently uncertain, and despite our efforts to comply withapplicable laws, we may be unable to pursue this business fully or ouractivities may be claimed or found to be in violation of applicable UnitedStates or foreign regulations; 

·             It is difficult for us to predict thegrowth of our online gaming business, which is a relatively new industry withan increasing number of market entrants;

·             It is uncertain whether the UnlawfulInternet Gambling Enforcement Act of 2006 will have an adverse effect on thecompetitive environment for finding online gaming customers outside the UnitedStates; and

·             The loss of our President and ChiefExecutive Officer or another member of our senior management team maynegatively impact the success of our business.

Investors are cautioned that all forward-lookingstatements involve risks and uncertainties.

 

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**WPT ENTERPRISES, INC.Quantitative and Qualitative Disclosures about Market Risk; Controls andProcedures**

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our financialinstruments include cash and cash equivalents, U.S. Treasury and Agencysecurities and short-term municipal securities. Our main investment objectivesare the preservation of investment capital and the maximization of after-taxreturns on our investment portfolio. Consequently, we invest with onlyhigh-credit-quality issuers and limit the amount of credit exposure to any oneissuer. We do not use derivative instruments for speculative or investmentpurposes.

Our cash and cashequivalents are not subject to significant interest rate risk due to the shortmaturities of these instruments. As of April 1, 2007, the carrying value of ourcash and cash equivalents approximated fair value. We have in the past and mayin the future obtain marketable debt securities (principally consisting ofcommercial paper, corporate bonds and government securities) having a weightedaverage duration of one year or less. Consequently, such securities would notbe subject to significant interest rate risk.

**ITEM 4.CONTROLS AND PROCEDURES**

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we conducted an evaluation ofour disclosure controls and procedures, as such term is defined underRule 13a-15(e) or Rule 15d — 15(e) promulgated under the SecuritiesExchange Act of 1934, as amended, as of the end of the period covered by thisquarterly report. Based on their evaluation, our Chief Executive Officer andChief Financial Officer concluded that WPT Enterprises, Inc.’s disclosurecontrols and procedures are effective.

There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses, if any) in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of the evaluation referenced above.

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**WPT ENTERPRISES, INC.Part IIOther Information**

**ITEM 1.LEGAL PROCEEDINGS**

On July 19, 2006, a legal action was commencedagainst us by seven poker players that alleges, among other things, an unfairbusiness practice of the Company. On March 14, 2007, plaintiffs filed amotion for summary judgment in the case and on April 12, 2007 we filed ouropposition to the motion. The parties are currently engaged in discovery and atrial date has been set for April 1, 2008. We do not expect any materialadverse consequences from this action. Accordingly, no provision has been madein the financial statements for any such losses.

Weare also involved in various inquiries, administrative proceedings, andlitigation relating to other matters arising in the normal course of ourbusiness. While any proceeding or litigation has an element of uncertainty,management currently believes that the final outcome of these matters is notlikely to have a material adverse effect upon our future financial position orresults of operations and accordingly, no provision for loss has been recordedin connection therewith.

**ITEM 1A.RISK FACTORS**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed below, which replace in their entirety the risk factorsdescribed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2006. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

***Our new broadcasting agreement with the Game Show Network isa new business arrangement that will be a significant source of our future revenue,and there is no assurance the Game Show Network will be a viable businesspartner or that they will exercise rights to broadcast future seasons of theWPT, which would materially and adversely affect our results of operations.***

On April 1, 2007, the Travel Channel did notexercise its option to broadcast Season Six of the WPT.  On April 2, 2007, we entered into anagreement with the Game Show Network, LLC, pursuant to which the Game ShowNetwork will broadcast Season Six of the WPT, with options to broadcast SeasonsSeven and Eight of the WPT.  Thelicense fees we had received from the Travel Channel for previous seasons ofthe WPT and PPT had been our most significant source of revenue, comprisingapproximately 59% of our total historical revenues.  Although management believes the terms of theagreement with the Game Show Network are favorable, the agreement provides forper-season aggregate payments of approximately $7 million, versus per-seasonaggregate payments of approximately $10.5 million under our agreement with theTravel Channel.  Due to the significanceof programming license fees on our historical revenues, the lower fees we willreceive will require the Company to develop other areas of its business to makeup for that decrease in broadcast licensing revenue.  There is no assurance that the Game ShowNetwork will exercise its options to air Seasons Seven and Eight**.  **If,in the future, the Game Show Network elects not to continue airing the WPTseries and we cannot maintain or replace our agreement with the Game ShowNetwork with comparable license agreements, it will be detrimental to theviability of the WPT brand and, consequently, would have a material adverseeffect on our business, prospects, financial condition, results of operations,cash flow and, ultimately, the price of our common stock.

***Our agreement with CryptoLogic is a new business arrangementthat we hope will be a significant source of our future revenue, and there isno assurance that CryptoLogic will be a viable business partner, which wouldmaterially and adversely affect our results of operations.***

On April 23, 2007, we entered into anagreement with CryptoLogic, Inc. pursuant to which CryptoLogic willoperate and manage our WPT-branded real-money gaming website, WorldPokerTour.com.  Our online gaming site is currently operatedby WagerWorks, Inc., but we are in the process of transitioning our site to beoperated on the CryptoLogic network.  Thewebsite is designed not to accept bets from players in the U.S. and other restrictedjurisdictions.  We cannot be assured thatthe transition of our gaming site onto the CryptoLogic network will proceedsmoothly or that CryptoLogic’s operation of the site going forward will meetmanagement’s business expectations, the failure of which would have a materialadverse impact on our online gaming business.

***Our agreements with the Travel Channel and the Game ShowNetwork grant rights to the Travel Channel and the Game Show Network,respectively, that could impact the value of our WPT and Professional PokerTour brands and place some limits on our growth.***

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Althoughour agreement with the Travel Channel has expired with respect to futureseasons of the WPT, the Travel Channel still retains certain rights that couldimpact the value of our WPT and Professional Poker Tour brands and place somelimits on our growth. Furthermore, the Game Show Network also has certainrestrictive rights that will affect our exploitation of the WPT televisionseries.  For example:

·       For a period of up to fiveyears from April 1, 2007, the Travel Channel has the right to receive 15% ofour adjusted gross revenues from all DVD and home video sales, merchandisingand publishing activities and international television licenses.

·       As is customary in mostproduction agreements with television networks, the Travel Channel retainsfinal edit rights over the WPT and PPT programs that we produce.  The Game Show Network has similar rightsunder its agreement with us.  If theTravel Channel or the Game Show Network exercise those rights in a manner thatdiminishes the quality of our programs or negatively affects relationships thatare important to our programming, including those with the casinos hosting thepoker tournaments at which we film our shows, such actions could have a materialadverse effect on our business, prospects, financial condition, results ofoperations or cash flow and, ultimately, the price of our common stock.

·       The Game Show Networkagreement requires the Game Show Network’s prior approval of any show sponsorship,which might prevent us from entering into sponsorship arrangements.

·       Under our agreement withthe Travel Channel, with respect to both the WPT and PPT television series weare subject to holdback provisions that extend beyond the license period foreach season. These holdback periods may impact our ability to resell thisprogramming into secondary markets in the U.S. or the timing of suchsales.  Furthermore, additional holdbacksapply to certain WPT episodes while the program is being optioned by the GameShow Network.

Any future licenseagreements with other licensees for our television series are likely to havesimilar or other provisions that could impact the value of our brands and limitour growth.

***Our success depends on our current brand and any futurebrands we may develop, and if the value of our brands were to diminish, ourbusiness would be adversely affected.***

Our successdepends on our current WPT brand, which consists of a portfolio of trademarks,service marks and copyrighted materials, and the development of other brands,such as the PPT.   The Travel Channel’sdecision not to renew its option for future seasons of the PPT may hurt ourability to develop the PPT brand or to find a new broadcast partner for thePPT. Our portfolio includes, but is not limited to, existing and futureepisodes of the televised programming produced in connection with our existingand future brands and certain elements of these episodes, trade names and otherintellectual property rights and any future brands we develop. In connectionwith our branding and licensing operations, we have entered into agreementswith Brandgenuity LLC and other licensing agents in international territoriesto seek licensing opportunities for the WPT brand. While specific contractualprovisions require that the licensees brought to us by Brandgenuity maintainthe quality of our brands, we cannot be certain that our licensees or theirmanufacturers and distributors will honor their contractual obligations or thatthey will not take other actions that will diminish the value of our brandprior to our ability to detect and prevent any such actions.

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***There is a risk that we may notbe able to protect the format of our episodes, our current and future brandsand our other proprietary rights.***

We are susceptibleto others imitating our television show format and other products andinfringing on our intellectual property rights. We currently believe thatseveral competitive poker-related television programs use exhibition methodsand technology that might infringe on one or more claims of our pending patentapplications. We have issued letters to some of the producers of theseprograms, notifying them that we have intellectual property rights in suchtechnology, and that we intend to vigorously enforce such rights in order toprotect our proprietary processes. These and other producers of poker-relatedprogramming may be well established and may have significantly greaterresources than we do. Litigation may be necessary to enforce our intellectualproperty rights and to determine the validity and scope of our proprietaryrights. Any litigation could result in substantial expense, may reduce ourprofits and may not adequately protect our intellectual property rights uponwhich we are substantially dependent. In addition, the laws of certain foreigncountries do not always protect intellectual property rights to the same extentas the laws of the U.S. Imitation of our television show formats and otherproducts or infringement of our intellectual property rights could diminish thevalue of our brands or otherwise adversely affect our revenues.

Any litigation orclaims against us based upon our intellectual property or other third partyrights, whether or not successful, could result in substantial costs and harmour reputation. In addition, such litigation or claims could force us to do oneor more of the following: to cease exploitation of our television series andrelated products or portions thereof that violate the potentially infringedthird party rights or intellectual property, which would adversely affect ourrevenue; to negotiate a license from the holder of the intellectual property orother right alleged to have been infringed, which license may not be availableon reasonable terms, if at all; or to modify our television series and relatedproducts or portions thereof to avoid infringing the intellectual property orother rights of a third party, which may be costly and time-consuming orimpossible to accomplish.

***Early termination of our agreements with member casinos orviolation by member casinos of the restrictive covenants contained in theseagreements could negatively affect the size of telecast audiences and lead todeclines in the performance of all of our other lines of business.***

We have enteredinto written agreements with all of the “member casinos” that host the WorldPoker Tour and Professional Poker Tour tour stops. The WPT agreements wereoriginally for a term of five years and, although some member casinos have abilateral option, most of the agreements provided us with a unilateral optionto renew on the same terms for another five years. In September 2004, weexercised our right to renew most of these agreements. However, in each yearafter its first year of participation, the member casino may elect to withdrawits tournament from the World Poker Tour lineup and terminate the agreement bygiving us notice by a specified date or, if earlier, a specified length of timebefore the date of the tournament, which is generally four to six months. Whilethe agreement is in effect and for varying periods of time thereafter, themember casino is prohibited from televising the tournament itself, permittingany third party to televise the tournament or licensing its name, trademarks orlikeness to any other party in conjunction with the telecast of a pokertournament. If a significant number of these casinos were to terminate theagreements and/or allow a competing company to telecast their tournaments inviolation of these restrictions or after their expiration for the restrictedtime period, this could result in a decline in our future telecast audiences,which in turn would lead to declines in the performance and success of ourother lines of business. For the first season of the PPT, each member casinosigned an agreement covering only one event. We anticipate executing newagreements with each member casino that participates in any subsequent seasonsof the Professional Poker Tour.

To date, fourmember casinos that have hosted World Poker Tour tour stops have chosen to nolonger participate as hosts of World Poker Tour events. We have subsequentlyreplaced each of these venues with additional tour stops, and do not believethat their withdrawal has had a significant impact on the quality of the Touror on our business.

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***Terminationor impairment of our relationships with key licensing and strategic partnerscould adversely affect our revenues and results of operations.***

We have developedrelationships with key strategic partners in many areas of our business,including poker tournament event sponsorship, merchandise licensing, corporatesponsorship, Internet gaming and international distribution. We hope to derivesignificant income from our licensing arrangements, and our agreements with ourstrategic partners are vital to finding these licensing arrangements. If wewere to fail to manage our existing licensing relationships, this failure couldhave a material adverse effect on our financial condition and results ofoperations. We would also be materially adversely affected if we were to loseour rights under any of our other key contracts or if the counterparty to anyof these contracts were to breach its obligations to us. We rely on a limitednumber of contracts under which third parties provide us with services vital toour business. These agreements include:

·       our agreement withPartyGaming, pursuant to which PartyGaming agreed to pay us fees for sponsoringinternational broadcasts of our programming in international territories (i.e.,non-U.S.), subject to certain requirements regarding the type and amount ofadvertising and branding we are able to provide them; and;

·       our agreement withBrandgenuity LLC, pursuant to which it negotiates third party consumer productlicensing agreements;

·       our agreement withCryptoLogic, pursuant to which CryptoLogic will operate and manage ourWPT-branded real-money gaming website, WorldPokerTour.com.

If ourrelationship with any of these or certain other third parties were to beinterrupted, or the services provided by any of these third parties were to bedelayed or deteriorate for any reason without being adequately replaced, ourbusiness could be materially adversely affected. If we are forced to find areplacement for any of these strategic partners, this could create disruptionin our business and may result in reduced revenues, increased costs ordiversion of management’s attention and resources.

In addition, whilewe have significant control over our licensed products and advertising, we donot have operational and financial control over these third parties, and wehave limited influence with respect to the manner in which they conduct theirbusinesses. If any of these strategic partners experiences a significantdownturn in its business or were otherwise unable to honor its obligations tous, our business could be materially disrupted.

***Our further expansion into foreign markets will subject usto additional business risks.***

In connection withour prior decision to build and operate our own online gaming site, wesignificantly expanded our international presence.  We currently we have 34 employees in Israel,and are in the process of determining what role those employees will play nowthat we have determined to have CryptoLogic operate our gaming site. We intendto further expand our business in foreign markets in other ways, includingcontinued international distribution of our U.S. telecasts, creating additionalpoker tours in foreign countries and distributing branded merchandise inforeign countries. Our international operations could be adversely affected bychanges in political and economic conditions, trade protection measures and thestatus of regulatory requirements that may restrict the sales of our products,increase costs of foreign production or other costs that prohibit Internetgaming activities in international jurisdictions. Also, changes in exchangerates between the U.S. dollar and other currencies could potentially result insignificant increases in our costs or decreases in our earnings.

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***We will face a variety of risksas we expand into new or complementary businesses in the future.***

Our coreoperations have consisted of marketing, promoting and licensing our televisedentertainment, selling, or licensing the right to manufacture and sell, ourbranded merchandise and the marketing and promotion of our WPT-brandedreal-money gaming website. Our current strategic objectives include not onlyfurther development and enhancement of our existing business but also the entryinto new or complementary businesses, such as expansion of our current businessoperations into international markets and the development of poker-relatededucational content, such as our launch of the WPT Academy. We are alsoexploring other opportunities to leverage the World Poker Tour brand, includingthe potential development of additional television programming. The followingrisks associated with expanding into new or complementary businesses byinvestment, licensing, acquisition, strategic alliance, co-production or other arrangementscould have a material adverse effect on our business, operating results andfinancial condition and the price of our common stock:

·       potential diversion ofmanagement’s attention and resources from our existing business and aninability to recruit or develop the necessary management resources to managenew businesses;

·       unanticipated liabilitiesor contingencies from new or complementary businesses or ventures;

·       potential operating lossesfrom new business ventures;

·       reduced earnings due to potentialgoodwill impairment charges, increased interest costs and additional costsrelated to the integration of acquisitions;

·       potential reallocations ofresources due to the growing complexity of our business and strategy;

·       competition from companies engagedin the new or complementary businesses that we are entering;

·       possible additionalregulatory requirements and compliance costs;

·       dilution of ourstockholders’ percentage ownership or an increase of our leverage when issuingequity or convertible debt securities or incurring debt; and

·       potential unavailability onacceptable terms, or at all, of additional financing necessary for expansion.

***The loss of the services of Steven Lipscomb or other keyemployees or on-air talent or our failure to attract key individuals wouldmaterially and adversely affect our business.***

We are highlydependent on the services of Steven Lipscomb, who is the creator and ExecutiveProducer of the WPT and Professional Poker Tour television series and currentlyserves as our President and Chief Executive Officer. Although we have enteredinto an employment agreement with Mr. Lipscomb governing his employmentthrough December 29, 2008 (unless either side reduces the term toDecember 29, 2007 by November 1, 2007), Mr. Lipscomb may electto decrease the level of his involvement with us or terminate his employmentaltogether prior to the expiration of this term.

Our continuedsuccess is also dependent upon retention of other key management executives whohave been instrumental in our success thus far and upon our ability to attractand retain employees and on-air talent to implement our corporate developmentstrategy and our branding and licensing efforts. The loss of some of our seniorexecutives, or an inability to attract or retain other key individuals, couldmaterially adversely affect us. Growth in our business is dependent, to a largedegree, on our ability to retain and attract such employees. We seek tocompensate and provide incentives to our key executives, as well as otheremployees, through competitive salaries, stock ownership and bonus plans, butwe can make no assurance that these programs will allow us to retain keyemployees or hire new employees. In addition, our future success may also beaffected by the potential need to replace our key on-air talent at aninopportune time, such as midway through the tapings of a season of the WPT orPPT television programs.

 

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***Lakes Entertainment, Inc. remains the majorityshareholder of the company and is able to effectively control our managementand operations.***

LakesEntertainment, Inc. through its wholly-owned subsidiary, Lakes Poker Tour,LLC, owns 12,480,000 shares of our outstanding common stock, representingapproximately 61% of our voting power. Lakes Entertainment, together with ourdirectors and executive officers, beneficially owns approximately 14,988,542shares of our common stock, which represents approximately 71% of our votingpower. As a result, Lakes Entertainment, either alone or together with ourdirectors and executive officers, controls the outcome of all matters requiringstockholder approval, including the future merger, consolidation or sale of allor substantially all of our assets. Therefore, Lakes Entertainment indirectlycontrols our management through the election and removal of members of theBoard of Directors. This concentrated control could discourage others frominitiating any potential merger, takeover or other change of controltransaction that may otherwise be beneficial to our stockholders. As a result,the return on your investment in our common stock through the market price ofour common stock or ultimate sale of our business could be adversely affected.

***Our board of directors’ ability to issue undesignatedpreferred stock and the existence of anti-takeover provisions may depress thevalue of our common stock.***

Our authorizedcapital includes 20 million shares of undesignated preferred stock. Ourboard of directors has the power to issue any or all of the shares of preferredstock, including the authority to establish one or more series and to fix thepowers, preferences, rights and limitations of such class or series, withoutseeking stockholder approval, subject to certain limitations on this powerunder Nasdaq listing requirements. Further, as a Delaware corporation, we aresubject to provisions of the Delaware General Corporation Law regarding “businesscombinations.” We may, in the future, consider adopting additionalanti-takeover measures. The authority of our board to issue undesignated stockand the anti-takeover provisions of Delaware law, as well as any futureanti-takeover measures adopted by us, may, in certain circumstances, delay,deter or prevent takeover attempts and other changes in control of the companynot approved by our board of directors. As a result, our stockholders may loseopportunities to dispose of their shares at favorable prices generallyavailable in takeover attempts or that may be available under a merger proposaland the market price, voting and other rights of the holders of common stockmay also be affected.

**Risks Related to Our Industry**

***Our television programming may be unable to maintain asufficient audience for a variety of reasons, many of which are beyond ourcontrol.***

Televisionproduction is a speculative business because revenues and income derived fromtelevision depend primarily upon the continued acceptance of that programmingby the public, which is difficult to predict. Public acceptance of particularprogramming is dependent upon, among other things, the quality of theprogramming, the strength of networks on which the programming is telecast, thepromotion and scheduling of the programming and the quality and acceptance ofcompeting television programming and other sources of entertainment andinformation. Popularity of programming can also be negatively impacted byexcessive telecasting of the programming beyond viewers’ saturation thresholds.The WPT television series, while still one of the highest-rated shows on theTravel Channel, has had decreased Nielsen ratings in the past year due to anincreasing number of competing poker-related shows. Furthermore, pursuant toour agreement with the Game Show Network, Season Six, and potentially seasonsSeven and Eight of the WPT television series will air on the Game Show Network,which is a new television network to us with which we have had noexperience.  If the WPT television seriesis unable to maintain high ratings when it airs on the Game Show Network, itmay elect not to exercise its options for additional episodes and seasons, inwhich event we may be unable to negotiate future U.S. telecast licenseagreements on terms that are favorable, or at all.

***Our ability to create and license our television programmingprofitably may be negatively affected by adverse trends that apply to thetelevision production business generally.***

Televisionrevenues and income may be affected by a number of factors, many of which arenot within our control. These factors include a general decline in televisionviewers, pricing pressure in the television advertising industry, strength ofthe stations on which our programming is telecast, general economic conditions,increases in production costs and availability of other forms of entertainmentand leisure time activities. All of these factors, as well as others, mayquickly change and these changes cannot be predicted with certainty. Our futurelicensing opportunities may also be adversely affected by these changes.Accordingly, if any of these changes were to occur, the revenues and income wegenerate from television programming could decline.

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***A decline in general economic conditions or the popularityof our brand of televised poker tournaments could adversely impact ourbusiness.***

Because ouroperations are affected by general economic conditions and consumer tastes, ourfuture success is unpredictable. The demand for entertainment and leisureactivities tends to be highly sensitive to consumers’ disposable incomes andthus a decline in general economic conditions could, in turn, have a materialadverse effect on our business, operating results and financial condition andthe price of our common stock. An economic decline could also adversely affectour corporate sponsorship business, sales of our branded merchandise and otheraspects of our business.

The continuedpopularity of our type of entertainment is vital in maintaining the ability toleverage our brand and develop products or services that appeal to our targetaudiences, which, in turn, is important to our long-term results of operations.Public tastes are unpredictable and subject to change and may be affected bychanges in the country’s political and social climate. A change in publicopinion could have a material adverse effect on our business, operating resultsand financial condition and, ultimately, the price of our common stock.

***The political or social climate regarding gaming and pokercould negatively impact our ability to negotiate future telecast licensearrangements and could negatively impact our chances of renewal.***

Although thepopularity of poker, in particular, and gaming, in general, has continued togrow in the U.S. and abroad, gaming has historically experienced backlash fromvarious constituencies and communities. Currently, the legal operational statusof Internet-based casinos and cardrooms remains unclear in some countries. TheU.S. government has taken steps to curb activities that it believes constitutesunlawful online gaming, through legislation such as the Unlawful InternetGambling Enforcement Act of 2006 and through recent arrests of off-shore onlinegaming operators traveling in the U.S.

Based on theuncertain regulatory environment surrounding the marketing and promotion ofInternet-based casinos and cardrooms to viewers in the U.S., the TravelChannel, which has final edit rights to the shows that it telecasts, hasindicated it will likely not display the “dot com” names or logos of Internet-basedcasinos and cardrooms in its telecasts, although it has expressed a willingnessto display names and logos from strictly play-for-free “dot net” websites fromour member casinos. However, if the Travel Channel elected not to allow displayof “dot net” logos within the series, we may not be able to attract otherInternet-based casinos or to retain the existing online cardroom remaining onour tour. Additionally, increased regulatory scrutiny on Internet gamblingsites may eliminate these sites as sources of advertising revenue fortelevision networks that exhibit poker-related programming, thereby potentiallyimpacting the value of such programming to these networks.

***Government regulation of online gaming in foreign countriesmay restrict the activities or affect the financial results of our onlineventure that is under development.***

The currentWPTonline.com website is licensed by the Alderney Gambling Control Commission,and while we believe that WagerWorks is in compliance with all internationalInternet gaming regulations, we are currently reliant on WagerWorks forcompliance with all applicable regulations, including ongoing verification thatimproper wagers are not placed on our online gaming site.  Once CryptoLogic begins to operate our onlinegaming site, we will rely on CryptoLogic to comply with the applicableregulations. If WagerWorks’ or CryptoLogic’s compliance or verification isinadequate, regulators in the U.S. or other jurisdictions may impose fines orother sanctions or threaten or take other actions that could adversely affectour reputation and the revenues we derive from the license of rights toWagerWorks or CryptoLogic. Although CryptoLogic is responsible for obtainingall gaming permits and licenses necessary to operate the gaming site itself, wewill be responsible for obtaining all gaming permits and licenses on behalf ofthe Company, which may be expensive and time consuming. We continue to monitorthe legality of Internet gaming in domestic and international jurisdictions,but cannot be certain that changes in existing regulations will be beneficialto the online gaming market. Additionally, we expect that on-air promotion ofour online gaming site via international WPT television telecasts will continueto be a primary marketing tool for driving poker players to the site. However,certain territories and foreign networks may restrict us from incorporatingmarketing elements related to our online site into our international telecastsand certain laws or regulations may restrict the type of advertising in generalin those territories. If these restrictions occur, our costs of customeracquisition may be substantially higher than anticipated.

***Internet gaming is a relatively new industry and, therefore,we do not know if the market will continue to develop and our products andservices to be offered through our online gaming website will be in demand.***

Internet gaming isa relatively new industry that continues to rapidly evolve and is characterizedby an increasing number of market entrants. If the Internet gaming marketbecomes saturated with competitors, or if our products and services to beoffered through our new online gaming website do not achieve market acceptance,we could incur losses in connection with our investment in our online ventureand our future business, operating results and financial condition could beadversely affected.

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***Congress’ passing of the UnlawfulInternet Gambling Enforcement Act or future government regulation of onlinegaming in the U.S. may restrict the activities or affect the financial resultsof our online gaming site.***

InOctober 2006, Congress passed, and the President signed, the SAFE Port Actwhich included in it the Unlawful Internet Gambling Enforcement Act of 2006(the “Act”). The Act prohibits financial institutions from processing paymentsin connection with unlawful internet gambling pursuant to state or federallaws.  We believe that the Act is unlikely to have a direct adverse effecton the Company in light of our policy of not taking U.S. wagers on our onlinegaming site. Nevertheless, we cannot tell with certainty the impact the Actwill have on our overall business. Until now, many other online gamingcompanies have accepted wagers and derived significant revenues from customersin the U.S. A few of these companies, most of which are larger, moreestablished and better funded than we are, have stopped accepting U.S. wagersin reaction to the new legislation. This could result in greater competition tosecure online gaming customers outside the U.S. if companies that previouslyaccepted U.S. wagers redirect their efforts in securing markets where WPToffers online gaming services.

We believe that anumber of online gaming sites currently sponsor poker tournaments pursuant towhich their customers can win “buy-ins” to tournaments held in traditionalbrick and mortar casinos, including WPT series tournaments. We cannot predicthow the Act will affect these sites or how, if at all, these sites will modifytheir marketing strategies in reaction to the Act. Accordingly, there is a riskof fewer participants in WPT events, which ultimately could affect thepopularity of these events and tournament poker in general. Further, it ispossible that the inability of poker players in the United States to playonline will decrease the general level of public interest in poker in the U.S.If these factors cause a decrease in the popularity of poker, this, would havea material adverse effect on our business, prospects, financial condition,results of operations, cash flow and, ultimately, the price of our commonstock.

***Our quarterly results may fluctuate, causing fluctuation ofour stock price that may negatively affect the value of our common stock.***

Under our licenseagreements for the WPT and PPT, revenues are recognized as each episode isdelivered to the Travel Channel or, in connection with Season Six andthereafter, the Game Show Network. Therefore, our quarterly revenue canfluctuate significantly depending on the number of episodes delivered in anyone quarter. In addition, the sales of consumer products that utilize ourlicensed intellectual proper vary greatly, due to holiday seasons, schoolschedules and other outside factors. As a result, our financial results can beexpected to fluctuate significantly from quarter to quarter, leading tovolatility and a possible adverse effect on the market price of our commonstock.

***The television entertainment market in which we operate ishighly competitive and competitors with greater financial resources or marketplacepresence may enter our markets to our detriment.***

We compete with other poker-related televisionprogramming, including ESPN’s coverage of the “World Series of Poker” andits “World Series of Poker” Circuit Events, Fox Sports Net’s exhibition ofthe Poker Superstars Invitational and Poker Dome Challenge television shows,NBC’s exhibition of the National Heads-Up Poker Championship and Poker AfterDark television shows and the Game Show Network’s exhibition of the High StakesPoker, among others. These and other producers of poker-related programming maybe well established and may have significantly greater resources than we do.Based on the popularity of these poker-related televised programs, we believethat additional competing televised poker programs may currently be indevelopment or may be developed in the future. Our programming also competesfor telecast audiences and advertising revenue with telecasts of mainstreamprofessional and amateur sports, as well as other entertainment and leisureactivities. These competing programs and activities and brands that may resultmay decrease the popularity of the WPT or Professional Poker Tour series anddilute the WPT brand. This would adversely affect our operating results andfinancial condition and, ultimately, the price of our common stock.

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**ITEM 5. OTHERINFORMATION**

As a result of the recent decision toutilize the CryptoLogic software platform for the re-launch of the onlinegaming site and stop the development of an internally-created software platform,the Company expects to write off approximately $2.0-$3.0 million ofcertain property, equipment and other capitalized costs during the secondquarter of 2007.  

**ITEM 6. EXHIBITS**
| 31.1   |   | Certification  of CEO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                          |   |
| 31.2   |   | Certification  of CFO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |   |
|   |   |                                                                                                                                                          |   |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           |   |
|   |   |                                                                                                                                                          |   |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002           |   |

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report on Form 10-Q to be signed on its behalf by theundersigned, thereunto duly authorized. 
| Dated: May 10, 2007 | WPT ENTERPRISES, INC.   |
|---------------------|-------------------------|
|                | Registrant              |
|                |                    |
|                |                    |
|                | / s/ Steven Lipscomb    |
|                | Steven Lipscomb         |
|                | Chief Executive Officer |
|                |                    |
|                |                    |
|                | /s/ Scott A. Friedman   |
|                | Scott A. Friedman       |
|                | Chief Financial Officer |

 

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