UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

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

Commission File Number 000-51064

GREAT WOLF RESORTS, INC.

Delaware		51-0510250
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
122 West Washington Avenue		53703
Madison, Wisconsin 53703		(Zip Code)
(Address of principal executive offices)

(608) 661-4700
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o         Accelerated filer  þ      Non-accelerated filer  o

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

The number of shares outstanding of the issuer’s common stock was 30,699,671 as of November 6, 2007.

 

 

Great Wolf Resorts, Inc.

Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2007

INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2007 and 2006			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 5. Other Information			37
Item 6. Exhibits			37
Signatures			39
Certification
Certification
Certification
Certification

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GREAT WOLF RESORTS, INC. AND SUBSIDIARIES

		September 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	21,533			$	96,778
Accounts receivable, net of allowance for doubtful accounts of $141 and $205			2,388				2,680
Accounts receivable — related parties			2,143				2,223
Inventory			3,823				2,825
Other current assets			5,808				4,638
Total current assets			35,695				109,144
Property and equipment, net			583,093				489,968
Investments in and advances to related parties			53,596				25,028
Other assets			31,486				19,450
Other intangible assets			23,829				23,829
Goodwill			17,927				16,020
Total assets		$	745,626			$	683,439
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,654			$	1,432
Accounts payable			10,433				25,882
Accrued payroll			1,199				2,768
Accrued expenses			12,346				12,740
Accrued expenses — related parties			378				443
Advance deposits			7,927				7,165
Gift certificates payable			2,648				3,349
Total current liabilities			36,585				53,779
Mortgage debt			280,737				224,161
Other long-term debt			92,528				63,796
Other long-term liabilities			2,060				391
Deferred tax liability			14,428				15,846
Deferred compensation liability			2,331				2,200
Total liabilities			428,669				360,173
Minority interest			—				5,757
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 250,000,000 shares authorized; 30,700,003 and 30,509,320 shares issued and outstanding, at September 30, 2007, and December 31, 2006, respectively			307				305
Additional paid in capital			398,425				396,909
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding			—				—
Accumulated deficit			(79,405	)			(77,505	)
Deferred compensation			(2,200	)			(2,200	)
Accumulated other comprehensive loss, net of tax			(170	)			—
Total stockholders’ equity			316,957				317,509
Total liabilities and stockholders’ equity		$	745,626			$	683,439

See accompanying notes to condensed consolidated financial statements.

GREAT WOLF RESORTS, INC. AND SUBSIDIARIES

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenues:
Rooms		$	30,754			$	24,363			$	87,659			$	68,503
Food and beverage			7,577				5,723				22,621				16,695
Other hotel operations			7,407				5,805				20,990				16,234
Management and other fees			983				888				2,231				1,629
Management and other fees — related parties			1,162				853				3,295				2,250
			47,883				37,632				136,796				105,311
Other revenue from managed properties			3,015				3,147				8,852				9,131
Total revenues			50,898				40,779				145,648				114,442
Operating expenses by department:
Rooms			4,158				3,134				12,147				9,008
Food and beverage			6,273				4,682				19,383				14,037
Other			6,024				4,529				17,615				12,868
Other operating expenses:
Selling, general and administrative			10,005				9,382				34,582				31,983
Property operating costs			6,553				5,313				20,726				14,888
Depreciation and amortization			9,105				6,430				26,567				18,697
Loss on sale of property			128				375				128				953
			42,246				33,845				131,148				102,434
Other expenses from managed properties			3,015				3,147				8,852				9,131
Total operating expenses			45,261				36,992				140,000				111,565
Net operating income			5,637				3,787				5,648				2,877
Investment income			(281	)			—				(336	)			—
Interest income			(551	)			(863	)			(2,365	)			(2,315	)
Interest expense			3,829				1,817				11,104				5,399
Income/(loss) before income taxes, minority interests, and equity in losses of unconsolidated related parties			2,640				2,833				(2,755	)			(207	)
Income tax expense (benefit)			784				1,102				(1,157	)			(83	)
Minority interests, net of tax			—				(77	)			(443	)			(114	)
Equity in loss (earnings) of unconsolidated related parties, net of tax			95				(280	)			745				247
Net income (loss)		$	1,761			$	2,088			$	(1,900	)		$	(257	)
Other comprehensive income (loss), net of tax:
Unrealized loss on interest rate swaps			(329	)			—				(170	)			—
Comprehensive income (loss)		$	1,432			$	2,088			$	(2,070	)		$	(257	)
Net income (loss) per share-basic		$	0.06			$	0.07			$	(0.06	)		$	(0.01	)
Net income (loss) per share-diluted		$	0.06			$	0.07			$	(0.06	)		$	(0.01	)
Weighted average common shares outstanding:
Basic			30,570,719				30,370,229				30,521,022				30,272,674
Diluted			30,570,719				30,370,229				30,521,022				30,272,674

See accompanying notes to the condensed consolidated financial statements.

GREAT WOLF RESORTS, INC. AND SUBSIDIARIES

		Nine months ended
		September 30,
		2007				2006
Operating activities:
Net loss		$	(1,900	)		$	(257	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			26,567				18,697
Non-cash employee compensation expense			2,004				2,392
Loss on sale of property			128				953
Equity in losses of unconsolidated related parties			1,285				411
Minority interests			(764	)			(190	)
Deferred tax benefit			(1,375	)			(176	)
Changes in operating assets and liabilities:
Accounts receivable and other assets			(4,950	)			1,956
Accounts payable, accrued expenses and other liabilities			(5,333	)			(7,716	)
Net cash provided by operating activities			15,662				16,070
Investing activities:
Capital expenditures for property and equipment			(130,095	)			(77,197	)
Cash distributions from unconsolidated related parties			—				18,902
Investments in and advances to related parties			(16,981	)			(357	)
Investment in development			(20,245	)			—
Purchase of minority interest			(6,900	)			—
Issuance of notes receivable			(3,266	)			—
Proceeds from sale of assets			—				2,045
Increase (decrease) in restricted cash			1,133				(1,257	)
Decrease in escrows			842				554
Net cash used in investing activities			(175,512	)			(57,310	)
Financing activities:
Principal payments on long-term debt			(1,008	)			(1,360	)
Proceeds from issuance of long-term debt			86,538				37,938
Payment of loan costs			(925	)			(1,160	)
Net cash provided by financing activities			84,605				35,418
Net decrease in cash and cash equivalents			(75,245	)			(5,822	)
Cash and cash equivalents, beginning of period			96,778				54,782
Cash and cash equivalents, end of period		$	21,533			$	48,960
Supplemental Cash Flow Information-
Cash paid for interest, net of capitalized interest		$	9,761			$	4,527
Cash paid for income taxes, net of refunds		$	266			$	329
Non-cash items:
Change in construction in process accruals		$	11,391			$	5,785
Guarantee on loan for related party		$	1,371			$	—

See accompanying notes to the condensed consolidated financial statements.

GREAT WOLF RESORTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except per share amounts)

1. ORGANIZATION

     The terms “Great Wolf Resorts,” “us,” “we” and “our” are used in this report to refer to Great Wolf Resorts, Inc.

Business Summary

     We are a family entertainment resort company that provides our guests with a high-quality vacation at an affordable price. We are the largest owner, operator and developer in North America of drive-to family resorts featuring indoor waterparks and other family-oriented entertainment activities. Our resorts generally feature approximately 270 to 400 family suites that sleep from six to ten people and each includes a wet bar, microwave oven, refrigerator and dining and sitting area. We provide a full-service entertainment resort experience to our target customer base: families with children ranging in ages from 2 to 14 years old that live within a convenient driving distance of our resorts. We operate under our Great Wolf Lodge^® and Blue Harbor Resort™ brand names. Our resorts are open year-round and provide a consistent and comfortable environment where our guests can enjoy our various amenities and activities.

     We provide our guests with a self-contained vacation experience and focus on capturing a significant portion of their total vacation spending. We earn revenues through the sale of rooms, which includes admission to our indoor waterpark, and other revenue-generating resort amenities. Each of our resorts features a combination of the following revenue-generating amenities: themed restaurants, an ice cream shop and confectionery, full-service spa, game arcade, gift shop, miniature golf, interactive game attraction and meeting space. We also generate revenues from licensing arrangements, management fees and other fees with respect to our operation or development of properties owned in whole or in part by third parties.

     The following table presents an overview of our portfolio of operating resorts and resorts under construction. As of September 30, 2007, we operate eight Great Wolf Lodge resorts (our signature northwoods-themed resorts) and one Blue Harbor Resort (a nautical-themed property).

																		Indoor
		Ownership								Guest				Condo				Entertainment
		Percentage				Opening				Suites				Units				Area (1)
																		(Approx. ft2)
Existing Resorts:
Wisconsin Dells, WI (2)			30.32	%			1997				308				77				102,000
Sandusky, OH (2)			30.32	%			2001				271				—				41,000
Traverse City, MI (3)			100	%			2003				280				—				51,000
Kansas City, KS			100	%			2003				281				—				49,000
Sheboygan, WI			100	%			2004				182				64				54,000
Williamsburg, VA			100	%			2005				405				—				78,000
Pocono Mountains, PA			100	%			2005				401				—				91,000
Niagara Falls, ONT (4)			—				2006				406				—				94,000
Mason, OH (5)			100	%			2006				401				—				93,000
Resorts Under Construction:
Grapevine, TX (6)			100	%		Late 2007					402				—				98,000
Grand Mound, WA (7)			49	%		Early 2008					398				—				78,000
Concord, NC (8)			100	%		Early 2009					400				—				95,000

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     General — We have prepared these unaudited condensed consolidated interim financial statements according to the rules and regulations of the Securities and Exchange Commission. Accordingly, we have omitted certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These interim financial statements should be read in conjunction with the financial statements, accompanying notes and other information included in our Annual Report on Form 10-K for the year ended December 31, 2006.

     The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the financial condition and results of operations and cash flows for the periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions. Such estimates and

assumptions affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

     Principles of Consolidation — Our consolidated financial statements include our accounts and the accounts of all of our majority owned subsidiaries. As part of our consolidation process, we eliminate all significant intercompany balances and transactions.

     Investments in and Advances to Related Parties — As of September 30, 2007, we have investments in two joint ventures that we do not consolidate:

	§		A 30.32% interest in a joint venture that owns Great Wolf Lodge resorts in Wisconsin Dells, Wisconsin and Sandusky, Ohio.
	§		A 49% interest in a joint venture that owns a Great Wolf Lodge resort under construction in Grand Mound, Washington.

     We use the equity method to account for our investments in unconsolidated joint ventures, as we do not have a controlling interest. Net income or loss is allocated between the owners in the joint ventures based on the hypothetical liquidation at book value method (HLBV). Under the HLBV method, net income or loss is allocated between the owners based on the difference between each owner’s claim on the net assets of the joint venture at the end and beginning of the period, after taking into account contributions and distributions. Each owner’s share of the net assets of the joint venture is calculated as the amount that the owner would receive if the joint venture were to liquidate all of its assets at net book value and distribute the resulting cash to creditors and owners in accordance with their respective priorities.

     Included in our Investment in and Advances to Related Parties line on our September 30, 2007 consolidated balance sheet is a preferred equity investment of $8,000 in one of our joint ventures. This preferred equity investment bears interest at 11%.

     Guarantee — We recognize guarantees in accordance with FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. We have provided a partial guarantee for up to $49,980 of mortgage debt obtained by one of our joint ventures. Based on our assessment of the likelihood of having to possibly perform on this guarantee, we have recorded $1,370 as the estimated fair value of this guarantee at its inception, as an increase in our investment in the unconsolidated joint venture and a liability on our consolidated balance sheet.

     Minority Interest — We record the non-owned equity interests of our consolidated subsidiaries as minority interests on our consolidated balance sheets. The minority ownership interest of our earnings or loss, net of tax, is classified as “Minority interests” in our condensed consolidated statements of operations. In June 2007 we purchased the minority interest in the one resort that had a minority interest, and we now own 100% of the resort. The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired was recorded as an increase to goodwill of $1,907.

     Income Taxes — At the end of each interim reporting period, we estimate the effective tax rate expected to be applicable for the full fiscal year. The rate determined is used in providing for income taxes on a year-to-date basis.

     Other Comprehensive Income — We record unrealized gain and loss on interest rate swaps in accordance with Financial Accounting Standards (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires the effective portion of the swap’s gain or loss to be initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the forecasted transaction affects earnings.  The ineffective portion of the gain or loss is reported in earnings immediately.

     Segments—We are organized into a single operating division. Within that operating division, we have three reportable segments in 2007 and 2006:

	•		resort ownership/operation-revenues derived from our consolidated owned resorts;
	•		resort third-party management-revenues derived from management, license and other related fees from unconsolidated managed resorts; and
	•		condominium sales-revenues derived from sales of condominium units to third-party owners.

          We evaluate the performance of each segment based on earnings before interest, income taxes, and depreciation and amortization (EBITDA), excluding minority interests and equity in earnings of unconsolidated related parties.

The following summarizes significant financial information regarding our segments:

		Resort				Resort Third-												Totals per
		Ownership/				Party				Condominium								Financial
		Operation				Management				Sales				Other				Statements
Three months ended September 30, 2007
Revenues		$	45,738			$	5,160			$	—			$	—			$	50,898
EBITDA, excluding certain items			12,132				2,145				—				465			$	14,742
Depreciation and amortization			(8,843	)			—				—				(262	)			(9,105	)
Investment income			—				—				—				—				281
Interest expense, net			—				—				—				—				(3,278	)
Income before income taxes, minority interests, and equity in loss of unconsolidated related parties			—				—				—				—			$	2,640
Additions to long-lived assets			37,361				—								140			$	37,501

		Resort				Resort												Totals per
		Ownership/				Third-Party				Condominium								Financial
		Operation				Management				Sales				Other				Statements
Nine months ended September 30, 2007
Revenues		$	131,270			$	14,378			$	—			$	—			$	145,648
EBITDA, excluding certain items			29,638				5,526				—				(2,949	)		$	32,215
Depreciation and amortization			(26,109	)			—				—				(458	)			(26,567	)
Investment income			—				—				—				—				336
Interest expense, net			—				—				—				—				(8,739	)
Loss before income taxes, minority interests, and equity in loss of unconsolidated related parties			—				—				—				—			$	(2,755	)
Additions to long-lived assets			129,613				—				—				482			$	130,095
Total assets			618,095				2,507				—				125,024			$	745,626

		Resort				Resort												Totals per
		Ownership/				Third-Party				Condominium								Financial
		Operation				Management				Sales				Other				Statements
Three months ended September 30, 2006
Revenues		$	35,891			$	4,888			$	—			$	—			$	40,779
EBITDA, excluding certain items			9,865				1,741				(120	)			(1,269	)		$	10,217
Depreciation and amortization			(6,294	)			—				—				(136	)			(6,430	)
Interest expense, net			—				—				—				—				(954	)
Loss before income taxes, minority interests, and equity in earnings of unconsolidated related parties			—				—				—				—			$	(2,833	)
Additions to long-lived assets			27,248				—				—				194			$	27,442

		Resort				Resort												Totals per
		Ownership/				Third-Party				Condominium								Financial
		Operation				Management				Sales				Other				Statements
Nine months ended September 30, 2006
Revenues		$	101,432			$	13,010			$	—			$	—			$	114,442
EBITDA, excluding certain items			25,910				3,879				(268	)			(7,947	)		$	21,574
Depreciation and amortization			(18,336	)			—				—				(361	)			(18,697	)
Interest expense, net			—				—				—				—				(3,084	)
Loss before income taxes, minority interests, and equity in loss of unconsolidated related parties			—				—				—				—			$	(207	)
Additions to long-lived assets			76,682				—				—				515			$	77,197
Total assets			527,692				607				—				114,338			$	642,637

     The Other items in the table above represent corporate-level activities that do not constitute a reportable segment. Total assets at the corporate level primarily consist of cash, our investments in and advances to related parties, and intangibles. Goodwill is included in our resort ownership/operation segment.

     Recent Accounting Pronouncements — In July 2006, the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

          We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. All of the tax years since the date of our IPO are open in all jurisdictions. Our policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense. We believe that we have appropriate support for the income tax positions taken and to be taken on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

          We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact the consolidated financial condition, results of operations or cash flows. At January 1, 2007, we had unrecognized tax benefits of $978, which primarily related to uncertainty regarding the sustainability of certain deductions taken on our 2005 and 2006 U.S. Federal income tax return related to transaction costs from our IPO. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. We do not expect the total amount of unrecognized tax benefits to change significantly in the next year.

          In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact of the adoption of this statement.

          In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The provisions of this statement are required to be applied prospectively. We are currently evaluating the impact of the adoption of this statement.

3. SHARE-BASED COMPENSATION

          Effective January 1, 2006, we adopted SFAS 123(R), Share-Based Payment, using the modified prospective application transition method. Before we adopted SFAS 123(R), we accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Other than for the expense related to our deferred compensation shares and our non-vested shares, no share-based employee compensation cost has been reflected in net income prior to January 1, 2006.

          We recognized $598, and $2,004, net of estimated forfeitures, in share-based compensation expense for the three and nine months ended September 30, 2007, respectively. The total income tax benefit recognized related to share-based compensation was $251 and $842 for the three and nine months ended September 30, 2007, respectively. We recognize compensation expense on grants of share-based compensation awards on a straight-line basis over the requisite service period of each award recipient. As of September 30, 2007, total unrecognized compensation cost related to share-based compensation awards was $4,044, which we expect to recognize over a weighted average period of approximately 3.1 years.

          The Great Wolf Resorts 2004 Incentive Stock Plan (the Plan) authorizes us to grant up to 3,380,740 options, stock appreciation rights or shares of our common stock to employees and directors. At September 30, 2007, there were 1,617,036 shares available for future grants under the Plan.

          We anticipate having to issue new shares of our common stock for stock option exercises.

Stock Options

          We have granted non-qualified stock options to purchase our common stock under the Plan at prices equal to the fair market value of the common stock on the grant dates. The exercise price for certain options granted under the plans may be paid in cash, shares of common stock or a combination of cash and shares. Stock options expire ten years from the grant date and vest ratably over three years.

          We recorded stock option expense of $431 and $1,139 for the three and nine months ended September 30, 2007, respectively. There were no stock options granted during the nine months ended September 30, 2007 or 2006. We recorded stock option expense of $305 and $1,292 for the three and nine months ended September 30, 2006, respectively.

     A summary of stock option activity during the nine months ended September 30, 2007, is:

										Weighted
						Weighted				Average
						Average				Remaining
						Exercise				Contractual
		Shares				Price				Life
Number of shares under option:
Outstanding at beginning of period			1,064,500			$	17.55
Granted			—
Exercised			(167	)		$	12.40
Forfeited			(76,833	)		$	20.90
Outstanding at end of period			987,500			$	17.29			7.28 years
Exercisable at end of period			648,348			$	17.36			7.25 years

There was no intrinsic value of our outstanding or exercisable stock options at September 30, 2007 or 2006.

Market Condition Share Awards

          Certain officers are eligible to receive shares of our common stock in payment of market condition share awards granted to them in accordance with the terms thereof.

          We granted 215,592 and 81,820 market condition share awards during the nine months ended September 30, 2007 and 2006, respectively. We recorded share based compensation expense of $120 and $402 for the three and nine months ended September 30, 2007, respectively. We recorded share based compensation expense of $129 and $353 for the three and nine months ended September 30, 2006, respectively.

Of the 2007 market condition shares awards granted:

	•		53,006 are based on our common stock’s performance in 2007 relative to a stock index, as designated by the Compensation Committee of the Board of Directors. These shares vest ratably over a three-year period, 2007-2009. The per share fair value of these market condition shares was $7.25.
			The fair value of these market condition shares was determined using a Monte Carlo simulation and the following assumptions:

Dividend yield			—
Weighted average, risk free interest rate			5.05	%
Expected stock price volatility			42.13	%
Expected stock price volatility (small-cap stock index)			16.64	%

We used an expected dividend yield of 0% as we do not currently pay a dividend and do not contemplate paying a dividend in the foreseeable future. The weighted average, risk free interest rate is based on the one-year T-bill rate. Our expected stock price volatility was estimated using daily returns data of our stock for a two-year period ending on the grant date. The expected stock price volatility for the small cap stock index was estimated using daily returns data for a two-year period ending on the grant date.

	•		81,293 are based on our common stock’s absolute performance during the three-year period 2007-2009. Half of these shares vest on December 31, 2009, and the other half vest on December 31, 2010. The per share fair value of these market condition shares was $6.65.
			The fair value of these market condition shares was determined using a Monte Carlo simulation and the following assumptions:

Dividend yield			—
Weighted average, risk free interest rate			4.73	%
Expected stock price volatility			42.13	%

			We used an expected dividend yield of 0% as we do not currently pay a dividend and do not contemplate paying a dividend in the foreseeable future. The weighted average, risk free interest rate is based on the four-year T-bill rate. Our expected stock price volatility was estimated using daily returns data of our stock for a two-year period ending on the grant date.
	•		81,293 are based on our common stock’s performance in 2007-2009 relative to a stock index, as designated by the Compensation Committee of the Board of Directors. Half of these shares vest on December 31, 2009, and the other half vest on December 31, 2010. The per share fair value of these market condition shares was $8.24.
			The fair value of these market condition shares was determined using a Monte Carlo simulation and the following assumptions:

Dividend yield			—
Weighted average, risk free interest rate			4.73	%
Expected stock price volatility			42.13	%
Expected stock price volatility (small-cap stock index)			16.64	%

We used an expected dividend yield of 0% as we do not currently pay a dividend and do not contemplate paying a dividend in the foreseeable future. The weighted average, risk free interest rate is based on the four-year T-bill rate. Our expected stock price volatility was estimated using daily returns data of our stock for a two-year period ending on the grant date. The expected stock price volatility for the small cap stock index was estimated using daily returns data for a two-year period ending on the grant date.

Of the 2006 market condition shares awards granted:

	•		81,820 were based on our common stock’s performance in 2006 relative to a stock index, as designated by the Compensation Committee of the Board of Directors. The per share fair value of these market condition shares was $5.76.
			The fair value of the market condition shares was determined using a Monte Carlo simulation and the following assumptions:

Dividend yield			—
Weighted average, risk free interest rate			4.12	%
Expected stock price volatility (peer group of companies)			31.00	%
Expected stock price volatility (small-cap stock index)			17.50	%

			We used an expected dividend yield of 0% as we do not currently pay a dividend and do not contemplate paying a dividend in the foreseeable future. The weighted average, risk free interest rate is based on the one year T-bill rate. Our expected stock price volatility was estimated using daily returns data for the three-year period ending on the grant date for peer group companies. The expected stock price volatility for the small cap stock index was estimated using three-year return averages.
			Based on our common stock performance in 2006, employees earned and were issued 81,820 market condition shares in February 2007.

Performance Share Awards

          Certain officers are eligible to receive shares of our common stock in payment of performance share awards granted to them in accordance with the terms thereof. We granted 23,149 and 27,273 performance shares during the nine months ended September 30, 2007 and 2006, respectively. Grantees of performance shares are eligible to receive shares of our common stock based on the achievement of certain individual and departmental performance criteria during the calendar year. The per share fair value of performance shares granted during the nine months ended September 30, 2007 and 2006, was $13.10 and $11.03, respectively, which represents the fair value of our common stock on the grant date. We recorded share based compensation expense of $25 and $76 for the three and nine months ended September 30, 2007, respectively. We recorded share based compensation expense of $82 and $228 for the three and nine months ended September 30, 2006, respectively.

          Based on our achievement of certain individual and departmental performance goals, employees earned and were issued 17,949 performance shares in February 2007 related to the 2006 grants. As a result, we recorded a reduction in expense of $103 during the nine months ended September 30, 2007, related to the shares not issued.

Deferred Compensation Awards

          Pursuant to their employment arrangements, certain executives received bonuses upon completion of the IPO. Executives receiving bonus payments totaling $2,200 elected to defer those payments pursuant to our deferred compensation plan. To satisfy this obligation, we contributed 129,412 shares of our common stock to the trust that holds the assets to pay obligations under our deferred compensation plan. The fair value of that stock at the date of contribution was $2,200. In accordance with the provisions of EITF Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested,” we have recorded the fair value of the shares of common stock, at the date the shares were contributed to the trust, as a reduction of our stockholders’ equity. Also, as prescribed by EITF Issue No. 97-14, we account for the change in fair value of the shares held in the trust as a charge to compensation cost. We recorded share based compensation revenue of $245 and $207, for the three and nine months ended September 30, 2007, respectively. We recorded share based compensation expense (revenue) of $(6) and $214, for the three and nine months ended September 30, 2006, respectively.

Non-vested Shares

          We have granted non-vested shares to certain employees and our directors. Shares vest ratably over various periods up to five years from the grant date. We valued the non-vested shares at the closing market value of our common stock on the date of grant.

A summary of non-vested shares activity for the nine months ended September 30, 2007 is as follows:

						Weighted
						Average
						Grant Date				Aggregate
		Shares				Fair Value				Intrinsic Value
Non-vested shares balance at beginning of period			245,000
Granted			143,711			$	13.47
Forfeited			(5,000	)		$	10.79
Vested			(46,600	)		$	12.75
Non-vested shares balance at end of period			337,111			$	12.35			$	167

          We recorded share based expense of $267 and $697 for the three and nine months ended September 30, 2007, respectively. We recorded share based expense of $210 and $305 for the three and nine months ended September 30, 2006, respectively.

4. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

		September 30,				December 31,
		2007				2006
Land and improvements		$	38,121			$	38,058
Building and improvements			219,499				178,464
Furniture, fixtures and equipment			258,436				243,991
Construction in process			135,468				71,848
			651,524				532,361
Less accumulated depreciation			(68,431	)			(42,393	)
Property and equipment, net		$	583,093			$	489,968

Depreciation expense was $8,941 and $6,326 for the three months ended September 30, 2007 and 2006, respectively. Depreciation expense was $26,084 and $18,737 for the nine months ended September 20, 2007 and 2006, respectively.

5. LONG-TERM DEBT

     Long-term debt consists of the following:

		September 30,				December 31,
		2007				2006
Long-Term Debt:
Traverse City/Kansas City mortgage loan		$	71,869			$	72,801
Mason mortgage loan			75,858				55,792
Pocono Mountains mortgage loan			97,000				97,000
Grapevine construction loan			37,477				—
Junior subordinated debentures			80,545				51,550
Other Debt:
City of Sheboygan bonds			8,437				8,383
City of Sheboygan loan			3,733				3,863
			374,919				289,389
Less current portion of long-term debt			(1,654	)			(1,432	)
Total long-term debt		$	373,265			$	287,957

     Traverse City/Kansas City Mortgage Loan — This loan is secured by our Traverse City and Kansas City resorts. The loan bears interest at a fixed rate of 6.96%, is subject to a 25-year principal amortization schedule, and matures in January 2015. The loan has customary financial and operating debt compliance covenants. The loan also has customary restrictions on our ability to prepay the loan prior to maturity. We were in compliance with all covenants under this loan at September 30, 2007.

     Mason Mortgage Loan — This loan is secured by our Mason resort.  The loan bears interest at a floating rate of 30-day LIBOR plus a spread of 265 basis points (total rate of 7.66% as of September 30, 2007).  The loan matures in December 2008 and also has two one-year extensions available at our option.  The loan is interest-only during its initial three-year term and then is subject to a 25-year amortization schedule in the extension periods.  This loan has customary financial and operating debt compliance covenants associated with an individual mortgaged property, including a maximum ratio of consolidated net long-term debt divided by consolidated trailing twelve month adjusted EBITDA and a minimum consolidated tangible net worth provision.  This loan has no restrictions or fees associated with the repayment of the loan principal.  We were in compliance with all covenants under this loan at September 30, 2007.

     In April 2007, we entered into an interest rate swap agreement with two financial institutions on a notional amount of $71,000. The agreement expires in December 2008. The agreement effectively fixes the interest rate on $71,000 of floating rate debt outstanding at a rate of 7.65% per annum, thus reducing our exposure to interest rate fluctuations. The notional amount does not represent amounts exchanged by the parties, and thus is not a measure of exposure to us. The differences to be paid or received by us under the interest rate swap agreement are recognized as an adjustment to interest expense. The agreement is with major financial institutions, which are expected to fully perform under the terms of the agreement.

     Pocono Mountains Mortgage Loan – In December 2006 we closed on a $97,000 first mortgage loan secured by our Pocono Mountains resort. The loan bears interest at a fixed rate of 6.10% and matures December 1, 2016. The loan is interest only for the initial 18-month period and thereafter is subject to a 30-year principal amortization schedule. The loan has customary covenants associated with an individual mortgaged property. The loan also has customary restrictions on our ability to prepay the loan prior to maturity. We were in compliance with all covenants under this loan at September 30, 2007.

     Grapevine Construction Loan — In July 2006 we closed on a $79,500 loan to construct the Great Wolf Lodge in Grapevine, Texas. The loan is secured by a first mortgage on the Grapevine, Texas property. The loan bears interest at a floating rate of 30-day LIBOR plus a spread of 260 basis points (total rate of 7.72% as of September 30, 2007).  The loan matures in July 2009 and also has two one-year extensions available at our option.  The loan is interest-only during its initial three-year term and then is subject to a 25-year amortization schedule in the extension periods.  This loan has customary financial and operating debt compliance covenants associated with an individual mortgaged property, including a maximum ratio of consolidated net long-term debt divided by consolidated trailing twelve month adjusted EBITDA and a minimum consolidated tangible net worth provision. The loan has no restrictions or fees associated with the repayment of the loan principal.  We were in compliance with all covenants under this loan at September 30, 2007.

     Junior Subordinated Debentures — In March 2005 we completed a private offering of $50,000 of trust preferred securities (TPS) through Great Wolf Capital Trust I (Trust I), a Delaware statutory trust which is our subsidiary. The securities pay holders cumulative cash distributions at an annual rate which is fixed at 7.80% through March 2015 and then floats at LIBOR plus a spread of 310 basis points thereafter. The securities mature in March 2035 and are callable at no premium after March 2010. In addition, we invested $1,500 in Trust I’s common securities, representing 3% of the total capitalization of Trust I.

     Trust I used the proceeds of the offering and our investment to purchase from us $51,550 of our junior subordinated debentures with payment terms that mirror the distribution terms of the trust securities. The costs of the TPS offering totaled $1,600, including $1,500 of underwriting commissions and expenses and $100 of costs incurred directly by Trust I. Trust I paid these costs utilizing an investment from us. These costs are being amortized over a 30-year period. The proceeds from our debenture sale, net of the costs of the TPS offering and our investment in Trust I, were $48,400. We used the net proceeds to retire a construction loan.

     In June 2007 we completed a private offering of $28,125 of TPS through Great Wolf Capital Trust III (Trust III), a Delaware statutory trust which is our subsidiary. The securities pay holders cumulative cash distributions at an annual rate which is fixed at 7.90% through June 2012 and then floats at LIBOR plus a spread of 300 basis points thereafter. The

securities mature in June 2017 and are callable at no premium after June 2012. In addition, we invested $870 in the Trust’s common securities, representing 3% of the total capitalization of Trust III.

     Trust III used the proceeds of the offering and our investment to purchase from us $28,995 of our junior subordinated debentures with payment terms that mirror the distribution terms of the trust securities. The costs of the TPS offering totaled $932, including $870 of underwriting commissions and expenses and $62 of costs incurred directly by Trust III. Trust III paid these costs utilizing an investment from us. These costs are being amortized over a 10-year period. The proceeds from our debenture sales, net of the costs of the TPS offering and our investment in Trust III, were $27,193. We will use the net proceeds for future development costs.

     As a result of the issuance of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” and the accounting profession’s application of the guidance provided by the FASB, issue trusts, like Trust I and Trust III (collectively, the Trusts), are generally variable interest entities. We have determined that we are not the primary beneficiary under the Trusts, and accordingly we do not include the financial statements of the Trusts in our consolidated financial statements.

     Based on the foregoing accounting authority, our consolidated financial statements present the debentures issued to the Trusts as long-term debt. Our investments in the Trusts are accounted as cost investments and are included in other assets. For financial reporting purposes, we record interest expense on the corresponding debentures in our condensed consolidated statements of operations.

     City of Sheboygan Bonds — The City of Sheboygan (the City) bonds represent the face amount of bond anticipation notes (BANs) issued by the City in November 2003 in conjunction with the construction of the Blue Harbor Resort in Sheboygan, Wisconsin. In accordance with the provisions of EITF Issue No. 91-10, we have recognized as a liability the obligations for the BANs. The notes bear interest at an annual rate of 3.95% and mature in 2008. The notes are not a general obligation of the City and are payable from (a) the proceeds of BANs or other funds appropriated by the City for the payment of interest on the BANs and (b) the proceeds to be delivered from the issuance and sale of securities by the City. We have an obligation to fund payment of these BANs. Our obligation to fund repayment of the notes will be satisfied by certain minimum guaranteed amounts of room tax payments to be made by the Blue Harbor Resort through 2028.

     City of Sheboygan Loan — The City of Sheboygan loan amount represents a loan made by the City in 2004 in conjunction with the construction of the Blue Harbor Resort in Sheboygan, Wisconsin. The loan is noninterest bearing and matures in 2018. Our obligation to repay the loan will be satisfied by certain minimum guaranteed amounts of real and personal property tax payments to be made by the Blue Harbor Resort through 2018.

     Future Maturities — Future principal requirements on long-term debt are as follows:

Through
September 30,
2008		$	1,654
2009			3,718
2010			5,308
2011			113,046
2012			3,306
Thereafter			247,887
Total		$	374,919

6. COMPREHENSIVE INCOME

     SFAS 130, “Reporting Comprehensive Income,” requires the disclosure of the components included in comprehensive income. For the three and nine months ended September 30, 2007, we recorded comprehensive loss, net of tax of approximately $329 and $170, respectively, related to unrealized loss on our interest rate swap. We had no similar amount for the three and nine months ended September 30, 2006.

7. EARNINGS PER SHARE

     We calculate our basic earnings per common share by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding. Our diluted earnings per common share assumes the issuance of common stock for all potentially dilutive stock equivalents outstanding using the treasury stock method. In periods in which we incur a net loss, we exclude potentially dilutive stock equivalents from the computation of diluted weighted average shares outstanding as the effect of those potentially dilutive items is anti-dilutive.

     The trust that holds the assets to pay obligations under our deferred compensation plan has 129,412 shares of our common stock. In accordance with the provisions of EITF Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested,” we treat those shares of common stock as treasury stock for purposes of our earnings per share computations and therefore we exclude them from our basic and diluted earnings per share calculations. Basic and diluted earnings per common share are as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income (loss) attributable to common shares		$	1,761			$	2,088			$	(1,900	)		$	(257	)
Weighted average common shares outstanding — basic			30,570,719				30,370,229				30,521,022				30,272,674
Weighted average common shares outstanding — diluted			30,570,719				30,370,229				30,521,022				30,272,674
Net income (loss) per share — basic		$	0.06			$	0.07			$	(0.06	)		$	(0.01	)
Net income (loss) per share — diluted		$	0.06			$	0.07			$	(0.06	)		$	(0.01	)

     Options to purchase 972,500 shares of common stock were not included in the computations of diluted earnings per share for the three and nine months ended September 30, 2007, because the exercise prices for the options were greater than the average market price of the common shares during that period. There were 238,739 shares of common stock that were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2007, because the market and/or performance criteria related to these shares had not been met at September 30, 2007.

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

     The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in Item 1 of our Annual Report on Form 10-K entitled, “Forward-Looking Statements.” All dollar amounts in this discussion, except for per share data and operating statistics, are in thousands.

Overview

     The terms “Great Wolf Resorts,” “us,” “we” and “our” are used in this report to refer to Great Wolf Resorts, Inc.

     Business. We are a family entertainment resort company that provides our guests with a high-quality vacation at an affordable price. We are the largest owner, operator and developer in North America of drive-to family resorts featuring indoor waterparks and other family-oriented entertainment activities. Our resorts generally feature approximately 270 to

400 family suites that sleep from six to ten people and each includes a wet bar, microwave oven, refrigerator and dining and sitting area. We provide a full-service entertainment resort experience to our target customer base: families with children ranging in ages from 2 to 14 years old that live within a convenient driving distance of our resorts. We operate under our Great Wolf Lodge^® and Blue Harbor Resort™ brand names. Our resorts are open year-round and provide a consistent and comfortable environment where our guests can enjoy our various amenities and activities.

     We provide our guests with a self-contained vacation experience and focus on capturing a significant portion of their total vacation spending. We earn revenues through the sale of rooms, which includes admission to our indoor waterpark, and other revenue-generating resort amenities. Each of our resorts features a combination of the following revenue-generating amenities: themed restaurants, an ice cream shop and confectionery, full-service spa, game arcade, gift shop, miniature golf, interactive game attraction and meeting space. We also generate revenues from licensing arrangements, management fees and other fees with respect to our operation or development of properties owned in whole or in part by third parties.

     The following table presents an overview of our portfolio of operating resorts and resorts under construction. As of September 30, 2007, we operate eight Great Wolf Lodge resorts (our signature northwoods-themed resorts) and one Blue Harbor Resort (a nautical-themed property).

																Indoor
		Ownership						Guest				Condo				Entertainment
		Percentage				Opening		Suites				Units				Area (1)
																(Approx. ft2)
Existing Resorts:
Wisconsin Dells, WI (2)			30.32	%		1997			308				77				102,000
Sandusky, OH (2)			30.32	%		2001			271				—				41,000
Traverse City, MI (3)			100	%		2003			280				—				51,000
Kansas City, KS			100	%		2003			281				—				49,000
Sheboygan, WI			100	%		2004			182				64				54,000
Williamsburg, VA			100	%		2005			405				—				78,000
Pocono Mountains, PA			100	%		2005			401				—				91,000
Niagara Falls, ONT (4)			—			2006			406				—				94,000
Mason, OH (5)			100	%		2006			401				—				93,000
Resorts Under Construction:
Grapevine, TX (6)			100	%		Late 2007			402				—				98,000
Grand Mound, WA (7)			49	%		Early 2008			398				—				78,000
Concord, NC (8)			100	%		Early 2009			400				—				95,000

     Industry Trends. We operate in the family entertainment resort segment of the travel and leisure industry. The concept of a family entertainment resort with an indoor waterpark was first introduced to the United States in Wisconsin Dells, Wisconsin and has evolved there over the past 17 years. In an effort to boost occupancy and daily rates, as well as capture off-season demand, hotel operators in the Wisconsin Dells market began expanding indoor pools and adding waterslides and other water-based attractions to existing hotels and resorts. The success of these efforts prompted several local operators to build new, larger destination resorts based primarily on the concept.

     We believe that these properties, which typically are themed and include other resort features such as arcades, retail shops and full food and beverage service in addition to the indoor waterpark, have historically outperformed standard hotels in the market. We believe that the rate premiums and increased market share in the Wisconsin Dells for hotels and resorts with some form of an indoor waterpark can be attributed to several factors, including the ability to provide a year-round vacation destination without weather-related risks, the wide appeal of water-based recreation and the favorable trends in leisure travel discussed below.

     While no standard industry definition for a family entertainment resort featuring an indoor waterpark has developed, we generally consider resorts with at least 200 rooms featuring indoor waterparks larger than 25,000 square feet, as well as a variety of water slides and other water-based attractions, to be competitive with our resorts. A recent Hotel & Leisure Advisors, LLC survey indicates that the number of indoor waterpark destination resorts that meet this definition has grown from 29 available properties as of year-end 2005 to 41 available properties as of year-end 2006.

     We believe recent vacation trends favor drive-to family entertainment resorts featuring indoor waterparks, as the number of families choosing to take shorter, more frequent vacations they can drive to has increased in recent years. We believe these trends will continue. We believe indoor waterpark resorts are generally less affected by changes in economic cycles, as drive-to destinations are generally less expensive and more convenient than destinations that require air travel.

     Outlook. We believe that no other operator or developer other than Great Wolf Resorts has established a portfolio of family entertainment resorts featuring indoor waterparks. We intend to continue to expand our portfolio of owned resorts

throughout the United States and to selectively seek licensing and management opportunities domestically and internationally. The resorts we are currently constructing and plan to develop in the future require significant industry knowledge and substantial capital resources. Similar family entertainment resorts compete directly with several of our resorts.

     Our primary business objective is to increase long-term stockholder value. We believe we can increase stockholder value by executing our internal and external growth strategies. Our primary internal growth strategies are to: maximize total resort revenue; minimize costs by leveraging our economies of scale; and build upon our existing brand awareness and loyalty in order to compete more effectively. Our primary external growth strategies are to: capitalize on our first-mover advantage by being the first to develop and operate family entertainment resorts featuring indoor waterparks in our selected target markets; focus on development and strategic growth opportunities by seeking to develop additional resorts and target selected licensing and joint venture opportunities; and continue to innovate by leveraging our in-house expertise, in conjunction with the knowledge and experience of our third-party suppliers and designers.

     In attempting to execute our internal and external growth strategies, we are subject to a variety of business challenges and risks. These challenges include: development and licensing of properties; increases in costs of constructing, operating and maintaining our resorts; competition from other entertainment companies, both within and outside our industry segment; and external economic risks, including family vacation patterns and trends. We seek to meet these challenges by providing sufficient management oversight to site selection, development and resort operations, concentrating on growing and strengthening awareness of our brand and demand for our resorts, and maintaining our focus on safety.

          We believe that our Traverse City and Sandusky resorts have been and will continue to be affected by adverse general economic circumstances in the Michigan/Northern Ohio region (such as bankruptcies of several major companies and/or large announced layoffs by major employers) and increased competition that has occurred in these markets over the past three years. The Michigan/Northern Ohio region includes cities that have historically been the Traverse City and Sandusky resorts’ largest suppliers of customers. We believe the adverse general economic circumstances in the region have negatively impacted overall discretionary consumer spending in that region over the past year and may continue to do so going forward. We believe this has and may continue to have an impact on the operating performance of our Traverse City and Sandusky resorts. Also, we have experienced a much slower-than-expected occupancy ramp-up and lower-than-expected average daily room rates at our Sheboygan, Wisconsin property since its opening in 2004. We believe this operating weakness has been primarily attributable to the fact that the overall development of Sheboygan as a tourist destination continues to lag behind our initial expectations. We believe this has impacted and will likely continue to impact the consumer demand for our indoor waterpark resort in that market and the operations of the resort. Additionally, our Mason resort opened its first phase in December 2006 and is continuing to ramp up during its first full year of operations.

     Our external growth strategies are based primarily on our development of additional indoor waterpark resorts (either alone or in conjunction with joint venture partners) and the development of additional indoor waterpark resorts by others (in a licensing situation). Developing resorts of the size and scope of our family entertainment resorts generally requires financing for a significant portion of a project’s expected construction costs. The subprime loan crisis in 2007 has precipitated a general tightening in US lending markets, resulting in a decrease in the overall availability of construction financing and less favorable terms for borrowers. Although we cannot predict the ultimate effect on our external growth strategy of the current credit environment, we believe that the availability to us of construction financing may be negatively impacted in the future and that terms of construction financing may be less favorable than we have obtained in recent years. Notwithstanding the current and anticipated continuing difficulties in the credit markets, we believe we can continue to obtain construction financing sufficient to execute our development strategies.

     Revenue and Key Performance Indicators. We seek to generate positive cash flows and maximize our return on invested capital from each of our owned resorts. Our rooms revenue represents sales to guests of room nights at our resorts and is the largest contributor to our cash flows and profitability. Rooms revenue accounted for approximately 67% of our total resort revenue for the nine months ended September 30, 2007. We employ sales and marketing efforts to increase overall demand for rooms at our resorts. We seek to optimize the relationship between room rates and

occupancies through the use of yield management techniques that attempt to project demand in order to selectively increase room rates during peak demand. These techniques are designed to assist us in managing our higher occupancy nights to achieve maximum rooms revenue and include such practices as:

	•		Monitoring our historical trends for occupancy and estimating our high occupancy nights;
	•		Offering the highest discounts to previous guests in off-peak periods to build customer loyalty and enhance our ability to charge higher rates in peak periods;
	•		Structuring rates to allow us to offer our previous guests the best rate while simultaneously working with a promotional partner or offering internet specials;
	•		Monitoring sales of room types daily to evaluate the effectiveness of offered discounts; and
	•		Offering specials on standard suites and yielding better rates on larger suites when standard suites sell out.

In addition, we seek to maximize the amount of time and money spent on-site by our guests by providing a variety of revenue-generating amenities.

     We have several key indicators that we use to evaluate the performance of our business. These indicators include the following:

	•		Occupancy;
	•		Average daily room rate, or ADR;
	•		Revenue per available room, or RevPAR;
	•		Total revenue per available room, or Total RevPAR;
	•		Total revenue per occupied room, or Total RevPOR; and
	•		Earnings before interest, taxes, depreciation and amortization, or EBITDA.

     Occupancy, ADR and RevPAR are commonly used measures within the hospitality industry to evaluate hotel operations and are defined as follows:

	•		Occupancy is calculated by dividing total occupied rooms by total available rooms.
	•		ADR is calculated by dividing total rooms revenue by total occupied rooms.
	•		RevPAR is the product of occupancy and ADR.
	Total RevPAR and Total RevPOR are defined as follows:
	•		Total RevPAR is calculated by dividing total revenue by total available rooms.
	•		Total Rev POR is calculated by dividing total revenue by total occupied rooms.

     Occupancy allows us to measure the general overall demand for rooms at our resorts and the effectiveness of our sales and marketing strategies. ADR allows us to measure the effectiveness of our yield management strategies. While ADR

and RevPAR only include rooms revenue, Total RevPOR and Total RevPAR include both rooms revenue and other revenue derived from food and beverage and other amenities at our resorts. We consider Total RevPOR and Total RevPAR to be key performance indicators for our business because we derive a significant portion of our revenue from food and beverage and other amenities. For the nine months ended September 30, 2007, approximately 33% of our total resort revenues consisted of non-rooms revenue.

     We use RevPAR and Total RevPAR to evaluate the blended effect that changes in occupancy, ADR and Total RevPOR have on our profitability. We focus on increasing ADR and Total RevPOR because we believe those increases can have the greatest positive impact on our profitability. In addition, we seek to maximize occupancy, as increases in occupancy generally lead to greater total revenues at our resorts, and we believe maintaining certain occupancy levels is key to covering our fixed costs. Increases in total revenues as a result of higher occupancy are, however, typically accompanied by additional incremental costs (including housekeeping services, utilities and room amenity costs). In contrast, increases in total revenues from higher ADR and Total RevPOR are typically accompanied by lower incremental costs and result generally, in a greater increase in profitability.

     We also use EBITDA as a measure of the operating performance of each of our resorts. EBITDA is a supplemental financial measure and is not defined by accounting principles generally accepted in the United States of America, or GAAP. See “Non-GAAP Financial Measures” below for further discussion of our use of EBITDA and a reconciliation to net income.

Recent Accounting Pronouncements

          In July 2006, the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

          We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. All of the tax years since the date of our IPO are open in all jurisdictions. Our policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense. We believe that we have appropriate support for the income tax positions taken and to be taken on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

          We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact the consolidated financial condition, results of operations or cash flows. At January 1, 2007, we had unrecognized tax benefits of $978, which primarily related to uncertainty regarding the sustainability of certain deductions taken on our 2005 and 2006 U.S. Federal income tax return related to transaction costs from our IPO. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. We do not expect the total amount of unrecognized tax benefits to change significantly in the next year.

          In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact of the adoption of this statement.

          In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits companies to choose to measure many financial assets and liabilities at fair value.

Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The provisions of this statement are required to be applied prospectively. We are currently evaluating the impact of the adoption of this statement.

Non-GAAP Financial Measures

     We use EBITDA as a measure of our operating performance. EBITDA is a supplemental non-GAAP financial measure. EBITDA is commonly defined as net income plus (a) net interest expense; (b) income taxes; and (c) depreciation and amortization.

     EBITDA as calculated by us is not necessarily comparable to similarly titled measures presented by other companies. In addition, EBITDA (a) does not represent net income or cash flows from operations as defined by GAAP; (b) is not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.

     We believe EBITDA is useful to an investor in evaluating our operating performance because:

	•		a significant portion of our assets consists of property and equipment that are depreciated over their remaining useful lives in accordance with GAAP. Because depreciation and amortization are non-cash items, we believe that presentation of EBITDA is a useful measure of our operating performance;
	•		it is widely used in the hospitality and entertainment industries to measure operating performance without regard to items such as depreciation and amortization; and
	•		we believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of items directly resulting from our asset base, primarily depreciation and amortization, from our operating results.

     Our management uses EBITDA:

	•		as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of items directly resulting from our asset base, primarily depreciation and amortization, from our operating results;
	•		for planning purposes, including the preparation of our annual operating budget;
	•		as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures and expand our business; and
	•		as one measure in determining the value of other acquisitions and dispositions.

     Using a measure such as EBITDA has material limitations. These limitations include the difficulty associated with comparing results among companies and the inability to analyze certain significant items, including depreciation and interest expense, which directly affect our net income or loss. Management compensates for these limitations by considering the economic effect of the excluded expense items independently, as well as in connection with its analysis of net income.

     The following table reconciles net loss to EBITDA for the periods presented.

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income (loss)		$	1,761			$	2,088			$	(1,900	)		$	(257	)
Adjustments:
Interest expense, net			3,278				954				8,739				3,084
Income tax expense (benefit)			715				1,340				(1,376	)			(172	)
Depreciation and amortization			9,105				6,430				26,567				18,697
EBITDA		$	14,859			$	10,812			$	32,030			$	21,352

Results of Operations

General

     Our results of operations for the three and nine months ended September 30, 2007 and 2006 are not directly comparable primarily due to the opening of our Great Wolf Lodge in Mason, Ohio in December 2006.

     Our financial information includes:

	•		our subsidiary entity that provides resort development and management/licensing services;
	•		our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono Mountains and Mason operating resorts;
	•		equity interests in resorts in which we have ownership interests but which we do not consolidate; and
	•		our resorts that are under construction which we will consolidate.

     Revenues. Our revenues consist of:

	•		lodging revenue, which includes rooms, food and beverage, and other department revenues from our resorts;
	•		management fee and other revenue from resorts, which includes fees received under our management, license, development and construction management agreements; and
	•		other revenue from managed properties. We employ the staff at our managed properties (except for the Niagara Falls resort). Under our management agreements, the resort owners reimburse us for payroll, benefits and certain other costs related to the operations of the managed properties. Emerging Issues Task Force, or EITF, Issue No. 01-14, “Income Statement Characteristics of Reimbursements for Out-of-Pocket Expenses” (EITF 01-14), establishes standards for accounting for reimbursable expenses in our statements of operations. Under this pronouncement, the reimbursement of payroll, benefits and costs is recorded as revenue on our statements of operations, with a corresponding expense recorded as “other expenses from managed properties.”

     Operating Expenses. Our departmental operating expenses consist of rooms, food and beverage and other department expenses.

     Our other operating expenses include the following items:

•

selling, general and administrative expenses, which are associated with the operations and management of resorts and which consist primarily of expenses such as corporate payroll and related benefits, operations management,

			sales and marketing, finance, legal, information technology support, human resources and other support services, as well as general corporate expenses;
	•		property operation and maintenance expenses, such as utility costs and property taxes;
	•		depreciation and amortization; and
	•		other expenses from managed properties, which are recorded as an expense in accordance with EITF 01-14.

     Three months ended September 30, 2007, compared with the three months ended September 30, 2006

The following table shows key operating statistics for our resorts for the three months ended September 30, 2007 and 2006:

		All Properties (a)				Same Store Comparison (b)
		Three months				Three months				Three months
		ended				ended				ended
		September 30,				September 30,				September 30,				Increase (Decrease)
		2007				2007				2006				$				%
Occupancy			69.9	%			73.0	%			73.4	%			N/A				(0.5	)%
ADR		$	248.36			$	248.75			$	242.67			$	6.08				2.5	%
RevPAR		$	173.55			$	181.63			$	178.17			$	3.46				1.9	%
Total RevPOR		$	371.06			$	370.81			$	358.76			$	12.05				3.4	%
Total RevPAR		$	259.29			$	270.76			$	263.40			$	7.36				2.8	%

     In December 2006 we opened our resort in Mason, Ohio. As a result, total revenue, rooms revenue and other revenue for the three month periods ended September 30, 2007 and 2006 are not directly comparable.

     Presented below are selected amounts from the statements of operations for the three months ended September 30, 2007 and 2006:

		Three months ended
		September 30,
										Increase
		2007				2006				(Decrease)
Revenues		$	50,898			$	40,779			$	10,119
Operating expenses:
Departmental operating expenses			16,455				12,345				4,110
Selling, general and administrative			10,005				9,382				623
Property operating costs			6,553				5,313				1,240
Depreciation and amortization			9,105				6,430				2,675
Net operating income			5,637				3,787				1,850
Net interest expense			3,278				954				2,324
Income tax expense			784				1,102				(318	)
Net income			1,761				2,088				(327	)

     Revenues. Total revenues increased primarily due to the opening of our Mason resort in December 2006, our construction of 104 additional guest suites at our Williamsburg resort and increased marketing efforts at our Williamsburg and Pocono Mountains resorts. Revenues increased at these resorts by $10,047 for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006.

     Operating expenses. Total operating expenses increased primarily due to the opening of our Mason resort in December 2006, our construction of 104 additional guest suites at our Williamsburg resort and increased marketing efforts at our Williamsburg and Pocono Mountains resorts.

	•		Departmental expenses increased by $4,095 for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006, due primarily to the opening of our Mason resort, the expansion of our Williamsburg resort and increased revenues at our Williamsburg and Pocono Mountains resorts.
	•		Selling, general and administrative expenses increased by $2,326 due primarily to the opening of our Mason resort, the expansion of our Williamsburg resort and increased marketing efforts at our Williamsburg and Pocono Mountains resorts, while corporate selling, general and administrative expenses decreased by $1,114 due primarily to decreased legal costs, and more capitalizable labor, due to increased development activity for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006.
	•		Total property operating costs (exclusive of opening costs) increased $1,232 for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006, due primarily to the opening of our Mason resort, as well as increased repairs and maintenance expense and increased utilities expense related to the expansion of our Williamsburg resort and amenity additions to several of our other resorts. Opening costs related to our resorts were $1,291 for the three months ended September 30, 2007, as compared to $1,282 for the three months ended September 30, 2006.
	•		Total depreciation and amortization increased mainly due to the opening of our Mason resort and the expansion at our Williamsburg resort. The total increase in depreciation and amortization at these two resorts was $2,352 during the three months ended September 30, 2007 as compared to three months ended September 30, 2006.

     Net operating income. During the three months ended September 30, 2007, we had net operating income of $5,637 as compared to a net operating income of $3,787 for the three months ended September 30, 2006.

     Net income. Net income decreased due to the following:

•

An increase in net interest expense of $2,324 mainly due to mortgage debt related our Pocono Mountains and Mason resorts.

     This increase was partially offset by:

	•		An increase in operating income from $3,787 for the three months ended September 30, 2006, to $5,637 for the three months ended September 30, 2007; and
	•		An decrease of $318 in income tax expense recorded in the three months ended September 30, 2007, as compared to the three months ended September 30, 2006.

     Nine months ended September 30, 2007, compared with the nine months ended September 30, 2006

The following table shows key operating statistics for our resorts for the nine months ended September 30, 2007 and 2006:

		All Properties (a)				Same Store Comparison (b)
		Nine months				Nine months				Nine months
		ended				ended				ended
		September 30,				September 30,				September 30,				Increase (Decrease)
		2007				2007				2006				$				%
Occupancy			65.1	%			67.0	%			67.8	%			N/A				(1.2	)%
ADR		$	244.90			$	240.32			$	237.85			$	2.47				1.0	%
RevPAR		$	159.52			$	160.93			$	161.29			$	(0.36	)			(0.2	)%
Total RevPOR		$	369.58			$	360.69			$	355.82			$	4.87				1.4	%
Total RevPAR		$	240.73			$	241.53			$	241.29			$	0.24				0.1	%

     In December 2006 we opened our resort in Mason, Ohio. As a result, total revenue, rooms revenue and other revenue for the nine month periods ended September 30, 2007 and 2006 are not directly comparable.

     Presented below are selected amounts from the statements of operations for the nine months ended September 30, 2007 and 2006:

		Nine months ended
		September 30,
										Increase
		2007				2006				(Decrease)
Revenues		$	145,648			$	114,442			$	31,206
Operating expenses:
Departmental operating expenses			49,145				35,913				13,232
Selling, general and administrative			34,582				31,983				2,599
Property operating costs			20,726				14,888				5,838
Depreciation and amortization			26,567				18,697				7,870
Net operating income			5,648				2,877				2,771
Net interest expense			8,739				3,084				5,655
Income tax benefit			(1,157	)			(83	)			(1,074	)
Net loss			(1,900	)			(257	)			(1,643	)