**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**
|  | **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--|-------|----------------------------------------------------------------------------------------------|

**For thequarterly period ended July 2, 2006**

**OR**
|  | **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--|-------|-----------------------------------------------------------------------------------------------|

For thetransition period from                                     to                                     

**CommissionFile No. 0-24993**

**WPT ENTERPRISES, INC.**(Exact name of registrant as specified in its charter)

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

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Largeaccelerated filer o                                            Acceleratedfiler  x                            Non-acceleratedfiler  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).                                                                                                                                          Yeso                                    No  x

As of August8, 2006 there were 20,378,333 shares of Common Stock, $0.001 par value pershare, outstanding.

 

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**WPTENTERPRISES, INC.**

**INDEX**
|            | ** **            | ** **                                                                                                            | **Page of**   |
|------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------|---------------|
| ** ** | ** **            | ** **                                                                                                            | **Form 10-Q** |
| PART I.    | FINANCIAL INFORMATION |                                                                                                                  |          |
|       |                  |                                                                                                                  |          |
|       | ITEM 1.               | FINANCIAL STATEMENTS                                                                                                  |          |   |
|       |                  |                                                                                                                  |          |   |
|       |                  | Condensed Balance Sheets as of July 2, 2006  (unaudited) and January 1, 2006                                          | 3             |   |
|       |                  |                                                                                                                  |          |   |
|       |                  | Condensed Statements of Earnings (Loss) for the three  and six months ended July 2, 2006 and July 3, 2005 (unaudited) | 4             |   |
|       |                  |                                                                                                                  |          |   |
|       |                  | Condensed Statements of Stockholders’ Equity for the  six months ended July 2, 2006 and July 3, 2005 (unaudited) | 5             |   |
|       |                  |                                                                                                                  |          |   |
|       |                  | Condensed Statements of Cash Flows for the six months  ended July 2, 2006 and July 3, 2005 (unaudited)                | 6             |   |
|       |                  |                                                                                                                  |          |   |
|       |                  | Notes to Condensed Financial Statements (unaudited)                                                                   | 7             |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM 2.               | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                           | 13            |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM 3.               | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                           | 22            |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM 4.               | CONTROLS AND PROCEDURES                                                                                               | 22            |   |
|       |                  |                                                                                                                  |          |   |
|       | PART II.              | OTHER INFORMATION                                                                                                     | 23            |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM  1.              | LEGAL  PROCEEDINGS                                                                                                    | 23            |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM 1A.              | RISK FACTORS                                                                                                          | 23            |   |
|       |                  |                                                                                                                  |          |   |
|       | ITEM 6.               | EXHIBITS                                                                                                              | 27            |   |
|       |                  |                                                                                                                  |          |   |
|       | SIGNATURES            | 28                                                                                                                    |          |

 

2

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**WPTENTERPRISES, INC.Condensed Balance SheetsJuly 2, 2006 (unaudited) and January 1, 2006**
| ** **                                                                                                   | ** ** | **July 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                                                                   | ** ** | **(In thousands)**    | ** ** |
| **Assets**                                                                                                   | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Current assets:                                                                                              |       |                       |       |                          |       |
| Cash and cash  equivalents                                                                                   |       | $                          | 6,585      |                          | $          | 1,737 |   |
| Short-term investments                                                                                       |       | 30,511                     |       | 26,735                        |       |
| Accounts receivable,  net of allowance of $23 and $74                                                        |       | 1,940                      |       | 3,091                         |       |
| Deferred television  costs                                                                                   |       | 733                        |       | 1,520                         |       |
| Inventory                                                                                                    |       | 41                         |       | 45                            |       |
| Other                                                                                                        |       | 671                        |       | 665                           |       |
|                                                                                                         |       | 40,481                     |       | 33,793                        |       |
|                                                                                                         |       |                       |       |                          |       |
| Property and equipment,  net                                                                                 |       | 2,852                      |       | 1,271                         |       |
| Restricted cash                                                                                              |       | 445                        |       | 249                           |       |
| Investment                                                                                                   |       | 4,563                      |       | 10,627                        |       |
| Other assets                                                                                                 |       | 159                        |       | 320                           |       |
| ** **                                                                                                   |       | $                          | 48,500     |                          | $          | 46,260 |   |
| ** **                                                                                                   | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Liabilities and Stockholders’  Equity**                                                               | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Current liabilities:                                                                                         |       |                       |       |                          |       |
| Accounts payable                                                                                             |       | 840                        |       | $                             | 1,550      |   |
| Accrued payroll and  related                                                                                 |       | 928                        |       | 246                           |       |
| Other accrued expenses                                                                                       |       | 1,069                      |       | 941                           |       |
| Deferred revenue                                                                                             |       | 3,351                      |       | 5,150                         |       |
|                                                                                                         |       | 6,188                      |       | 7,887                         |       |
|                                                                                                         |       |                       |       |                          |       |
| Stockholders’ equity:                                                                                   |       |                       |       |                          |       |
| Preferred stock, $0.001  par value, authorized 20,000 shares; none issued and outstanding                    |       | —                     |       | —                        |       |
| Common stock, $0.001  par value, authorized 100,000 shares; 20,378 and 20,158 shares issued and  outstanding |       | 20                         |       | 20                            |       |
| Additional paid-in  capital                                                                                  |       | 37,980                     |       | 34,113                        |       |
| Deficit                                                                                                      |       | (51                        | )          | (6,208                        | )          |
| Accumulated other  comprehensive earnings                                                                    |       | 4,363                      |       | 10,449                        |       |
| Deferred compensation                                                                                        |       | —                     |       | (1                            | )          |
|                                                                                                         |       | 42,312                     |       | 38,373                        |       |
| ** **                                                                                                   |       | $                          | 48,500     |                          | $          | 46,260 |   |

 

 

See notes to condensedfinancial statements

3

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**WPT ENTERPRISES, INC.Condensed Statements of Earnings (Loss)(In thousands, except per share data)(unaudited)**
| ** **                                                | ** ** | **Three months ended**                                | ** ** | **Six months ended**                                  | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                | ** ** | **July 2, 2006 and July 3, 2005** | ** ** | **July 2, 2006 and July 3, 2005** | ** ** |
| ** **                                                | ** ** | **2006**                                                        | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                             |       |                                                            |       |                                                            |       |   |   |   |   |
| License fees:                                             |       |                                                            |       |                                                            |       |   |   |   |   |
| Domestic television                                       |       | $                                                               | 7,259      |                                                            | $          | 3,586 |   | $ | 10,304 |   | $ | 5,549 |   |
| International television                                  |       | 661                                                             |       | 641                                                             |       | 1,568 |   | 1,060 |   |
| Product licensing                                         |       | 804                                                             |       | 1,114                                                           |       | 1,517 |   | 2,193 |   |
|                                                      |       | 8,724                                                           |       | 5,341                                                           |       | 13,389 |   | 8,802 |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| Online gaming                                             |       | 821                                                             |       | —                                                          |       | 1,732 |   | — |   |
| Event hosting and sponsorship fees                        |       | 1,412                                                           |       | 1,170                                                           |       | 2,209 |   | 1,714 |   |
| Other                                                     |       | 72                                                              |       | 89                                                              |       | 152 |   | 187 |   |
|                                                      |       | 11,029                                                          |       | 6,600                                                           |       | 17,482 |   | 10,703 |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Cost of  revenues**                                     |       | 4,176                                                           |       | 4,377                                                           |       | 6,596 |   | 7,564 |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Gross  profit**                                         |       | 6,853                                                           |       | 2,223                                                           |       | 10,886 |   | 3,139 |   |
| **Expenses:**                                             |       |                                                            |       |                                                            |       |   |   |   |   |
| Selling and administrative                                |       | 4,312                                                           |       | 2,836                                                           |       | 9,412 |   | 5,589 |   |
| Depreciation                                              |       | 49                                                              |       | 37                                                              |       | 97 |   | 58 |   |
|                                                      |       | 4,361                                                           |       | 2,873                                                           |       | 9,509 |   | 5,647 |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Earnings  (loss) from operations**                      |       | 2,492                                                           |       | (650                                                            | )          | 1,377 |   | (2,508 | ) |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Other  income:**                                        |       |                                                            |       |                                                            |       |   |   |   |   |
| Realized gain on sale of investment                       |       | —                                                          |       | —                                                          |       | 5,675 |   | — |   |
| Interest income                                           |       | 419                                                             |       | 224                                                             |       | 744 |   | 480 |   |
| **Earnings  (loss) before income taxes**                  |       | 2,911                                                           |       | (426                                                            | )          | 7,796 |   | (2,028 | ) |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Income  taxes**                                         |       | 344                                                             |       | —                                                          |       | 1,639 |   | — |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Net  earnings (loss)**                                  |       | $                                                               | 2,567      |                                                            | ($426      | ) | $ | 6,157 |   | ($2,028 | ) |
| ** **                                                | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  comprehensive earnings (loss), net of tax:**     | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized gains (losses) on marketable securities:       |       | (840                                                            | )          | 6                                                               |       | ($411 | ) | ($36 | ) |
| ** **                                                | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Comprehensive  earnings (loss)**                        |       | $                                                               | 1,727      |                                                            | ($420      | ) | $ | 5,746 |   | ($2,064 | ) |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Net  earnings (loss) per common share - basic**         |       | $                                                               | 0.12       |                                                            | ($0.02     | ) | $ | 0.30 |   | ($0.10 | ) |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Net  earnings (loss) per common share - diluted**       |       | $                                                               | 0.12       |                                                            | ($0.02     | ) | $ | 0.29 |   | ($0.10 | ) |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Weighted-average  common shares outstanding - basic**   |       | 20,603                                                          |       | 19,645                                                          |       | 20,310 |   | 19,351 |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| Dilutive effect  of stock warrants                        |       | 400                                                             |       | —                                                          |       | 400 |   | — |   |
| Dilutive effect  of stock options                         |       | 458                                                             |       | —                                                          |       | 458 |   | — |   |
|                                                      |       |                                                            |       |                                                            |       |   |   |   |   |
| **Weighted-average common shares  outstanding - diluted** |       | 21,461                                                          |       | 19,645                                                          |       | 21,168 |   | 19,351 |   |
|                                                           |            |                                                                 |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

See notes to condensedfinancial statements

4

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**WPT ENTERPRISES, INC.Condensed Statements of Stockholders’ EquitySix Months ended July 2, 2006 and July 3, 2005(unaudited)**
| ** **                                       | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumlated**      | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------------|------------|---------------------|------------|------------|------------|
| ** **                                       | ** ** | ** **              | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**           | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Common Stock**   | ** ** | **Paid-in** | ** ** | ** **     | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | ** **          | ** ** |
| ** **                                       | ** ** | **Shares**              | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Deficit**  | ** ** | **Compensation**  | ** ** | **Earnings/(Loss)** | ** ** | **Total**  | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| **2006**                                         | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES  AT JANUARY 1, 2006**                 | ** ** | **20,158**              | ** ** | **$**       | **20**     | ** **     | **$**      | **34,113**   | ** ** | **$**             | **(6,208** | **)**               | **$**      | **(1**     | **)**      | **$** | **10,449** | ** ** | **$** | **38,373** | ** ** |
| Reduction of  deferred compensation              |       |                    |       |        |       |           |       |         |       | 1                 |       |                |       | 1          |       |
| Common stock  issued                             |       | 220                     |       |        |       | 1              |       |         |       |              |       |                |       | 1          |       |
| Effect of  share-based compensation              |       |                    |       |        |       | 2,409          |       |         |       |              |       |                |       | 2,409      |       |
| Income tax  benefit from stock option exercises  |       |                    |       |        |       | 1,457          |       |         |       |              |       |                |       | 1,457      |       |
| Sale of  investment                              |       |                    |       |        |       |           |       |         |       |              |       | (5,675              | )          | (5,675     | )          |
| Other  comprehensive loss                        |       |                    |       |        |       |           |       |         |       |              |       | (411                | )          | (411       | )          |
| Net earnings                                     |       |                    |       |        |       |           |       | 6,157        |       |              |       |                |       | 6,157      |       |
| **BALANCES  AT JULY 2, 2006**                    | ** ** | **20,378**              | ** ** | **$**       | **20**     | ** **     | **$**      | **37,980**   | ** ** | **($51**          | **)**      | **$**               | **0**      | ** ** | **$**      | **4,363** | ** ** | **$** | **42,312** | ** ** |
| ** **                                       |       |                    |       |        |       |           |       |         |       |              |       |                |       |       |       |
| ** **                                       |       |                    |       |        |       |           |       |         |       |              |       |                |       |       |       |
| **2005**                                         | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES  AT JANUARY 2, 2005**                 | ** ** | **19,480**              | ** ** | **$**       | **19**     | ** **     | **$**      | **32,767**   | ** ** | **$**             | **(1,205** | **)**               | **$**      | **(6**     | **)**      | **$** | **(6** | **)** | **$** | **31,569** | ** ** |
| Reduction of  deferred compensation              |       |                    |       |        |       |           |       |         |       | 2                 |       |                |       | 2          |       |
| Common stock  issued                             |       | 675                     |       | 1           |       | 2              |       |         |       |              |       |                |       | 3          |       |
| Effect of  share-based compensation              |       |                    |       |        |       | 800            |       |         |       |              |       |                |       | 800        |       |
| Interest on  common shares subject to repurchase |       |                    |       |        |       | (21            | )          |         |       |              |       |                |       | (21        | )          |
| Other  comprehensive loss                        |       |                    |       |        |       |           |       |         |       |              |       | (36                 | )          | (36        | )          |
| Net loss                                         |       |                    |       |        |       |           |       | (2,028       | )          |              |       |                |       | (2,028     | )          |
| **BALANCES AT JULY 3, 2005**                     | ** ** | **20,155**              | ** ** | **$**       | **20**     | ** **     | **$**      | **33,548**   | ** ** | **$**             | **(3,233** | **)**               | **$**      | **(4**     | **)**      | **$** | **(42** | **)** | **$** | **30,289** | ** ** |

 

See notes to condensedfinancial statements

5

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**WPT ENTERPRISES, INC.Condensed Statements of Cash FlowsSix Months ended July 2, 2006 and July 3, 2005(unaudited)**

 
| ** **                                                                                             | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                             | ** ** | **(In thousands)** | ** ** |
| **OPERATING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net earnings  (loss)                                                                                   |       | $                       | 6,157      |       | ($2,028    | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |       |                    |       |       |       |
| Depreciation                                                                                           |       | 97                      |       | 58         |       |
| Production  depreciation                                                                               |       | 158                     |       | 126        |       |
| Share-based  compensation expense                                                                      |       | 2,293                   |       | 1,010      |       |
| Realized gain on  sale of investment                                                                   |       | (5,675                  | )          | —     |       |
| Income taxes                                                                                           |       | 1,457                   |       | —     |       |
| Bad debts                                                                                              |       | 27                      |       | 47         |       |
| Change in  operating assets and liabilities:                                                           |       |                    |       |       |       |
| Accounts  receivable                                                                                   |       | 1,124                   |       | 644        |       |
| Inventory                                                                                              |       | 4                       |       | 16         |       |
| Deferred  television costs                                                                             |       | 904                     |       | 511        |       |
| Other                                                                                                  |       | 155                     |       | (104       | )          |
| Accounts payable                                                                                       |       | (710                    | )          | 248        |       |
| Due to parent                                                                                          |       | —                  |       | (15        | )          |
| Accrued expenses                                                                                       |       | 810                     |       | 22         |       |
| Deferred revenue                                                                                       |       | (1,799                  | )          | 168        |       |
| Net cash  provided by operating activities                                                             |       | 5,002                   |       | 703        |       |
|                                                                                                   |       |                    |       |       |       |
| **INVESTING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                                    |       | (1,836                  | )          | (757       | )          |
| Proceeds from  sale of investment                                                                      |       | 5,686                   |       |       |       |
| Short-term  investments, purchases                                                                     |       | (24,981                 | )          | (28,974    | )          |
| Short-term  investments, sales/maturities                                                              |       | 21,172                  |       | 30,101     |       |
| Net cash  provided by investing activities                                                             |       | 41                      |       | 370        |       |
|                                                                                                   |       |                    |       |       |       |
| **FINANCING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** ** | ** ** |
| Increase in  restricted cash                                                                           |       | (196                    | )          | (2         | )          |
| Proceeds from  stock option exercises                                                                  |       | 1                       |       | 3          |       |
| Net cash  provided by (used in) financing activities                                                   |       | (195                    | )          | 1          |       |
|                                                                                                   |       |                    |       |       |       |
| Net increase in  cash and cash equivalents                                                             |       | $                       | 4,848      |       | $          | 1,074 |   |
| Cash and cash  equivalents - beginning of period                                                       |       | 1,737                   |       | 4,525      |       |
| **Cash and cash equivalents - end  of period**                                                         |       | $                       | 6,585      |       | $          | 5,599 |   |

 

See notes to condensedfinancial statements

 

6

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**WPTENTERPRISES, INC.**

**Notes to Condensed Financial Statements**

**(Unaudited)**

**1. BASIS OF PRESENTATION**

These condensed financial statements have beenprepared by the Company pursuant to the rules and regulations of the Securitiesand Exchange Commission (SEC) applicable to interim financial information.Accordingly, certain information normally included in the annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America has been condensed or omitted.  For further information, please refer to theannual audited financial statements of the Company, and the related notes,included within the Company’s Annual Report on Form 10-K for the fiscal yearended January 1, 2006, previously filed with the SEC, from which theinformation as of that date is derived.

In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included. The results for the current interim period are not necessarilyindicative of the results to be expected for the full year.

Certainminor reclassifications to amounts previously reported have been made toconform to the current period presentation.

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

Basic earnings (loss) per common share is calculatedby dividing net income (net loss) by the weighted average number of commonshares outstanding during the period. Shares for stock options granted toemployees and consultants of the Company are included in the computation afterthe options have vested because the shares are issuable for relatively minimalcash consideration in relation to the fair value of the options (Note 3).Diluted earnings (loss) per common share is calculated by adjusting weightedaverage outstanding shares, assuming conversion of all potentially dilutivestock options and awards (common stock equivalents). However, common stockequivalents are not considered in the calculation for loss periods because todo so would be anti-dilutive.

**3.SHARE-BASED COMPENSATION**

The Company has adopted the board-approved, 2004 StockIncentive Plan (the “2004 Plan”) that is authorized to grant stock awards topurchase up to 3,120,000 shares of common stock, including options topurchase up to 1,120,000 shares of common stock issued to employees andconsultants that were previously outstanding under a previous stock incentiveplan at the time of the Company’s conversion to a publicly-traded company.  On May 31, 2006, the shareholders of theCompany approved an amendment to the 2004 Plan to increase the number of sharesof common stock reserved for issuance from 3,120,000 shares to 4,200,000shares.  Under the 2004 Plan, optiongrants vest in equal installments over three-year and five-year periods,beginning on the first anniversary of the date of each grant and will continueon each subsequent anniversary date until the option is fully vested. Theemployee must be employed with the Company on the anniversary date in order tovest in any shares that year. Vested options are exercisable for ten years fromthe date of grant; however, if the employee is terminated (voluntarily orinvoluntarily), any unvested options as of the date of termination will beforfeited.  The Company issues new sharesof common stock upon exercise of options.

In the firstquarter of 2006, the Company adopted Statement of Financial Accounting Standards(SFAS) No. 123(R), *Share-BasedPayment-Revised 2004*, which requires the measurement and recognitionof compensation expense for stock options and other share-based compensation toemployees and directors based on the fair value of those awards at the date ofgrant. The Company adopted SFAS 123(R) using the “modified prospectivetransition” method that requires the Company to recognize share-basedcompensation for all new and unvested share-based awards that are ultimatelyexpected to vest as the requisite service period is rendered; accordingly, theCompany’s financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R).  In March 2005, the SEC issued Staff AccountingBulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has appliedcertain provisions of SAB 107 in its adoption of SFAS 123(R). Previously, theCompany accounted for share-based compensation to employees and directors usingthe intrinsic value method in accordance with Accounting Principles Board No.25, *Accounting for Stock Issued to Employees*(APB25*)*. For the six months ended July 2, 2006, the effect of the change from APB25 to SFAS 123(R) was to decrease net earnings and diluted earnings per shareby $2.3 million and $0.11, respectively.

The Company uses theBlack-Scholes option-pricing model to estimate the fair value and compensationcost associated with employee incentive stock options in accordance with SFAS123(R).  The bases for the keyassumptions included in the model are as follows:

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·                  Annualizedvolatility - As the Company has limited operating history and no definitivepeer or peer groups, expected volatility was based on historical volatility ofthe Company’s stock since it began trading in August 2004.

·                  Forfeiture rate –The Company used historical data to estimate employee departure behavior inestimating future forfeitures.

·                  Expected term –Due to the Company’s limited operating history including stock option exercisesand forfeitures, the Company calculated expected term using the “SimplifiedMethod” in accordance with SAB 107.

·                  Risk freeinterest rate - For periods within the expected term of the share option, riskfree interest rate is based on the U.S. Treasury yield curve in effect at thetime of grant.

Following is a summary ofthe assumptions used to estimate the weighted-average fair value of the stockoptions granted using the Black-Scholes pricing model:
|                              | ** ** | **Three Months Ended  July 2, 2006** | ** ** | **Six Months Ended  July 2, 2006** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Risk free  interest rate     |       | 5.06                                                     | %          | 4.68                                                   | %          |
| Expected life                |       | 6.5 years                                                |       | 6.5 years                                              |       |
| Expected  dividend yield     |       | 0                                                        | %          | 0                                                      | %          |
| Weighted-average  fair value |       | $                                                        | 3.80       |                                                   | $          | 4.24 |   |
| Annualized volatility        |       | 78.91                                                    | %          | 81.57                                                  | %          |
|                              |            |                                                          |            |                                                        |            |  |  |

The table below summarizesshare-based compensation expense, net of tax, related to employee stock optionsunder SFAS 123(R), which was allocated as follows (in thousands):
|                                                            | ** ** | **Three Months Ended  July 2, 2006** | ** ** | **Six Months Ended  July 2, 2006** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                       |       |                                                     |       |                                                   |       |
| Total cost of  share-based payment plans                   |       | $                                                        | 678        |                                                   | $          | 2,280 |   |
| Amounts  capitalized in deferred television costs          |       | —                                                   |       | —                                                 |       |
| Amounts charged  against income, before income tax benefit |       | $                                                        | 678        |                                                   | $          | 2,280 |   |
| Amount of related  income tax benefit recognized in income |       | —                                                   |       | —                                                 |       |

For the six months ended July 2, 2006, no income taxbenefit was recognized in the statement of earnings (loss) for share-basedcompensation arrangements.  Managementassessed the likelihood that deferred tax assets relating to future taxdeductions from share-based compensation will be recovered from future taxableincome and determined that a valuation allowance was required due touncertainty as to realization.

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The following table summarizes stock option activitythrough the three and six months ended July 2, 2006 and July 3, 2005:
| ** **                         | ** ** | ** **      | ** ** | **Number of Common Shares** | ** ** |
|------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **Options**     | ** ** | ** **                                 | ** ** | **Available** | ** ** | **Weighted Avg.** | ** ** |
| ** **                         | ** ** | **Outstanding** | ** ** | **Exercisable**                            | ** ** | **For Grant** | ** ** | **Exercise Price** | ** ** |
|                               |       |            |       |                                       |       |   |   |   |   |
| **   2006**              |       |            |       |                                       |       |   |   |   |   |
| **Balance  at January 1, 2006**    |       | 2,158,000       |       | 620,333                                    |       | 283,667 |   | $ | 7.14 |   |
| Authorized                         |       |            |       |                                       |       |   |   |   |   |
| Granted                            |       | 219,000         |       |                                       |       | (219,000 | ) | $ | 6.20 |   |
| Forfeited  /cancelled/expired      |       | (159,333        | )          |                                       |       | 159,333 |   | $ | 8.13 |   |
| Exercised                          |       | (115,000        | )          |                                       |       |   |   | $ | 0.0049 |   |
| **Balance  at April 2, 2006** |       | 2,102,667       |       | 785,500                                    |       | 224,000 |   | $ | 7.36 |   |
| Authorized                         |       |            |       |                                       |       | 1,080,000 |   |   |   |
| Granted                            |       | 109,500         |       |                                       |       | (109,500 | ) | $ | 5.18 |   |
| Forfeited  /cancelled/expired      |       | (153,501        | )          |                                       |       | 153,501 |   | $ | 10.07 |   |
| Exercised                          |       | (105,000        | )          |                                       |       |   |   | $ | 0.0049 |   |
| ** **                         | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at July 2, 2006**   |       | 1,953,666       |       | 619,333                                    |       | 1,348,001 |   | $ | 7.42 |   |
|                               |       |            |       |                                       |       |   |   |   |   |
| **    2005**             | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  at January 2, 2005**    |       | 2,561,000       |       | 560,000                                    |       | 559,000 |   | $ | 4.61 |   |
| Authorized                         |       |            |       |                                       |       |   |   |   |   |
| Granted                            |       | 24,500          |       |                                       |       | (24,500 | ) | $ | 19.50 |   |
| Forfeited  /cancelled/expired      |       | (32,000         | )          |                                       |       | 32,000 |   | $ | 8.60 |   |
| Exercised                          |       | (640,000        | )          |                                       |       |   |   | $ | 0.0049 |   |
| **Balance  at April 3, 2005** |       | 1,913,500       |       | 200,000                                    |       | 566,500 |   | $ | 6.27 |   |
| Authorized                         | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Granted                            |       | 34,000          |       |                                       |       | (34,000 | ) | $ | 17.25 |   |
| Forfeited  /cancelled/expired      |       | (31,500         | )          |                                       |       | 31,500 |   | $ | 8.31 |   |
| Exercised                          |       | (35,000         | )          |                                       |       |   |   | $ | 0.0049 |   |
| ** **                         | ** ** | ** **      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at July 3, 2005**   |       | 1,881,000       |       | 165,000                                    |       | 564,000 |   | $ | 6.55 |   |

The following table summarizes significant ranges ofoutstanding and exercisable options as of July 2, 2006**:**
| **Options Outstanding**                                                    | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices**                                         | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Avg.  Remaining  Contractual  Life** | ** ** | **Weighted  Avg.  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Avg.  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                                                                      | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $            0.0049 |       |                         | 225,000    |   | 5.65 |   | $ | 0.0049 |   | $ | 1,353,398 |   | 225,000 |   | $ | 0.0049 |   | $ | 1,353,398 |   |
| $     5.18  – 9.92                                |       |                         | 1,464,667  |   | 8.45 |   | 7.59 |   | 87,780 |   | 378,334 |   | 8.05 |   | — |   |
| $ 11.95 – 14.51                                                       |       |                         | 225,333    |   | 9.09 |   | 12.24 |   | — |   | 8,666 |   | 14.51 |   | — |   |
| $ 15.05 – 19.50                                                       |       |                         | 38,666     |   | 9.03 |   | 15.99 |   | — |   | 7,333 |   | 17.71 |   | — |   |
|                                                                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                            |       | 1,953,666                    |       | 8.21 |   | $ | 7.42 |   | $ | 1,441,178 |   | 619,333 |   | $ | 5.33 |   | $ | 1,353,398 |   |

 

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Theaggregate intrinsic value in the preceding table****represents the total pre-tax intrinsic value, based on theCompany’s closing stock price of $6.02 on June 30, 2006, which would have beenreceived by the option holders had they exercised their options as of thatdate.  As of July 2, 2006, the totalnumber of “in-the-money” options exercisable was 225,000. The total intrinsicvalue of options exercised during the six months ended July 2, 2006 was $1.4million.

Forthe six months ended July 2, 2006, total compensation cost related to SFAS123(R) was approximately $2.3 million, of which $92,000 relates to the totalfair value of the shares vested during the period.  As of July 2, 2006, total compensation costrelated to non-vested share-based options not yet recognized was $5.7 million, whichis expected to be recognized over the next 33 months on a weighted averagebasis.

Hadthe Company reported compensation costs as determined by the fair value methodof accounting for option grants to employees and directors under SFAS 123, *Accounting for Stock-based Compensation* (SFAS 123) in 2005,net loss and net loss per common share would approximate the following proforma amounts (in thousands, except per share data):
|                                                                                                      | ** ** | **Three Months Ended  July 3, 2005** | ** ** | **Six Months Ended  July 3, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Net loss as  reported                                                                                |       | $                                                        | (426       | )                                                      | $          | (2,028 | ) |
| Deduct: Total  equity-based compensation expense determined under the fair value method, net  of tax |       | (596                                                     | )          | (1,165                                                 | )          |
| Pro forma net  loss under SFAS 123                                                                   |       | $                                                        | (1,022     | )                                                      | $          | (3,193 | ) |
|                                                                                                 |       |                                                     |       |                                                   |       |
| Net loss per  common share – basic and diluted -as reported                                     |       | $                                                        | (0.02      | )                                                      | $          | (0.10 | ) |
| Pro forma net loss per  common share – basic and diluted                                        |       | $                                                        | (0.05      | )                                                      | $          | (0.17 | ) |

During the three and six months ended July 3, 2005,compensation expense of $0.6 million and $1.0 million, respectively, related tostock options issued to consultants has not been included in the table above asthese options are already recorded at estimated fair value.

For purposes ofpro forma disclosures, the estimated fair value of options is amortized toexpense over the options’ vesting period. The weighted-average fair value ofeach option granted was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:
|                              | ** ** | **Three Months Ended  July 3, 2005** | ** ** | **Six Months Ended  July 3, 2005** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Risk free  interest rate     |       | 3.69                                                     | %          | 3.91                                                   | %          |
| Expected life                |       | 6 years                                                  |       | 6 years                                                |       |
| Expected  dividend yield     |       | —                                                   |       | —                                                 |       |
| Weighted-average  fair value |       | $                                                        | 12.17      |                                                   | $          | 13.13 |   |
| Annualized volatility        |       | 79.54                                                    | %          | 80.84                                                  | %          |
|                              |            |                                                          |            |                                                        |            |  |  |

 

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**4.INVESTMENT**

InMarch 2006, the Company sold 630,000 common shares of its then 12% interest inPokerTek, Inc. at $9.03 per share, resulting in net cash proceeds ofapproximately $5.7 million. As a result of the sale, the Company realized again of approximately $5.7 million, and its ownership interest was reduced to450,000 shares, or 5%.

TheCompany accounts for its investment in PokerTek at fair market value andclassified it as “available for sale.”

**5.SEGMENT INFORMATION**

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 July 2, 2006 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  Products** | ** ** | **Online  Gaming** | ** ** | **Corporate  Alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 8,524      |                   | $          | 872                |       | $                        | 821        |          | $          | 812       |       | $ | — |   | $ | 11,029 |   |
| Cost of revenues |       | 3,663       |       | 101                    |       | 381                |       | 31                       |       | —        |       | 4,176     |       |
| Gross profit     |       | 4,861       |       | 771                    |       | 440                |       | 781                      |       | —        |       | 6,853     |       |
| Total assets     |       | 1,877       |       | 1,198                  |       | 764                |       | 14                       |       | 44,647        |       | 48,500    |       |
| Depreciation     |       | 86          |       | —                 |       | —             |       | —                   |       | 49            |       | 135       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

**Threemonths ended July 3, 2005 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  Products** | ** ** | **Online  Gaming** | ** ** | **Corporate  Alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 4,999      |                   | $          | 1,195              |       | $                        | —     |          | $          | 406       |       | $ | — |   | $ | 6,600 |   |
| Cost of revenues |       | 4,216       |       | 161                    |       | —             |       | —                   |       | —        |       | 4,377     |       |
| Gross profit     |       | 783         |       | 1,034                  |       | —             |       | 406                      |       | —        |       | 2,223     |       |
| Total assets     |       | 1,297       |       | 570                    |       | 450                |       | 16                       |       | 33,944        |       | 36,277    |       |
| Depreciation     |       | 72          |       | —                 |       | —             |       | —                   |       | 37            |       | 109       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

**Sixmonths ended July 2, 2006 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  Products** | ** ** | **Online  Gaming** | ** ** | **Corporate  Alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 12,979     |                   | $          | 1,663              |       | $                        | 1,732      |          | $          | 1,108     |       | $ | — |   | $ | 17,482 |   |
| Cost of revenues |       | 5,499       |       | 235                    |       | 789                |       | 73                       |       | —        |       | 6,596     |       |
| Gross profit     |       | 7,480       |       | 1,428                  |       | 943                |       | 1,035                    |       | —        |       | 10,886    |       |
| Depreciation     |       | 158         |       | —                 |       | 1                  |       | —                   |       | 96            |       | 255       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

 

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**Sixmonths ended July 3, 2005 (in thousands):**

|                  | ** ** | **Studios** | ** ** | **Consumer  Products** | ** ** | **Online  Gaming** | ** ** | **Corporate  Alliances** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------|------------|-------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|-----------|------------|
| Revenues         |       | $           | 7,662      |                   | $          | 2,342              |       | $                        | —     |          | $          | 699       |       | $ | — |   | $ | 10,703 |   |
| Cost of revenues |       | 7,369       |       | 195                    |       | —             |       | —                   |       | —        |       | 7,564     |       |
| Gross profit     |       | 293         |       | 2,147                  |       | —             |       | 699                      |       | —        |       | 3,139     |       |
| Depreciation     |       | 126         |       | —                 |       | —             |       | —                   |       | 58            |       | 184       |       |
|                  |            |             |            |                        |            |                    |            |                          |            |               |            |           |            |  |  |  |  |  |  |

**6.ONLINE GAMING AGREEMENTS**

On June 21, 2006, theCompany entered into and executed a Source Code License and Service Agreement,effective as of June 16, 2006 (the CyberArts Agreement), with CyberArtsLicensing, LLC (CyberArts), pursuant to which CyberArts granted to the Companya perpetual, nonexclusive and nontransferable license for the object code ofcertain poker software and related banking and cardroom management softwaretools (the Software) for the Company’s development of its own online pokerroom. The Company paid CyberArts a one-time license fee of $1.3 million for theSoftware upon the execution of the Agreement, which is included in Property andEquipment, as well as a payment of $180,000 for the first year of CyberArts’support and maintenance for the Software. During the term of the CyberArtsAgreement, the Company is obligated to pay an annual fee of $180,000, subjectto annual increases of up to a maximum of 9% in each year, for continuingsupport and maintenance, payable on the anniversary of the effective date of theagreement. The support and maintenance services can be cancelled by eitherparty at any time upon 60 days notice. Additionally, at the Company’s requestand expense, CyberArts shall provide the Company with custom development workon the Software.  The Company also hasthe right to purchase the source code for the Software at any time during theterm of the CyberArts Agreement for an additional $2.7 million.

On July 10, 2006, theCompany entered into and executed Amendment No. 1 (the Amendment) to the BrandLicense and Online Casino Operating Agreement with WagerWorks Alderney 3Limited, an Alderney company and a wholly-owned subsidiary of WagerWorks, Inc.(WagerWorks), dated as of January 19, 2005 (the Wagerworks Agreement).   The parties amended the Wagerworks Agreementto permit the Company to (i) own and operate its own online poker room, and(ii) offer multi-player, real-money poker gaming via cellular phone usingsoftware provided by a particular vendor.  In addition, the Amendment specified a termination date for WagerWorks’operation of the Company’s online poker room (the Poker Room) on the earlier tooccur of (i) August 1, 2007, (ii) thirty (30) days following the Company’srequest to WagerWorks to terminate operation of the Poker Room, or (iii) sixty(60) days following WagerWorks’ notice to the Company that it will terminateits operation of the Poker Room. Furthermore, the parties agreed to increaseWagerWorks’ share of revenue derived from the operation of the Poker Room to75% from the original 25%. The changed revenue share percentage reflects anattempt to incentivize WagerWorks to provide a quality online poker room duringthe transition by the Company to the operation of its own online pokerroom.  All terms associated with theonline casino that are contained within the original Wagerworks Agreement remainthe same.

**7.****              SUBSEQUENT EVENTS**

On July 12, 2006, theCompany entered into and executed a licensing agreement with 3G Scene Limitedpursuant to which the Company granted 3G Scene a non-exclusive license to usethe World Poker Tour brand in conjunction with the promotion of its real-moneymobile gaming application.  Pursuant tothe agreement, 3G Scene will offer real-money mobile games solely injurisdictions where such gaming is not restricted.  In consideration for the license, the Companyshall be entitled to 50% of net revenues. In a separate agreement entered into on July 31, 2006, the Companyacquired an approximate 10% ownership interest in 3G Scene for approximately$2.9 million.   

On July 19, 2006 theCompany was served with a complaint by seven poker players alleging that it hasengaged in, among other things, certain anti-competitive and unfair businesspractices by requiring players to execute participant releases in connectionwith tournaments it films through its exclusive arrangements with casinos thathas allegedly limited the number of televised poker tournaments that highstakes professional poker players can play in. It is management’s belief that the claims asserted in the complaint aremisleading and without merit. The Company is unable at this time to estimate arange of loss, if any, in connection with this matter and, accordingly, hasmade no provision therefor.

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**WPTENTERPRISES, INC.**

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

**And Results of Operations**
| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

**Overview**

Wecreate branded entertainment and consumer products driven by the development,production and marketing of televised programming based on gaming themes. OurWorld Poker Tour®,or WPT, television series, based on a series of high-stakes poker tournaments,airs in the U.S. on the Travel Channel and in more than 150 territoriesglobally. We have four operating units:

*WPT Studios*, our multi-media entertainmentdivision, generates revenue through the domestic and international licensing ofbroadcast and telecast rights and through casino host fees. Since ourinception, the WPT Studios division has been responsible for approximately 76%of our total revenue. We license the WPT series to The Travel Channel, L.L.C.(TRV or Travel Channel) for telecast in the United States under an exclusivelicense agreement. We also have license agreements for the distribution of ourWorld Poker Tour episodes in over 150 territories, for which we receive licensefees, net of our agent’s sales fee and agreed upon sales and marketingexpenses. In addition, during January 2006, we signed a license agreement withTRV to telecast our new Professional Poker TourTM, or PPT, series, which began airing inthe third quarter of 2006. We also collect annual host fees from the membercasinos that host World Poker Tour events (our member casinos).

Wehave entered into a series of agreements with TRV for the United Statesdistribution of the WPT television series (the WPT Agreements). Since ourinception, fees from TRV under the WPT Agreements and an agreement with TRVrelating to the PPT series have been responsible for approximately 60% of our totalrevenue. For each season covered by the WPT Agreements and related options, TRVhas exclusive rights to exhibit the episodes in that season an unlimited numberof times on its television network (or any other television network owned bythe Discovery Channel) in the U.S. for four years (three years for the episodesin Season One). We have produced four complete seasons of the World Poker Tourseries under the WPT Agreements, and Season Five is currently in production.TRV continues to hold options to license the Seasons Six and Seven.

Underthe WPT Agreements, TRV pays fixed license fees for each episode we produce,which are payable at various times during the pre-production, production andpost-production process and are recognized upon TRV’s receipt and acceptance ofthe completed episode. Television production costs related to WPT episodes aregenerally capitalized and charged to the cost of revenues as 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. The following table describes the timing of Seasons One through Fiveof the World Poker Tour series, including the delivery and exhibition of theepisodes each season:
| World Poker  Tour Season | ** ** | **Date of TRV  Agreement or  Option for  Season** | ** ** | **Number of  episodes  (including  specials)** | ** ** | **Production Period and  Delivery of Episodes to TRV** | ** ** | **Initial Telecast of Episodes in  Season** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Season One                         |       | January  2003                                                         |       | 15                                                  |       | February  2002 – June 2003                                                      |       | March  2003 – June 2003                                    |       |
| Season Two                         |       | August  2003                                                          |       | 25                                                  |       | July  2003 – June 2004                                                          |       | December  2003 – September 2004                            |       |
| Season Three                       |       | May  2004                                                             |       | 21                                                  |       | May  2004 – April 2005                                                          |       | October  2004 – August 2005                                |       |
| Season Four                        |       | March  2005                                                           |       | 21                                                  |       | May  2005 – April 2006                                                          |       | October  2005 – June 2006                                  |       |
| Season Five                        |       | March 2006                                                            |       | 22                                                  |       | May 2006 – April 2007  (expected)                                               |       | October 2006 – June  2007 (expected)                       |       |

In January 2006, we enteredinto an agreement with TRV for the U.S. distribution of the PPT televisionseries. Similar to the WPT Agreements and related options, TRV has exclusiverights to exhibit the PPT episodes in that season an unlimited number of timeson its television network (or any other television network owned by theDiscovery Channel) in the U.S. for four years. Under our agreement with TRVregarding PPT, TRV had options to license the following three seasons (SeasonsTwo through Four). In accordance with our accounting policy of not capitalizingproduction costs until a firm commitment for distribution is in place, weexpensed approximately $4.3 million of production expenses related to theProfessional Poker Tour during fiscal 2004 and 2005. With the execution of the PPTagreement, in the first quarter of 2006, we began capitalizing additionalexpenses associated with the production of the PPT series that are now beingexpensed as the first season episodes are delivered to the Travel Channel.  During the first six months of 2006, wedelivered ten episodes of the PPT series, resulting in revenue of $3.0 millionand cost of revenues of $1.0 million.

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On May1, 2006, TRV notified the Company that it had chosen to not exercise its optionfor Season II and subsequent seasons of the PPT.  The PPT’s first season, which includes 24two-hour episodes, has already been filmed and began to air on TRV in July2006.  The Company has begun discussionsto find a new broadcast partner for the PPT going forward.

Further,under the WPT and PPT Agreements, TRV has the right to receive a percentage ofour adjusted gross revenues from international television licenses, productlicensing and publishing, merchandising and certain other sources, afterspecified minimum amounts are met.  Forthe six months ended July 2, 2006, we recognized $0.3 million of Travel Channelparticipation expense that was recorded in cost of revenues.

*WPTConsumer Products*, our branded consumer products division,generates revenues principally through royalties from the licensing of ourbrand to companies seeking to use the World Poker Tour brand and logo in theretail sales of their consumer products. In addition, this business unitgenerates revenue from direct sales of company-produced branded merchandise. Wehave generated significant revenues from existing licensees, including USPlaying Card, Hands-On Mobile, and MDI. We also have a number of licensees thatare developing new licensed products including electronic, casino-based,poker-related gaming machines from IGT, and interactive television games fromPixel Play.

*WPT CorporateAlliances*, our sponsorship and event management division,generates revenue through corporate sponsorship and management of televised andlive events. Our sponsorship program uses the professional sports model as amethod to foster entitlement sponsorship opportunities and naming rights tomajor corporations.  Anheuser-Busch hasbeen the largest source of revenues through its sponsorship of Seasons II, IIIand IV of the World Poker Tour series on TRV. During the third quarter of 2006,we completed an agreement with Anheuser-Busch to continue its sponsorship forSeason V of the World Poker Tour. During the second quarter of 2006, wefinalized a sponsorship agreement with Xyience, Inc., a non-alcoholic energydrink developer and distributor, to promote its product as the “official energydrink” of Season V and Season VI of the World Poker Tour.  We will recognize revenues from thisagreement when the programs are broadcast beginning in 2007. 

*WPT Online Gaming*, our online poker andcasino gaming division, generates revenue through our agreement withWagerWorks, Inc. (WagerWorks) pursuant to which in January 2005 we granted toWagerWorks a license to utilize the WPT brand to create a WPT-branded onlinegaming website, WPTonline.com, which features an online poker room and anonline casino with a broad selection of slots and table games.  In exchange for the license of our brand toWagerWorks, WagerWorks shares with us a percentage of all net revenue itcollects from the operation of the online poker room and online casino.Although any Internet user can access WPTonline.com via the World Wide Web, thewebsite does not permit bets to be made from players in the U.S. and otherrestricted jurisdictions. WPTonline.com generated approximately $1.7 million inrevenue for the six months ended July 2, 2006, compared to costs of revenues ofapproximately $0.8 million.

In2006, we decided to develop our own software for our online poker room.  On June 21, 2006, we entered into andexecuted a Source Code License and Service Agreement, effective as of June 16,2006 (the CyberArts Agreement) with CyberArts Licensing, LLC (CyberArts),pursuant to which CyberArts granted to us a perpetual, nonexclusive andnontransferable license for the object code of certain poker software andrelated banking and cardroom management software tools (the Software) for thedevelopment of our own online poker room. We paid CyberArts a one-time licensefee of $1.3 million for the Software upon the execution of the Agreement, aswell as a payment of $180,000 for the first year of CyberArts’ support andmaintenance for the Software. During the term of the CyberArts Agreement, weare obligated to pay CyberArts an annual fee of $180,000, subject to annualincreases of up to a maximum of 9% in each year, for continuing support andmaintenance, payable on the anniversary of the effective date of the Agreement.The support and maintenance services can be cancelled by either party at anytime upon 60 days notice. Additionally, at our request and expense, CyberArtsshall provide us with custom development work on the Software.  We also have the right to purchase the sourcecode for the Software at any time during the term of the CyberArts Agreementfor an additional $2.7 million.  TheCyberArts agreement enables us to develop, manage, market and handle customerservice for the online poker business from our own international headquarters.

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

On July 12, 2006, weentered into and executed a licensing agreement with 3G Scene Limited, pursuantto which we granted 3G Scene a non-exclusive license to use the World PokerTour brand in conjunction with the promotion of its real-money mobile gamingapplication.  Pursuant to the agreement,3G Scene will offer real-money mobile games solely in jurisdictions where suchgaming is not restricted.  Inconsideration for the license, we shall be entitled to 50% of net revenues. Ina separate agreement entered into on July 26, 2006, we acquired an approximate10% ownership interest in 3G Scene for approximately $2.9 million.   

## **Results of Operations**

**Six Months Ended July 2, 2006Compared to the Six Months Ended July 3, 2005**

*Revenues.*Our total revenues increased by $6.8 million (63%) during thesix months ended July 2, 2006 compared to the six months ended July 3, 2005.Domestic television licensee fees increased $4.8 million (86%) in the first sixmonths of 2006 compared to the 2005 period. The increase was primarily a resultof the delivery in the first six months of sixteen episodes of Season IV of theWPT television series versus the delivery of thirteen episodes of Season III inthe 2005 period, and the delivery of ten episodes of Season I of the PPTtelevision series in the first six months versus no episodes of the PPTdelivered in the 2005 period. Product licensing revenues decreased $0.7 million(31%) in the first six months of 2006 compared to the 2005 period. The decreasewas due, in part, to lower revenues from US Playing Card and our lottery gamepartner, MDI, which were partially offset by increased mobile gaming sales fromHands-On Mobile (formerly Mforma). International television license feesincreased $0.5 million (48%) due to increased distribution agreements in thefirst quarter of 2006 compared to the 2005 period.  Specifically, we have expanded intoadditional territories and have agreements now for WPT Seasons I, II andIII.  Online gaming, host fees,sponsorship and merchandise revenues also increased $2.2 million (115%) in thefirst six months of 2006 compared to the 2005 period, of which $1.7 million isdue to the online gaming revenue during 2006, which had not yet been launchedduring the first six months of 2005, as well as increased sponsorship fees forSeason IV versus Season III.

*Cost ofrevenues*. Cost of revenues decreased by approximately $1.0million (13%) in the first six months of 2006 compared to the 2005 period. Thedecrease was primarily due to lower recognized PPT production costs, as webegan capitalizing these costs in the first quarter of 2006 versus previouslyexpensing them in 2005 since no distribution deal had been reached.  During the first six months of 2006, costs ofrevenues associated with the PPT were $1.0 million compared to $3.0 million inthe same period in 2005. Additionally, a decrease of $0.8 million related tonon-cash compensation expense related to consultant stock options contributedto the favorable variance. The favorable variance was partially offset by $0.8million in online gaming cost of revenues during the first six months of 2006compared to $0 in the same period in 2005.

*Grossmargins.*  Overall grossmargins were 62% in the first six months of 2006 compared to 29% in the firstsix months of 2005.  Domestic televisionlicensing margins were 49% in the first six months compared to negative 27% inthe 2005 period, with the increase primarily due to the recognition of a largerportion of PPT production costs in 2005, since no distribution deal had beenreached during the early stages of production, combined with increased revenuesfrom sponsorship fees, online gaming and international distribution licensefees.

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*Sellingand administrative expenses.*Selling and administrativeexpenses increased $3.8 million (68%) in the first six months of 2006 comparedto the 2005 period. This increase was primarily due to an additional $2.3million of share-based compensation expense, resulting from the implementationof Statement of Financial Accounting Standards (SFAS) No. 123(R), *Share-Based Payment-Revised 2004*. Therewas no share-based compensation expense related to employee and director stockoptions and stock purchases recognized during the six months ended July 3,2005, pursuant to the accounting guidance in effect during that time period.

*Otherincome*. We recognized $5.7 million in gain on sale ofinvestment in the first six months of 2006, relating to the sale of a portionof our stock in PokerTek, Inc., which went public in October 2005. Interestincome increased by $0.3 million (55%) for the first six months of 2006compared to the 2005 period, primarily due to higher cash equivalents andshort-term investment balances.

*Incometaxes*.  Provision forincome taxes was $1.6 million and $0 for the first six months of 2006 and 2005,respectively, and the effective tax rate for the first six months of 2006 and2005 was approximately 30% and 0%, respectively. The rate increased in 2006 dueto positive taxable income that we expect to generate that will exceed our netoperating loss carryforward from 2005. A valuation allowance was previouslyrecorded for the net deferred tax asset related to the 2005 net operating losscarryforward.

*Netearnings (loss).* Our net earnings before tax of $7.8 millionand net earnings of $6.2 million for the first six months of 2006 wereprimarily a result of our gain on sale of investment of $5.7 million, as wellas earnings from operations of $1.4 million. These factors were partiallyoffset by the effects of the adoption of SFAS 123(R) as of January 1,2006.  Net loss was $2.0 million for the2005 period. For the balance of 2006, excluding future stock grants, we expectcharges for share-based compensation under SFAS No. 123(R) to be approximately$0.7 million each quarter.

**Three Months Ended July 2, 2006Compared to the Three Months Ended July 3, 2005**

*Revenues.*Our total revenues increased by $4.4 million (67%) during thethree months ended July 2, 2006 compared to the three months ended July 3, 2005.Domestic television licensee fees increased $3.7 million (102%) in the secondquarter of 2006 compared to the 2005 period. The increase was primarily aresult of the delivery in the second quarter of ten episodes of Season IV ofthe WPT television series versus the delivery of eight episodes of Season IIIin the 2005 period, and the delivery of nine episodes of Season I of the PPTtelevision series in the first quarter versus no episodes of the PPT deliveredin the 2005 period. Product licensing revenues decreased $0.3 million (28%) inthe second quarter of 2006 compared to the 2005 period. The decrease was due,in part, to lower license revenues from US Playing Cards and MDI, which werepartially offset by increased mobile gaming sales from Hands-On Mobile. Onlinegaming, host fees, sponsorship and merchandise revenues also increased $1.0million (83%) in the second quarter of 2006 compared to the 2005 period, ofwhich $0.8 million is due to the online gaming revenue during 2006, which hadlaunched at the end of the second quarter of 2005, as well as increasedsponsorship fees for Season IV versus Season III.

*Cost ofrevenues*. Cost of revenues decreased by approximately $0.2million (5%) in the second quarter of 2006 compared to the 2005 period. Thedecrease was primarily due to lower recognized PPT production costs, as webegan capitalizing these costs in the first quarter of 2006 versus previouslyexpensing them during 2005 since no distribution deal had been reached.  During the quarter, costs of revenuesassociated with the PPT were $0.9 million compared to $1.5 million in the prioryear quarter.  Additionally, a decreaseof $0.5 million in non-cash compensation expense related to consultant stockoptions contributed to the favorable variance. The favorable variance waspartially offset by $0.4 million in online gaming cost of revenues during thesecond quarter of 2006 compared to $0 in the same period in the prior year, aswell as additional episodes were delivered in the second quarter of 2006compared to the same period in the prior year.

*Grossmargins.*  Overall grossmargins were 62% in the second quarter of 2006 compared to 34% in the secondquarter of 2005.  Domestic televisionlicensing margins were 51% in the second quarter compared to negative 14% inthe 2005 period, with the increase primarily due to the recognition of a largepercentage of PPT production costs in 2005 since no distribution deal had beenreached during the early stages of production, combined with increased revenuesfrom our online gaming operations and sponsorship fees.

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*Sellingand administrative expenses.*Selling and administrativeexpenses increased $1.5 million (52%) in the second quarter of 2006 compared tothe 2005 period. This increase was primarily due to an additional $0.7 millionof share-based compensation expense, resulting from the implementation of SFAS123(R). There was no share-based compensation expense related to employee anddirector stock options and stock purchases recognized during the three monthsended July 3, 2005, pursuant to the accounting guidance in effect during thattime period.

*Otherincome*. Interest income increased by $0.2 million (87%) forthe second quarter of 2006 compared to the 2005 period, primarily due to highercash equivalents and short-term investment balances.

*Incometaxes*.  Provision forincome taxes was $0.3 million and $0 for the second quarter of 2006 and 2005,respectively, and the effective tax rate for the second quarter of 2006 and2005 was approximately 30% and 0%, respectively. The rate increased in 2006 dueto positive taxable income that we expect to generate that will exceed our netoperating loss carryforward from 2005. A valuation allowance was previouslyrecorded for the net deferred tax asset related to the 2005 net operating losscarryforward.

*Netearnings (loss).* Our higher gross margins in the secondquarter of 2006 resulted in net earnings before tax of $2.9 million and netearnings of $2.6 million for the second quarter of 2006. The 2006 resultsreflect the impact of our adoption of SFAS 123(R) as of January 1, 2006.  Net loss was $0.4 million for the 2005period.

**Liquidity and Capital Resources**

During the first sixmonths of 2006, we generated cash flow primarily through our operatingactivities and proceeds of $5.7 million from the sale of a portion of ourPokerTek investment. Our principal cash requirements consist of televisionproduction costs, payroll and benefits, professional fees, marketing costs,business insurance and office lease costs. We intend to use funds currently onhand for working capital and capital expenditures associated with the expansionof our media, online gaming and other businesses and for general corporatepurposes. We expect that cash, cash equivalents and short-term investments onhand and generated from operations will be sufficient to fund our workingcapital and capital expenditure requirements for at least the next twelvemonths.

However, we may from timeto time seek additional capital to fund our operations or fund our expansionplans as circumstances arise. To raise capital, we may seek to sell additionalequity securities, issue debt or convertible securities, or seek to obtaincredit facilities through financial institutions.

The table below setsforth our known contractual obligations as of July 2, 2006 (in thousands):
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Year 1** | ** ** | **Years  2-3** | ** ** | **Years 4-5** | ** ** | **Years 6 and  Beyond** | ** ** |
|                             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease  obligations (1) |       | $                                         | 4,313      |   | $ | 815 |   | $ | 1,713 |   | $ | 1,785 |   | $ | — |   |
| Employee  obligations (2)        |       | 250                                       |       | 250 |   | — |   | — |   | — |   |
|                             |       | $                                         | 4,563      |   | $ | 1,065 |   | $ | 1,713 |   | $ | 1,785 |   | $ | — |   |

 

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(1)       Operating lease obligationsinclude rent payments for our corporate offices pursuant to two leaseagreements. For the first lease, monthly lease payments began at approximately$38,000 and escalate to approximately $45,000 over the six-year lease term. Forthe second lease, monthly payments began $28,000 at approximately and escalateup to approximately $33,000 over the five-year lease term. The amounts setforth in the table above assume monthly lease payments through June 2011.

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

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**Critical Accounting Estimates andPolicies**

 

Althoughour financial statements necessarily make use of certain accounting estimatesby management, except as described below, we believe there are no matters thatare the subject of such estimates that are so highly uncertain or susceptibleto change as to present a significant risk of a material impact on ourfinancial condition or operating performance. Moreover, except as describedbelow, we do not employ any critical accounting policies that are selected fromamong available alternatives or require the exercise of significant managementjudgment to apply.

*Revenue recognition:*  Revenue from the domestic and internationaldistribution of our television series is recognized as earned under thefollowing criteria established by the American Institute of Certified PublicAccountants Statement of Position (SOP) No. 00-2, *Accounting by Producers or Distributors of Films*(SOP 00-2):

·             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

·             Collectibilityis reasonably assured.

Inaccordance with the terms of the WPT and PPT Agreements, we recognize domestictelevision license revenues upon the receipt and acceptance of completedepisodes.  However, due to restrictionsand practical limitations applicable to our operating relationships withforeign networks, we currently do not consider collectibility of internationaltelevision license revenues to be reasonably assured, and accordingly, we donot recognize such revenue until the distributor has received payment.  Additionally, we present internationaldistribution license fee revenues net of the distributor’s fees, as thedistributor is the primary obligor in the transaction with the ultimatecustomer pursuant to Emerging Issues Task Force (EITF) 99-19, *Reporting Revenue Gross as a Principal versus Net asan Agent*(EITF 99-19)

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

Onlinegaming revenues are recognized monthly based on detailed statements receivedfrom WagerWorks, our online gaming service provider, for online poker andcasino activity during the previous month. In accordance with EITF 99-19, we present online gaming revenues grossof WagerWorks costs, including WagerWorks management fee, royalties, creditcard processing and chargebacks that are recorded as cost of revenues, since wehave the ability to adjust price and specifications of the online gaming site,we bear the majority of the credit risk and we are responsible for the salesand marketing of the gaming site.**Weinclude certain promotional expenses related to free bets and deposit bonusesalong with customer chargebacks as deductions of revenue. All other promotionalexpenses are generally recorded as sales and marketing expenses.

Eventhosting fees are paid by host casinos for the privilege of hosting the eventsand are recognized as the episodes that feature the host casino are aired.Sponsorship revenues are recognized as the episodes that feature the sponsorare aired.  Licensing advances andguaranteed payments collected, but not yet earned, by us, as well as casinohost fees and sponsorship receipts collected prior to the airing of episodes,are classified as deferred revenue in the accompanying balance sheets.

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*Deferredtelevision costs:*  Weaccount for deferred television costs in accordance with SOP 00-2.  Deferred television costs includecapitalizable direct costs, production overhead and development costs and arestated at the lower of cost or net realizable value based on anticipatedrevenue. We have not currently anticipated any revenues in excess of thosesubject to existing contractual relationships, since we have insufficientoperating history to enable such anticipation. In January 2006, we signed a distribution agreement for thePPT with Discovery Communications, Inc., the parent company of the TravelChannel; therefore, PPT television costs began to be capitalized during thefirst quarter of 2006, and are expensed as episodes are delivered to the TravelChannel.  Marketing, distributionand general and administrative costs are expensed as incurred. Capitalizedtelevision production costs for each episode are expensed as revenues arerecognized upon delivery and acceptance by the Travel Channel of the completedepisode. Management currently estimates that 93% of capitalized deferredtelevision costs at July 2, 2006, are expected to be expensed in connectionwith episode deliveries by the end of fiscal 2006.

*Investment:*Until October 2005, we had an investment, consisting of a15% equity interest (carried at its nominal cost basis) in and a loanreceivable from PokerTek, a company formed in August 2003 to develop and marketthe PokerPro system, an electronic poker table designed to provide a fullyautomated poker room environment, to tribal casinos, commercial casinos andcard clubs. As a result of PokerTek’s initial public offering in October 2005,our ownership interest was diluted to 12%. As of July 2, 2006, Lyle Berman, whois the Chairman of our Board, and his son Bradley Berman collectively ownapproximately 7% of PokerTek. Lyle Berman also serves as Chairman of the Boardof PokerTek, and received options to purchase 200,000 shares of common stock inthe company.

On January 20, 2006, we entered into an agreement to sell630,000 shares of PokerTek’s common stock held by us, at a price per share of$9.03.  We closed the transaction onFebruary 28, 2006, and received net cash proceeds of approximately $5.7million. As a result, we currently own an approximate 5% ownership interest inPokerTek consisting of 450,000 shares.

We account for this investment as “available for sale”pursuant to SFAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and adjust the investmentto fair market value at each balance sheet date ($4.6 million at July 2, 2006),with the changes in fair market value included as a component of accumulatedother comprehensive income in the statement of stockholder’s equity.

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

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

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

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Forthe six months ended July 2, 2006, share-based compensation expense recognizedand included in selling and administrative expenses was $2.3 million, whichconsisted of compensation expense related to employee stock options based onthe value of the portion of share-based payment awards that is ultimatelyexpected to vest during the period.  Thevalue of the portion of the award that is ultimately expected to vest isrecognized as expense, using a straight-line method, over the requisite serviceperiods in our statement of earnings (loss).

##### Recently Issued AccountingPronouncements

In2005, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards No. 155 (SFAS 155), *Accounting for Certain Hybrid Instruments*amending theguidance in SFAS 133, *Accounting forDerivative Instruments and Hedging Activities,* and SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.*SFAS 155 allows financial instruments that have embeddedderivatives to be accounted for as a whole (eliminating the need to bifurcatethe derivative from its host) if the holder elects to account for the wholeinstrument on a fair value basis. SFAS 155 will be effective for financialinstruments acquired or issued during our fiscal year that begins afterSeptember 15, 2006.  We presently do notexpect SFAS 155 to be applicable to any instruments likely to be acquired orissued by us.

In June 2006, the FASB issued InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109,*(FIN 48).FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB StatementNo. 109, *Accounting for Income Taxes.*FIN 48 also prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return that results in a tax benefit.Additionally, FIN 48 provides guidance on de-recognition, income statementclassification of interest and penalties, accounting in interim periods,disclosure, and transition. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The Company is currently evaluating theeffect that the application of FIN 48 will have on its results ofoperations and financial condition.

**Off-BalanceSheet 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**

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

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

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·                                          Weremain heavily reliant upon our agreements with TRV as a source of revenue andany termination or impairment of these agreements, such as TRV’s recentdecision not to renew its agreement with us for future seasons of the PPT,would materially and adversely affect the results of our operations;

·                                          Thetermination or impairment of our relationships with key licensing and strategicpartners could harm our business performance;

·                                          Ourtelevision programming may fail to maintain a sufficient audience for a varietyof reasons, many of which are beyond our control;

·                                          Our abilityto create and license our television programming profitably may be negativelyaffected by adverse trends that apply to the television production businessgenerally;

·                                          Ourcompetitors (many of whom have greater financial resources or marketplacepresence) may develop television programming that would directly compete withour television programming;

·                                          A decline ingeneral economic conditions or the popularity of our brand of televised pokertournaments may negatively 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;

·                                          Theregulatory environment for online gaming is currently uncertain, and despiteout efforts to comply with applicable laws, we may be unable to pursue thisbusiness fully or our activities may be claimed or found to be in violation ofapplicable United States or foreign regulations;

·                                          It isdifficult for us to predict the growth of our online casino business, which isa relatively new industry with an increasing number of market entrants;

·                                          We will incurincreased costs and expenses related to the development and maintenance of ourown online poker room; and

·                                          The loss ofour President and Chief Executive Officer or another member of our seniormanagement team may negatively impact the success of our business.

Investors are cautionedthat all forward-looking statements involve risks and uncertainties.

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

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

Our financial instrumentsinclude cash and cash equivalents, U.S. Treasury and Agency securities andshort-term municipal securities. Our main investment objectives are thepreservation of investment capital and the maximization of after-tax returns onour investment portfolio. Consequently, we invest with only high-credit-qualityissuers and limit the amount of credit exposure to any one issuer. We do notuse derivative instruments for speculative or investment purposes.

Our cash and cashequivalents are not subject to significant interest rate risk due to the shortmaturities of these instruments. As of July 2, 2006, the carrying value of ourcash and cash equivalents approximated fair value. We have in the past and mayin the future obtain marketable debt securities (principally consisting ofcommercial paper, corporate bonds and government securities) having a weightedaverage duration of one year or less. Consequently, such securities would notbe subject to significant interest rate risk.

**ITEM 4.CONTROLS AND PROCEDURES**

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e) orRule 15d — 15(e) promulgated under the Securities Exchange Act of 1934, asamended, as of the end of the period covered by this quarterly report. Based ontheir evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that WPT Enterprises, Inc.’s disclosure controls and procedures areeffective.

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

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**WPTENTERPRISES, INC.**

**Part II**

**Other Information**

**ITEM 1.LEGAL PROCEEDINGS**

As discussed in Note 7 to the accompanying financialstatements, on July 19, 2006, we were served with a complaint filed in theUnited States District Court, Central District of California by seven pokerplayers.  The complaint alleges, amongother things, that the business practice of requiring players to executecertain participant releases in connection with tournaments we film  through our exclusive arrangement withcasinos has allegedly limited the number of televised poker tournament venuesfor high stakes professional poker players in violation of antitrust laws.  We have issued a statement indicating ourbelief that the claims asserted in the complaint are misleading and withoutmerit.  We are currently preparing aresponse.

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

**ITEM 1A.RISK FACTORS**

In addition to the other information set forth in this report, youshould carefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended January 1, 2006,which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not the onlyrisks facing our Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operatingresults.  In addition to the informationin this report and the factors discussed in Part I, “Item 1A. Risk Factors” ofour Annual Report on Form 10-K for the year ended January 1, 2006 (some ofwhich are revised below), you should consider the following risk resulting fromour entering into a license agreement with CyberArts Licensing, LLC in June of2006 that may materially adversely affect our business, financial condition and/oroperating results:

***Thedevelopment and operation of our own online poker room may be costly and timeconsuming and may never be successful.***

In the first halfof 2006, our management and Board of Directors determined to change WPT Online’sbusiness strategy. We decided to develop and operate our own online poker room,rather than rely on a third party vendor, as we have done since early2005.  On June 21, 2006, we entered intoa Source Code License and Services Agreement with CyberArts Licensing, LLC, pursuantto which CyberArts granted to us a perpetual, nonexclusive, and nontransferablelicense for certain poker software and related banking and cardroom managementsoftware tools for the development of our own online poker room.  Based on the CyberArts software platform, weplan to develop the additional software necessary for an online poker room andto develop the capabilities necessary to operate this business.  While we believe that the operation of ourown online poker room will grant us more flexibility and quality control overthe operation of our online poker room, the development of the website and thebanking, customer service, marketing and information technology requirementsassociated therewith may be costly and may divert management’s attention fromoperating other, more stable areas of our business.  We will also need to hire additionalemployees and engage contractors with the necessary expertise to develop andoperate the online poker room. Furthermore, there is no way to predict whether or not we can developthe requisite core of regular users of our proposed online poker room to makethe online poker room profitable.

Additionally, thefollowing risk factors appearing in Part I, “Item 1A. Risk Factors” in ourAnnual Report on Form 10-K for the year ending January 1, 2006 are revised andupdated to read as follows:

***The revenues we receive under ouragreements with the Travel Channel and Discovery Communications have been andcontinue to be our most significant source of revenue; the termination orimpairment of these agreements would materially and adversely affect ourresults of operations.***

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Under our agreements with the Travel Channel, LLC, wehave granted the Travel Channel exclusive licenses to exhibit our WPT SeasonsOne through Four programming on television in the U.S. and options to acquiresimilar licenses for the episodes comprising each of Seasons Five throughSeven, which is expected to be completed in 2009. Our agreement with DiscoveryCommunications, Inc., the Travel Channel’s parent company, granted the TravelChannel a license to air Season One of the PPT and options to acquire similarlicenses for Seasons Two through Four. Because the license fees we receive fromthe Travel Channel have been and will continue to be our most significantsource of revenue, comprising approximately 61% of our total historicalrevenues, our failure to maintain or replace our agreements with the TravelChannel with comparable license agreements prior to the material growth ofother revenue streams would have a material adverse effect on our financialcondition and our results of operations and cash flow. On May 1, 2006, theTravel Channel notified us that it had chosen to not exercise its option forSeason II and subsequent seasons of the PPT. Although we have already begun discussions to find a new broadcastpartner for the PPT going forward, we may never find a new broadcast partnerfor the PPT.  Even if we find a broadcastpartner for the PPT, there is no guarantee that we will be able to do so onterms that are favorable to the Company. The failure of the Travel Channel to renew the PPT for future seasonsmay also be detrimental to the PPT and WPT brand and make it more difficult tofind a new broadcast partner.  Evenfollowing the growth of other revenue streams, our failure to maintain ourlicense agreements with the Travel Channel with respect to the WPT or to find anew broadcast partner for the PPT would be detrimental to the viability of theWorld Poker Tour and PPT brands and, consequently, would have a materialadverse effect on our business, prospects, financial condition, results ofoperations, cash flow and, ultimately, the price of our common stock.

***Our success depends on our current brandand any future brands we may develop, and if the value of our brands were todiminish, our business would be adversely affected.***

Our success depends on our current WPT brand, whichconsists of a portfolio of trademarks, service marks and copyrighted materials,and the development of other brands, such as the PPT.  The Travel Channel’s recent decision not torenew its option for future seasons of the PPT may hurt our ability to developthe PPT brand or to find a new broadcast partner for the PPT.  Our portfolio includes, but is not limitedto, existing and future episodes of the televised programming produced inconnection with our existing and future brands and certain elements of theseepisodes, trade names and other intellectual property rights and any futurebrands we develop. In connection with our branding and licensing operations, wehave entered into an agreement with Brandgenuity LLC to seek licensingopportunities for the WPT brand. While specific contractual provisions requirethat the licensees brought to us by Brandgenuity maintain the quality of ourbrands, we cannot be certain that our licensees or their manufacturers anddistributors will honor their contractual obligations or that they will nottake other actions that will diminish the value of our brand prior to ourability to detect and prevent any such actions.

***Termination or impairment of ourrelationships with key licensing and strategic partners could adversely affectour revenues and results of operations.***

We have developed relationships with key strategicpartners in many areas of our business, including poker tournament eventsponsorship, merchandise licensing, corporate sponsorship, Internet gamingdevelopment and international distribution. We hope to derive significantincome from our licensing arrangements, and our agreements with our strategicpartners are vital to finding these licensing arrangements. If we were to failto manage our existing licensing relationships, this failure could have amaterial adverse effect on our financial condition and results of operations.We would also be materially adversely affected if we were to lose our rightsunder any of our other key contracts or if the counterparty to any of thesecontracts were to breach its obligations to us. We rely on a limited number ofcontracts under which third parties provide us with services vital to ourbusiness. These agreements include:

·                  our agreement with Brandgenuity LLC,pursuant to which it negotiates third party consumer product licensingagreements; 

 

·                  our agreements with Alfred HaberDistribution, Inc., pursuant to which it identifies potential licensees andnegotiates licenses to telecast the World Poker Tour and Professional PokerTour television programs on television networks outside of the U.S.; and 

 

·                  our agreement with WagerWorks,pursuant to which WagerWorks operates and manages our WPT-branded real-moneygaming website, WPTonline.com. The website is designed not to accept bets fromplayers in the U.S. and other restricted jurisdictions. Players in thesejurisdictions may play on a play-for-free version of WPTonline.com. 

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If our relationship with any of these or certain otherthird parties were to be interrupted, or the services provided by any of thesethird parties were to be delayed or deteriorate for any reason without beingadequately replaced, our business could be materially adversely affected. If weare forced to find a replacement for any of these strategic partners, thiscould create disruption in our business and may result in reduced revenues,increased costs or diversion of management’s attention and resources.

In addition, while we have significant control overour licensed products and advertising, we do not have operational and financialcontrol over these third parties, and we have limited influence with respect tothe manner in which they conduct their businesses. If any of these strategicpartners experiences a significant downturn in its business or were otherwiseunable to honor its obligations to us, our business could be materiallydisrupted.

We recently entered into an agreement with WagerWorkspursuant to which we will transition our online poker room currently operatedby WagerWorks over to an online poker room operated and maintained by us.  We cannot be assured that the transition to ourown online poker room will not affect our relationship with WagerWorks withrespect to the ongoing operations of the non-poker online casino or whether thetransition to our own online poker room will result in a material adverseimpact to our online gaming business.

***The political or social climate regardinggaming and poker could negatively impact our ability to negotiate futuretelecast license arrangements, retain certain of our member casinos or pursueInternet gaming ventures as a potential source of future revenue.***

Although the popularity of poker, in particular, andgaming, in general, has recently been growing in the U.S. and abroad, gaminghas historically experienced backlash from various constituencies andcommunities. Currently, the legal status of Internet-based casinos and cardroomsis unclear under U.S. law and under the laws of other countries. Based onthe uncertain regulatory environment surrounding the marketing and promotion ofInternet-based casinos and cardrooms to viewers in the U.S., the TravelChannel, which has final edit rights to the shows that it telecasts, hasindicated it will likely not display the “dot com” names or logos ofInternet-based casinos and cardrooms in its telecasts, although it hasexpressed a willingness to display names and logos from strictly play-for-free “dotnet” websites from our member casinos. Of the three Internet cardrooms thathave been World Poker Tour member casinos, two have recently terminated theiragreements with us to be member casinos, and the third has indicated that itmay terminate its agreement with us. Those withdrawals forced us to seektournaments to replace those hosted by those online cardrooms with otherevents. Although we were able to secure other tournaments to replace thetournaments held by the withdrawing members, we may be unable to replace othertournaments, if other member casinos terminate their agreements with us withoutadversely impacting our production schedule. If our production schedule isimpacted, it could have an adverse effect on our operating results during theapplicable season.

U.S. federal prosecutors have contended thatonline gambling sites are illegal, and the U.S. government has been tryingto curb the activities of offshore Internet casinos by investigating andpressuring American companies that provide services to these sites on thetheory that they are aiding and abetting the operations. As part of theseactivities, U.S. marshals seized funds from the Travel Channel’s parentcompany, Discovery Communications, Inc., that initially belonged to a CostaRica-based Internet casino operation that paid Discovery Communications fortelevision spots to advertise an online poker room. This focus on Internetgambling sites may eliminate these sites as sources of advertising revenue fortelevision networks that exhibit poker-related programming, thereby potentiallyimpacting the value of such programming to these networks. If this occurs, itmay negatively affect our ability to negotiate future telecast licensearrangements on terms that are most advantageous to us.

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On July 17, 2006, prosecutors from the Department ofJustice arrested the chief executive officer of BetOnSports, an online gamblingwebsite operated by a company publicly traded in the United Kingdom, on chargesof racketeering conspiracy and for participating in an illegal gamblingenterprise, due to the fact that the company took wagers from customers in theUnited States.  The prosecutors filedcharges against 10 other people involved with BetOnSports and with threeFlorida marketing companies that the prosecutors said were involved inpromoting illegal gambling.  Although ourcurrent online gaming website does not accept bets from players in the UnitedStates, and although our future online poker room we are currently developingwill not allow players from the United States to play for real money, there isno guarantee that the Department of Justice or other regulatory authorities,both in the United States or abroad, will not prevent us from operating anonline poker room or licensing our brand in connection with online gaming.  Furthermore, on July 11, 2006, the House ofRepresentatives approved The Unlawful Internet Gambling Enforcement Act, whichis legislation intended to curb or eliminate Internet gambling operations,including criminalizing the processing of payments to such operations byfinancial institutions.  Although theSenate has not yet voted on the bill, its approval by the House ofRepresentatives indicates that there is a possibility of legislation beingenacted in the United States to limit or eliminate the ability of persons inthe United States to wager online.  Theenactment of any such legislation, or the continued attention paid to internetgaming by the Department of Justice, could have an adverse effect on our futurebusiness, operating results and financial conditions.

 

***Government regulation of online gaming inforeign countries may restrict the activities or affect the financial resultsof our online venture that is under development.***

On February 3, 2005, we finalized an agreementwith a subsidiary of WagerWorks, Inc. to develop a WPT-branded real-moneygaming website. The site, WPTonline.com, officially launched on June 29,2005. WPTonline.com does not accept bets from players in the U.S. and otherrestricted jurisdictions. Players in these jurisdictions may play on aplay-for-free version of WPTonline.com. The website is hosted from Alderney,one of the United Kingdom’s Channel Islands. While the website is licensed bythe Alderney Gambling Control Commission, and while we believe that WagerWorksis in compliance with all international Internet gaming regulations, we cannotbe certain that WagerWorks will be allowed to accept wagers in all the marketswe plan to enter. Pursuant to our agreement with WagerWorks, we are reliant onthe revenues derived from the license of rights to WagerWorks. We are alsoreliant on WagerWorks for compliance with all applicable regulations, includingongoing verification that improper wagers are not placed on WPTonline.com. IfWagerWorks’ compliance or verification is inadequate, regulators in theU.S. or other jurisdictions may impose fines or other sanctions orthreaten or take other actions that could adversely affect our reputation andthe revenues we derive from the license of rights to WagerWorks. After thetermination of our relationship with WagerWorks with respect to WagerWorks’operation of our online poker room, we will be solely responsible for complyingwith all international Internet gaming regulations in connection with anyonline poker room we operate independently. Therefore, any risks previouslyborne by WagerWorks in connection with operating our online poker room willbecome direct risks to us.  We will beresponsible for obtaining all gaming permits and licenses necessary to operateour own online poker room, which may be expensive and time consuming.  We continue to monitor the legality ofInternet gaming in domestic and international jurisdictions, but cannot becertain that changes in existing regulations will be beneficial to the onlinegaming market. Additionally, we expect that on-air promotion of WPTonline.comvia international World Poker Tour television telecasts will continue to be aprimary marketing tool for driving poker players to the site. However, certainterritories and foreign networks may restrict us from incorporating marketingelements related to our online site into our international telecasts andcertain laws or regulations may restrict the type of advertising in general inthose territories. If these restrictions occur, our costs of customeracquisition may be substantially higher than anticipated.

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**ITEM 6. EXHIBITS**

** **
| 10.1   |   | CyberArts Source Code License and Services  Agreement, dated June 21, 2006, by and between WPT Enterprises, Inc. and  CyberArts Licensing, LLC                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| 31.1   |   | Certification of CEO pursuant to Securities Exchange  Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                          |
| 31.2   |   | Certification of CFO pursuant to Securities Exchange  Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                          |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002           |
|   |   |                                                                                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002           |

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report onForm 10-Q to be signed on its behalf by the undersigned, thereunto dulyauthorized. 
|                        |                    |   |
|------------------------|-------------------------|--------|
| Dated: August 10, 2006 | WPT ENTERPRISES, INC.   |   |
|                   | Registrant              |   |
|                   |                    |   |
|                   | /s/ Steven Lipscomb     |   |
|                   | Steven Lipscomb         |   |
|                   | Chief Executive Officer |   |
|                   |                    |   |
|                   |                    |   |
|                   | /s/ W. Todd Steele      |   |
|                   | W. Todd Steele          |   |
|                   | Chief Financial Officer |   |

 

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