Table ofContents

 

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**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 September 28, 2008**

 

**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.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **77-0639000**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction             |       | (I.R.S. Employer    |
| of incorporation or organization)        |       | 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)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

 

As of November 5, 2008 there were 20,491,993shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 

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**WPT ENTERPRISES, INC.**

 

**INDEX**

 
| ** **    | ** ** | ** **            | ** **                                                                                                                                                           | ** ** | **Page of**   |
|---------------|------------|-----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|
| ** **    | ** ** | ** **            | ** **                                                                                                                                                           | ** ** | **Form 10-Q** |
| PART I.  |       | FINANCIAL INFORMATION |                                                                                                                                                                 |       |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 1.               | FINANCIAL STATEMENTS                                                                                                                                                 |       |               |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       |                  | Condensed  Consolidated Balance Sheets as of September 28, 2008 (unaudited) and  December 30, 2007                                                         |       | 3                  |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       |                  | Unaudited  Condensed Consolidated Statements of Loss and Comprehensive Loss for the three  and nine months ended September 28, 2008 and September 30, 2007 |       | 4                  |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       |                  | Unaudited  Condensed Consolidated Statements of Stockholders’ Equity for the nine months  ended September 28, 2008 and September 30, 2007             |       | 5                  |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       |                  | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine months ended  September 28, 2008 and September 30, 2007                            |       | 6                  |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       |                  | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                                      |       | 7                  |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 2.               | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                          |       | 15                 |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 3.               | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                          |       | 25                 |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 4.               | CONTROLS AND  PROCEDURES                                                                                                                                             |       | 25                 |
|          |       |                  |                                                                                                                                                                 |       |               |
| PART II. |       | OTHER INFORMATION     |                                                                                                                                                                 | 26         |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 1.               | LEGAL PROCEEDINGS                                                                                                                                                    |       | 26                 |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 1A.              | RISK FACTORS                                                                                                                                                         |       | 26                 |
|          |       |                  |                                                                                                                                                                 |       |               |
|          |       | ITEM 6.               | EXHIBITS                                                                                                                                                             |       | 29                 |
|          |       |                  |                                                                                                                                                                 |       |               |
| SIGNATURES    |       | 30                    |

 

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**PART 1 – FINANCIALINFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**WPT ENTERPRISES, INC.**

**Condensed Consolidated BalanceSheets**

 
| ** **                                                                                       | ** ** | **September 28, 2008**                                   | ** ** | **December 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **(unaudited)**                                                    | ** ** | ** **                      | ** ** |
| ** **                                                                                       | ** ** | **(In thousands, except par value data)** | ** ** |
| **Assets**                                                                                       |       |                                                               |       |                            |       |
| Current assets:                                                                                  |       |                                                               |       |                            |       |
| Cash and cash equivalents                                                                        |       | $                                                                  | 5,227      |                            | $          | 3,852 |   |
| Investments in marketable securities                                                             |       | 3,883                                                              |       | 22,971                          |       |
| Accounts receivable, net of allowances of $7 and $18                                             |       | 967                                                                |       | 2,758                           |       |
| Deferred television costs                                                                        |       | 1,412                                                              |       | 2,198                           |       |
| Other                                                                                            |       | 1,318                                                              |       | 830                             |       |
|                                                                                             |       | 12,807                                                             |       | 32,609                          |       |
|                                                                                             |       |                                                               |       |                            |       |
| Investments in marketable securities                                                             |       | 11,248                                                             |       | 4,200                           |       |
| Property and equipment, net                                                                      |       | 1,555                                                              |       | 1,462                           |       |
| Investment in unconsolidated investee                                                            |       | 1,000                                                              |       | 2,923                           |       |
| Other                                                                                            |       | 537                                                                |       | 503                             |       |
|                                                                                             |       | $                                                                  | 27,147     |                            | $          | 41,697 |   |
|                                                                                             |       |                                                               |       |                            |       |
| **Liabilities and Stockholders’ Equity**                                                    |       |                                                               |       |                            |       |
| Current liabilities:                                                                             |       |                                                               |       |                            |       |
| Accounts payable                                                                                 |       | $                                                                  | 392        |                            | $          | 736 |   |
| Accrued payroll and related                                                                      |       | 501                                                                |       | 988                             |       |
| Other accrued expenses                                                                           |       | 1,254                                                              |       | 1,308                           |       |
| Deferred revenue                                                                                 |       | 1,010                                                              |       | 2,870                           |       |
|                                                                                             |       | 3,157                                                              |       | 5,902                           |       |
|                                                                                             |       |                                                               |       |                            |       |
| **Commitments and Contingencies**                                                                |       |                                                               |       |                            |       |
|                                                                                             |       |                                                               |       |                            |       |
| Stockholders’ equity:                                                                       |       |                                                               |       |                            |       |
| Preferred stock, $0.001 par value; authorized 20,000 shares; none  issued or outstanding         |       | —                                                             |       | —                          |       |
| Common stock, $0.001 par value; authorized 100,000 shares; 20,492  shares issued and outstanding |       | 20                                                                 |       | 20                              |       |
| Additional paid-in capital                                                                       |       | 44,429                                                             |       | 43,833                          |       |
| Deficit                                                                                          |       | (19,203                                                            | )          | (8,072                          | )          |
| Accumulated other comprehensive gain (loss)                                                      |       | (1,256                                                             | )          | 14                              |       |
|                                                                                             |       | 23,990                                                             |       | 35,795                          |       |
|                                                                                             |       | $                                                                  | 27,147     |                            | $          | 41,697 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

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**WPT ENTERPRISES, INC.**

**CondensedConsolidated Statements of Loss and Comprehensive Loss**

(unaudited)

** **
| ** **                                                          | ** ** | **Three months ended**                                   | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September  28, 2008**                                       | ** ** | **September  30, 2007**    | ** ** | **September  28, 2008** | ** ** | **September  30, 2007** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| **Revenues:**                                                       |       |                                                               |       |                            |       |   |   |   |   |
| License fees:                                                       |       |                                                               |       |                            |       |   |   |   |   |
| Domestic television                                                 |       | $                                                                  | 900        |                            | $          | 1,424 |   | $ | 5,400 |   | $ | 8,132 |   |
| International television                                            |       | 286                                                                |       | 490                             |       | 1,459 |   | 1,709 |   |
| Product licensing                                                   |       | 654                                                                |       | 759                             |       | 1,914 |   | 2,618 |   |
|                                                                |       | 1,840                                                              |       | 2,673                           |       | 8,773 |   | 12,459 |   |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| Online gaming                                                       |       | 150                                                                |       | 119                             |       | 688 |   | 929 |   |
| Event hosting and sponsorship fees                                  |       | 676                                                                |       | 1,575                           |       | 3,023 |   | 3,058 |   |
| Other                                                               |       | 166                                                                |       | 38                              |       | 382 |   | 171 |   |
|                                                                |       | 2,832                                                              |       | 4,405                           |       | 12,866 |   | 16,617 |   |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Cost of revenues**                                                |       | 997                                                                |       | 1,355                           |       | 6,452 |   | 6,594 |   |
| **Gross profit**                                                    |       | 1,835                                                              |       | 3,050                           |       | 6,414 |   | 10,023 |   |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Selling, general and administrative expense**                     |       | 4,534                                                              |       | 5,709                           |       | 16,437 |   | 16,942 |   |
| **Asset impairment and abandonment charges**                        |       | 1,923                                                              |       | —                          |       | 1,923 |   | 2,270 |   |
| **Loss from operations**                                            |       | (4,622                                                             | )          | (2,659                          | )          | (11,946 | ) | (9,189 | ) |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Other income:**                                                   |       |                                                               |       |                            |       |   |   |   |   |
| Realized gain on sale of investment                                 |       | —                                                             |       | —                          |       | 11 |   | — |   |
| Interest                                                            |       | 203                                                                |       | 448                             |       | 804 |   | 1,359 |   |
| **Loss before income taxes**                                        |       | (4,419                                                             | )          | (2,211                          | )          | (11,131 | ) | (7,830 | ) |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Income taxes**                                                    |       | —                                                             |       | —                          |       | — |   | — |   |
| **Net loss**                                                        |       | (4,419                                                             | )          | (2,211                          | )          | (11,131 | ) | (7,830 | ) |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Unrealized gain (loss) on securities**                            |       | (225                                                               | )          | 24                              |       | (1,270 | ) | 30 |   |
| **Comprehensive loss**                                              |       | $                                                                  | (4,644     | )                               | $          | (2,187 | ) | $ | (12,401 | ) | $ | (7,800 | ) |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Net loss per common share - basic and diluted**                   |       | $                                                                  | (0.21      | )                               | $          | (0.11 | ) | $ | (0.54 | ) | $ | (0.38 | ) |
|                                                                |       |                                                               |       |                            |       |   |   |   |   |
| **Weighted-average common shares outstanding -  basic and diluted** |       | 20,603                                                             |       | 20,603                          |       | 20,603 |   | 20,603 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

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**WPT ENTERPRISES, INC.**

**Condensed Consolidated Statementsof Stockholders’ Equity**

**Nine Months ended September 28, 2008 and September 30, 2007**

(unaudited)

 
| ** **                              | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**      | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------------|------------|------------|------------|
| ** **                              | ** ** | ** **              | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**            | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Common Stock**   | ** ** | **Paid-in** | ** ** | ** **     | ** ** | **Comprehensive** | ** ** | ** **           | ** ** |
| ** **                              | ** ** | **Shares**              | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Deficit**       | ** ** | **Gain (Loss)** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
| **2008**                                |       |                    |       |        |       |           |       |              |       |                 |       |       |       |
| **Balances at December 30, 2007**  |       | 20,492                  |       | $           | 20         |           | $          | 43,833            |       | $                    | (8,072     | )          | $          | 14 |   | $ | 35,795 |   |
| Share-based compensation expense        |       | —                  |       | —      |       | 596            |       | —            |       | —               |       | 596        |       |
| Other comprehensive loss                |       | —                  |       | —      |       | —         |       | —            |       | (1,270               | )          | (1,270     | )          |
| Net loss                                |       | —                  |       | —      |       | —         |       | (11,131           | )          | —               |       | (11,131    | )          |
|                                    |       |                    |       |        |       |           |       |              |       |                 |       |       |       |
| **Balances at September 28, 2008** |       | 20,492                  |       | $           | 20         |           | $          | 44,429            |       | $                    | (19,203    | )          | $          | (1,256 | ) | $ | 23,990 |   |
|                                    |       |                    |       |        |       |           |       |              |       |                 |       |       |       |
| **2007**                                |       |                    |       |        |       |           |       |              |       |                 |       |       |       |
| **Balances at January 1, 2007**    |       | 20,378                  |       | $           | 20         |           | $          | 41,719            |       | $                    | 1,561      |       | $          | (49 | ) | $ | 43,251 |   |
| Common stock issued                     |       | 114                     |       | —      |       | 1              |       | —            |       | —               |       | 1          |       |
| Share-based compensation expense        |       | —                  |       | —      |       | 1,813          |       | —            |       | —               |       | 1,813      |       |
| Other comprehensive gain                |       | —                  |       | —      |       | —         |       | —            |       | 30                   |       | 30         |       |
| Net loss                                |       | —                  |       | —      |       | —         |       | (7,830            | )          | —               |       | (7,830     | )          |
| **Balances at September 30, 2007** |       | 20,492                  |       | $           | 20         |           | $          | 43,533            |       | $                    | (6,269     | )          | $          | (19 | ) | $ | 37,265 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

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**WPT ENTERPRISES, INC.**

**Condensed Consolidated Statementsof Cash Flows**

(unaudited)

 
| ** **                                                                   | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **September 28, 2008** | ** ** | **September 30, 2007** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**          | ** ** |
| **OPERATING ACTIVITIES:**                                                    |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (11,131    | ) | $ | (7,830 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                             |       |   |   |
| Depreciation and amortization                                                |       | 552                              |       | 540 |   |
| Share-based compensation                                                     |       | 596                              |       | 1,813 |   |
| Asset impairment and abandonment charges                                     |       | 1,923                            |       | 2,270 |   |
| Increase in operating (assets) and liabilities:                              |       |                             |       |   |   |
| Accounts receivable                                                          |       | 1,791                            |       | 333 |   |
| Income taxes                                                                 |       | —                           |       | (394 | ) |
| Deferred television costs                                                    |       | 786                              |       | 57 |   |
| Other current assets                                                         |       | (485                             | )          | (601 | ) |
| Accounts payable                                                             |       | (344                             | )          | (27 | ) |
| Accrued expenses                                                             |       | (541                             | )          | 52 |   |
| Deferred revenue                                                             |       | (1,860                           | )          | (282 | ) |
| Net cash used in operating activities                                        |       | (8,713                           | )          | (4,069 | ) |
|                                                                         |       |                             |       |   |   |
| **INVESTING ACTIVITIES:**                                                    |       |                             |       |   |   |
| Purchase of property and equipment                                           |       | (645                             | )          | (754 | ) |
| Purchases of marketable securities                                           |       | (11,187                          | )          | (45,336 | ) |
| Sales/redemptions of marketable securities                                   |       | 21,957                           |       | 46,178 |   |
| Net cash provided by investing activities                                    |       | 10,125                           |       | 88 |   |
|                                                                         |       |                             |       |   |   |
| **FINANCING ACTIVITIES:**                                                    |       |                             |       |   |   |
| (Increase) decrease in restricted cash                                       |       | (37                              | )          | 106 |   |
| Proceeds from stock option exercises                                         |       | —                           |       | 1 |   |
| Net cash provided by (used in) financing activities                          |       | (37                              | )          | 107 |   |
|                                                                         |       |                             |       |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       | 1,375                            |       | (3,874 | ) |
| Cash and cash equivalents - beginning of period                              |       | 3,852                            |       | 8,360 |   |
| **Cash and cash equivalents - end of period**                                |       | $                                | 5,227      |   | $ | 4,486 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

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**WPT ENTERPRISES, INC.**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS**

 

Thesecondensed consolidated financial statements have been prepared by management ofWPT Enterprises, Inc. (the “Company”) pursuant to the rules andregulations of the Securities and Exchange Commission (the “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 in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 30, 2007, previously filed with theSEC, from which the information as of that date is derived.

 

In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included. The resultsfor the current interim periods are not necessarily indicative of the resultsto be expected for the full year.

 

In the first quarter of2008, the Company adopted SFAS 157, *FairValue Measurements* for all financial assets and liabilities and forall non-financial assets and liabilities recognized or disclosed at fair valuein the financial statements on a recurring basis (at least annually)*.*SFAS 157 defines fair value andestablishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The adoption of SFAS 157 did not have a significantimpact on the consolidated financial statements. In the first quarter of 2008,the Company also adopted SFAS 159, *The**Fair Value Option for Financial Assets andFinancial Liabilities – including an**amendment of FAS 115.*SFAS 159 allows entities to choose, atspecified election dates, to measure eligible financial assets and liabilitiesat fair value in situations when they are not required to be measured at fairvalue. The adoption of SFAS 159 did not have a significant impact on theconsolidated financial statements.

 

In February 2008,the FASB issued FSP 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13* and FSP 157-2, *Effective Date of FASB Statement No. 157*. FSP 157-1amends SFAS 157 to remove certain leasing transactions from its scope, and waseffective upon initial adoption of SFAS 157. FSP 157-2 delays theeffective date of SFAS 157 for all non-financial assets and liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually). We are currentlyevaluating the impact that SFAS 157 will have on our consolidatedfinancial statements when it is applied to non-financial assets and liabilitiesthat are not measured at fair value on a recurring basis.

 

In October 2008, theFASB issued FSP 157-3 *Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active*.FSP 157-3 clarifies the application of SFAS 157 in a market that is notactive, and addresses application issues such as the use of internalassumptions when relevant observable data does not exist, the use of observablemarket information when the market is not active and the use of market quoteswhen assessing the relevance of observable and unobservable data. FSP 157-3 iseffective for all periods presented in accordance with SFAS 157. Theadoption of FSP 157-3 did not have a significant impact on our consolidatedfinancial statements.

 

InDecember 2007, the FASB issued SFAS 141 (Revised 2007), *Business Combinations.* SFAS 141R will significantly changethe accounting for business combinations. SFAS 141R is to be appliedprospectively to business combinations for which the acquisition date is on orafter January 1, 2009.

 

In December 2007,the FASB issued SFAS 160, *NoncontrollingInterests in**ConsolidatedFinancial Statements – an Amendment of ARB No. 51* whichestablishes accounting and reporting standards for the noncontrolling orminority interest in a subsidiary and for the deconsolidation of a subsidiary.SFAS 160 is effective for the fiscal year 2009. Among the effects of SFAS160 will be the future exclusion from net income (loss) of the noncontrollingor minority interest therein and the relocation of such noncontrolling orminority interest to the stockholders’ equity section of the balance sheet. TheCompany is evaluating other effects, if any, that SFAS 160 will have onthe Company’s future financial position, results of operations and cash flows.

 

InMarch 2008, the FASB issued SFAS 161, *Disclosures AboutDerivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133*.SFAS 161 expands the disclosure requirements in SFAS 133, *Accounting for Derivative Instruments and Hedging Activities*,regarding derivative instruments and hedging activities. SFAS 161 will beeffective for fiscal year 2009. The Company does not currently expect that SFAS161 will have a material impact on the Company’s future financial condition, resultsof operations or cash flows.

 

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**2. LOSSPER SHARE**

 

Basic loss per common share is calculated by dividing netloss by the weighted-average number of common shares outstanding during theperiod. Shares for certain stock options granted to Company employees areincluded in the computation after the options have vested when the shares areissuable for minimal cash consideration in relation to the fair value of theoptions. Diluted earnings per common share is ordinarily calculated byadjusting weighted-average outstanding shares, assuming the conversion of allpotentially dilutive stock options and awards (common stock equivalents).However, common stock equivalents are not included in the calculation ofdiluted earnings per share for loss periods because the effect isanti-dilutive.

 

**3.SHARE-BASED COMPENSATION**

 

Share-based compensationexpense was ($21,000) and $596,000 for the three and nine months ended September 28,2008, respectively, and $554,000 and $1,813,000 for the three and nine monthsended September 30, 2007, respectively. Forfeitures of unvested stockoptions in the three months ended September 28, 2008 exceeded estimates atthe time of grant resulting in a recovery of previously recognized unvestedshare-based compensation expense.

 

TheCompany uses the Black-Scholes option-pricing model to estimate the fair valueand compensation cost associated with employee incentive stock options whichrequires the consideration of historical employee exercise behavior data andthe use of a number of assumptions including volatility of the Company’s stockprice, the weighted-average risk-free interest rate, and the weighted-averageexpected life of the options.

 

Thefollowing values represent the average per grant assumptions used to valueoptions granted during the three and nine months ended September 28, 2008and September 30, 2007, respectively. There have been no significantchanges to the assumptions thus far in 2008 and none are expected during theremainder of 2008.

 
| **Key valuation assumptions** | ** ** | **Three months ended   September 28, 2008** | ** ** | **Three months ended   September 30, 2007** | ** ** | **Nine months ended  September 28, 2008** | ** ** | **Nine months ended  September 30, 2007** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Risk-free interest rate                 |       | No  grants                                                           |       | 4.07                                                                 | %          | 3.38                                                          | %          | 4.46                                                          | %          |
| Expected term                           |       | No  grants                                                           |       | 6  years                                                             |       | 6  years                                                      |       | 6  years                                                      |       |
| Expected dividend yield                 |       | No  grants                                                           |       | 0                                                                    | %          | 0                                                             | %          | 0                                                             | %          |
| Expected volatility                     |       | No  grants                                                           |       | 69.89                                                                | %          | 69.95                                                         | %          | 71.98                                                         | %          |
| Forfeiture rate                         |       | 20.58                                                                | %          | 16.71                                                                | %          | 20.58                                                         | %          | 16.71                                                         | %          |
| Weighted-average fair value             |       | No  grants                                                           |       | $                                                                    | 2.29       |                                                          | $          | 0.82                                                          |       | $ | 2.87 |   |
|                                         |            |                                                                      |            |                                                                      |            |                                                               |            |                                                               |            |  |  |  |

 

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·                  Risk-freeinterest 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 and with maturities consistent with the expected term of theoptions.

·                  Expected term —The Company calculated expected term for each grant using the “SimplifiedMethod” in accordance with SAB 107 and 110.

·                  Expecteddividend yield — As the Company does not pay dividends, the dividend ratevariable in the Black-Scholes model is zero.

·                  Expectedvolatility — Expected volatility was based on historical daily stock prices ofthe Company’s stock since it began trading in August 2004.

·                  Forfeiture rate— As share-basedcompensation expense recognized is based on awards ultimately expected to vest,expense for grants beginning upon adoption of SFAS 123R, *Share-Based Payment-Revised 2004 are*reduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. The Company uses historicaldata to estimate future forfeitures, and reviews the estimates quarterly.

 

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Thefollowing table summarizes stock option activity through the nine months ended September 28,2008 and September 30, 2007:

 
| ** **                             | ** ** | ** **      | ** ** | **Number of Common Shares** | ** ** |
|----------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **Options**     | ** ** | ** **                                 | ** ** | **Available** | ** ** | **Weighted-avg.** | ** ** |
| ** **                             | ** ** | **outstanding** | ** ** | **Exercisable**                            | ** ** | **for grant** | ** ** | **exercise price** | ** ** |
| **2008**                               |       |            |       |                                       |       |   |   |   |   |
| **Balance at December 31, 2007**  |       | 2,920,857       |       | 1,322,206                                  |       | 267,150 |   | $ | 5.66 |   |
| Forfeited /cancelled/expired           |       | (83,600         | )          | —                                     |       | 83,600 |   | 4.33 |   |
| **Balance at March 30, 2008**     |       | 2,837,257       |       | 1,412,373                                  |       | 350,750 |   | 5.70 |   |
| Granted                                |       | 52,000          |       | —                                     |       | (52,000 | ) | 1.26 |   |
| Forfeited /cancelled/expired           |       | (33,950         | )          | —                                     |       | 33,950 |   | 4.66 |   |
| **Balance at June 29, 2008**      |       | 2,855,307       |       | 1,466,040                                  |       | 332,700 |   | 5.63 |   |
| Forfeited /cancelled/expired           |       | (425,536        | )          | —                                     |       | 425,536 |   | 4.37 |   |
| **Balance at September 28, 2008** |       | 2,429,771       |       | 1,491,706                                  |       | 758,236 |   | $ | 5.85 |   |
|                                   |       |            |       |                                       |       |   |   |   |   |
| **2007**                               |       |            |       |                                       |       |   |   |   |   |
| **Balance at January 1, 2007**    |       | 2,318,166       |       | 1,050,200                                  |       | 983,501 |   | $ | 6.76 |   |
| Granted                                |       | 287,000         |       | —                                     |       | (287,000 | ) | 4.80 |   |
| Forfeited /cancelled/expired           |       | (90,466         | )          | —                                     |       | 90,466 |   | 8.49 |   |
| **Balance at April 1, 2007**      |       | 2,514,700       |       | 1,010,533                                  |       | 786,967 |   | 6.47 |   |
| Granted                                |       | 182,000         |       | —                                     |       | (182,000 | ) | 4.53 |   |
| Forfeited /cancelled/expired           |       | (85,667         | )          | —                                     |       | 85,667 |   | 5.25 |   |
| Exercised                              |       | (113,660        | )          | —                                     |       | — |   | 0.0049 |   |
| **Balance at July 1, 2007**       |       | 2,497,373       |       | 912,139                                    |       | 690,634 |   | 6.67 |   |
| Granted                                |       | 220,000         |       | —                                     |       | (220,000 | ) | 3.50 |   |
| Forfeited /cancelled/expired           |       | (202,599        | )          | —                                     |       | 202,599 |   | 7.26 |   |
| **Balance at September 30, 2007** |       | 2,514,774       |       | 1,307,106                                  |       | 673,233 |   | $ | 6.34 |   |

 

The following table summarizes significant ranges ofoutstanding and exercisable options as of September 28, 2008**:**

 
| ** **                              | ** **              | **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.  exercise  price** | ** ** | **Aggregate  intrinsic  value** | ** ** |
| $                                       | 0.0049                  |                         | 111,340    |                                            | 3.41       |   | $ | 0.0049 |   | $ | 97,434 |   | 111,340 |   | $ | 0.0049 |   | $ | 97,434 |   |
| $                                       | 1.26 — 4.80   |                         | 906,165    |                                            | 8.80       |   | 3.21 |   | — |   | 171,400 |   | 4.48 |   | — |   |
| $                                       | 5.18 — 9.92   |                         | 1,289,266  |                                            | 6.21       |   | 7.58 |   | — |   | 1,117,966 |   | 7.83 |   | — |   |
| $                                       | 11.95 — 14.51 |                         | 117,000    |                                            | 6.86       |   | 12.23 |   | — |   | 85,000 |   | 12.35 |   | — |   |
| $                                       | 15.05 — 19.50 |                         | 6,000      |                                            | 6.81       |   | 15.79 |   | — |   | 6,000 |   | 15.79 |   | — |   |
|                                    |                    | 2,429,771                    |       | 7.08                                            |       | $ | 5.85 |   | $ | 97,434 |   | 1,491,706 |   | $ | 7.15 |   | $ | 97,434 |   |

 

Theaggregate intrinsic value in the preceding table****represents the total pre-tax intrinsic value, based on theCompany’s closing stock price of $0.88 on September 26, 2008, which wouldhave been received by the option holders had they exercised their options as ofthat date. As of September 28, 2008 and September 30, 2007, the totalnumber of “in-the-money” options exercisable was 111,340.  No options were exercised during the threeand nine months ended September 28, 2008. The total intrinsic value ofoptions exercised during the three and nine months ended September 30,2007 was $0.5 million.

 

As of September 28,2008, total unrecognized compensation cost related to non-vested options is$1.0 million, which is expected to be recognized over the next 28 months on aweighted-average basis.

 

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**4. FAIR VALUE MEASUREMENTS**

 

OnDecember 31, 2007 (the first day of fiscal year 2008), the Company adoptedthe provisions of SFAS 157, *Fair Value Measurements*.The adoption of SFAS 157 in the first quarter of 2008 did not have asignificant impact on our consolidated financial statements.

 

Investmentsin marketable securities that are classified as available for sale are the onlyassets or liabilities that the Company is required to measure at theirestimated fair value on a recurring basis. The estimated fair value isdetermined using inputs from among the three levels of the fair value hierarchyset forth in SFAS 157 as follows:

 

Level1 inputs – Unadjusted quoted prices in active markets for identical assets orliabilities, which prices are available at the measurement date.

 

Level2 inputs – Include quoted prices for similar assets and liabilities in activemarkets, quoted prices for identical or similar assets and liabilities inmarkets that are not active, inputs other than quoted prices that areobservable for the asset or liability (*i.e.*, interestrates, yield curves, *etc.*) and inputsthat are derived principally from or corroborated by observable market data bycorrelation or other means (market corroborated inputs).

 

Level3 inputs – Unobservable inputs that reflect management’s estimates about theassumptions that market participants would use in pricing the asset orliability. Management develops these inputs based on the best informationavailable, including internally-developed data.

 

In estimating fair value,the Company utilizes valuation techniques that maximize the use of observableinputs and minimize the use of unobservable inputs to the extent possible. None of theCompany’s financial instruments are measured based on Level 2 inputs.

 

As of September 28,2008, the Company’s financial assets carried at fair value are summarized below(in thousands):

 
| **Description**                           | ** ** | **Level 1** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Municipal bonds (*)                       |       | $                | 801        |             | $          | —    |       | $ | 801 |   |
| Auction rate securities (*)               |       | —           |       | 10,159           |       | 10,159    |       |
| Corporate preferred securities (*)        |       | 3,691            |       | —           |       | 3,691     |       |
| Certificates of deposit (*)               |       | 480              |       | —           |       | 480       |       |
| Total assets at estimated fair value (**) |       | $                | 4,972      |             | $          | 10,159    |       | $ | 15,131 |   |

 

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(*)           See Note 5. Investments inMarketable Securities.

 

(**)                        The Company chose not to elect the fairvalue option as offered by SFAS 159, *TheFair Value Option for Financial Assets**and Financial Liabilities — including an amendment**of FAS 115,*for its financial assets andliabilities that had not been previously carried at fair value. Therefore,material financial assets and liabilities not carried at fair value are stillreported at carrying values.

 

For financial assets thatutilize Level 1 inputs, the Company utilizes direct observable price quotes inactive markets for identical assets. Due to the lack of observable marketquotes on the Company’s auction rate securities (“ARS”) portfolio, the Companyutilizes valuation models that rely exclusively on Level 3 inputs includingthose that are based on management’s estimates of expected cash flow streamsand collateral values, default risk underlying the security, discount rates andoverall capital market liquidity.  Thevaluation of the Company’s ARS portfolio is subject to uncertainties that aredifficult to predict.  Factors that mayimpact the estimated fair value include changes to credit ratings of ARS aswell as to the assets collateralizing the securities, rates of default of theunderlying assets, underlying collateral value, discount rates, and evolvingmarket conditions affecting the liquidity of ARS.

 

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The following tablesummarizes the activity related to the Company’s ARS, which as discussed above,are measured at fair value using Level 3 inputs (in thousands):

 
| Beginning balance - December 30, 2007                                             |   | $      | 7,825  |   |
|----------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Total realized and unrealized gains (losses) included in other  comprehensive loss (*) |   | (1,241 | )      |
| Purchases, net of issuances and settlements                                            |   | 3,575  |   |
| Ending balance - September 28, 2008 (unaudited)                                   |   | $      | 10,159 |   |

 

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(*)                                The Companyconsiders the decline in the estimated fair value of ARS to be temporary.Accordingly, the related unrealized loss is included in Accumulated OtherComprehensive Gain (Loss) in stockholders’ equity as of September 28,2008.

 

**5. INVESTMENTS IN MARKETABLESECURITIES**

 

The Company’s investmentportfolio includes investments in ARS. The types of ARS that the Company ownsare backed by student loans, the majority of which are guaranteed under theFederal Family Education Loan Program, and are primarily AAA or Aaa ratedthrough the date of this filing. However, as a result of liquidity issuesexperienced in the global credit and capital markets in the first quarter of2008, auctions for ARS failed and the Company’s ARS are classified as long-terminvestments in marketable securities as of September 28, 2008.

 

As of September 28,2008 and December 30, 2007, investments in marketable securities withoriginal maturities beyond three months consist of the following (inthousands):

 

**September 28,2008 (unaudited)**

 
| ** **                                        | ** ** | **Cost** | ** ** | **Unrealized  Gains (Losses)** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------|------------|----------|------------|-------------------------------------|------------|---------------------|------------|
| **Maturity less than 1 year** |       |     |       |                                |       |                |       |
| Corporate preferred securities                    |       | $        | 3,707      |                                | $          | (16                 | )          | $ | 3,691 |   |
| Certificates of deposit                           |       | 192      |       | —                              |       | 192                 |       |
|                                              |       | $        | 3,899      |                                | $          | (16                 | )          | $ | 3,883 |   |
| **Maturity 1 to 5 years**                         |       |     |       |                                |       |                |       |
| Municipal bonds                                   |       | $        | 800        |                                | $          | 1                   |       | $ | 801 |   |
| Auction rate securities                           |       | 11,400   |       | (1,241                              | )          | 10,159              |       |
| Certificates of deposit                           |       | 288      |       | —                              |       | 288                 |       |
|                                              |       | $        | 12,488     |                                | $          | (1,240              | )          | $ | 11,248 |   |

 

**December 30, 2007**

 
| ** **                                        | ** ** | **Cost**   | ** ** | **Unrealized  Gains (Losses)** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------|------------|
| **Maturity less than 1 year** | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **          | ** ** |
| US treasury and agency securities                 |       | $          | 1,000      |                                | $          | —              |       | $ | 1,000 |   |
| Short-term municipal bonds                        |       | 1,000      |       | 1                                   |       | 1,001               |       |
| Auction rate securities                           |       | 7,825      |       | —                              |       | 7,825               |       |
| Corporate preferred securities                    |       | 12,464     |       | 9                                   |       | 12,473              |       |
| Certificates of deposit                           |       | 672        |       | —                              |       | 672                 |       |
|                                              |       | $          | 22,961     |                                | $          | 10                  |       | $ | 22,971 |   |
|                                              |       |       |       |                                |       |                |       |
| **Maturity 1 to 5 years**                         |       |       |       |                                |       |                |       |
| Municipal bonds                                   |       | $          | 1,827      |                                | $          | (3                  | )          | $ | 1,824 |   |
| Corporate preferred securities                    |       | 1,985      |       | 7                                   |       | 1,992               |       |
| Certificates of deposit                           |       | 384        |       | —                              |       | 384                 |       |
|                                              |       | $          | 4,196      |                                | $          | 4                   |       | $ | 4,200 |   |

 

Unrealizedgains (losses) on securities previously reported as other comprehensive incomethat were realized and included in the statements of loss and comprehensiveloss were not material during the nine months ended September 28, 2008 andSeptember 30, 2007.

 

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The brokers that hold the Company’s ARS have entered into agreementswith the New York Attorney General and various state and federal regulators toeither repurchase ARS or to use their best efforts to provide liquidity andother relief for holders of ARS by the end of 2009. The Company was notified byone broker that holds $3.9 million of ARS that the Company could expect to sellthe ARS to that broker during the period June 30, 2010 to July 2,2012. The Company was notified by another broker that holds $7.5 million of ARSthat the Company did not qualify for a November 5, 2008 repurchase of theARS held by that broker due to the amount of the Company’s total investmentsheld by them, and the Company is instead covered by the broker’s agreement withthe New York Attorney General and various state and federal regulators to usetheir best efforts to provide liquidity and other relief for ARS by the end of2009. The broker that holds $3.9 million of ARS has offered to provide a loan,secured by ARS held by that broker, equal to 75% of the fair value of the ARSheld by that broker. The Company has entered into an agreement with the brokerthat holds $7.5 million of ARS to provide a line of credit, secured by ARS heldby that broker, equal to 50% of the fair value of the ARS held by that broker.No amounts have been borrowed under that line of credit.

 

**6. ASSET IMPAIRMENT ANDABANDONMENT CHARGES**

 

TheCompany performed an impairment analysis of its investment in Cecure Gaming inthe third quarter of 2008 due to difficulties Cecure Gaming is having inobtaining working capital to finance their business development over the nextseveral years. Cecure Gaming also recently had a significant reduction instaffing. This investment was measured at implied fair value resulting in another-than-temporary impairment charge. The implied fair value measurement wascalculated using financial metrics and ratios of comparable public companiesand was measured using Level 3 inputs, as the Company used unobservable inputsand significant management judgment to value this investment due to the absenceof quoted market prices, inherent lack of liquidity, and the long-term natureof this investment. The Company recorded a $1,923,000 impairment charge in thethird quarter of 2008 related to this investment.

 

During the second quarterof 2007, the Company wrote off $2,270,000 of online gaming assets as a resultof ceasing the development of a stand-alone online gaming business and joininga third-party online gaming network.

 

**7. INCOME TAXES**

 

Due toactual and forecasted net losses, there was no income tax provision for the threeand nines month ended September 28, 2008 and September 30, 2007. Based on the Company’s relatively limitedand volatile earnings history, theCompany recorded a full valuation allowance for the net deferred tax assets asmanagement currently believes it is more likely than not that deferred taxassets will not be realized in the foreseeable future.

 

**8.CONTINGENCIES**

 

TheCompany is currently involved in various inquiries, administrative proceedingsand litigation relating to other matters arising in the normal course of theCompany’s business. Management is unable to estimate the minimum loss to beincurred, if any, as a result of the final outcome of these matters butbelieves they are not likely to have a material adverse effect upon the Company’sfuture financial position or results of operations; accordingly, no provisionfor loss has been recorded in connection therewith.

 

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**9. SEGMENTINFORMATION**

 

Theoperating segments reported below are the segments of the Company for whichseparate financial 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 September 28, 2008 (in thousands):**

 
| ** **                    | ** ** | **WPT**     | ** ** | **WPT Online** | ** ** | **WPT Global** | ** ** | **WPT**       | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** **                    | ** ** | **Studios** | ** ** | **Gaming**          | ** ** | **Non-gaming**      | ** ** | **Marketing** | ** ** | **China**  | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues:                     |       |        |       |                |       |                |       |          |       |       |       |          |       |   |   |
| Domestic television           |       | $           | 900        |                | $          | —              |       | $             | —     |       | $          | —        |       | $ | — |   | $ | — |   | $ | 900 |   |
| International television      |       | 286         |       | —              |       | —              |       | —        |       | —     |       | —        |       | 286 |   |
| Product licensing             |       | —      |       | —              |       | —              |       | 654           |       | —     |       | —        |       | 654 |   |
| Online gaming                 |       | —      |       | 150                 |       | —              |       | —        |       | —     |       | —        |       | 150 |   |
| Event hosting and sponsorship |       | 593         |       | —              |       | —              |       | 83            |       | —     |       | —        |       | 676 |   |
| Other                         |       | —      |       | —              |       | 140                 |       | 26            |       | —     |       | —        |       | 166 |   |
|                          |       | 1,779       |       | 150                 |       | 140                 |       | 763           |       | —     |       | —        |       | 2,832 |   |
| Cost of revenues              |       | 667         |       | 172                 |       | 72                  |       | 86            |       | —     |       | —        |       | 997 |   |
| Gross profit                  |       | 1,112       |       | (22                 | )          | 68                  |       | 677           |       | —     |       | —        |       | 1,835 |   |
| Total assets                  |       | 2,076       |       | 256                 |       | 800                 |       | 670           |       | 392        |       | 22,953        |       | 27,147 |   |
| Depreciation and amortization |       | 61          |       | —              |       | 51                  |       | —        |       | 8          |       | 76            |       | 196 |   |
|                               |            |             |            |                     |            |                     |            |               |            |            |            |               |            |  |  |  |  |  |  |  |  |  |

 

Revenues attributed todomestic and foreign operations were $2.0 million and $0.8 million,respectively.

 

**Threemonths ended September 30, 2007 (in thousands):**

 
| ** **                    | ** ** | **WPT**     | ** ** | **WPT Online** | ** ** | **WPT Global** | ** ** | **WPT**       | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** **                    | ** ** | **Studios** | ** ** | **Gaming**          | ** ** | **Non-gaming**      | ** ** | **Marketing** | ** ** | **China**  | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues:                     |       |        |       |                |       |                |       |          |       |       |       |          |       |   |   |
| Domestic television           |       | $           | 1,424      |                | $          | —              |       | $             | —     |       | $          | —        |       | $ | — |   | $ | — |   | $ | 1,424 |   |
| International television      |       | 490         |       | —              |       | —              |       | —        |       | —     |       | —        |       | 490 |   |
| Product licensing             |       | —      |       | —              |       | —              |       | 759           |       | —     |       | —        |       | 759 |   |
| Online gaming                 |       | —      |       | 119                 |       | —              |       | —        |       | —     |       | —        |       | 119 |   |
| Event hosting and sponsorship |       | 249         |       | —              |       | —              |       | 1,326         |       | —     |       | —        |       | 1,575 |   |
| Other                         |       | —      |       | —              |       | 19                  |       | 19            |       | —     |       | —        |       | 38 |   |
|                          |       | 2,163       |       | 119                 |       | 19                  |       | 2,104         |       | —     |       | —        |       | 4,405 |   |
| Cost of revenues              |       | 876         |       | 134                 |       | 12                  |       | 333           |       | —     |       | —        |       | 1,355 |   |
| Gross profit                  |       | 1,287       |       | (15                 | )          | 7                   |       | 1,771         |       | —     |       | —        |       | 3,050 |   |
| Total assets                  |       | 2,848       |       | 433                 |       | 88                  |       | 1,335         |       | 137        |       | 39,905        |       | 44,746 |   |
| Depreciation and amortization |       | 78          |       | 13                  |       | —              |       | —        |       | —     |       | 88            |       | 179 |   |
|                               |            |             |            |                     |            |                     |            |               |            |            |            |               |            |  |  |  |  |  |  |  |  |  |

 

Revenues attributed todomestic and foreign operations were $3.1 million and $1.3 million,respectively.

 

**Ninemonths ended September 28, 2008 (in thousands):**

 
| ** **                    | ** ** | **WPT**     | ** ** | **WPT Online** | ** ** | **WPT Global** | ** ** | **WPT**       | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** **                    | ** ** | **Studios** | ** ** | **Gaming**          | ** ** | **Non-gaming**      | ** ** | **Marketing** | ** ** | **China**  | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues:                     |       |        |       |                |       |                |       |          |       |       |       |          |       |   |   |
| Domestic television           |       | $           | 5,400      |                | $          | —              |       | $             | —     |       | $          | —        |       | $ | — |   | $ | — |   | $ | 5,400 |   |
| International television      |       | 1,459       |       | —              |       | —              |       | —        |       | —     |       | —        |       | 1,459 |   |
| Product licensing             |       | —      |       | —              |       | —              |       | 1,914         |       | —     |       | —        |       | 1,914 |   |
| Online gaming                 |       | —      |       | 688                 |       | —              |       | —        |       | —     |       | —        |       | 688 |   |
| Event hosting and sponsorship |       | 2,641       |       | —              |       | —              |       | 382           |       | —     |       | —        |       | 3,023 |   |
| Other                         |       | 7           |       | —              |       | 243                 |       | 132           |       | —     |       | —        |       | 382 |   |
|                          |       | 9,507       |       | 688                 |       | 243                 |       | 2,428         |       | —     |       | —        |       | 12,866 |   |
| Cost of revenues              |       | 5,511       |       | 556                 |       | 146                 |       | 239           |       | —     |       | —        |       | 6,452 |   |
| Gross profit                  |       | 3,996       |       | 132                 |       | 97                  |       | 2,189         |       | —     |       | —        |       | 6,414 |   |
| Depreciation and amortization |       | 190         |       | —              |       | 103                 |       | —        |       | 25         |       | 234           |       | 552 |   |
|                               |            |             |            |                     |            |                     |            |               |            |            |            |               |            |  |  |  |  |  |  |  |  |  |

 

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Revenues attributed todomestic and foreign operations were $9.1 million and $3.8 million,respectively.

 

**Ninemonths ended September 30, 2007 (in thousands):**

 
| ** **                    | ** ** | **WPT**     | ** ** | **WPT Online** | ** ** | **WPT Global** | ** ** | **WPT**       | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** **                    | ** ** | **Studios** | ** ** | **Gaming**          | ** ** | **Non-gaming**      | ** ** | **Marketing** | ** ** | **China**  | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues:                     |       |        |       |                |       |                |       |          |       |       |       |          |       |   |   |
| Domestic television           |       | $           | 8,132      |                | $          | —              |       | $             | —     |       | $          | —        |       | $ | — |   | $ | — |   | $ | 8,132 |   |
| International television      |       | 1,709       |       | —              |       | —              |       | —        |       | —     |       | —        |       | 1,709 |   |
| Product licensing             |       | —      |       | —              |       | —              |       | 2,618         |       | —     |       | —        |       | 2,618 |   |
| Online gaming                 |       | —      |       | 929                 |       | —              |       | —        |       | —     |       | —        |       | 929 |   |
| Event hosting and sponsorship |       | 950         |       | —              |       | —              |       | 2,108         |       | —     |       | —        |       | 3,058 |   |
| Other                         |       | 19          |       | —              |       | 95                  |       | 57            |       | —     |       | —        |       | 171 |   |
|                          |       | 10,810      |       | 929                 |       | 95                  |       | 4,783         |       | —     |       | —        |       | 16,617 |   |
| Cost of revenues              |       | 5,156       |       | 596                 |       | 58                  |       | 784           |       | —     |       | —        |       | 6,594 |   |
| Gross profit                  |       | 5,654       |       | 333                 |       | 37                  |       | 3,999         |       | —     |       | —        |       | 10,023 |   |
| Depreciation and amortization |       | 245         |       | 40                  |       | —              |       | —        |       | —     |       | 255           |       | 540 |   |
|                               |            |             |            |                     |            |                     |            |               |            |            |            |               |            |  |  |  |  |  |  |  |  |  |

 

Revenues attributed todomestic and foreign operations were $13.2 million and $3.4 million,respectively.

 

**10.SUBSEQUENT EVENTS**

 

LakesEntertainment, Inc. (“Lakes”) declared a stock dividend on October 1,2008 of all of the Company shares held by Lakes. The record date for thedividend to Lakes’ stockholders was October 24, 2008 and the date ofdistribution of the shares is November 21, 2008. Lakes owns 12,480,000shares, or approximately 61 percent, of the Company’s outstanding common stock.

 

OnOctober 15, 2008, the Company notified CryptoLogic Inc. and itswholly-owned subsidiary WagerLogic Limited (collectively “CryptoLogic”) of thetermination of its software license and support agreement with CryptoLogicdated August 24, 2007, as amended. The Company will no longer operate theWPT-branded online gaming website on the CryptoLogic network after November 14,2008.  The Company will continue tooperate two international corporate websites that provide links to theWPT-branded online gaming website.

 

OnNovember 4, 2008, the Company entered into a $3,250,000 domestic sponsorshiparrangement with Pocket Kings for FullTiltPoker.net to sponsor Season Seven ofthe World Poker Tour television series.

 

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**ITEM 2.****                ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**Business Overview**

 

Wecreate internationally branded entertainment and consumer products driven bythe development, production and marketing of televised programming based ongaming themes. Our World Poker Tour®, or WPTtelevision series, based on a series of high-stakes poker tournaments,currently airs on the Game Show Network and the Travel Channel in the UnitedStates, and has been licensed for broadcast globally. In January 2008, welaunched ClubWPT.com, an innovative subscription-based online poker clubtargeted to the estimated 60 million poker players in the United States, whichis currently offered in 38 states. We currently offer a real-money onlinegaming website, which prohibits wagers from players in the U.S. and otherrestricted jurisdictions. We recently announced that this website will be shutdown in November 2008. We also license our brand to companies in thebusiness of poker equipment and instruction, apparel, publishing, electronicand wireless entertainment, DVD/home entertainment, casino games and giftwareand are engaged in the sale of corporate sponsorships. In addition, we haveoperations in mainland China, pursuant to our agreement with the China LeisureSports Administrative Center, where we are developing and marketing online andmobile games supporting the WPT China National Traktor Poker TourTM.

 

Wehave four business segments:

 

*WPTStudios,* ourmulti-media entertainment division, generates revenue through the domestic andinternational licensing of television broadcasts, international televisionsponsorship revenue and casino host fees. Since our inception, the WPT Studiosdivision has been responsible for 73% of our total revenue. We licensed SeasonsOne through Five of the WPT television series to The Travel Channel, L.L.C. (“TRV”or “Travel Channel”) for telecast in the United States under an exclusivelicense agreement (the “TRV Agreement”). Prior to 2007, we also licensed SeasonOne of the Professional Poker Tour (“PPT”) television series to TRV. On April 2,2007, we entered into an agreement (the “GSN Agreement”) with Game ShowNetwork, LLC (“GSN”), pursuant to which GSN agreed to license Season Six of theWPT for a $300,000 license fee per episode. For Season Five, we received an average of $477,000 per episode underthe TRV agreement. We also have license and sponsor agreements for the distributionof our WPT and PPT episodes into international territories for which we receivelicense and sponsor fees. We also collect annual host fees from the membercasinos that host World Poker Tour events.

 

Sinceour inception, domestic television distribution fees from the TRV Agreement, aseparate agreement with TRV relating to the PPT series and the GSN Agreementhave been responsible for 54% of our total revenue. For each season covered bythe TRV Agreement and related options, TRV has exclusive rights to exhibit theepisodes in that season an unlimited number of times on its television networkin the U.S. for four years, or three years in the case of Season One of theWPT.

 

Underboth the TRV and GSN Agreements, TRV and GSN paid fixed license fees for eachepisode we produced, which were payable at various times during thepre-production, production and post-production process and revenues were notrecognized until receipt and acceptance of the completed episode was confirmed.Television production costs related to WPT episodes are generally capitalizedand charged to cost of revenues as the related revenues are recognized.Therefore, the timing and number of episodes involved in the various seasons ofthe series affect the timing of the revenues and expenses of the WPT Studiosbusiness.

 

OnJune 7, 2008, GSNdid not exercise its option to broadcast Season Seven of the WPT series. On July 17, 2008, we announced a broadcast license agreement withFox Sports Network (“FSN”), pursuant to which FSN will broadcast Season Sevenof the WPT television series.  FSNreceived exclusive rights to air 26 one-hour WPT episodes in the United Statesacross its national sports cable network. Unlike past seasons, FSN’sexclusivity only applies to the episodes it produces for the network.  Consequently, we are free to produce otherSeason Seven episodes on other networks if another deal arises.  Unlike our historical broadcast licenseagreements with Travel Channel and GSN, we will not receive per-episode licensefees from FSN. However, similar to many sports leagues and entertainmentproperties, we have been afforded certain integration and advertising rights inand around the program, which will allow us to seek sponsorship revenues forSeason Seven of the WPT, domestically and internationally. Accordingly, we arecurrently in discussions with several potential sponsors.

 

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From2004 until December 2006, we licensed our shows internationally through an exclusive agreement with Alfred HaberDistribution, Inc. In December 2006, we notified Alfred Haber thatthey would no longer be the international distributor for our shows, and we beganutilizing our internal staff and resources to distribute our shows into theinternational marketplace. During 2007, we came to an arrangement with AlfredHaber whereby they provide non-exclusive assistance on international licensingmatters on a case-by-case basis, with substantially the same terms as ourprevious relationship with them.

 

As internationaltelevision license fees continue to decline, we are pursuing internationalsponsorship revenues.   In December 2006,we signed a multi-year international sponsorship agreement with PartyGamingPlc, owner of PartyPoker.com, pursuant to which they sponsor certaininternational television broadcasts of the WPT and PPT. PartyGaming pays usfixed fees for entering into broadcast sponsorship arrangements that meetcertain requirements, with maximum payment levels for each of the coveredseasons of each series. For the nine months ended September 28, 2008 and September 30,2007, we recognized revenues of $1.6 million and $0.7 million, respectively,from PartyGaming.  We expect to recognize additionalinternational sponsorship revenues from PartyGaming during the fourth quarterof 2008 related to the distribution of Seasons Four and Six of the WPT.

 

*WPT Online* includes the international real money gaming websitelinked to WorldPokerTour.com and content website at WorldPokerTour.com, whichincludes poker tournament coverage and live updates thereof, statistics, pokerplayer information, an online merchandise store, and ClubWPT.com which welaunched in January 2008.

 

In 2006, wedecided to commission the development of our own software for our online pokerroom. We licensed a software platform from CyberArts Licensing, LLC, and hiredapproximately thirty employees in Israel to develop the software and supportinfrastructure. However, the development of the CyberArts-based site ceased on April 23,2007, when we entered into a three year software supply and support agreementwith CryptoLogic Inc. and its wholly-owned subsidiary WagerLogic Limited(collectively “CryptoLogic”). As a result of the decision to utilizeCryptoLogic and move away from the internally-developed online gaming platformbased on CyberArts software, we wrote off $2.3 million of property andequipment and related capitalized costs during the second quarter of 2007. Inaddition to the write-off of assets, we curtailed our Israel operations andclosed one of our two offices there during the second quarter of 2007, and inthe fourth quarter of 2007 we closed the remaining office in Israel.

 

CryptoLogic operatesan online gaming site for us featuring a poker room and casino games utilizingits proprietary software, in exchange for 20% of the net gaming revenuesgenerated from the site. We are also a member in a centralized online gamingnetwork (the “Network”) with several other licensees of CryptoLogic, pursuantto which players are able to play on our branded gaming site on the Network.

 

In June 2007,CryptoLogic delivered the poker software to us and the online poker room becameoperational on June 28, 2007. On July 26, 2007, CryptoLogic deliveredten casino games and effective March 5, 2008, we executed an amendment tothe Agreement, exercising our option for a full suite of casino games with anannual minimum guarantee payable to CryptoLogic from us of $750,000. We alsoexercised our option to have CryptoLogic develop two additional poker languagerooms in Spanish and German for $100,000.

 

On October 15,2008, we notified CryptoLogic of our intent to terminate our agreements withthem. Effective November 14, 2008, we will no longer operate theWPT-branded online gaming website on the CryptoLogic Network.  We paid CryptoLogic $350,000 in September 2008for the option to terminate our agreements with them and we will have nopayment obligations to CryptoLogic after November 14, 2008.  The Company will continue to operate twointernational corporate websites that provide links to the WPT-branded onlinegaming website.

 

The non-gaming website linked to WorldPokerTour.comincludes poker tournament coverage and live updates thereof, statistics, pokerplayer information, an online merchandise store and ClubWPT.com.  ClubWPT.com offers a monthly subscriptionpackage for $19.95 per month, as well as discounted quarterly and annualoptions. In return, members receive exclusive club benefits and points whichmake them eligible to enter into over 5,000 live poker and eliminationblackjack tournaments, sit-n-go poker tournaments and poker ring games for achance to win over $100,000 in cash and prizes each month, which could includea $10,000 seat into a WPT televised main event. Accordingly, non-subscriberswho do not wish to purchase the other club benefits are offered a free oralternative means of entry.

 

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We use a third party service provider, CentaurusGames, LLC (“Centaurus”), to operate our subscription-based online service forClubWPT.com, which includes supporting the software, technical operations andcustomer service. In return for Centaurus’ services, Centaurus earns apercentage of net revenues which is calculated as subscriber fees less certaincosts including chargebacks, prize pool, Club content, financial charges andcompliance fees. Centaurus acquired the operating assets of Ultimate BlackjackTour, LLC in the third quarter of 2008.

 

On July 31, 2008, we announced an additionalagreement with FSN to jointly create a new poker program focused on buildingawareness and driving traffic to our online subscription website, ClubWPT.com.The parties have agreed to the production and distribution of an initial run of13 one-hour television programs (“the Initial Programming”). The ClubWPT showdebuted on FSN on October 5, 2008. Subsequent to the delivery of the Initial Programming, FSN will have anoption to broadcast future episodes and the number of future episodes to bebroadcast will depend upon the number of shows we deliver, up to forty hoursper year. FSN may also terminate the relationship upon thirty days writtennotice.

 

Weare obligated to: 1) manage all aspects of ClubWPT.com including running alltournaments and identifying winners that will participate in the televisionprogram, 2) ensure that television participants are brought to the televisionstudio and are set up to play in the event, and 3) pay FSN a percentage of netprofits and pay for the costs of television production (production costs of theinitial 13 programs are recoupable against net profits). In addition toproviding the distribution channel, FSN is obligated to promote ClubWPT.comthrough in-show title sponsorship, in-show billboards, audio mentions, websitelogos on poker tables, commercial inventory and website presence on the main page ofFSN’s website, FoxSports.com.

 

*WPT Global Marketing* includes branded consumer products, sponsorship andpartnerships, and event management. Branded consumer products generate revenueprincipally through royalties from the licensing of our brand to companies seekingto use the World Poker Tour brand and logo in the retail sales of theirconsumer products.

 

Domestic sponsorship and event management generate revenuethrough corporate sponsorship and management of televised and live events.During 2007, we signed a three-year agreement with Blue Diamond Almonds tosponsor Seasons Six, Seven and Eight of the WPT. In return for online and eventpresence, Blue Diamond pays $150,000 per season. We also signed an agreementwith Southwest Airlines to be the official airline of the World Poker Tour forSeason Six.

 

InFebruary 2006, we launched an events division offering help in designingspecial programs for corporations, meeting planners and charitableorganizations for entertainment purposes only.

 

*WPTChina.* On August 6, 2007, we entered into a Cooperation Agreement (the “CooperationAgreement”) with the China Leisure Sports Administrative Center (the “CLSAC”),a Chinese government-sanctioned body with authority over certain leisuresports, including the popular Chinese national card game “Traktor Poker” or “TuoLa Ji.” We have the right to brand and exploit the WPT China National TraktorPoker Tour during the five-year term of the Cooperation Agreement.Additionally, we are afforded certain marketing and sponsorship rights inconjunction with the WPT China National Traktor Poker Tour, including the rightto sanction and derive revenue from third-party branding at tour events, theright to exploit films and other content generated in conjunction with the WPTChina National Traktor Poker Tour in all media and the right to obtain onlineand mobile subscription revenues. Furthermore, the CLSAC agreed to organize noless than 15 WPT China National Traktor Poker Tour events each year during theterm, to secure placement of the championship finals on a major Chinesetelevision station, and to promote the WPT China National Traktor Poker Tour.In exchange, we pay a yearly fee to the CLSAC, which started at $505,000 forthe first year and increases by ten percent annually for the remaining fouryears of the term. We also have a unilateral option to extend the agreement foran additional five years, provided that the yearly fee for the first year ofthe renewed term, will increase by 25% from the fee due for fifth year of theterm.

 

On October 12, 2007, we launched the inauguralseason of the WPT China National Traktor Poker Tour in Lanzhou, Gansu. After 15regional tournaments, Season One culminated at the Grand Finals held inNanjing, Jiangsu on June 22-25, 2008, where the first ever nationalchampionship team was crowned. Season Two of the WPT China National TraktorPoker Tour began in Luoyang, Henan on October 11, 2008 and the GrandFinals are expected to be held in Beijing on June 12-14, 2009 aftercompletion of the 15 regional tournaments.

 

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**Results of Operations**

 

**Three Months Ended September 28,2008 Compared to the Three Months Ended September 30, 2007**

 

*Revenues. *Total revenues decreased by$1.6 million (36%) during the three months ended September 28, 2008,compared to the three months ended September 30, 2007. Domestic televisionlicensing revenues decreased $0.5 million (37%) in the third quarter of 2008compared to the 2007 period. The decrease was primarily a result of the lower per episode licensefee under the GSN agreement governing 2008 revenues, as compared to the TRVagreement in effect during the prior year period. Internationaltelevision licensing revenues decreased by $0.2 million (42%) in the thirdquarter of 2008 compared to the 2007 period, a result of lower fees associatedwith international distribution agreements.Product licensing revenuesdecreased by approximately $0.1 million (14%) in the third quarter of 2008,primarily due to lower revenues from one customer in the current quarter ascompared to the 2007 period. Online gaming revenues rose modestly in the third quarter of 2008compared to the third quarter of 2007.Event hosting and sponsorshiprevenues decreased $0.9 million (57%) in the third quarter of 2008, dueprimarily to higher domestic sponsorship revenues from one customer in theprior period and lower international sponsorship revenues in the current period. Other revenues in the third quarter of2008 were higher than in the third quarter of 2007 due to the addition ofsubscription revenues from ClubWPT.com in the 2008 period. In October 2008,FSN began airing, “ClubWPT.com”, a new poker program focused on buildingawareness and driving traffic to ClubWPT.com.

 

*Cost of revenues*.  Cost of revenues decreased by $0.4 million(26%) in the third quarter of 2008, compared to the 2007 period. The decreasewas primarily due to a$339,000 reduction of previously recorded Season Six WorldPoker Tour production costs.

 

*Gross margins.*  Grossmargins were 65% in the third quarter of 2008 compared to 69% in the thirdquarter of 2007.  This decrease wasprimarily due to a$339,000 reduction of previously estimated Season Six production costs andlower license fees per episode under the GSN contract.

 

*Selling, generaland administrative expense. *Selling,general and administrative expense decreased $1.2 million (21%) during thethree months ended September 28, 2008, compared to the prior year period.The decrease was due to lower personnel related expenses, professional servicesand online gaming advertising costs, partially offset by increases in ClubWPTand online gaming sponsorship costs, a $300,000 lease abandonment provision and$350,000 of costs to terminate our agreements with CryptoLogic.

 

*Asset impairment and abandonment charges*.  We performed an impairment analysis of ourinvestment in Cecure Gaming in the third quarter of 2008 due to difficultiesCecure Gaming is having in obtaining working capital to finance their businessdevelopment over the next several years. Cecure Gaming also recently had asignificant reduction in staffing. This investment was measured at implied fair value resultingin an other-than-temporary impairment charge. We recorded a $1,923,000impairment charge in the third quarter of 2008 related to this investment.

 

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**Nine months Ended September 28,2008 Compared to the Nine Months Ended September 30, 2007**

 

*Revenues.** *Totalrevenues decreased by $3.8 million (23%) during the nine months ended September 28,2008, compared to the nine months ended September 30, 2007. Domestictelevision licensing revenues decreased $2.7 million (34%) in the first ninemonths of 2008 compared to the 2007 period. The decrease was a result of the lower per episodelicense fee under the GSN agreement governing 2008 revenues, as compared to theTRV agreement in effect during the prior year period. Internationaltelevision licensing revenues decreased by $0.3 million (15%) during the ninemonths ended September 28, 2008 compared to the 2007 period, a result oflower fees associated with international distribution agreements.Productlicensing revenues decreased by $0.7 million (27%) in the first nine months of2008 compared to the 2007 period primarily due to higher license revenues fromthree customers in the 2007 period. Online gaming revenues decreased $0.2million (26%), primarily as a result of lower levels of player activity on oursite on the CryptoLogic Network in the 2008 period versus the site operated byWagerWorks in the 2007 period. Event hosting and sponsorshiprevenues were approximately the same in both periods, however, internationaltelevision sponsorship revenues from Party Gaming increased by $1.0 millionwhich offset a $1.0 million decrease in domestic sponsorships primarily relatedto two customers in the prior period. Other revenues in the nine months ended September 28,2008 were higher than the same period in 2007 due to the addition of revenuesfrom the subscription-based website ClubWPT.com in the 2008 period.  In October 2008, FSN began airing, “ClubWPT.com”,a new poker program focused on driving awareness and traffic to ClubWPT.com.

 

*Cost of revenues*.  Cost of revenues decreased by $0.1 million(2%) in the first nine months of 2008, compared to the 2007 period. We recordeda $339,000 reductionof previously recorded Season Six WorldPoker Tour production costs in the first nine months of 2008. Excluding thisadjustment, cost of revenues increased in the first nine months of 2008 due tohigher costs related to international sponsorship revenues.

 

*Gross margins.*  Grossmargins were 50% in the first nine months of 2008, compared to 60% in the firstnine months of 2007. Domestic television licensing margins were 16% in thefirst nine months of 2008 compared to 41% in the same period in 2007. Thisdecrease was primarily due to a $339,000 reduction of previously estimated Season Six productioncosts and lower license fees per episode under the GSN contract.

 

*Selling, generaland administrative expense.* Selling,general and administrative expense decreased $0.5 million (3%) during the ninemonths ended September 28, 2008, compared to the nine months ended September 30,2007. The decrease was due to lower personnel related expenses, partiallyoffset by increases in ClubWPT, online gaming and WPT China sponsorship costs, marketingand advertising costs associated with our online gaming business, a $300,000lease abandonment provision and $350,000 of costs to terminate our agreementswith CryptoLogic.

 

*Asset impairment and abandonment charges*.  We performed an impairment analysis of ourinvestment in Cecure Gaming in the third quarter of 2008 due to difficultiesCecure Gaming is having in obtaining working capital to finance their businessdevelopment over the next several years. Cecure Gaming also recently had asignificant reduction in staffing. This investment was measured at implied fair value resultingin an other-than-temporary impairment charge. We recorded a $1,923,000impairment charge in the third quarter of 2008 related to this investment.During the second quarter of 2007, we wrote off $2,270,000 of on-line gamingassets as a result of ceasing the development of a stand-alone online gamingbusiness and joining a third-party online gaming network.

 

**Business Outlook**

 

For the fourth quarter of2008, we expect:

 

·                                        FSN to air thefirst four episodes of Season Seven of the WPT television series. Actual airdates and time slots are controlled by FSN.

·                                        To recognizehost fees and domestic sponsorship revenues for the first four episodes ofSeason Seven of the WPT television series. Actual air dates and time slots arecontrolled by FSN.

·                                        To seek foreignsponsorship revenues for Season Seven of the WPT television series.

·                                        To produce 13episodes of the ClubWPT.com television show and for FSN to air them throughoutthe quarter.

·                                        To obtain16,000 to 20,000 paying subscribers for ClubWPT.com by the end of the quarter.

·                                        To launch theWPT China integrated online and mobile poker game in November and begin torecognize revenue from China-related activities.

·                                        To continue theproduction of Season Two of the WPT China National Traktor Poker Tour.

 

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Regarding productioncosts and operating expenses, we expect:

 

·                                        To incur production costsrelating to Season Seven of the WPT television series while seeking foreignsponsorship revenues.

·                                        Minor costs to exit onlinegaming on the CryptoLogic network.

·                                        Higher sales and marketingcosts associated with producing 13 episodes of the ClubWPT.com television show.

·                                        Increased costs associatedwith building and launching the WPT China integrated online and mobile pokergame platform.

 

**Liquidity and Capital Resources**

 

Duringthe first nine months of 2008, cash and cash equivalents and investments inmarketable securities decreased by $10.7 million to a combined balance of $20.4million. Cash was used to support operating activities and to purchase propertyand equipment. Our principal cash requirements consist of payroll and benefits,office leases, television production, professional and consulting fees,business insurance and sales and marketing costs.

 

Weintend to use funds currently on hand for working capital and capitalexpenditures associated with the expansion of the WPT television series,ClubWPT, WPT global marketing and WPT China, and for general corporatepurposes. We anticipate our overall selling, general and administrativeexpenses will decrease in future periods. Specifically, we anticipateeliminating sales and marketing expenditures related to our online gaming site,in addition to reductions in certain general and administrative costs as wecontinue to implement cost-cutting measures company-wide. However, weanticipate increasing expenditures relating to driving significantly moretraffic to ClubWPT.com and we expect to continue to invest in our China effortsby developing and marketing online and mobile games supporting the WPT ChinaNational Traktor Poker Tour.

 

As of September 28, 2008, we had approximately $10.2 millioninvested in auction rate securities (“ARS”), net of a $1.2 million unrealizedvaluation allowance, which we believe is a temporary decline in estimated fairvalue. Historically, ARS have been liquid with interest rates resetting every 7to 35 days by an auction process. However, beginning in February 2008,auctions for ARS held by us failed as a result of liquidity issues experiencedin the global credit and capital markets. An auction failure means that theamount of securities submitted for sale exceeds the amount of purchase ordersand the parties wishing to sell the securities are instead required to hold theinvestment until a successful auction is completed. The ARS continue to payinterest in accordance with the terms of the underlying security; however,liquidity will continue to be limited until there is a successful auction oruntil such time as other markets for ARS develop.

 

The brokers that hold our ARS have entered into agreements with the NewYork Attorney General and various state and federal regulators to eitherrepurchase ARS or to use their best efforts to provide liquidity and otherrelief to holders of ARS by the end of 2009. We were notified by one brokerthat holds $3.9 million of ARS that we could expect to sell the ARS to thatbroker during the period June 30, 2010 to July 2, 2012. We werenotified by our other broker that holds $7.5 million of ARS that we did notqualify for a November 5, 2008 repurchase of the ARS held by that brokerdue to the amount of our total investments held by them, and we are insteadcovered by the broker’s agreement with the New York Attorney General andvarious state and federal regulators to use their best efforts to provideliquidity and other relief for ARS by the end of 2009. The broker that holds$3.9 million of ARS has offered to provide a loan to us, secured by ARS held bythat broker, equal to 75% of the fair value of the ARS held by that broker. Wehave entered into an agreement with the broker that holds $7.5 million of ARSto provide a line of credit to us, secured by ARS held by that broker, equal to50% of the fair value of the ARS held by that broker.  No amounts have been borrowed under that lineof credit agreement.

 

OurARS portfolio is collateralized by student loans that primarily have AAA or Aaaratings and the majority of which are guaranteed under the Federal FamilyEducation Loan Program. We believe that the credit quality of these assets hasnot been impacted; however, beginning in the second quarter of 2008, wedetermined that the estimated fair value of our ARS had temporarily declineddue to the current lack of liquidity in the marketplace. As a result, as of September 28,2008, we have classified all ARS as non-current investments in marketablesecurities, with the estimated decline in fair value recorded as an unrealizedloss of $1.2 million, which is included in Accumulated Other Comprehensive Gain(Loss) in stockholders’ equity.

 

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Weexpect that cash, cash equivalents, investments in marketable securities andborrowings on credit lines secured by our ARS portfolio will be sufficient tofund our working capital and capital expenditure requirements for the next yeareven considering the current liquidity issues with ARS. If these securitiesremain illiquid for a period greater than one year, then we will likely berequired to seekadditional working capital to fund our operations. General economic and capitalmarket conditions are rapidly changing, are unpredictable and the impact on ourbusiness is not within our control. To raise working capital, we may need toseek to sell additional equity securities, issue debt or convertible securities,or seek to obtain credit facilities through financial institutions, theavailability of which is highly uncertain.

 

The table below sets forth ourknown contractual obligations as of September 28, 2008 (in thousands):

 
| ** **                       | ** ** | **Payments due by period (in thousands)** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                                          | ** ** | **Year 1** | ** ** | **Years 2-3** | ** ** | **Years 4-5** | ** ** | **Years 6**

**and Beyond** | ** ** |
| Operating leases (1)             |       | $                                                                  | 2,439      |   | $ | 878 |   | $ | 1,561 |   | $ | — |   | $ | — |   |
| Purchase obligations (2),(3)     |       | 1,825                                                              |       | 1,539 |   | 286 |   | — |   | — |   |
| Employee obligation (4)          |       | 125                                                                |       | 125 |   | — |   | — |   | — |   |
|                             |       | $                                                                  | 4,389      |   | $ | 2,542 |   | $ | 1,847 |   | $ | — |   | $ | — |   |

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| (1)    |   | Operating lease  obligations include rent payments for our corporate offices pursuant to two  lease agreements. For the first lease, monthly lease payments are  approximately $40,000 and escalate to approximately $45,000 over the  remaining lease term. For the second lease, monthly lease payments are  approximately $31,000 and escalate to approximately $33,000 over the  remaining lease term. The amounts set forth in the table above include monthly  lease payments through June 2011. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Includes the  operational expenses associated with the development of WorldPokerTour.com.  These expenses relate to the gaming and non-gaming aspects of the website.  Operational expenses associated with WPT China are also included.  Additionally, included in purchase obligations are open purchase orders of  approximately $235,000 as of September 28, 2008. These liabilities are  included in Other Accrued Expenses.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Includes a three year  base retainer with Antonio Esfandiari, who serves as our spokesperson for  ClubWPT.com.                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (4)    |   | Employee obligations  include the base salary payable to Steven Lipscomb under his employment  agreement.                                                                                                                                                                                                                                                                                                                                                                                                   |

 

**NasdaqStock Market Listing Compliance**

 

On August 14, 2008,the Nasdaq Stock Market (“Nasdaq”) notified the Company that we were was not incompliance with the minimum stock listing price requirements of NasdaqMarketplace Rule 4450(a)(5) as a result of the closing bid price forthe Company’s common stock being below $1.00 for 30 consecutive business days.This notification has no effect on the listing of the Company’s common stock atthis time. The Nasdaq Marketplace Rules provide the Company with 180calendar days to regain compliance, which will require the bid price of the Company’scommon stock to remain above $1.00 for a minimum of 10 consecutive businessdays.

 

On October 16, 2008,Nasdaq announced the suspension of the enforcement of the rules requiringa minimum $1.00 closing bid price. The suspension will remain in effect throughJanuary 19, 2009. On October 22, 2008, Nasdaq notified the Companythat as a result of the decision to suspend enforcement of the rules requiringa minimum $1.00 closing bid price through January 19, 2009, that Nasdaqhas granted the Company an extension until May 18, 2009 to become incompliance with Nasdaq Marketplace Rule 4450(a)(5). The Company willcontinue to execute its business plan to provide an opportunity to demonstratevalue to the investment community and regain Nasdaq compliance.

 

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**LakesEntertainment, Inc. Stock Dividend**

 

LakesEntertainment, Inc. (“Lakes”) declared a stock dividend on October 1,2008 of all of the Company shares held by Lakes. The record date for thedividend to Lakes’ stockholders is October 24, 2008 and the date ofdistribution of the shares is November 21, 2008. Lakes owns 12,480,000shares, or approximately 61 percent, of our outstanding common stock.

 

**Critical Accounting Estimates and Policies**

 

Although our financialstatements necessarily make use of certain accounting estimates by management,except as described below, we believe there are no matters that are the subjectof such estimates that are so highly uncertain or susceptible to change as topresent a significant risk of a material impact on our financial condition oroperating performance. Moreover, except as described below, we do not employany critical accounting policies that are selected from among availablealternatives or require the exercise of significant management judgment toapply.

 

*Investmentsin marketable securities.*  We account forour long-term investments in marketable securities in accordance withSFAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  Our investment portfolio includes investmentsin ARS. As a result of the liquidity issues surrounding our ARS, they wereclassified as long-term investments in marketable securities as of September 28,2008.

 

Due to the lack ofobservable market quotes on our ARS portfolio, we utilize valuation models thatare based on management’s estimates of expected cash flow streams andcollateral values, default risk underlying the security, discount rates andoverall capital market liquidity. The valuation of our ARS portfolio is subjectto considerable uncertainties and evolving market conditions that are difficultto predict. Factors that may impact the estimated fair value include changes tocredit ratings of the ARS as well as to the assets collateralizing thesecurities, rates of default of the underlying assets, underlying collateralvalue, discount rates, and evolving market conditions affecting the liquidityof ARS. If uncertainties in the capital and credit markets continue, thesemarkets deteriorate further or we experience any ratings downgrades on any ARSinvestments in our portfolio, we may incur additional impairments to our ARSinvestment portfolio, which could adversely affect our financial condition,cash flows and operating results.

 

*Revenue recognition.*  Revenue from the domestic andinternational distribution of our television series is recognized as earnedunder the following criteria established by the AICPA SOP 00-2, *Accounting by Producers or Distributors of Films*:

 

·                   Persuasiveevidence of an arrangement exists;

·                   Theshow/episode is complete, and in accordance with the terms of the arrangement,has been delivered or is available for immediate and unconditional delivery;

·                   Thelicense period has begun and the customer can begin its exploitation,exhibition or sale;

·                   Theseller’s price to the buyer is fixed and determinable; and

·                   Collectabilityis reasonably assured.

 

In accordance with theterms of our agreements, we recognized domestic television license revenues uponthe receipt and acceptance of completed episodes by the Travel Channel and GSN.However, due to restrictions and practical limitations applicable to ouroperating relationships with foreign networks, we do not considercollectibility of international television license revenues to be “reasonablyassured,” and accordingly, we do not recognize such revenue unless payment hasbeen received. Additionally, we presentcertain international distribution license fee revenues net of the distributor’sfees, as the distributor is the primary obligor in the transaction with theultimate customer pursuant to EITF 99-19, *Reporting Revenue Gross asa Principal versus Net as an Agent*.

 

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Product licensingrevenues are recognized when the underlying royalties from the sales of therelated products are earned. We recognize minimum revenue guarantees, if any,ratably over the term of the license or as earned based on actual sales of therelated products, if greater. We present product licensing fees gross oflicensing commissions, which are recorded as selling and administrativeexpenses since we are the primary obligor in the transaction with the ultimatecustomer pursuant to EITF 99-19.

 

Online gaming revenuesare recognized monthly based on detailed statements received from CryptoLogic,our online gaming service provider for online poker and casino activity. Inaccordance with EITF 99-19, we present online gaming revenues gross of serviceprovider costs (including the service provider’s management fee, royalties andcredit card processing that are recorded as cost of revenues) as we have theability to adjust price and specifications of the online gaming site, we bearthe majority of the credit risk and we are responsible for the sales andmarketing of the gaming site.**We include certain cashpromotional expenses related to free bets and deposit bonuses along withcustomer chargebacks as direct reductions of revenue. All other promotionalexpenses are generally recorded as sales and marketing expenses.

 

Subscription revenues arerecognized monthly based on statements received from Centaurus, our subscription-basedonline service provider. In accordance with EITF 99-19, we presentsubscriptions revenues gross of service provider costs (including the serviceprovider’s management fee, content fees and credit card processing fees thatare recorded as cost of revenues) as we have the ability to adjustspecifications of the game site, we bear the majority of the credit risk and weare responsible for the sales and marketing of the gaming site. All other promotionalexpenses are generally recorded as sales and marketing expenses.

 

Event hosting fees arepaid 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. Licensingadvances and guaranteed payments collected, but not yet earned, as well ascasino host fees and sponsorship fees collected prior to the airing ofepisodes, are classified as deferred revenue in the accompanying balancesheets.

 

*Travel Channel participation.** *We account for royalty payments tothe Travel Channel when the applicable revenues from the exploitation of theWorld Poker Tour brand are recognized, after specified minimum amounts are met.We record these amounts in cost of revenues.

 

*Deferred television costs.*  We account for deferred televisioncosts in accordance with SOP 00-2. Deferred television costs include directproduction, overhead and development costs stated at the lower of cost or netrealizable value based on anticipated revenue. Production overhead includesincremental costs associated with the productions such as office facilities andinsurance. Shared facilities costs are allocated to episodes based onheadcount. Production overhead insurance costs are allocated to televisioncosts based on number of episodes. Capitalized television production costs foreach episode are expensed as revenues are recognized upon delivery andacceptance of the completed episode using theindividual-film-forecast-computation method for each season produced.Management currently estimates that all deferred television costs at September 28,2008 are expected to be expensed in connection with domestic episode deliveriesand foreign sponsor license arrangements over the next twelve months and are,therefore, presented as current assets.

 

*Investment in unconsolidated investee.** *We paid $2.9 million in 2006 to acquire approximately 10%of Cecure Gaming. Our ownership was subsequently diluted toapproximately 8%. CecureGaming developed software and other products which enable Cecure Gaming or itslicensees to offer real money gaming services to customers via mobile devices.As we have less then 20% ownership interest and do not have the ability toexercise significant influence over Cecure Gaming, we account for thisinvestment under the cost method and periodically evaluate the carrying valuefor impairment.

 

Weperformed an impairment analysis of our investment in Cecure Gaming in thethird quarter of 2008 due to difficulties Cecure Gaming is having in obtainingworking capital to finance their business development over the next severalyears. Cecure Gaming also recently had a significant reduction in staffing.This investment was measuredat implied fair value resulting in an other-than-temporary impairment charge.The implied fair value measurement was calculated using financial metrics andratios of comparable public companies and was measured using Level 3 inputs, aswe used unobservable inputs and significant management judgment to value thisinvestment due to the absence of quoted market prices, inherent lack ofliquidity, and the long-term nature of this investment. We recorded a$1,923,000 impairment charge in the third quarter of 2008 related to thisinvestment.

 

*Share-based compensation. **On January 2, 2006, we adoptedSFAS 123(R) using the*“modified prospectivetransition” method, which requires recognition of expense for all awardsgranted after the date of adoption and for the unvested portion of previouslygranted awards outstanding as of the date of adoption.

 

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##### **Recently Issued AccountingPronouncements**

#####  

See “Note 1. Basis ofPresentation and Recent Accounting Pronouncements” for information aboutrecently issued accounting pronouncements.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**PrivateSecurities Litigation Reform Act**

** **

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

 

Forward-lookinginformation involves important risks and uncertainties that could significantlyaffect our anticipated future results and, accordingly, actual results maydiffer materially from those expressed in any forward-looking statement.  Our forward-looking statements generallyrelate to plans for future expansion and other business development activities,expected levels of capital spending, potential sources of future financing andthe possible effects on our business of gaming, tax and other regulation and ofcompetition. Although it is not possible to foresee all of the factors that maycause actual results to differ from our forward-looking statements, see “Part II– Other Information, Item 1A. Risk Factors” and the risk factors described inour Form 10-K for the year ended December 30, 2007 for risk factorsthat may impact our forward-looking statements.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Ourfinancial instruments include cash and cash equivalents and marketablesecurities. Our main investment objectives are the preservation of investmentcapital and the maximization of after-tax returns on our investment portfolio.Consequently, we invest with only high-credit-quality issuers and limit theamount of credit exposure to any one issuer.

 

Ourcash and cash equivalents are not subject to significant interest rate risk dueto the short maturities of these instruments. As of September 28, 2008,the carrying value of our cash and cash equivalents approximates fair value. Wealso hold short-term investments consisting of marketable debt securities(consisting of corporate preferred securities, municipal bonds and certificatesof deposit) having a weighted-average duration of one year or less.Consequently, such securities are not subject to significant interest raterisk. We also hold long-term investments in marketable securities which consistof ARS. The types of ARS investments that we own are backed by student loans,the majority of which are guaranteed under the Federal Family Education LoanProgram, and are primarily AAA or Aaa rated.

 

Historically,these types of ARS investments have been highly liquid using an auction processthat resets the applicable interest rate at predetermined intervals, typicallyevery 7 to 35 days, to provide liquidity at par. However, as a result of theliquidity issues experienced in the global credit and capital markets, theauctions for all of our ARS failed beginning in February 2008. Thefailures of these auctions do not affect the value of the collateral underlyingthe ARS, and we continue to earn interest on our ARS at contractually setrates. However, we will not be able to liquidate our ARS until the issuer callsthe security, a successful auction occurs, a buyer is found outside of theauction process or the security matures. During October 2008, we receivedaccount statements for the end of the third quarter of 2008, from the firmsmanaging our ARS which estimated the fair value of our ARS. We analyzed thesestatements and have concluded that for the nine month period ended September 28,2008, a decrease of $1.2 million in the estimated fair value of the ARS we holdhas occurred as a result of the current lack of liquidity. We consider declinesin the estimated fair value of our ARS due to lack of liquidity to be temporaryimpairments that have been recorded as an unrealized loss in stockholders’equity as of September 28, 2008. See “Note 5. Investments in MarketableSecurities” for more information about our ARS investments.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Interim Chief Financial Officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rule 13a-15(e) or Rule 15d-15(e) promulgated underthe Securities Exchange Act of 1934, as amended, as of the end of the periodcovered by this quarterly report. Based on their evaluation, our ChiefExecutive Officer and Interim Chief Financial Officer concluded that ourdisclosure controls and procedures are effective.

 

Therehave been no significant changes (including corrective actions with regard tosignificant deficiencies or material weaknesses, if any) in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation referenced above.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

See “Note 8.Contingencies” for information about legal proceedings.

 

**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”in our Form 10-K for the year ended December 30, 2007. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial may also materially adversely affect our business, financialcondition and/or operating results.

 

***GSN did not exercise its right to broadcast future seasonsof the WPT and our new broadcast agreement with FSN does not provide for anybroadcast fees to be paid to us, which could materially and adversely affectour results of operations.***

 

On June 7, 2008, GSNnotified us that it would not exercise its option to broadcast future seasonsof the WPT. The license fees we have received from domestic broadcasters havebeen our most significant source of revenue, comprising approximately 54% ofour total historical revenues. Although we entered into a distributionagreement with FSN on September 30, 2008 to broadcast Season Seven of theWPT television series, the FSN agreement does not provide for any license feesto be paid to us for the broadcast rights. We intend to generate fees fromsponsors by integrating sponsor logos and other advertising materials into ourprograms and around the broadcast of the shows. There is no assurance that wewill be able to find sponsors for Season Seven of the WPT television series, orto the extent we do find sponsors, that the fees paid will be equal to theamounts paid to us by GSN. We may still be required to pay the costs to producethe shows for FSN and depending on the amount of sponsor revenues we are ableto generate, if any, the lack of license fees in our FSN agreement could have amaterial adverse effect on our financial condition, results of operations andcash flows.

 

***Our broadcasting agreement with FSN is a new businessarrangement, and there is no assurance FSN will be a viable business partner orthat they will exercise rights to broadcast future seasons of the WPT, whichwould materially and adversely affect our results of operations.***

 

On September 30,2008, we entered into an agreement with Fox Sports Network to broadcast SeasonSeven of the WPT. If in the future, FSN elects not to continue airing the WPTseries and we cannot replace our agreement with FSN with a comparableagreement, it may be difficult for us to obtain sponsorship funds, it will bedetrimental to the viability of the WPT brand and, consequently, would have amaterial adverse effect on our financial condition, results of operations andcash flows.

 

***Our ClubWPT.com business will beheavily dependent upon television as a primary source for the generation of newsubscribers, which if not achieved could materially and adversely affect ourresults of operations.***

 

Wewill be incurring about $1.3 million of television production costs in thefourth quarter of 2008 for a television poker program focused on buildingawareness and driving traffic to our online subscription website. In the eventthat sufficient subscribers do not result from these television broadcasts, wecould incur significant losses in this business.

 

***Our reliance on Centaurus Games, LLC as a third partysystems provider is subject to system security risks and business viabilityrisks that could disrupt our internal reporting or disrupt services provided toClubWPT.com customers, and any such disruption could harm our revenue, increaseour expenses and harm our reputation.***

 

Experienced computerprogrammers and hackers may be able to penetrate Centaurus Games’s networksecurity and misappropriate confidential information, create system disruptionsor cause shutdowns. In addition, computer programmers and hackers may be ableto develop and deploy viruses, worms, and other malicious software programsthat attack their products or otherwise exploit any security vulnerabilities oftheir products. As a result we could lose existing or potential customers. Weare also Centaurus Game’s major source of revenue. If we do not providesufficient business to them, they may face significant financial pressures. Ourefforts to address these risks could result in interruptions, delays, cessationof service and loss of existing or potential customers that may reduce ourrevenues, increase our expenses and harm our reputation.

 

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***Rules andregulations governing******sweepstakes, promotionsand giveaways vary by state and county and our compliance with these rules andregulations could restrict or eliminate our ability to generate revenues atClubWPT.com which could materially and adversely impact the viability of thisbusiness.***

 

Changesin laws or regulations in various states or countries over sweepstakes,promotions and giveaways or a negative finding of law regarding thecharacterization of the type of online activity carried out on ClubWPT.comcould result in our inability to obtain subscribers in those jurisdictions,which in turn could significantly impact our ability to generate revenue.

 

***Due to the international nature of our WPT China business,political or economic changes or other factors could reduce our future revenue,increase costs and harm our investment in this business.***

 

Our future revenues,expenses and financial condition could be impacted by a variety of factorsimpacting our WPT China business, including:

 

·                  changes in China’s economic or politicalconditions, including inflation, recession, interest rate fluctuations andactual or anticipated military or political conflicts;

·                  local labor conditions and regulations;

·                  managing a geographically dispersed workforce;

·                  changes in the regulatory or legalenvironment;

·                  differing technology standards orcustomer requirements;

·                  import, export or other businesslicensing requirements or requirements relating to making foreign directinvestments, which could affect our ability to obtain favorable terms forcontracts or lead to penalties or restrictions; and

·                  difficulties associated with repatriatingcash generated or held abroad in a tax-efficient manner and changes in taxlaws.

 

In many foreigncountries, particularly in those with developing economies, it is common toengage in business practices that are prohibited by laws and regulationsapplicable to us, such as the Foreign Corrupt Practices Act. Although weimplement policies and procedures designed to facilitate compliance with theselaws, our employees, contractors and agents, as well as those companies towhich we outsource certain of our business operations, may take actions inviolation of our policies. Any such violation, even if prohibited by our policies,could have a material adverse effect on our business.

 

***We depend on third parties to develop and market our operations inChina, and we have little control over their day-to-day operations and have noway to ensure that we can monetize our China operations effectively.***

 

Werecently formed a corporation to do business in China. Prior to this formation,we developed our WPT China operations using third parties vendors andconsultants in China.  We expect tocontinue to rely heavily on third party vendors and consultants for criticalparts of our business in China. Actions by these vendors or consultants maylimit or prohibit the continued development of this business or may limit orprohibit our ability to continue to do business in China.

 

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***We may be adversely impacted by economic factors beyond ourcontrol and may incur******additionalimpairment charges to our investment portfolio.***

 

As of September 28,2008, we had $11.4 million of principal invested in ARS. The types of ARSinvestments that we own are backed by student loans, the majority of which areguaranteed under the Federal Family Education Loan Program, and are primarilyAAA or Aaa rated. The estimated fair value of our ARS holdings at September 28,2008 was $10.2 million, which reflects a $1.2 million unrealized holding loss.We recorded this unrealized loss in Accumulated Other Comprehensive Gain (Loss)in stockholders’ equity, reflecting an impairment that we have concluded as atemporary decline in value.

 

The brokers that hold our ARS have entered into agreements with the NewYork Attorney General and various state and federal regulators to eitherrepurchase ARS or to use their best efforts to provide liquidity and otherrelief for holders of ARS by the end of 2009. We were notified by one brokerthat holds $3.9 million of ARS that we could expect to sell the ARS to thatbroker during the period June 30, 2010 to July 2, 2012. We werenotified by our other broker that holds $7.5 million of ARS that we did notqualify for a November 5, 2008 repurchase of the ARS held by that brokerdue to the amount of our total investments held by them, and we are insteadcovered by their agreement with the New York Attorney General and various stateand federal regulators to use their best efforts to provide liquidity and otherrelief for ARS by the end of 2009. The broker that holds $3.9 million of ARShas offered to provide a loan to us, secured by ARS held by that broker, equalto 75% of the fair value of the ARS held by that broker. We have entered intoan agreement with the broker that holds $7.5 million of ARS to provide a lineof credit to us, secured by ARS held by that broker, equal to 50% of the fairvalue of the ARS held by that broker.  Noamounts have been borrowed under that line of credit agreement.

 

If uncertainties in thecapital and credit markets continue, these markets deteriorate further or weexperience any ratings downgrades on any ARS investments in our portfolio, wemay incur additional impairments to our ARS investment portfolio, which couldnegatively affect our financial condition, results of operations and cashflows.

 

***We received a Nasdaq staff determination letter on August 14,2008, notifying us that we were not in compliance with the minimum stocklisting price requirements of Nasdaq Marketplace Rule 4450(a)(5) as aresult of the closing bid price for the Company’s common stock being below$1.00 for 30 consecutive business days.***

 

TheNasdaq Marketplace Rules provide the Company with 180 calendar days toregain compliance, which will require the bid price of the Company’s commonstock to remain above $1.00 for a minimum of 10 consecutive business days by February 10,2009. If we do not regain compliance with this rule, Nasdaq Staff will providewritten notification that our securities will be delisted. On October 16,2008, Nasdaq announced the suspension of the enforcement of rules requiringa minimum $1.00 closing bid price. The suspension will remain in effect throughJanuary 19, 2009. OnOctober 22, 2008, Nasdaq notified the Company that as a result of thedecision to suspend enforcement of the rules requiring a minimum $1.00closing bid price through January 19, 2009, that Nasdaq has granted theCompany an extension until May 18, 2009 to become in compliance withNasdaq Marketplace Rule 4450(a)(5).

 

***There are other significant risk factors that impact our business. Thefollowing is list of these other significant risk factors:***

 

·                    The terminationor impairment of our relationships with key licensing and strategic partnerscould harm our business performance;

·                    Our televisionprogramming may fail to maintain a sufficient audience for a variety of reasons,many of which are beyond our control;

·                    Ourcompetitors, many of whom have greater financial resources or marketplacepresence, continue to develope television programming that directly competeswith our television programming;

·                    The continuingdecline and increasing uncertainty in general economic conditions or adversechanges in the popularity of our brand of televised poker tournaments maynegatively impact our business;

·                    We may beunable to protect our entertainment concepts, our current and future brands andour other intellectual property rights;

·                    We may beunable to successfully expand into foreign markets or into new or complementarybusinesses;

·                    The regulatoryenvironment for online gaming is currently uncertain, and despite our effortsto comply with applicable laws, we could be found to be in violation ofapplicable United States or foreign regulations; and

·                    The loss of our Presidentand Chief Executive Officer or another member of our senior management team maynegatively impact the success of our business.

 

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**ITEM 6. EXHIBITS**

 
| 10.1   |   | World  Poker Tour Series Season VII Sponsored Episodes Agreement, dated as of  September 15, 2008, between Pocket Kings and WPT Enterprises, Inc.                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                           |
| 31.1   |   | Certification of Chief Executive Officer 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 Interim Chief Financial Officer  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 Interim 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**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report on Form 10-Q to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated: November 5, 2008 |   | WPT ENTERPRISES, INC.           |
|------------------------------|--------|---------------------------------|
|                         |   | Registrant                      |
|                         |   |                            |
|                         |   |                            |
|                         |   | / s/ *Steven Lipscomb*          |
|                         |   | Steven Lipscomb                 |
|                         |   | Chief Executive Officer         |
|                         |   |                            |
|                         |   |                            |
|                         |   | /s/ *Thomas Flahie*             |
|                         |   | Thomas Flahie                   |
|                         |   | Interim Chief Financial Officer |

 

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