**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

**(MarkOne)**

 

| **x**                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**              |
|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                         | ** ** | ** **                                                                                                |
| **For the quarterly period ended October 1, 2006** |
| ** **                                         |
| **OR**                                             |
|                                               |       |                                                                                                      |
| **o**                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                                      to                                      **

 

**Commission File No. 0-24993**

**WPT ENTERPRISES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **77-06390000**                       |
|------------------------------------------------------------------|------------|---------------------------------------|
| (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’stelephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|  | Yes o | No x |
|--|-------|------|

 

As of November 6, 2006 there were 20,378,333 shares ofCommon Stock, $0.001 par value per share, outstanding.

 

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**WPTENTERPRISES, INC.**

**INDEX**
| PART I.  | FINANCIAL INFORMATION |                                                                                                                                                            | **Page** |
|----------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 1.               | FINANCIAL STATEMENTS                                                                                                                                            |     |   |
|     |                  |                                                                                                                                                            |     |   |
|     |                  | Condensed Balance  Sheets as of October 1, 2006 (unaudited) and January 1, 2006                                                                                 |     | 3 |
|     |                  |                                                                                                                                                            |     |   |
|     |                  | Condensed  Statements of Earnings (Loss) and Comprehensive Earnings (Loss) for the three  and nine months ended October 1, 2006 and October 2, 2005 (unaudited) |     | 4 |
|     |                  |                                                                                                                                                            |     |   |
|     |                  | Condensed  Statements of Stockholders’ Equity for the nine months ended October 1, 2006  and October 2, 2005 (unaudited)                                   |     | 5 |
|     |                  |                                                                                                                                                            |     |   |
|     |                  | Condensed  Statements of Cash Flows for the nine months ended October 1, 2006 and  October 2, 2005 (unaudited)                                                  |     | 6 |
|     |                  |                                                                                                                                                            |     |   |
|     |                  | Notes to  Condensed Financial Statements (unaudited)                                                                                                            |     | 7 |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 2.               | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                                                                     |     | 14 |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 3.               | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                                                                     |     | 23 |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 4.               | CONTROLS AND PROCEDURES                                                                                                                                         |     | 23 |
|     |                  |                                                                                                                                                            |     |   |
| PART II. | OTHER INFORMATION     |                                                                                                                                                            |     |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM  1.              | LEGAL  PROCEEDINGS                                                                                                                                              |     | 24 |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 1A.              | RISK FACTORS                                                                                                                                                    |     | 24 |
|     |                  |                                                                                                                                                            |     |   |
|     | ITEM 6.               | EXHIBITS                                                                                                                                                        |     | 26 |
|     |                  |                                                                                                                                                            |     |   |
|     | SIGNATURES            |                                                                                                                                                            | 27       |

 

2

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**WPT ENTERPRISES, INC.**

**CondensedBalance Sheets**

**October 1, 2006 (unaudited) andJanuary 1, 2006**

 
| ** **                                                                                                   | ** ** | **October 1, 2006** | ** ** | **January 1, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                   | ** ** | **(In thousands)**       | ** ** |
| **Assets**                                                                                                   | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Current assets:                                                                                              |       |                          |       |                          |       |
| Cash and cash  equivalents                                                                                   |       | $                             | 9,030      |                          | $          | 1,737 |   |
| Short-term investments                                                                                       |       | 30,827                        |       | 26,735                        |       |
| Accounts receivable                                                                                          |       | 2,598                         |       | 3,091                         |       |
| Deferred television  costs                                                                                   |       | 1,363                         |       | 1,520                         |       |
| Inventory                                                                                                    |       | 55                            |       | 45                            |       |
| Other                                                                                                        |       | 892                           |       | 665                           |       |
|                                                                                                         |       | 44,765                        |       | 33,793                        |       |
|                                                                                                         |       |                          |       |                          |       |
| Property and equipment,  net                                                                                 |       | 3,066                         |       | 1,271                         |       |
| Restricted cash                                                                                              |       | 451                           |       | 249                           |       |
| Investments                                                                                                  |       | 2,923                         |       | 10,627                        |       |
| Other assets                                                                                                 |       | 161                           |       | 320                           |       |
| ** **                                                                                                   |       | $                             | 51,366     |                          | $          | 46,260 |   |
| ** **                                                                                                   | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| **Liabilities and Stockholders’  Equity**                                                               | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Current liabilities:                                                                                         |       |                          |       |                          |       |
| Accounts payable                                                                                             |       | $                             | 837        |                          | $          | 1,550 |   |
| Accrued payroll and  related                                                                                 |       | 1,016                         |       | 246                           |       |
| Other accrued expenses                                                                                       |       | 1,452                         |       | 941                           |       |
| Deferred revenue                                                                                             |       | 5,138                         |       | 5,150                         |       |
|                                                                                                         |       | 8,443                         |       | 7,887                         |       |
| ** **                                                                                                   | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| 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 and 20,158 shares issued and  outstanding |       | 20                            |       | 20                            |       |
| Additional paid-in  capital                                                                                  |       | 40,329                        |       | 34,113                        |       |
| Retained earnings  (deficit)                                                                                 |       | 2,641                         |       | (6,208                        | )          |
| Accumulated other  comprehensive earnings (loss)                                                             |       | (67                           | )          | 10,449                        |       |
| Deferred compensation                                                                                        |       | —                        |       | (1                            | )          |
|                                                                                                         |       | 42,923                        |       | 38,373                        |       |
|                                                                                                         |       | $                             | 51,366     |                          | $          | 46,260 |   |

 

Seenotes to condensed financial statements

3

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**WPT ENTERPRISES, INC.**

**CondensedStatements of Earnings (Loss) and Comprehensive Earnings (Loss)**

**(In thousands, except per share data)**

**(unaudited)**

 
| ** **                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **October 1, 2006**    | ** ** | **October 2, 2005**   | ** ** | **October 1, 2006** | ** ** | **October 2, 2005** | ** ** |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| License fees:                                             |       |                             |       |                            |       |   |   |   |   |
| Domestic television                                       |       | $                                | 3,163      |                            | $          | 442 |   | $ | 13,467 |   | $ | 5,993 |   |
| International television                                  |       | 623                              |       | 395                             |       | 2,191 |   | 1,456 |   |
| Product licensing                                         |       | 861                              |       | 933                             |       | 2,378 |   | 3,125 |   |
|                                                      |       | 4,647                            |       | 1,770                           |       | 18,036 |   | 10,574 |   |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Online gaming                                             |       | 912                              |       | 170                             |       | 2,644 |   | 170 |   |
| Event hosting and sponsorship fees                        |       | 249                              |       | 73                              |       | 2,458 |   | 1,785 |   |
| Other                                                     |       | 60                               |       | 115                             |       | 212 |   | 301 |   |
|                                                      |       | 5,868                            |       | 2,128                           |       | 23,350 |   | 12,830 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Cost of  revenues**                                     |       | 1,737                            |       | 561                             |       | 8,333 |   | 8,125 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Gross  profit**                                         |       | 4,131                            |       | 1,567                           |       | 15,017 |   | 4,705 |   |
| **Expenses:**                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling and administrative                                |       | 4,479                            |       | 3,319                           |       | 13,891 |   | 8,908 |   |
| Depreciation                                              |       | 70                               |       | 56                              |       | 167 |   | 113 |   |
|                                                      |       | 4,549                            |       | 3,375                           |       | 14,058 |   | 9,021 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Earnings  (loss) from operations**                      |       | (418                             | )          | (1,808                          | )          | 959 |   | (4,316 | ) |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Other  income:**                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Realized gain on sale of investment                       |       | 4,541                            |       | —                          |       | 10,216 |   | — |   |
| Interest                                                  |       | 431                              |       | 254                             |       | 1,175 |   | 734 |   |
| **Earnings  (loss) before income tax provision**          |       | 4,554                            |       | (1,554                          | )          | 12,350 |   | (3,582 | ) |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax provision                                      |       | 1,862                            |       | —                          |       | 3,501 |   | — |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Net  earnings (loss)**                                  |       | $                                | 2,692      |                            | $          | (1,554 | ) | $ | 8,849 |   | $ | (3,582 | ) |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  comprehensive earnings (loss), net of tax:**     | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized gains (losses) on marketable securities:       |       | 110                              |       | (37                             | )          | $ | (300 | ) | $ | (73 | ) |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Comprehensive  earnings (loss)**                        |       | $                                | 2,802      |                            | $          | (1,591 | ) | $ | 8,549 |   | $ | (3,655 | ) |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Net  earnings (loss) per common share - basic**         |       | $                                | 0.13       |                            | $          | (0.08 | ) | $ | 0.43 |   | $ | (0.18 | ) |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  earnings (loss) per common share - diluted**       |       | $                                | 0.12       |                            | $          | (0.08 | ) | $ | 0.41 |   | $ | (0.18 | ) |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted-average  common shares outstanding - basic**   |       | 20,603                           |       | 19,721                          |       | 20,408 |   | 19,525 |   |
| ** **                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dilutive effect  of:                                      |       |                             |       |                            |       |   |   |   |   |
| Warrants                                                  |       | 400                              |       | —                          |       | 400 |   | — |   |
| Options                                                   |       | 697                              |       | —                          |       | 545 |   | — |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| **Weighted-average common shares  outstanding - diluted** |       | 21,700                           |       | 19,721                          |       | 21,353 |   | 19,525 |   |

 

See notes tocondensed financial statements

4

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**WPTENTERPRISES, INC.**

**CondensedStatements of Stockholders’ Equity**

**NineMonths ended October 1, 2006 and October 2, 2005**

**(unaudited)**

 
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** ** | **Accumlated**      | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|---------------|------------|-------------------|------------|---------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**  | ** ** | ** **        | ** ** | **Other**           | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Earnings**   | ** ** | **Deferred**  | ** ** | **Comprehensive** | ** ** | ** **          | ** ** |
| ** **                                     | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Compensation**  | ** ** | **Earnings/(Loss)** | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **(In thousands)**    | ** ** |
| **2006**                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES  AT JANUARY 1**                     | ** ** | **20,158**            | ** ** | **$**       | **20**     | ** **     | **$**      | **34,113**    | ** ** | **$**             | **(6,208** | **)**               | **$**      | **(1**     | **)**      | **$** | **10,449** | ** ** | **$** | **38,373** | ** ** |
| Reduction of deferred compensation             |       |                  |       |        |       |           |       |          |       | 1                 |       |                |       | 1          |       |
| Common stock issued                            |       | 220                   |       |        |       | 1              |       |          |       |              |       |                |       | 1          |       |
| Effect of share-based compensation             |       |                  |       |        |       | 3,046          |       |          |       |              |       |                |       | 3,046      |       |
| Income tax benefit from stock option exercises |       |                  |       |        |       | 3,169          |       |          |       |              |       |                |       | 3,169      |       |
| Sale of investment                             |       |                  |       |        |       |           |       |          |       |              |       | (10,216             | )          | (10,216    | )          |
| Other comprehensive loss                       |       |                  |       |        |       |           |       |          |       |              |       | (300                | )          | (300       | )          |
| Net earnings                                   |       |                  |       |        |       |           |       | 8,849         |       |              |       |                |       | 8,849      |       |
| **BALANCES  AT OCTOBER 1**                     | ** ** | **20,378**            | ** ** | **$**       | **20**     | ** **     | **$**      | **40,329**    | ** ** | **$**             | **2,641**  | ** **          | **$**      | **0**      | ** ** | **$** | **(67** | **)** | **$** | **42,923** | ** ** |
|                                           | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **2005**                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES  AT JANUARY 2**                     | ** ** | **19,480**            | ** ** | **$**       | **19**     | ** **     | **$**      | **32,767**    | ** ** | **$**             | **(1,205** | **)**               | **$**      | **(6**     | **)**      | **$** | **(6** | **)** | **$** | **31,569** | ** ** |
| Reduction of deferred compensation             |       |                  |       |        |       |           |       |          |       | 4                 |       |                |       | 4          |       |
| Common stock issued                            |       | 678                   |       | 1           |       | 28             |       |          |       |              |       |                |       | 29         |       |
| Effect of share-based compensation             |       |                  |       |        |       | 714            |       |          |       |              |       |                |       | 714        |       |
| Common stock subject to repurchase             |       |                  |       |        |       | 643            |       |          |       |              |       |                |       | 643        |       |
| Interest on common stock subject to repurchase |       |                  |       |        |       | (24            | )          |          |       |              |       |                |       | (24        | )          |
| Other comprehensive loss                       |       |                  |       |        |       |           |       |          |       |              |       | (73                 | )          | (73        | )          |
| Net loss                                       |       |                  |       |        |       |           |       | (3,582        | )          |              |       |                |       | (3,582     | )          |
| **BALANCES AT OCTOBER 3**                      | ** ** | **20,158**            | ** ** | **$**       | **20**     | ** **     | **$**      | **34,128**    | ** ** | **$**             | **(4,787** | **)**               | **$**      | **(2**     | **)**      | **$** | **(79** | **)** | **$** | **29,280** | ** ** |

 

See notes to condensed financial statements

5

----

 

**WPT ENTERPRISES, INC.**

**CondensedStatements of Cash Flows**

**Nine Months ended October 1, 2006 andOctober 2, 2005**

**(unaudited)**

 
| ** **                                                                                            | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                            | ** ** | **(In thousands)** | ** ** |
|                                                                                                  | ** ** | ** **              | ** ** | ** ** | ** ** |
| **OPERATING  ACTIVITIES:**                                                                            |       |                    |       |       |       |
| Net earnings (loss)                                                                                   |       | $                       | 8,849      |       | $          | (3,582 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash provided by (used in) operating activities: |       |                    |       |       |       |
| Depreciation, including production depreciation of  $254 and $191                                     |       | 421                     |       | 304        |       |
| Share-based compensation                                                                              |       | 3,154                   |       | 772        |       |
| Realized gain on sale of investment                                                                   |       | (10,216                 | )          | —     |       |
| Income taxes                                                                                          |       | 3,169                   |       | —     |       |
| Bad debts                                                                                             |       | 11                      |       | (51        | )          |
| Change in operating assets and liabilities:                                                           |       |                    |       |       |       |
| Accounts receivable                                                                                   |       | 482                     |       | 614        |       |
| Inventory                                                                                             |       | (10                     | )          | 1          |       |
| Deferred television costs                                                                             |       | 50                      |       | (349       | )          |
| Other                                                                                                 |       | (69                     | )          | (559       | )          |
| Accounts payable                                                                                      |       | (713                    | )          | 66         |       |
| Due to parent                                                                                         |       | —                  |       | (14        | )          |
| Accrued expenses                                                                                      |       | 1,282                   |       | 582        |       |
| Deferred revenue                                                                                      |       | (12                     | )          | 1,484      |       |
| Net cash  provided by (used in) operating activities                                                  |       | 6,398                   |       | (732       | )          |
|                                                                                                  |       |                    |       |       |       |
| **INVESTING  ACTIVITIES:**                                                                            |       |                    |       |       |       |
| Purchase of property and equipment                                                                    |       | (2,216                  | )          | (962       | )          |
| Investment in unconsolidated investee                                                                 |       | (2,923                  | )          | —     |       |
| Short-term investments, purchases                                                                     |       | (34,102                 | )          | (36,873    | )          |
| Short-term investments, sales/maturities                                                              |       | 30,101                  |       | 37,033     |       |
| Proceeds from sale of investment                                                                      |       | 10,236                  |       | —     |       |
| Net cash  provided by (used in) investing activities                                                  |       | 1,096                   |       | (802       | )          |
|                                                                                                  |       |                    |       |       |       |
| **FINANCING  ACTIVITIES:**                                                                            |       |                    |       |       |       |
| Increase in restricted cash                                                                           |       | (202                    | )          | (5         | )          |
| Proceeds from stock option exercises                                                                  |       | 1                       |       | 29         |       |
| Net cash  provided by (used in) financing activities                                                  |       | (201                    | )          | 24         |       |
|                                                                                                  |       |                    |       |       |       |
| Net increase  (decrease) in cash and cash equivalents                                                 |       | $                       | 7,293      |       | $          | (1,510 | ) |
| Cash and cash  equivalents - beginning of period                                                      |       | 1,737                   |       | 4,525      |       |
| **Cash and cash equivalents - end  of period**                                                        |       | $                       | 9,030      |       | $          | 3,015 |   |

 

See notes to condensedfinancial statements

6

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

**1. BASIS OF PRESENTATION**

These condensed financialstatements have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) applicable tointerim financial information. Accordingly, certain information normallyincluded in the annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America hasbeen condensed or omitted.  For furtherinformation, please refer to the annual audited financial statements of theCompany, and the related notes, included within the Company’s Annual Report onForm 10-K for the fiscal year ended January 1, 2006, previously filed with the 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.

**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 stock options granted to employees and consultants of the Company areincluded in the computation after the options have vested because the sharesare issuable for relatively minimal cash consideration in relation to the fairvalue of the options (Note 3). Diluted earnings (loss) per common share iscalculated by adjusting weighted-average outstanding shares, assumingconversion of all potentially dilutive stock options and awards (common stockequivalents). However, common stock equivalents are not considered in thecalculation for loss periods because to do so would be anti-dilutive.

**3.SHARE-BASED COMPENSATION**

The Company has adoptedthe board-approved, 2004 Stock Incentive Plan (the “2004 Plan”) that isauthorized to grant stock awards to purchase up to 3,120,000 shares ofcommon stock, including the options to purchase up to 1,120,000 shares ofcommon stock issued to employees and consultants that were previouslyoutstanding under a previous stock incentive plan at the time of conversion toa publicly-traded company.  On May 31,2006, the shareholders of the Company approved an amendment to the 2004 Plan toincrease the number of shares of common stock reserved for issuance from3,120,000 shares to 4,200,000 shares. Under the 2004 Plan, the options vest in equal installments overthree-year and five-year periods, beginning on the first anniversary of the dateof each grant and will continue on each subsequent anniversary date until theoption is fully vested. The employee must be employed with the Company on theanniversary date in order to vest in any shares for that year. Vested optionsare exercisable for ten years from the date of grant; however, if the employeeis terminated (voluntarily or involuntarily), any unvested options as of thedate of termination will be forfeited. WPTE issues new shares of common stock upon exercise of options.

In the first quarter of 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment-Revised 2004*, usingthe “modified prospective transition” method, and accordingly, the Company’sfinancial statements for prior periods have not been restated to reflect the retroactiveimpact of SFAS 123(R).  In March 2005,the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating toSFAS 123(R). The Company has applied certain provisions of SAB 107 in itsadoption of SFAS 123(R). Previously,the Company accounted for share-based compensation to employees anddirectors using the intrinsic value method in accordance with AccountingPrinciples Board No. 25, *Accounting for StockIssued to Employees*(“APB 25”).  For the three and nine monthsended October 1, 2006, the effect of the change from APB 25 to SFAS 123(R) wasto decrease both net earnings and diluted earnings per share by $0.6 millionand $2.9 million, and $0.03 and $0.14, respectively.

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

7

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·                  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 used 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 a summary ofthe assumptions used to estimate the weighted-average fair value of the stockoptions granted using the Black-Scholes pricing model:

 
| ** **                   | ** ** | **Three months ended  October 1, 2006** | ** ** | **Nine months ended  October 1, 2006** | ** ** |
|------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Risk free  interest rate     |       | 4.62                                                        | %          | 4.65                                                       | %          |
| Expected life                |       | 6.5 years                                                   |       | 6.5 years                                                  |       |
| Expected  dividend yield     |       | 0                                                           | %          | 0                                                          | %          |
| Weighted-average  fair value |       | $                                                           | 2.96       |                                                       | $          | 3.60 |   |
| Annualized volatility        |       | 77.31                                                       | %          | 79.44                                                      | %          |
|                              |            |                                                             |            |                                                            |            |  |  |

 

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  October 1, 2006** | ** ** | **Nine months ended  October 1, 2006** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                       |       |                                                        |       |                                                       |       |
| Total cost of  share-based payment plans                   |       | $                                                           | 637.5      |                                                       | $          | 2,917.6 |   |
| Amounts  capitalized in deferred television costs          |       | 8.9                                                         |       | 8.9                                                        |       |
| Amounts charged  against income, before income tax benefit |       | $                                                           | 628.6      |                                                       | $          | 2,908.7 |   |
| Amount of related  income tax benefit recognized in income |       | —                                                      |       | —                                                     |       |

 

For the ninemonths ended October 1, 2006, no income tax benefit was recognized in thestatement of earnings (loss) for share-based compensation arrangements.  Management assessed the likelihood that the deferredtax assets relating to future tax deductions from share-based compensation willbe recovered from future taxable income and determined that a valuationallowance is necessary, to the extent that management currently believes it ismore likely than not that tax benefits will not be realized. Management’s determinationis based primarily on historical earnings volatility, and the Company’srelatively short operating history.

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The following tablesummarizes stock option activity through the three and nine months endedOctober 1, 2006 and October 2, 2005:
| ** **                           | ** ** | ** **      | ** ** | ** **      | ** ** | **Number of Common Shares** | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **Options**     | ** ** | ** **      | ** ** | **Available**                              | ** ** | **Weighted-avg.** | ** ** |
| ** **                           | ** ** | **outstanding** | ** ** | **Exercisable** | ** ** | **for grant**                         | ** ** | **exercise price** | ** ** |
|                                 |       |            |       |            |       |                                       |       |   |   |
| **2006**                             |       |            |       |            |       |                                       |       |   |   |
| **Balance  at January 1, 2006**      |       | 2,158,000       |       | 620,333         |       | 283,667                                    |       | $ | 7.14 |   |
| Authorized                           |       |            |       |            |       |                                       |       |   |   |
| 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 |   |
| Authorized                           |       |            |       |            |       | 1,080,000                                  |       |   |   |
| Granted                              |       | 109,500         |       |            |       | (109,500                                   | )          | $ | 5.18 |   |
| Forfeited /cancelled/expired         |       | (153,501        | )          |            |       | 153,501                                    |       | $ | 10.07 |   |
| Exercised                            |       | (105,000        | )          |            |       |                                       |       | $ | 0.0049 |   |
| **Balance  at July 2, 2006**    |       | 1,953,666       |       | 619,333         |       | 1,348,001                                  |       | $ | 7.42 |   |
| ** **                           | ** ** | ** **      | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Granted                              |       | 249,000         |       |            |       | (249,000                                   | )          | $ | 4.22 |   |
| Forfeited /cancelled/expired         |       | (15,333         | )          |            |       | 15,333                                     |       | $ | 13.50 |   |
| **Balance  at October 1, 2006** |       | 2,187,333       |       | 1,043,167       |       | 1,114,334                                  |       | $ | 7.01 |   |
|                                 |       |            |       |            |       |                                       |       |   |   |
| **2005**                             | ** ** | ** **      | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Balance  at January 2, 2005**      |       | 2,561,000       |       | 560,000         |       | 559,000                                    |       | $ | 4.61 |   |
| Authorized                           |       |            |       |            |       |                                       |       |   |   |
| Granted                              |       | 24,500          |       |            |       | (24,500                                    | )          | $ | 19.50 |   |
| Forfeited /cancelled/expired         |       | (32,000         | )          |            |       | 32,000                                     |       | $ | 8.60 |   |
| Exercised                            |       | (640,000        | )          |            |       |                                       |       | $ | 0.0049 |   |
| **Balance  at April 3, 2005**   |       | 1,913,500       |       | 200,000         |       | 566,500                                    |       | $ | 6.27 |   |
| Authorized                           | ** ** | ** **      | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Granted                              |       | 34,000          |       |            |       | (34,000                                    | )          | $ | 17.25 |   |
| Forfeited /cancelled/expired         |       | (31,500         | )          |            |       | 31,500                                     |       | $ | 8.31 |   |
| Exercised                            |       | (35,000         | )          |            |       |                                       |       | $ | 0.0049 |   |
| **Balance  at July 3, 2005**    |       | 1,881,000       |       | 165,000         |       | 564,000                                    |       | $ | 6.55 |   |
| ** **                           | ** ** | ** **      | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Granted                              |       | 355,000         |       |            |       | (355,000                                   | )          | $ | 12.26 |   |
| Forfeited /cancelled/expired         |       | (90,000         | )          |            |       | 90,000                                     |       | $ | 14.22 |   |
| Exercised                            |       | (3,333          | )          |            |       |                                       |       | $ | 8.00 |   |
| **Balance at October 2, 2005**  |       | 2,142,667       |       | 611,667         |       | 299,000                                    |       | $ | 7.17 |   |

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The following tablesummarizes significant ranges of outstanding and exercisable options as ofOctober 1, 2006**:**
| **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                      |       | 5.40 |   | $ | 0.0049 |   | $ | 844,898 |   | 225,000 |   | $ | 0.0049 |   | $ | 844,898 |   |
| $3.93 – 4.26                       |       | 249,000                      |       | 9.92 |   | 4.22 |   | — |   | — |   | — |   | — |   |
| $5.18 – 9.92                       |       | 1,458,833                    |       | 8.20 |   | 7.59 |   | — |   | 758,334 |   | 8.05 |   | — |   |
| $11.95 – 14.51                     |       | 225,000                      |       | 8.85 |   | 12.23 |   | — |   | 48,333 |   | 12.41 |   | — |   |
| $15.05 – 19.50                     |       | 29,500                       |       | 8.83 |   | 15.54 |   | — |   | 11,500 |   | 15.79 |   | — |   |
|                                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                    |       | 2,187,333                    |       | 8.18 |   | $ | 7.01 |   | $ | 844,898 |   | 1,043,167 |   | $ | 6.60 |   | $ | 844,898 |   |

 

The aggregateintrinsic value in the preceding table****representsthe total pre-tax intrinsic value, based on the Company’s closing stock priceof $3.76 on September 29, 2006, which would have been received by the optionholders had they exercised their options as of that date.  As of October 1, 2006, the total number of “in-the-money”options exercisable was 225,000. The total intrinsic value of options exercisedduring the nine months ended October 1, 2006 was $1.4 million.

For the nine months ended October 1, 2006, totalcompensation cost related to SFAS 123(R) was approximately $2.9 million, ofwhich $2.5 million relates to the total fair value of the shares vested duringthe period.  As of October 1, 2006, totalcompensation cost related to non-vested share-based options not yet recognizedwas $5.6 million, which is expected to be recognized over the next 35 months ona weighted-average basis.

Had the Company reported compensation costs asdetermined by the fair value method of accounting for option grants toemployees and directors under SFAS 123, *Accounting for Stock-basedCompensation* (“SFAS 123”) in 2005, net loss and net loss per commonshare would approximate the following pro forma amounts (in thousands, exceptper share data):
| ** **                                                                                           | ** ** | **Three months ended  October 2, 2005** | ** ** | **Nine months ended  October 2, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net loss as  reported                                                                                |       | $                                                           | (1,554     | )                                                          | $          | (3,582 | ) |
| Deduct: Total  equity-based compensation expense determined under the fair value method, net  of tax |       | (689                                                        | )          | (1,854                                                     | )          |
| Pro forma net loss  under SFAS 123                                                                   |       | $                                                           | (2,243     | )                                                          | $          | (5,436 | ) |
|                                                                                                 |       |                                                        |       |                                                       |       |
| Net loss per  common share – basic and diluted -as reported                                     |       | $                                                           | (0.08      | )                                                          | $          | (0.18 | ) |
| Pro forma net loss per  common share – basic and diluted                                        |       | $                                                           | (0.11      | )                                                          | $          | (0.28 | ) |

 

Duringthe three and nine months ended October 2, 2005, compensation expense of $(0.2)million (due to a decrease in the stock price during the third quarter of 2005)and $0.8 million, respectively, related to stock options issued to consultantshas not been included in the table above as these options are already recordedat estimated fair value.

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Forpurposes of pro forma disclosures, the estimated fair value of options isassumed to be amortized to expense over the options’ vesting period. Theweighted-average fair value of each option granted was estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingassumptions:
| ** **                   | ** ** | **Three months ended  October 2, 2005** | ** ** | **Nine months ended  October 2, 2005** | ** ** |
|------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Risk free  interest rate     |       | 4.04                                                        | %          | 3.97                                                       | %          |
| Expected life                |       | 6.25 years                                                  |       | 6.13 years                                                 |       |
| Expected  dividend yield     |       | —                                                      |       | —                                                     |       |
| Weighted-average  fair value |       | $                                                           | 10.29      |                                                       | $          | 11.71 |   |
| Annualized volatility        |       | 88.40                                                       | %          | 84.62                                                      | %          |
|                              |            |                                                             |            |                                                            |            |  |  |

 

**4.INVESTMENTS**

In March 2006, the Company sold630,000 common shares of its then 11.7% interest in PokerTek, Inc. at $9.03 pershare, resulting in net cash proceeds of approximately $5.7 million. As aresult of the sale, the Company realized a gain of approximately $5.7 millionin the first quarter of 2006.  InSeptember 2006, the Company sold its remaining equity interest in Pokertekconsisting of 450,000 shares at $10.11 per share, resulting in net cashproceeds and realized an additional gain of approximately $4.5 million in thethird quarter of 2006.

On July 31, 2006, the Company acquireda 10% ownership interest in 3G Scene Limited (“3G Scene”) for approximately$2.9 million in cash (Note 5). 3G Scene designs and operates software and otherproducts that enable it or its licensees to offer gaming services to customersvia mobile devices. Since WPTE has less than a 20% ownership interest and doesnot have the ability to exercise significant influence over 3G Scene, thisinvestment is accounted for under the cost method and will be reviewed at leastquarterly by management for declines in fair value that may be determined to beother-than-temporary, in accordance with Emerging Issues Task Force (“EITF”)03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*.

**5. ONLINE GAMING AGREEMENTS**

On June 21, 2006, theCompany entered into an agreement, effective as of June 16, 2006 (the “CyberArtsAgreement”), with CyberArts Licensing, LLC (“CyberArts”), pursuant to whichCyberArts granted to the Company a perpetual, non-exclusive andnontransferable license for the object code of certain poker software andrelated banking and cardroom management software tools (the “Software”) for theCompany’s development of its own online poker room. The Company paid CyberArtsa one-time license fee of $1.3 million for the Software upon the execution ofthe Agreement, which is included in property and equipment and will beamortized on a straight-line basis over 36 months (consistent with the Company’ssoftware capitalization policy), as well as a payment of $180,000 for the firstyear of CyberArts’ support and maintenance for the Software. During the term ofthe CyberArts Agreement, the Company is obligated to pay additional annualsupport and maintenance fees of $180,000, subject to annual increases of up toa maximum of 9% in each year, payable on each anniversary of the CyberArtsAgreement. The Company also has an option to purchase the source code for theSoftware at any time during the term of the CyberArts Agreement for anadditional $2.7 million.

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On July 10, 2006, theCompany entered into and executed an amendment to its agreement with awholly-owned subsidiary of WagerWorks, Inc. (“WagerWorks”), dated as of January19, 2005 (the “Wagerworks Agreement”). Among other things, the amendment specified a termination date forWagerWorks’ operation of the Company’s online poker room (the “Poker Room”) onthe earlier to occur of (i) August 1, 2007, (ii) thirty (30) days following theCompany’s request to terminate operation of the Poker Room, or (iii) sixty (60)days following WagerWorks’ notice that it will terminate its operation of thePoker Room. Furthermore, the parties agreed to increase WagerWorks’ share ofrevenue derived from the operation of the Poker Room to 75% from the original25% to provide added incentive to WagerWorks to provide a quality online pokerroom during the transition by the Company to the operation of its own onlinepoker room.  Additionally, all termsassociated with the online casino that are contained within the originalWagerworks Agreement will remain the same.

On July 12, 2006, the Company entered into and executed alicensing agreement with 3G Scene, whereby 3G Scene was granted a non-exclusive license to use the WorldPoker Tour brand in conjunction with the promotion of its real-money mobilegaming applications.  Pursuant to theagreement, 3G Scene will offer real-money mobile games solely in jurisdictionswhere such gaming is not prohibited.  Inconsideration for the license, the Company shall be entitled to 50% of netrevenues involving WPTE-related applications.

**6.CONTINGENCIES**

On July 19, 2006, the Company became a defendant in anaction alleging, among other things, that its business practice requiringplayers to execute certain participant releases in connection with certaintournaments violate antitrust laws. The Company intends to vigorouslydefend its practice and, although unable at this time to estimate any minimumlosses, if any, in connection with this matter, based on information nowavailable, management does not expect any material adverse consequence fromthis action. Accordingly, no provision has been made in the financialstatements for any such losses. It is the Company’s policy not to accrue forestimated future legal and related defense costs, if any, to be incurred inconnection with outstanding or threatened litigation and other disputed mattersbut rather, to record such as period costs when the services are rendered.

InOctober 2006, the Unlawful Internet Gambling Enforcement Act of 2006 (the “Act”)was signed into law.  Among other thingsthe Act prohibits financial institutions from processing payments in connectionwith unlawful internet gambling pursuant to state or federal laws.   The Company believes that the Act isunlikely to have a direct adverse effect on the Company’s day-to-day operations,since it has always maintained a policy of not taking online wagers frompatrons within the United States. The Act could potentially result in increasedcompetition to secure online gaming customers outside the United States;however, the long-term impact, if any, on the Company’s business cannotcurrently be determined.

**7.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 October 1, 2006 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  products** | ** ** | **Online  gaming** | ** ** | **Corporate  alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 3,790      |                   | $          | 917                |       | $                        | 912        |          | $          | 249       |       | $ | — |   | $ | 5,868 |   |
| Cost of revenues |       | 958         |       | 199                    |       | 570                |       | 10                       |       | —        |       | 1,737     |       |
| Gross profit     |       | 2,832       |       | 718                    |       | 342                |       | 239                      |       | —        |       | 4,131     |       |
| Total assets     |       | 3,111       |       | 944                    |       | 709                |       | 194                      |       | 46,408        |       | 51,366    |       |
| Depreciation     |       | 96          |       | —                 |       | —             |       | —                   |       | 70            |       | 166       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

** **

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**Threemonths ended October 2, 2005 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  products** | ** ** | **Online  gaming** | ** ** | **Corporate  alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 890        |                   | $          | 995                |       | $                        | 170        |          | $          | 73        |       | $ | — |   | $ | 2,128 |   |
| Cost of revenues |       | 273         |       | 185                    |       | 103                |       | —                   |       | —        |       | 561       |       |
| Gross profit     |       | 617         |       | 810                    |       | 67                 |       | 73                       |       | —        |       | 1,567     |       |
| Total assets     |       | 2,260       |       | 832                    |       | 489                |       | 12                       |       | 32,731        |       | 36,324    |       |
| Depreciation     |       | 65          |       | —                 |       | —             |       | —                   |       | 56            |       | 121       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

 

**Ninemonths ended October 1, 2006 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  products** | ** ** | **Online  gaming** | ** ** | **Corporate  alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 16,768     |                   | $          | 2,580              |       | $                        | 2,644      |          | $          | 1,358     |       | $ | — |   | $ | 23,350 |   |
| Cost of revenues |       | 6,447       |       | 444                    |       | 1,359              |       | 83                       |       | —        |       | 8,333     |       |
| Gross profit     |       | 10,321      |       | 2,136                  |       | 1,285              |       | 1,275                    |       | —        |       | 15,017    |       |
| Depreciation     |       | 254         |       | —                 |       | 1                  |       | —                   |       | 166           |       | 421       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

 

**Ninemonths ended October 2, 2005 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  products** | ** ** | **Online  gaming** | ** ** | **Corporate  alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 8,552      |                   | $          | 3,336              |       | $                        | 170        |          | $          | 772       |       | $ | — |   | $ | 12,830 |   |
| Cost of revenues |       | 7,642       |       | 380                    |       | 103                |       | —                   |       | —        |       | 8,125     |       |
| Gross profit     |       | 910         |       | 2,956                  |       | 67                 |       | 772                      |       | —        |       | 4,705     |       |
| Depreciation     |       | 191         |       | —                 |       | —             |       | —                   |       | 113           |       | 304       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

** **

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**WPTENTERPRISES, INC.**

**Management’sDiscussion and Analysis of Financial Condition**

**AndResults of Operations**

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

**Overview**

We create brandedentertainment and consumer products driven by the development, production andmarketing of televised programming based on gaming themes. Our World Poker Tour®, or WPT, television series,based on a series of high-stakes poker tournaments, airs in the U.S. on theTravel Channel and in more than 150 territories globally. We have fouroperating units:

*WPTStudios*, our multi-media entertainment division, generatesrevenue through the domestic and international licensing of broadcast andtelecast rights and through casino host fees. Since our inception, the WPTStudios division has been responsible for approximately 75% of our totalrevenue. We license the WPT series to The Travel Channel, L.L.C. (“TRV” or “TravelChannel”) for telecast in the United States under an exclusive licenseagreement. We also have license agreements for the distribution of our WorldPoker Tour episodes in over 150 territories, for which we receive license fees,net of our agent’s sales fee and agreed upon sales and marketing expenses. Inaddition, during January 2006, we signed a license agreement with TRV totelecast our new Professional Poker TourTM (“PPT”) series,which began airing in the third quarter of 2006. We also collect annual hostfees from the member casinos that host World Poker Tour events (our membercasinos).

We have enteredinto a series of agreements with TRV for the United States distribution of theWPT television series (the WPT Agreements). Since our inception, fees from TRVunder the WPT Agreements and an agreement with TRV relating to the PPT serieshave been responsible for approximately 60% of our total revenue. For eachseason covered by the WPT Agreements and related options, TRV has exclusiverights to exhibit the episodes in that season an unlimited number of times onits television network (or any other television network owned by the DiscoveryChannel) in the U.S. for four years (three years for the episodes in SeasonOne). We have produced four complete seasons of the World Poker Tour seriesunder the WPT Agreements, and Season Five is currently in production. TRVcontinues to hold options to license Seasons Six and Seven.

Under the WPT Agreements,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 (expected)                  |       | August 2006 – August 2007 (expected)   |

 

In January 2006,we entered into an agreement with TRV for the U.S. distribution of Season Oneof the PPT television series. Similar to the WPT Agreements and relatedoptions, TRV has exclusive rights to exhibit the PPT episodes in that season anunlimited number of times on its television network (or any other televisionnetwork owned by the Discovery Channel) in the U.S. for four years. Under ouragreement with TRV regarding PPT, TRV had options to license the followingthree seasons (Seasons Two through Four). In accordance with our accountingpolicy of not capitalizing production costs until a firm commitment fordistribution is in place, we expensed approximately $0.7 million and $3.6million of production expenses related to the Professional Poker Tour duringfiscal 2004 and 2005, respectively. With the execution of the PPT agreement, inthe first quarter of 2006, we began capitalizing additional expenses associatedwith the production of the PPT series that are now being expensed as the firstseason episodes are delivered to the Travel Channel.  During the first nine months of 2006, wedelivered nineteen episodes of Season One of the PPT series, resulting inrevenue of $5.7 million and cost of revenues of $1.7 million.

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On May 1, 2006,TRV notified the Company that it had chosen to not exercise its options forSeason Two and subsequent seasons of the PPT. The PPT’s first season, which includes 24 two-hour episodes, has alreadybeen filmed and began to air on TRV in July 2006.  The Company is attempting to find a newbroadcast partner for the PPT going forward.

Further, under theWPT and PPT Agreements, TRV has the right to receive a percentage of ouradjusted gross revenues from international television licenses, productlicensing and publishing, merchandising and certain other sources, afterspecified minimum amounts are met.  Forthe nine months ended October 1, 2006, we recognized $0.5 million of TravelChannel participation expense that was recorded in cost of revenues.

*WPT Consumer Products*, our branded consumerproducts division, generates revenue principally through royalties from thelicensing of our brand to companies seeking to use the World Poker Tour brandand logo in the retail sales of their consumer products. In addition, thisbusiness unit generates revenue from direct sales of company-produced brandedmerchandise. We have generated significant revenues from existing licensees,including US Playing Card, Hands-On Mobile, and MDI. We also have a number oflicensees that are developing new licensed products including electronic,casino-based, poker-related gaming machines from IGT, and interactivetelevision games from Pixel Play.

*WPT Corporate Alliances*, our sponsorship and eventmanagement division, generates revenue through corporate sponsorship andmanagement of televised and live events. Our sponsorship program uses theprofessional sports model as a method to foster entitlement sponsorshipopportunities and naming rights to major corporations.  Anheuser-Busch has been the largest source ofrevenues through its sponsorship of Seasons Two, Three and Four of the WorldPoker Tour series on TRV. During the third quarter of 2006, we completed anagreement with Anheuser-Busch to continue its sponsorship for Season Five of theWorld Poker Tour. During the second quarter of 2006, we finalized a sponsorshipagreement with Xyience, Inc., a non-alcoholic energy drink developer anddistributor, to promote its product as the “official energy drink” of SeasonsFive and Six of the World Poker Tour.  Wewill recognize revenues from these agreements when the Season Five programs arebroadcast beginning in 2007. 

*WPT Online Gaming*, our online poker andcasino gaming division, generates revenue through our agreement withWagerWorks, Inc. (“WagerWorks”) pursuant to which in January 2005 we granted toWagerWorks a license to utilize the WPT brand to create a WPT-branded onlinegaming website, WPTonline.com, which features an online poker room and anonline casino with a broad selection of slots and table games.  In exchange for the license to WagerWorks ofour brand, WagerWorks shares with us a percentage of all net revenue itcollects from the operation of the online poker room and online casino. Althoughany Internet user can access WPTonline.com via the World Wide Web, the websitedoes not permit bets to be made from players in the U.S. and other restrictedjurisdictions. WPTonline.com generated approximately $2.6 million in revenues,which are presented gross of WagerWorks costs, for the nine months endedOctober 1, 2006, compared to costs of revenues of approximately $1.4 million.

In 2006, we decided todevelop our own software for our online poker room.  On June 21, 2006, we entered into andexecuted a Source Code License and Service Agreement, effective as of June 16,2006 (the “CyberArts Agreement”) with CyberArts Licensing, LLC (“CyberArts”),pursuant to which CyberArts granted to us a perpetual, non-exclusive andnontransferable license for the object code of certain poker software and relatedbanking and cardroom management software tools (the “Software”) for thedevelopment of our own online poker room. We paid CyberArts a one-time licensefee of $1.3 million for the Software upon the execution of the Agreement, whichis included in property and equipment and will be amortized on a straight-linebasis over 36 months, as well as a payment of $180,000 for the first year ofCyberArts’ support and maintenance for the Software. During the term of theCyberArts Agreement, we are obligated to pay CyberArts an annual fee of$180,000, subject to annual increases of up to a maximum of 9% in each year,for continuing support and maintenance, payable on the anniversary of theeffective date of the Agreement. We also have the right to purchase the sourcecode for the Software at any time during the term of the CyberArts Agreementfor an additional $2.7 million.  TheCyberArts agreement enables us to develop, manage, market and handle customerservice for the online poker business from our own international headquarters.

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On July 10, 2006, theagreement with WagerWorks was amended to permit us to (i) own and operate ourown online poker room, and (ii) offer multi-player real-money poker gaming viacellular phone using software provided by 3G Scene Limited.   In addition, the Amendment specified atermination date for WagerWorks’ operation of our online poker room (the “PokerRoom”) on the earlier to occur of (i) August 1, 2007, (ii) thirty (30) daysfollowing our request to terminate operation of the Poker Room, or (iii) sixty(60) days following WagerWorks’ notice that it will terminate its operation ofthe Poker Room. Furthermore, the parties agreed that WagerWorks could increaseits share of revenue derived from the operation of the Poker Room to 75% fromthe original 25% to provide added incentive to WagerWorks to provide a qualityonline poker room during the transition by us to the operation of our ownonline poker room.  Also, all termsassociated with the online casino that are contained within the originalagreement will remain the same.

On July 12, 2006, we entered into and executed a licensingagreement with 3G Scene Limited, pursuant to which we granted 3G Scene anon-exclusive license to use the World Poker Tour brand in conjunction with thepromotion of its real-money mobile gaming applications.  Pursuant to the agreement, 3G Scene willoffer real-money mobile games solely in jurisdictions where such gaming is notrestricted.  In consideration for thelicense, we shall be entitled to 50% of net revenues. In a separate agreemententered into on July 26, 2006, we acquired an approximate 10% ownershipinterest in 3G Scene for approximately $2.9 million.

InOctober 2006, the Unlawful Internet Gambling Enforcement Act of 2006 (the “Act”)was signed into law.  Among other thingsthe Act prohibits financial institutions from processing payments in connectionwith unlawful internet gambling pursuant to state or federal laws.  We believe that the Act is unlikely to have adirect adverse effect on the Company’s day-to-day operations, since we havealways maintained a policy of not taking online wagers from patrons within theUnited States. The Act could potentially result in increased competition tosecure online gaming customers outside the United States; however, thelong-term impact, if any, on our business cannot currently be determined.

## **Resultsof Operations**

**Nine Months Ended October 1, 2006Compared to the Nine Months Ended October 2, 2005**

*Revenues.*Ourtotal revenues increased by $10.5 million (82%) during the nine months endedOctober 1, 2006 compared to the nine months ended October 2, 2005. Domestictelevision licensee fees increased $7.5 million (125%) in the first nine monthsof 2006 compared to the 2005 period. The increase was primarily due to thedelivery of nineteen episodes of Season One of the PPT television series in thefirst nine months versus no episodes of the PPT delivered in the 2005 period,combined with the delivery of sixteen episodes of Season Four and one episodeof Season Five of the WPT television series (17 total episodes) versus thedelivery of thirteen episodes of Season Three and one episode of Season Four(14 total episodes) in the 2005 period.  International televisionlicense fees increased $0.7 million (51%) due to more distribution agreementsin place during the first nine months of 2006 compared to the 2005 period.  Specifically, we have expanded intoadditional territories and now have international distribution agreements forWPT Seasons One, Two, Three and Four. Online gaming, host fees and sponsorshiprevenues also increased $3.1 million (136%) in the first nine months of 2006compared to the 2005 period, of which $2.5 million is due to increased onlinegaming revenues, as we had higher levels of player activity during the firstnine months of 2006 compared to the 2005 period, as well as increasedsponsorship fees for Season Four versus Season Three.  Product licensing revenues decreased $0.7million (24%) in the first nine months of 2006 compared to the 2005period.  The decrease was primarily dueto lower revenues from US Playing Card, Jakks Pacific and our lottery gamepartner, MDI.  The decreases were aresult of lower demand for chip sets and plug and play games in the consumermarketplace.  The decreased revenues werepartially offset by increased mobile gaming sales from Hands-On Mobile(formerly Mforma).

*Cost of revenues*. Cost of revenues increasedby approximately $0.2 million (3%) in the first nine months of 2006 compared tothe 2005 period. The increase was primarily a result of an increase in onlinegaming costs of $1.3 million as the 2006 period had higher levels of playeractivity versus the 2005 period. The increased player activity generatesgreater revenues, which increases the level of WagerWorks’ share of suchrevenues, increasing the amount of the fees paid to the service provider, whichare based on a percentage of gross revenues. In addition, production costsincreased $0.3 million as a result of the delivery in the first ninemonths of sixteen episodes of Season Four and one episode of Season Five of theWPT television series (17 total episodes) versus the delivery of thirteenepisodes of Season Three and one episode of Season Four (14 total episodes) inthe 2005 period.  The increased costs wereoffset by lower PPTproduction costs of $1.5 million, as we began capitalizing these costs in thefirst quarter of 2006 versus previously expensing them in 2005 since nodistribution deal had been reached.

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*Gross margins.*  Overall gross margins were 64% in the first nine months of2006 compared to 37% in the first nine months of 2005.  Domestic television licensing margins were55% in the first nine months compared to negative 21% in the 2005 period, withthe increase primarily due to the recognition of a larger portion of PPTproduction costs in 2005, since no distribution deal had been reached duringthe early stages of production, combined with increased PPT revenues as aresult of the delivery of nineteen episodes versus no episodes being deliveredin the 2005 period.  In addition,increased revenues from online gaming, sponsorship fees, and internationaldistribution license fees helped contribute to the favorable gross margins.

*Selling and administrative expenses.*Selling and administrativeexpenses increased $5.0 million (56%) in the first nine months of 2006 comparedto the 2005 period. This increase was primarily due to $2.9 million ofshare-based compensation expense, resulting from the implementation of Statement of Financial Accounting Standards(“SFAS”) No. 123(R), *Share-BasedPayment-Revised 2004*. There was no share-based compensationexpense related to employee and director stock options and stock purchasesrecognized during the nine months ended October 2, 2005, pursuant to theaccounting guidance in effect during that time period.  The remainingdifference is due to increased headcount and legal fees incurred during thefirst nine months of 2006 associated with development, growth and regulatory compliancecosts.

*Other income*. We recognized $10.2million in gain on sale of investment in the first nine months of 2006,relating to the sale of our stock in PokerTek, Inc. Interest income increasedby $0.4 million (60%) for the first nine months of 2006 compared to the 2005period, primarily due to higher cash equivalents and short-term investmentbalances.

*Income taxes*.  Provision for income taxes was $3.5 millionand $0 for the first nine months of 2006 and 2005, respectively, and the overalltax rate for the year is projected to be approximately 28% (effective tax ratefrom operations was 17% and tax rate associated with the realized gain on saleof PokerTek was 41%) and 0% for 2006 and 2005, respectively. The rate increasedin 2006 due to positive taxable income that we expect to generate that willexceed our net operating loss carryforward from 2005. A valuation allowance waspreviously recorded for the net deferred tax asset related to the 2005 netoperating loss carryforward.

**Three Months Ended October 1, 2006Compared to the Three Months Ended October 2, 2005**

*Revenues.*Ourtotal revenues increased by $3.7 million (176%) during the three months endedOctober 1, 2006 compared to the three months ended October 2, 2005. Domestictelevision licensee fees increased $2.7 million (616%) in the third quarter of2006 compared to the 2005 period. The increase was primarily a result ofthe delivery of nine episodes of Season One of the PPT television series in thethird quarter versus no episodes of the PPT delivered in the 2005 period. Online gaming, sponsorshipand international television license revenues also increased $1.1 million (180%)in the third quarter of 2006 compared to the 2005 period, primarily due to anincrease of $0.7 million from online gaming revenue during 2006, as we hadhigher levels of player activity versus the prior year period.  International television licensing revenuesincreased by $0.2 million as a result of additional distribution agreements forSeason IV of the WPT and Season I of the PPT.   Product licensing revenues decreasedapproximately $70,000 (8%) in the third quarter of 2006 compared to the 2005period. The decrease was primarily due to lower revenues from Jakks Pacific andRadica Games, partially offset by increased mobile gaming sales from Hands-OnMobile (formerly Mforma).

*Cost of revenues*. Cost of revenues increasedby approximately $1.2 million (210%) in the third quarter of 2006 compared tothe 2005 period.  The increase wasprimarily a result of an increase in online gaming costs of $0.5 million as the2006 period had higher levels of player activity versus the 2005 period,  increasing the amount of the fees paid to theservice provider, which are based on a percentage of gross revenues.  Further, an amendment of the agreement withthe service provider, effective in July 2006, significantly increased thepercentage of revenues paid to that party, which contributed to theincrease.  In addition, an increase of$0.4 million was a result of the delivery in the third quarter of nineepisodes of Season One of the PPT television series versus no episodes beingdelivered in the 2005 period.

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*Gross margins.*  Overall gross margins were 70% in the third quarter of 2006compared to 74% in the third quarter of 2005. Domestic televisionlicensing margins were 73% in the third quarter of 2006 compared to 52% in thesame period in 2005.  This increase wasprimarily due to lower recognized PPT production costs, as we begancapitalizing these costs upon reaching a distribution agreement with the TravelChannel in the first quarter of 2006, versus previously expensing them during2005. The overall higher margin in the prior year period was due to a largermargin contribution from the consumer products, international television andsponsorship divisions.

*Selling and administrative expenses.*Selling and administrativeexpenses increased $1.2 million (35%) in the third quarter of 2006 compared tothe 2005 period. This increase was primarily due to an additional $0.6 millionof share-based compensation expense, resulting from the implementation of SFAS123(R). There was no share-based compensation expense related to employee anddirector stock options and stock purchases recognized during the three monthsended October 2, 2005, pursuant to the accounting guidance in effect duringthat time period.   The remaining difference is due to increasedheadcount and legal fees incurred during the third quarter of 2006 associatedwith development, growth and regulatory compliance costs.

*Other income*. We recognized $4.5 millionin gain on sale of investment in the third quarter of 2006, relating to thesale of the remaining stock in PokerTek, Inc. Interest income increased by $0.2million (70%) for the third quarter of 2006 compared to the 2005 period, primarilydue to higher cash equivalents and short-term investment balances.

*Income taxes*.  Provision for income taxes was $1.9 millionand $0 for the third quarter of 2006 and 2005, respectively, and the overalltax rate for the year is projected to be approximately 28% (effective tax ratefrom operations was 17% and tax rate associated with the realized gain on saleof PokerTek was 41%) and 0% for 2006 and 2005, respectively. The rate increasedin 2006 due to positive taxable income that we expect to generate that willexceed our net operating loss carryforward from 2005. A valuation allowance waspreviously recorded for the net deferred tax asset related to the 2005 netoperating loss carryforward.

**Liquidity and Capital Resources**

During the first nine months of 2006, cash flow was generatedfrom operations of $6.4 million. Additional cash was generated from theproceeds of the sale of our PokerTek stock of $10.2 million, offset by our purchaseof property and equipment of $2.2 million, investment in 3G Scene of $2.9million, and additional purchases of short-term investments of $4.0 million.Our principal cash requirements consist of television production costs, payrolland benefits, professional fees, marketing costs, business insurance and officelease costs. 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 expect that cash,cash equivalents and short-term investments on hand and generated fromoperations will be sufficient to fund our working capital and capitalexpenditure 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.

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The table below sets forth our known contractualobligations as of October 1, 2006 (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) |       | $                                         | 4,110      |   | $ | 822 |   | $ | 1,727 |   | $ | 1,561 |   | $ | — |   |
| Employee  obligations (2)        |       | 125                                       |       | 125 |   | — |   | — |   | — |   |
|                             |       | $                                         | 4,235      |   | $ | 947 |   | $ | 1,727 |   | $ | 1,561 |   | $ | — |   |

 

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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 approximately $28,000and escalate up to approximately $33,000 over the five-year lease term. Theamounts set forth in the table above assume monthly lease payments through June2011.

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

**Critical Accounting Estimates andPolicies**

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 susceptibleto change as to present a significant risk of a material impact on ourfinancial condition or operating performance. Moreover, except as describedbelow, we do not employ any critical accounting policies that are selected fromamong available 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 orDistributors of Films*(“SOP00-2”):

·             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;

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

·             Collectibility is reasonably assured.

In accordance with theterms of the WPT and PPT Agreements, we recognize domestic television licenserevenues upon the receipt and acceptance of completed episodes.  However, due to restrictions and practicallimitations applicable to our operating relationships with foreign networks, wecurrently do not consider collectibility of international television licenserevenues to be reasonably assured, and accordingly, we do not recognize suchrevenue until the distributor has received payment.  Additionally, we present international distribution license fee revenues netof the distributor’s fees, as the distributor is the primary obligor in thetransaction with the ultimate customer pursuant to Emerging Issues Task Force (“EITF”)99-19, *Reporting Revenue Gross as a Principal versus Netas 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 ratably overthe term of the license or as earned royalties based on actual sales of therelated products, if greater.  We presentproduct licensing fees gross of licensing commissions, which are recorded asselling and administrative expenses as we are the primary obligor in thetransaction with the ultimate customer pursuant to EITF 99-19.

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Online gaming revenues are recognized monthly based on detailedstatements received from WagerWorks, our online gaming service provider, foronline poker and casino activity.  Inaccordance with EITF 99-19, we present online gaming revenues gross ofWagerWorks costs, including WagerWorks management fee, royalties, credit cardprocessing and chargebacks that are recorded 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 are recognizedas the episodes that feature the host casino are aired. Sponsorship revenuesare recognized as the episodes that feature the sponsor are aired.  Licensing advances and guaranteed paymentscollected, 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 in accordance with the WPT andPPT agreements, in which TRV retains a right to 15% of adjusted gross revenuesfrom the exploitation of the World Poker Tour brand.  We record these amounts in cost of revenuesas revenues from international television, consumer products licensing, homeentertainment 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. In January 2006, we signed adistribution agreement for the PPT with Discovery Communications, Inc., theparent company of the Travel Channel; therefore, PPT television costs began tobe capitalized during the first quarter of 2006, and are expensed as episodesare delivered to the Travel Channel. Marketing, distribution and generaland administrative 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 64% of the $1.4 million in capitalizeddeferred television costs at October 1, 2006, are expected to be expensed inconnection with episode deliveries by the end of fiscal 2006.

*Investments:*On January 20, 2006, we entered into an agreement to sell630,000 shares of PokerTek’s common stock held by us, at a price per share of$9.03.  We closed the transaction onFebruary 28, 2006, and received net cash proceeds and recognized a gain on saleof investment of approximately $5.7 million. On September 8, 2006, we entered into an agreement to sell the remaining450,00 shares of PokerTek’s common stock held by us, at a price per share of$10.11, and received net cash proceeds and recognized a gain on sale ofinvestment of approximately $4.5 million.

On July 31, 2006, we acquired an approximate 10% ownershipinterest in 3G Scene Limited (“3G Scene”) for approximately $2.9 million.  3G Scene designs and operates softwareand products which enable 3G Scene or its licensees to offer gaming services tocustomers via mobile devices.  As we haveless then 20% ownership interest and do not have the ability to exercisesignificant influence over 3G Scene, we account for this investment under thecost method and we will review at least quarterly for declines in fair valuethat may be determined to be other-than-temporary, in accordance with EITF03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*.

*Incometaxes:*  We must assessthe likelihood that deferred tax assets will be recovered from future taxableincome and to the extent we believe that recovery is not likely, we mustestablish a valuation allowance.  Ourcurrent growth plans potentially may include international expansion, primarilyrelated to our online gaming business, expansion of our television and productlicensing businesses, industry consolidation and acquisitions and entry intonew branded gaming businesses.  Althoughwe anticipate that all potential strategies will be accretive to earnings, weare aware of the risks involved with an aggressive growth strategy.  Therefore, based on our limited and volatile earningshistory 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 tax benefitsrelated to stock option exercises will not be realized.

*Share-based compensation:* On January 2, 2006,we adopted SFAS No. 123(R), which establishes standards for the accountingfor transactions in which an entity exchanges its equity instruments for goodsor services. SFAS 123(R) focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions.

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Weadopted SFAS No. 123(R) using the “modified prospective transition” method,which requires recognition of expense for all awards granted after the date ofadoption and for the unvested portion of previously granted awards outstandingas of the date of adoption.  Inaccordance with the modified prospective transition method, our financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R).  InMarch 2005, the Securities and Exchange Commission issued Staff AccountingBulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have appliedcertain provisions of SAB 107 in our adoption of SFAS 123(R), specificallyrelated to our valuation methods. We estimate the fair value of stock optionawards on the date of grant using a Black-Scholes option pricing model.  The key assumptions included in ourBlack-Scholes model are annualized volatility, forfeiture rate, expected term,and risk free interest rate.

Forthe nine months ended October 1, 2006, share-based compensation expenserecognized and included in selling and administrative expenses was $2.8million, which consisted of compensation expense related to employee stockoptions based on the value of the portion of share-based payment awards that isultimately expected to vest during the period. The value of the portion of the award that is ultimately expected tovest is recognized as expense, using a straight-line method, over the requisiteservice periods in our statement of earnings (loss).

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

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No.157, *Fair Value Measurements*(“SFAS 157”)*,* which defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair valuemeasurements.  SFAS No. 157 will becomeeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  We are currentlyevaluating the effect that SFAS No. 157 will have on our financial position,results of operations and operating cash flows.

In June 2006, the FASB issued InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, *Accounting forIncome Taxes.* FIN 48 also prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax returnthat results in a tax benefit. Additionally, FIN 48 provides guidance onde-recognition, income statement classification of interest and penalties,accounting in interim periods, disclosure, and transition. This interpretationis effective for fiscal years beginning after December 15, 2006. TheCompany is currently evaluating the effect that the application of FIN 48will have on its results of operations and financial condition.

InFebruary 2006, the FASB issued SFAS 155, *Accountingfor Certain Hybrid Instruments*amending the guidance in SFAS 133, *Accounting for Derivative Instruments and HedgingActivities,* and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities.*SFAS155 allows financial instruments that have embedded derivatives to be accountedfor as a whole (eliminating the need to bifurcate the derivative from its host)if the holder elects to account for the whole instrument on a fair value basis.SFAS 155 will be effective for financial instruments acquired or issued duringour fiscal year that begins after September 15, 2006.  We presently do not expect SFAS 155 to beapplicable to any instruments likely to be acquired or issued by us.

**Off-Balance Sheet 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 Securities Litigation ReformAct**

 The foregoing discussion and other statementsin this report contain various “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.Forward-looking statements are based on our current expectations or beliefsconcerning future events. These statements can be identified by the use ofterminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”“could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words orexpressions.

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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 followingrisks:

·                          We remain heavily reliantupon our agreements with TRV as a source of revenue and any termination orimpairment of these agreements, such as TRV’s recent decision not to renew itsagreement with us for future seasons of the PPT, would materially and adverselyaffect the results of our operations;

·                          The termination or impairmentof our relationships with key licensing and strategic partners could harm ourbusiness performance;

·                          Our television programmingmay fail to maintain a sufficient audience for a variety of reasons, many ofwhich are beyond our control;

·                          Our ability to create andlicense our television programming profitably may be negatively affected byadverse trends that apply to the television production business generally;

·                          Our competitors (many of whomhave greater financial resources or marketplace presence) may developtelevision programming that would directly compete with our televisionprogramming;

·                          A decline in general economicconditions or the popularity of our brand of televised poker tournaments maynegatively impact our business;

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

·                          We may be unable tosuccessfully expand into foreign markets or into new or complementarybusinesses;

·                          The regulatory environmentfor online gaming is currently uncertain, and despite out efforts to complywith applicable 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 topredict the growth of our online casino business, which is a relatively newindustry with an increasing number of market entrants;

·                          We will incur increased costsand expenses related to the development and maintenance of our own online pokerroom;

·                          It is uncertain whether theUnlawful Internet Gambling Enforcement Act of 2006 will have an adverse effecton the competitive environment for finding online gaming customers outside theUnited States; and

·                          The loss of our President andChief Executive 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 October 1, 2006, the carrying value ofour cash and cash equivalents approximated fair value. We have in the past andmay in 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 the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rules 13a-15(e) and 15d– 15(e) promulgated under the Securities Exchange Act of 1934, as amended, asof the end of the period covered by this quarterly report. Based on theirevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat WPT Enterprises, Inc.’s disclosure controls and procedures are effective.

There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced above.

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

**ITEM 1. LEGAL PROCEEDINGS**

On July 19, 2006, we were served with a complaintfiled in the United States District Court, Central District of California byseven poker players.  The complaint alleges, among other things, that thebusiness practice of the Company in requiring players to execute certainparticipant releases in connection with tournaments we film through ourexclusive arrangement with casinos that have allegedly limited the number oftelevised poker venues for high stakes professional poker players violateantitrust laws.  We have issued a statement indicating our belief that theclaims asserted in the complaint are misleading and without merit and filed aresponse on August 24, 2006 reflecting our legal position.  A trial datehas been set for April 1, 2008.  

We are not currently a party to any other materiallitigation and are not aware of any threatened litigation that would have amaterial adverse effect on our business.

**ITEM 1A. RISK FACTORS**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended January 1, 2006, which couldmaterially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the only risks facingour Company. Additional risks and uncertainties not currently known to us orthat we currently deem to be immaterial also may materially adversely affectour business, financial condition and/or operating results.  In addition to the information in this reportand the factors discussed in Part I, “Item 1A. Risk Factors” of our AnnualReport on Form 10-K for the year ended January 1, 2006 (some of which arerevised below), you should consider the following risk resulting from Congresspassing the Unlawful Gambling Enforcement Act of 2006, which may materiallyadversely affect our business, financial condition and/or operating results:

***Congress’passing of the Unlawful Internet 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 venture currently operating and our new online gamingventure in development.***

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 financialinstitutions from processing payments in connection with unlawful internetgambling pursuant to state or federal laws.  We believe that the Act is unlikely to have a direct adverse effect onthe Company in light of our policy of not taking U.S. wagers on our onlinegaming site.  Nevertheless, we cannottell with certainty the impact the Act will have on our overall business.  Until now, many other online gaming companieshave accepted wagers and derived significant revenues from customers in theU.S.  A few of these companies, most ofwhich are larger, more established and better funded than we are, haveannounced that they will stop accepting U.S. wagers in reaction to the newlegislation.  This could result ingreater competition to secure online gaming customers outside the U.S. ifcompanies that previously accepted U.S. wagers redirect their efforts insecuring markets where WPT offers online gaming services.

Webelieve that a number of online gaming sites currently sponsor pokertournaments pursuant to which their customers can win “buy-ins” to tournamentsheld in traditional brick and mortar casinos, including WPT seriestournaments.  We cannot predict how theAct will affect these sites or how, if at all, these sites will modify theirmarketing strategies in reaction to the Act. Accordingly, there is a risk of fewer participants in WPT series eventswhich, ultimately could affect the popularity of these events and tournamentpoker in general, which would have a material adverse effect on our business,prospects, financial condition, results of operations, cash flow and,ultimately, the price of our common stock.

Additionally, the followingrisk factors appearing in Part I, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the year ending January 1, 2006, and as revised in ourQuarterly Report on Form 10-Q for the quarter ended July 2, 2006, are revisedand updated to read as follows:

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

Although the popularity of poker, in particular, andgaming, in general, has recently been growing in the U.S. and abroad, gaminghas historically experienced backlash from various constituencies andcommunities. Currently, the legal operational status of Internet-based casinosand cardrooms remains unclear as these groups assess the impact of recentregulations and restrictions in the U.S. and in other countries. The U.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 the uncertain regulatory environmentsurrounding the marketing and promotion of Internet-based casinos and cardroomsto viewers in the U.S., the Travel Channel, which has final edit rights to theshows that it telecasts, has indicated it will likely not display the “dot com”names or logos of Internet-based casinos and cardrooms in its telecasts,although it has expressed a willingness to display names and logos fromstrictly play-for-free “dot net” websites from our member casinos. However, ifthe Travel Channel elected not to allow display “dot net” logos within theseries, we may not be able to attract other Internet-based casinos or to retainthe existing online cardroom remaining on our tour.  Additionally, increased regulatory scrutinyon Internet gambling sites may eliminate these sites as sources of advertisingrevenue for television networks that exhibit poker-related programming, therebypotentially impacting the value of such programming to these networks.  Consequently, if Travel Channel changed itscurrent policy of accepting “dot net” advertising around the show, this couldnegatively impact the ad purchasing client pool which might be considered anadverse factor in its renewal evaluation.

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

The current WPTonline.com website is licensed by theAlderney Gambling Control Commission, and while we believe that WagerWorks isin compliance with all international Internet gaming regulations, we arereliant on WagerWorks for compliance with all applicable regulations, includingongoing verification that improper wagers are not placed on WPTonline.com. IfWagerWorks’ compliance or verification is inadequate, regulators in theU.S. or other jurisdictions may impose fines or other sanctions orthreaten or take other actions that could adversely affect our reputation andthe revenues we derive from the license of rights to WagerWorks. After thetermination of our relationship with WagerWorks with respect to WagerWorks’operation of our online poker room, we will be solely responsible for complyingwith all international Internet gaming regulations in connection with anyonline poker room we operate independently. Therefore, any risks previouslyborne by WagerWorks in connection with operating our online poker room willbecome direct risks to us.  We will beresponsible for obtaining all gaming permits and licenses necessary to operateour own online poker room, which may be expensive and time consuming.  We continue to monitor the legality ofInternet gaming in domestic and international jurisdictions, but cannot becertain that changes in existing regulations will be beneficial to the onlinegaming market. Additionally, we expect that on-air promotion of WPTonline.comvia international World Poker Tour television telecasts will continue to be aprimary marketing tool for driving poker players to the site. However, certainterritories and foreign networks may restrict us from incorporating marketingelements related to our online site into our international telecasts andcertain laws or regulations may restrict the type of advertising in general inthose territories. If these restrictions occur, our costs of customeracquisition may be substantially higher than anticipated.

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**ITEM 6.EXHIBITS**
| 10.1   |   | Subscription and Shareholders’ Agreement, dated July  31, 2006, by and between 3G Scene Limited, WPT Enterprises, Inc., Bessemer  Venture Partners VI, L.P. and it’s related investment partners and certain  shareholders and founders of 3G Scene Limited |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 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: November 9, 2006 |   | 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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