UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 ~~---------------------------- FORM~~

Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 3, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended July 3, 2005
OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC. ~~------------------------------------------------------ (Exact~~

(Exact name of registrant as specified in its charter) Minnesota 41-1913991 --------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 130 Cheshire Lane Minnetonka, Minnesota 55305 --------------------- ----- (Address of principal executive offices) (Zip Code)


Minnesota		41-1913991
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

130 Cheshire Lane Minnetonka, Minnesota		55305 (Zip Code)
(Address of principal executive offices)

(952) 449-9092 ~~(Registrant's~~

(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 ~~[X]~~o No ~~[ ]~~þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[ ]~~þ No ~~[X]~~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

As of ~~November 10, 2004,~~December 9, 2005, there were ~~22,250,634~~22,299,909 shares of Common Stock, $0.01 par value per share, outstanding. All share and per share data for periods prior to May 3, 2004 has been retroactively restated to give effect to a two-for-one stock split (the "Stock Split") in the form of a 100% stock dividend paid on May 3, 2004 to shareholders of record on April 26, 2004.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX

~~PAGE OF FORM~~

		Page of
		Form 10-Q ~~---------~~

PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets as of July 3, ~~October 3, 2004~~2005 (unaudited) and ~~December 28, 2003~~January 2, 2005		3
	Unaudited Condensed Consolidated Statements of Loss for the 4 three months ended ~~October~~July 3, 2005 and July 4, 2004 (restated)		4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended July 3, 2005 and ~~September 28, 2003~~July 4, 2004 (restated)		5
	Unaudited Condensed Consolidated Statements of Loss for the ~~nine 5~~six months ended ~~October~~July 3, 2005 and July 4, 2004 (restated)		6
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the six months ended July 3, 2005 and ~~September 28, 2003~~July 4, 2004 (restated)		7
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~8 nine~~six months ended ~~October~~July 3, 2005 and July 4, 2004 ~~and September 28, 2003 6~~ (restated)		8
	Notes to Unaudited Condensed Consolidated Financial Statements 7		9
ITEM 2. ~~MANAGEMENT'S~~	MANAGEMENT’S DISCUSSION AND 24 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20
ITEM 3.	QUANTITATIVE AND QUALITATIVE 37 DISCLOSURES ABOUT MARKET RISK		57
ITEM 4.	CONTROLS AND PROCEDURES 37		58
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS 38		58
ITEM 6.	EXHIBITS ~~AND REPORTS ON FORM 8-K 41~~		61
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 906

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)~~
(unaudited) OCTOBER 3, 2004 DECEMBER 28, 2003 --------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ 41,355 $ 25,340 (balance includes $27.6 million and $0 of WPT Enterprises, Inc. cash) Short-term investments 7,188 - (balance includes $6 million and $0 of WPT Enterprises, Inc. short-term investments) Accounts receivable, net 582 1,038 Deferred tax asset 1,504 5,385 Prepaids 1,832 2,119 Other current assets 1,165 1,645 -------- -------- Total Current Assets 53,626 35,527 -------- -------- Property and Equipment-Net 6,641 6,492 -------- -------- Other Assets: Land held under contract for sale 4,939 4,612 Land held for development 14,195 14,536 Notes receivable 90,939 84,682 Investments 7,937 8,717 Deferred tax asset 12,024 6,634 Other long-term assets 9,393 8,860 -------- -------- Total Other Assets 139,427 128,041 -------- -------- TOTAL ASSETS $199,694 $170,060 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,428 $ 1,906 Income taxes payable 6,426 7,215 Accrued payroll and related costs 573 497 Deferred revenue 4,067 505 Other accrued expenses 2,504 2,513 -------- -------- Total Current Liabilities 14,998 12,636 -------- -------- TOTAL LIABILITIES 14,998 12,636 -------- -------- COMMITMENTS AND CONTINGENCIES Minority interest 11,156 - Common shares issued by subsidiary subject to repurchase 608 - Shareholders' Equity: Capital stock, $.01 par value; authorized 200,000 shares; 22,247 and 21,474 common shares issued and outstanding at October 3, 2004, and December 28, 2003, respectively 235 215 Additional paid-in-capital 157,415 132,291 Retained earnings 15,282 24,918 -------- -------- Total Shareholders' Equity 172,932 157,424 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $199,694 $170,060 ======== ========

Consolidated Balance Sheets

July 3, 2005 and January 2, 2005


		July 3,			January 2,
		2005			2005

		(Unaudited)
		(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents	$	24,436		$	28,717
	(balance includes $5.6 million and $4.5 million of WPT Enterprises, Inc. cash)
	Short-term investments		26,566			28,930
	(balance includes $26.6 million and $27.8 million of WPT Enterprises, Inc. short-term investments)
	Accounts receivable, net of allowance of $0.2 million and $0		1,402			2,038
	Deferred tax asset		162			137
	Prepaids		684			1,233
	Other current assets		601			1,159

Total current assets			53,851			62,214

Property and equipment, net of accumulated depreciation			7,889			6,795

Long-term assets related to Indian casino projects
	Notes receivable, Indian Tribes		73,803			67,066
	Land held for development		15,783			15,433
	Intangible asset related to acquisition of management contracts		43,247			41,096
	Other		3,045			2,024

Total long-term assets related to Indian casino projects			135,878			125,619

	Investments		5,259			6,093
	Deferred tax asset		4,278			4,278
	Other		4,414			4,090

Total assets		$	211,569		$	209,089


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	3,464		$	780
	Income taxes payable		10,369			5,457
	Accrued payroll and related costs		697			891
	Deferred revenue		3,448			3,280
	Other accrued expenses		5,946			3,449

Total liabilities			23,924			13,857

Commitments and contingencies
Common shares issued by subsidiary subject to repurchase			639			618
Minority interest			11,185			11,222
Shareholders’ equity:
	Capital stock, $.01 par value; authorized 200,000 shares; 22,300 and 22,253 common shares issued and outstanding at July 3, 2005, and January 2, 2005, respectively		223			223
	Additional paid-in capital		158,130			157,895
	Retained earnings		17,510			25,280
	Accumulated other comprehensive loss		(42	)		(6	)

Total shareholders’ equity			175,821			183,392

Total liabilities and shareholders’ equity		$	211,569		$	209,089

The accompanying notes are an integral part of these consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Loss


			Three Months Ended

			July 3,			July 4,
			2005			2004

						(Restated)
			(Unaudited)
			(In thousands, except
			loss per share)
Revenues:
	License fee income		$	5,341		$	3,770
	Host fees, sponsorship and other			1,260			948

		Total revenues		6,601			4,718

Costs and expenses:
	Selling, general and administrative			6,970			3,146
	Production costs			4,377			2,645
	Net impairment losses			—			5,833
	Depreciation			113			150

		Total costs and expenses		11,460			11,774
	Net unrealized loss on notes receivable			(956	)		(44	)

Loss from operations				(5,815	)		(7,100	)

Other income:
	Interest income			364			43

		Total other income		364			43

Loss before income taxes, equity in loss of investments and minority interest				(5,451	)		(7,057	)
Income tax provision (benefit)				352			(469	)

Loss before equity in loss on investments and minority interest				(5,803	)		(6,588	)
Equity in loss of investments, net of tax				(7	)		(14	)

Loss before minority interest				(5,810	)		(6,602	)
Minority interest in net loss of subsidiary				159			—

Net loss			$	(5,651	)	$	(6,602	)

Loss per share, basic and diluted			$	(0.25	)	$	(0.30	)

Weighted average common shares outstanding				22,300			22,212

The accompanying notes are an integral part of these consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss


		Three Months Ended

		July 3,			July 4,
		2005			2004

					(Restated)
		(Unaudited)
		(In thousands)
Net loss		$	(5,651	)	$	(6,602	)
Other comprehensive loss, net of tax:
	Unrealized gain on securities		6			—

Comprehensive loss		$	(5,645	)	$	(6,602	)

The accompanying notes are an integral part of these consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Loss


			Six Months Ended

			July 3,			July 4,
			2005			2004

						(Restated)
			(Unaudited)
			(In thousands, except
			loss per share)
Revenues:
	License fee income		$	8,804		$	7,413
	Host fees, sponsorship and other			1,901			1,445

		Total revenues		10,705			8,858

Costs and expenses:
	Selling, general and administrative			13,435			6,394
	Production costs			7,564			5,117
	Net impairment losses			—			5,833
	Depreciation			204			293

		Total costs and expenses		21,203			17,637
	Net unrealized gain on notes receivable			1,880			530

Loss from operations				(8,618	)		(8,249	)

Other income:
	Interest income			814			91
	Other			—			42

		Total other income		814			133

Loss before income taxes, equity in earnings of investments and minority interest				(7,804	)		(8,116	)
Income tax provision (benefit)				707			(877	)

Loss before equity in earnings of investments and minority interest				(8,511	)		(7,239	)
Equity in earnings of investments, net of tax				6			245

Loss before minority interest				(8,505	)		(6,994	)
Minority interest in net loss of subsidiary				735			—

Net loss			$	(7,770	)	$	(6,994	)

Loss per share, basic and diluted			$	(0.35	)	$	(0.32	)

Weighted average common shares outstanding				22,289			21,982

The accompanying notes are an integral part of these consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss


		Six Months Ended

		July 3,			July 4,
		2005			2004

					(Restated)
		(Unaudited)
		(In thousands)
Net loss		$	(7,770	)	$	(6,994	)
Other comprehensive loss, net of tax:
	Unrealized loss on securities		(36	)		—

Comprehensive loss		$	(7,806	)	$	(6,994	)

The accompanying notes are an integral part of these consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows


			Six Months Ended

			July 3,			July 4,
			2005			2004

						(Restated)
			(Unaudited)
			(In thousands)
OPERATING ACTIVITIES:
	Net loss		$	(7,770	)	$	(6,994	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation		336			293
		Stock-based compensation expense		800			270
		Equity in earnings of investments		(6	)		(396	)
		Deferred income taxes		(25	)		(838	)
		Net impairment losses		—			5,833
		Unrealized gains on notes receivable		(1,879	)		(530	)
		Minority interest		(735	)		—
	Changes in operating assets and liabilities:
		Accounts receivable		636			715
		Prepaid expenses		549			—
		Other current assets		558			—
		Income taxes		4,912			28
		Accounts payable		999			(1,894	)
		Deferred revenue		168			—
		Accrued expenses		2,303			1,470

Net cash provided by (used in) operating activities				846			(2,043	)

INVESTING ACTIVITIES:
	Short-term investment securities			2,328			—
	Payments for land held under contract for sale			—			(251	)
	Advances on long-term assets related to Indian casino projects			(6,695	)		(8,157	)
	Payments to unconsolidated affiliates			(10	)		(226	)
	Proceeds from unconsolidated affiliates			850			1,683
	Payments for other long-term assets			(521	)		(391	)
	Decrease in other long-term assets			197			—
	Purchase of property and equipment			(1,430	)		(286	)

Net cash used in investing activities				(5,281	)		(7,628	)

FINANCING ACTIVITIES:
	Proceeds from sale of common stock			154			3,736

Net cash provided by financing activities				154			3,736

Net decrease in cash and cash equivalents				(4,281	)		(5,935	)
Cash and cash equivalents — beginning of period				28,717			25,340

Cash and cash equivalents — end of period			$	24,436		$	19,405

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid during the period for:
		Income taxes	$	45		$	13
	Noncash operating activities:
		Capitalized television costs related to unit options issued to consultants	$	—		$	139
		Acquisition of long-term assets and advances related to Indian casino projects	$	1,685		$	1,348

The accompanying notes are an integral part of these condensed consolidated financial statements. 3

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED STATEMENTS OF LOSS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)~~

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited) THREE MONTHS ENDED ------------------ OCTOBER 3, 2004 SEPTEMBER 28, 2003 --------------- ------------------ REVENUES: License fee income $ 2,974 $ 377 -------- -------- Total Revenues 2,974 377 -------- -------- COSTS

1.	BUSINESS OVERVIEW AND EXPENSES: Selling, general and administrative 3,710 2,224 Production costs 1,942 280 Depreciation and amortization 163 135 -------- -------- Total Costs and Expenses 5,815 2,639 -------- -------- LOSS FROM OPERATIONS (2,841) (2,262) -------- -------- OTHER INCOME (EXPENSE): Interest income 104 98 Equity in loss of unconsolidated affiliates (30) (50) Other 1 - -------- -------- Total other income, net 75 48 -------- -------- Loss before income taxes (2,766) (2,214) Benefit for income taxes (1,101) (912) -------- -------- Loss before minority interest (1,665) (1,302) Minority interest (53) - -------- -------- NET LOSS ($ 1,718) ($ 1,302) ======== ======== BASIC LOSS PER SHARE ($ 0.08) ($ 0.06) ======== ======== DILUTED LOSS PER SHARE ($ 0.08) ($ 0.06) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,232 21,278 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - - -------- -------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 22,232 21,278 ======== ======== ACCOUNTING POLICIES

~~The accompanying notes are an integral part of these condensed consolidated financial statements. 4~~ ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF LOSS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)~~

(unaudited) NINE MONTHS ENDED ----------------- OCTOBER 3, 2004 SEPTEMBER 28, 2003 --------------- ------------------ REVENUES: License fee income $ 11,832 $ 3,881 -------- -------- Total Revenues 11,832 3,881 -------- -------- COSTS AND EXPENSES: Selling, general and administrative 10,125 8,063 Production costs 7,059 2,370 Impairment losses 6,407 - Reversal of litigation and claims accrual - (3,212) Depreciation and amortization 456 394 -------- -------- Total Costs and Expenses 24,047 7,615 -------- -------- LOSS FROM OPERATIONS (12,215) (3,734) -------- -------- OTHER INCOME (EXPENSE): Interest income 195 649 Equity in earnings (loss) of unconsolidated 366 (197) affiliates Other 43 158 -------- -------- Total other income, net 604 610 -------- -------- Loss before income taxes (11,611) (3,124) Benefit for income taxes (2,028) (1,284) -------- -------- Loss before minority interest (9,583) (1,840) Minority interest (53) - -------- -------- NET LOSS ($ 9,636) ($ 1,840) ======== ======== BASIC LOSS PER SHARE ($ 0.44) ($ 0.09) ======== ======== DILUTED LOSS PER SHARE ($ 0.44) ($ 0.09) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,063 21,278 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - - -------- -------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 22,063 21,278 ======== ========

	*Business Overview*

~~The accompanying notes are an integral part of these condensed consolidated financial statements. 5~~ ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)~~

~~THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6~~ ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS~~

Lakes Entertainment, Inc., and Subsidiaries, a Minnesota corporation ~~("Lakes"~~(“Lakes” or the ~~"Company"~~“Company”) was established as a public corporation on December 31, 1998, via a distribution (the "Distribution") of its common stock, par value $.01 per share (the "Common Stock") to the shareholders of Grand Casinos, Inc. ("Grand"). Lakes' primary business is to develop and manage, has development agreements for various Indian-owned casino properties ~~that offer the opportunity for long-term~~and intends to manage such casinos when applicable regulatory approvals have been received and other contingencies have been satisfied. Lakes is also involved in other businesses, including development of ~~related entertainment facilities, including hotels, golf courses, theaters, recreational vehicle parks~~a Company-owned casino and other complementary amenities. Lakes provides experienced corporate and casino management and develops and implements a wide scale of marketing programs. In conjunction with this part of Lakes' business strategy, Lakes has entered into development and management agreements relating to one casino project in Michigan and two casino projects in California, withthe purchase/license or development of each subject to regulatory approvals. Lakes has also explored, and will continue to explore, numerous other possible development projects. Formed in March 2002 as a joint venture, World Poker Tour, LLC, a majority owned subsidiary of Lakes, created a circuit of previously-established poker tournaments affiliated under the "World Poker Tour" name, and produced the World Poker Tour television series. During August of 2004, WPT Enterprises, Inc. (WPTE) became a separate public company as a result of the completion of an initial public offering. Lakes remains a majority shareholder of WPTE, owning approximately 64% of the outstanding common stock. As a result, Lakes' consolidated results continue to include WPTE operations. WPTE has an agreement for a third season with the Travel Channel, LLC ("TRV"), for broadcast of the World Poker Tour series on cable television. TRV also has options for four additional seasons. WPTE receives a series of fixed license payments from TRV. Lakes has recently created a new division to buy, license and/or market new table game concepts for licensing to other casinos. In addition, as of July 3, 2005, Lakes owned approximately 62% of WPT Enterprises, Inc. (“WPTE”), a separate publicly held media and entertainment company principally engaged in the development, production and marketing of poker-themed televised programming, the licensing and sale of branded products and the sale of corporate sponsorships. Lakes’ unaudited condensed consolidated financial statements include the results of operations of WPTE, and in recent periods, all of Lakes’ revenues have been derived from WPTE’s business.

Lakes, through various subsidiaries, has entered into the following contracts for the development, and management of new casino operations, all of which are subject to various regulatory approvals and in some cases resolution of legal proceedings:


	•	Lakes has contracts to develop and manage The Foothill Oaks Casino, to be built on the Rancheria of the Shingle Springs Band of Miwok Indians (“Shingle Springs Tribe”) in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California (the “Shingle Springs Casino”).

	•	Lakes has contracts to develop and manage the Four Winds Casino resort to be built on land to be placed into trust for the Pokagon Band of Potawatomi Indians (“Pokagon Band”) in New Buffalo Township, Michigan near Interstate 94. The casino location will be near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago (the “Pokagon Casino”).

	•	Lakes has contracts to develop and manage a casino to be built on the Rancheria of the Jamul Indian Village (“Jamul Tribe”) located on State Highway 94, approximately 20 miles east of San Diego, California (the “Jamul Casino”).

	•	Lakes has consulting agreements and management contracts with three wholly-owned subsidiaries of the Pawnee Tribal Development Corporation (“Pawnee TDC” referred to collectively as the “Pawnee Nation”) in connection with assisting the Pawnee Nation in developing, equipping and managing three separate casino destinations.

	•	Lakes has consulting agreements and management contracts with the Iowa Tribe of Oklahoma (the “Iowa Tribe”) in connection with developing, equipping and managing a new casino and the Tribe’s existing Cimarron casino.

Lakes entered into consulting agreements and management contracts with the Kickapoo Traditional Tribe of Texas (the “Kickapoo Tribe”) effective as of January 2005 to improve the performance of the Kickapoo Tribe’s existing Lucky Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. During the third quarter of fiscal 2005 the Company’s relationship with the Kickapoo Tribe deteriorated and in November 2005, Lakes and the Kickapoo Tribe terminated their business relationship (Note 10).


	*Basis of Presentation*

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes, as restated Note 2 included within the Company’s Annual Report on Form 10-K for the year ended January 2, 2005, previously filed with the SEC on December 2, 2005, from which the balance sheet information as of that date is derived.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included, consisting only of normal recurring adjustments. The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

In addition to the restatements discussed in Note 3, certain amounts, as previously reported, have been reclassified to conform to the current period presentation.


2.	MANAGEMENT’S FINANCIAL PLANS

As of December 9, 2005, Lakes’ unaudited cash balance, excluding WPTE cash, was approximately $5.5 million. Lakes’ future quarterly corporate costs are expected to approximate $3.5 million and future quarterly development project-related costs are expected to approximate $3.5 million, however, a portion of these costs are discretionary and could be deferred if necessary. It is anticipated that Lakes will require additional capital through either public or private financings to fund operating expenses and development project-related costs during the remainder of 2005 and 2006 and the Company is currently considering various financing alternatives. The Company believes that its assets provide sufficient collateral to obtain the necessary financing. The assets of Lakes include common shares of WPTE that have an estimated fair value of $82.6 million as of December 9, 2005, based on the public trading price on that date, which may not be indicative of what Lakes could realize in a sale of its WPTE shares. The Company believes the shares of WPTE could be the source or part of the collateral for the additional financing. In addition, the Company continues to pursue engaging an investment banking firm to explore strategic alternatives for the Company’s shares of common stock of WPTE which may include the sale of part or all of such shares to fund Lakes’ operational and development needs. See Note 10 — subsequent events regarding Financing Facility.


3.	RESTATEMENT

During 2005, as a result of discussions with the staff of the SEC, the Company re-evaluated its accounting methodology surrounding its contractual relationships with Indian tribes and determined that it should have separately recognized the separate elements of its development and management agreements with the Indian tribes. Historically the Company recorded its advances to Indian tribes as notes receivable and deferred recognition of interest income due to the contingent repayment terms of the notes. The Company has now determined that as advances are made to the tribe pursuant to the development relationship it should have given separate recognition to the contractual notes receivable established and the related interests in management contracts that are acquired in conjunction with the development agreements. As a result the accompanying unaudited condensed consolidated financial statements for the three and six months ended July 4, 2004 have been restated from amounts previously reported to reflect these accounting changes

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

retroactively. A summary of the effects of the restatement on the results of operations for the quarterly period and six month period ended July 4, 2004, follows (in thousands, except per share data):


							For the Six
	For the Three			For the Three			Months Ended			For the Six
	Months Ended			Months Ended			July 4, 2004, As			Months Ended
Consolidated Statement	July 4, 2004, As			July 4, 2004,			Previously			July 4, 2004,
of Earnings (Loss)	Previously Reported			Restated			Reported			Restated

Net impairment losses	$	6,407		$	5,833		$	6,407		$	5,833
Total costs and expenses		12,357			11,774			18,232			17,637
Net unrealized gains (losses) on notes receivable		—			(44	)		—			530
Loss from operations		(7,639	)		(7,100	)		(9,374	)		(8,249	)
Income tax benefit		(461	)		(469	)		(927	)		(877	)
Net loss	$	(7,158	)	$	(6,602	)	$	(7,918	)	$	(6,994	)
Basic loss per share	$	(0.32	)	$	(0.30	)	$	(0.36	)	$	(0.32	)
Diluted loss per share	$	(0.32	)	$	(0.30	)	$	(0.36	)	$	(0.32	)

The following table illustrates the effect of the restatement on retained earnings:


	July 4, 2004

Retained earnings, as previously reported	$	17,000
Restatement adjustment		5,327

Retained earnings, as restated	$	22,327


4.	STOCK BASED COMPENSATION

The Company accounts for its employee stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (SFAS No. 123), to stock-based employee compensation (in thousands, except per share data).


		Three Months Ended						Six Months Ended

		July 3,			July 4,			July 3,			July 4,
		2005			2004			2005			2004

					Restated						Restated
Net loss:		$	(5,651	)	$	(6,602	)	$	(7,770	)	$	(6,994	)
As reported
	Less: Total stock-based compensation expense determined under the fair value method, net of related tax effects		(1,037	)		(361	)		(2,044	)		(717	)
Pro forma		$	(6,688	)	$	(6,963	)	$	(9,814	)	$	(7,711	)
Net loss per share, basic and diluted:
	As reported	$	(0.25	)	$	(0.30	)	$	(0.35	)	$	(0.32	)
	Pro forma	$	(0.30	)	$	(0.31	)	$	(0.44	)	$	(0.35	)

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)


5.	LOSS PER SHARE

For all periods, basic loss per share, is calculated by dividing the loss by the weighted average number of common shares outstanding. The effects of stock options and warrants have not been included in diluted loss per share for the three months ended or six months ended July 3, 2005 and July 4, 2004 as the effect would have been anti-dilutive as a result of losses.


6.	INCOME TAXES

In accordance with SFAS No. 109, Lakes evaluated the ability to utilize deferred tax assets arising from net operating loss carry forwards, deferred tax assets and other ordinary items and determined that a valuation allowance was appropriate at July 3, and January 2, 2005. Lakes evaluated all evidence and determined the negative evidence relating to delays in casino projects and net losses generated over the past three years outweighed the current positive evidence that the Company believes exists surrounding its ability to generate significant income from its long-term assets related to Indian casino projects. Therefore, the Company recorded a 100% valuation allowance against these items at July 3, and January 2, 2005. However, the Company has recognized a deferred tax asset related to capital losses during 2001 to 2004. The realization of these benefits is dependant on the generation of capital gains. The Company believes it will have sufficient capital gains in the foreseeable future to utilize these benefits due to significant appreciation in its investment in WPTE, which has a minimal cost basis. The Company owns approximately 12.5 million shares of WPTE common stock valued at approximately $82.6 million as of December 9, 2005 based upon the closing stock price as reported by Nasdaq on December 9, 2005 of $6.62.

The Company is currently ~~testing~~under examination for income and ~~marketing a number~~franchise tax matters. See Note 7 regarding the IRS Tax Audit and the Louisiana Department of ~~new games. See also Note 9. 7~~ Revenue Litigation Tax Matter.

7. COMMITMENTS AND CONTINGENCIES:


	*Tribal Commitments*

The Company’s development agreements with its tribal partners require the Company to provide financial support related to project development, in the form of loans.


	Tribal Casino Development Advances/Commitments
	As of July 3, 2005

	Pre-Construction		Land Held For		Remaining
	Advances		Development		Commitment

	(In thousands)
Jamul Tribe	$	15,289	$	6,612	$	8,099
Shingle Springs Tribe		35,765		8,811		5,424
Pokagon Band		45,365		—		27,635
Kickapoo Tribe*		645		304		1,051
Pawnee Nation		688		—		—
Iowa Tribe		83		55		862


*	Refer to Note 10 for further information regarding the Kickapoo Tribe project.

For the Pokagon Casino project, the Company has agreed to provide additional financing from its own funds if financing to the Pokagon Band at an interest rate not to exceed 13% is not available from third parties. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Based on discussions with prospective lenders, management presently believes that third-party financing will be available for this project. However, there can be no assurance that third-party financing will be available at the time the project begins construction.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) REVENUE RECOGNITION License fee income includes~~

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

Once the ~~following sources of WPTE revenue. DOMESTIC TELEVISION: Revenue from~~Pokagon Casino is open and Lakes is the ~~distribution~~manager of the ~~World Poker Tour domestic television series~~casino, the Company will be obligated to ~~TRV is recognized as earned under~~pay an amount to an unrelated third party related to a settlement and release agreement associated with Lakes obtaining the following criteria established by the American Institute of Certified Public Accountants Statement of Position ("SOP") No. 00-2, Accounting by Producers or Distributors of Films: - - Persuasive evidence of an arrangement exists - - The show/episode is complete, and in accordancemanagement contract with the ~~terms~~Pokagon Band. The obligation is payable quarterly for five years so long as Lakes is the manager of the ~~arrangement, has been delivered or is available for immediate and unconditional delivery - - The license period has begun~~casino, and the ~~customer can begin its exploitation, exhibition~~maximum liability over the five-year period is approximately $11 million.

Lakes may be required to provide a guarantee of tribal debt financing or ~~sale - - The seller's price~~otherwise provide support for the tribal obligations related to ~~the buyer is fixed and determinable - - Collectibility is reasonably assured Revenue is recognized upon receipt and acceptance of completed episodes by TRV in accordance with the terms~~any of the ~~contract. INTERNATIONAL TELEVISION: Revenue for international distribution~~projects. Any guarantees by Lakes will be recorded as a liability on the Company’s consolidated financial statements at the fair value of the television series is recognized as earned under the criteria of SOP 00-2, which is noted above. WPTE presents international distribution license fee revenues net of the distributor's fees, as the distributor is the primary obligator in the transaction with the ultimate customer. PRODUCT LICENSING: Product licensing revenues are recognized when the underlying royalties from the sales of the related products are earned. WPTE recognizes minimum revenue guarantees ratably over the term of the license or as earned royalties based on actual sales of the related products, if greater. HOST FEES: Host fee revenues paid by host casinos are recognized as episodes are aired. SPONSORSHIP: Sponsorship revenues are recognized as episodes are aired. DEFERRED REVENUE Licensing advances and guaranteed payments collected, but not yet earned by WPTE, as well as host fee and sponsorship receipts, collected prior to the airing of episodes, are classified as deferred revenue in the accompanying balance sheets. Deferred revenue is derived from three primary sources: Domestic Television, Product Licensing and Host Fees. Deferred revenue represents advanced payments received from TRV and product licensees, and deposits paid by casinos in order to secure a poker tournament date with the World Poker Tour as a host site. Deferred revenue was $4.1 million and $0.5 millionguarantee at October 3, 2004 and December 28, 2003, respectively. Deferred revenue at October 3, 2004 included $3.2 million from domestic television, $0.6 million from product licensing and $0.3 million from host fees. The $0.5 million balance at December 28, 2003 related to host fees. MINORITY INTEREST As of October 3, 2004, the $11.2 million minority interest balance on the accompanying balance sheet represents a 36% outside ownership interest in WPTE. COMMON SHARES SUBJECT TO REPURCHASEits inception.


	*Common Shares Subject to Repurchase*

WPTE violated certain securities laws in connection with its initial public offering by sending out written ~~e-mail~~email communications to individuals that did not contain all of the information required to be in a prospectus and were not preceded or accompanied by a prospectus meeting the requirements for a prospectus. These violations could require WPTE to repurchase shares sold in the offering to direct recipients of the ~~e-mail~~email communications for a period of up to one year at the offering price plus interest. WPTE sold 75,200 shares in the offering that ~~are~~were subject to such repurchase rights, and these shares ~~are~~were classified as common shares subject to ~~repurchase. It is possible that indirect recipients~~repurchase as of July 3, 2005 and January 2, 2005. As of August 9, 2005, the ~~written e-mail communications would assert that they have shares subject to~~one-year anniversary of WPTE’s initial public offering, WPTE’s repurchase ~~rights~~obligation with respect to such shares ~~purchased~~expired, and these shares were reclassified as equity as of October 2, 2005.


	*IRS Tax Audit*

The Company’s federal income tax returns are under audit by the Internal Revenue Service (“IRS”) for the fiscal years ended 2001 and 2000 related to the treatment of income categorized as a capital gain. If the Company is unsuccessful in sustaining its position the Company may be required to pay up to approximately $3.2 million plus interest and penalties related to tax on ordinary income, but this would be offset by re-establishing capital losses that would then be available to offset future capital gains, if any. The Company believes it will have sufficient capital gains in the ~~offering.~~foreseeable future to utilize these benefits due to significant appreciation in its investment in WPTE. The Company owns approximately 12.5 million shares of WPTE ~~believes that~~common stock valued at approximately $82.6 million as of December 9, 2005 based upon the ~~repurchase rights do not extend to indirect recipients and would contest any such assertion vigorously; therefore, no such shares have been recorded~~closing stock price as reported by Nasdaq on December 9, 2005 of $6.62. Lakes’ basis in the WPTE common ~~shares subject to repurchase. LAND HELD UNDER CONTRACT FOR SALE On December 28, 2001, the~~stock is minimal.


	*Leases*

The Company ~~entered into agreements to sell the Polo Plaza shopping center~~leases certain property and ~~the rights~~equipment, including an airplane, under non-cancelable operating leases. The Company’s airplane lease contained a residual value guarantee of $7.5 million. Rent expense, under non-cancelable operating leases, exclusive of real estate taxes, insurance, and obligations in the adjacent Travelodge property in Las Vegas, to Metroflag Polo, LLC and Metroflag BP, LLC, respectively ("Metroflag"). These sales were recorded under the deposit method of accounting. The terms of the agreements were amended in 2002 and 2003, including the selling prices and required payment dates. The amended sale prices were $23.8maintenance expense was $0.4 million and ~~$7.5~~$0.1 million ~~respectively. In 2003, the Company received a $16.8 million cash payment on the purchase price~~ for the ~~Polo Plaza property, at which time~~three-month period ended July 3, 2005 and July 4, 2004, respectively and $1.1 million and $0.2 million for the ~~Polo Plaza transaction was recorded as a sale. As of October~~six month period ended July 3, 2005 and July 4, 2004. During 2004, the Company ~~is owed $8 million (excluding interest) related to~~determined that the Polo Plaza property through the contractual requirement that Metroflag Polo, LLC redeem membership interests owned by the Company. The Company owns a subordinated membership interest that must be redeemed for $4 millionvalue of the ~~purchase price if the secured debt related~~aircraft had decreased to ~~the Travelodge property, which is due on December 28, 2004, is paid, or if the property is sold or the primary secured debt is refinanced. The Company also holds a preferred membership interest that~~$6.1 million. Therefore, the Company ~~can require to be repurchased anytime after December 24, 2006 for~~began accruing the expected deficiency over the remaining $4term of the lease This resulted in additional expense of $0.6 million purchase price portion. A total of $7 million in the Metroflag membership interests owned by the Company is included in "Investments" on the Company's consolidated balance sheet as of October 3, 2004. The $1 million difference is due to an impairment charge recorded in the fourth quarter of ~~2002 related to an unexercised early payment option on~~2004 and $0.8 during the ~~subordinated membership interest. 8~~ ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As of October~~six months ended July 3, ~~2004,~~2005. At the Company is contractually owed approximately $5.4 million plus interest related to the Travelodge property, and that amount becomes due on December 28, 2004. Of this amount, $4.9 million is included in "Land held under contract for sale" on the Company's consolidated balance sheets, with an offsetting deposit of $500,000 included in "Other accrued expenses". The difference between the $5.4 million owed to the Company and the $4.4 million net amount recorded on the Company's books is due to a $1 million impairment recorded in the fourth quarter of 2003. This charge was due to an early payment discount that the Company was considering extending to Metroflag; however, the discount was never granted. Company management recently entered negotiations with Metroflag that may result in further revisions to certainend of the payment terms for one or both of the properties. The Company believes the amounts recorded on its balance sheet are collectible, as the obligations are supported by agreements documenting the amounts owed to the Company and the related payment terms and the Company believes that Metroflag will be able to pay the amounts owed. In addition, the indebtedness due to Lakes for the Travelodge property is secured bylease term in April 2005 a first priority deed of trust against the leasehold interest. Therefore, if Metroflag were to default on its payment obligations related to the Travelodge property, ownership rights and obligations related to this property, consisting of a long-term land lease and motel operation, would revert back to Lakes. The Company believes the security for the Travelodge note receivable is adequate, based on management's assessment of land, values for similarly situated properties in Las Vegas, Nevada. LAND HELD FOR DEVELOPMENT Included in land held for development is land held for possible transfer to Indian tribes for use in future casino resort projects in the amount of $14.1 million and $14.5 million as of October 3, 2004 and December 28, 2003, respectively. In the event that this land is not transferred to the tribes, it can be sold by the Company. The Company periodically evaluates whether events and circumstances have occurred that may affect the recoverability of the net book value of these assets. If such events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the expected future undiscounted cash flows does not exceed the carrying value of the asset. the Company will recognize an impairment loss. During the second quarter of 2004, an impairment related to the land held for development in the amount of $0.5 million was recorded related to the Nipmuc Nation casino development project. This amount was included in the total impairment charge of $6.4 million related to the Nipmuc Nation project which also included a $5.9 million impairment charge on related notes receivable. This impairment occurred after the Nipmuc Nation was denied federal recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs (BIA). RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB issued an exposure draft of a proposed standard entitled "Share Based Payment", which would amend FAS No. 123, "Accounting for Stock-Based Compensation", and FAS No. 95, "Statement of Cash Flows". The proposed standard, if adopted, would require expensing stock options issued by the Company based on their estimated fair value at the date of grant and would be effective for the third quarter of 2005. Upon issuance of a final standard, the Company will evaluate the impact on our consolidated financial position and results of operations. 9 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. WPT ENTERPRISES, INC. INITIAL PUBLIC OFFERING On August 9, 2004, the Securities and Exchange Commission declared effective a registration statement of WPTE that registered the offer and sale of up to 4,000,000 shares of WPTE common stock, at $8.00 per share, in WPTE's initial public offering and an additional 600,000 shares of WPT common stock that were sold by the underwriters involved in the offering exercise related to their over-allotment option. WPTE's common stock was approved for trading on The Nasdaq Stock Market and began trading on August 10, 2004. Proceeds from the sale of the 4,600,000 shares were $32.4 million, net of estimated offering expenses and underwriting discounts. These proceeds have been and will continue to be used to expand WPTE's entertainment production business and for its working capital. There were no selling shareholders participating in the offering. Net proceeds in excess of minority interest have been reflected as additional paid-in-capital in the Company's financial statements. Lakes did not recognize a gain on this transaction. As of October 3, 2004, Lakes' consolidated balance sheet included unrestricted cash and cash equivalents and short-term investment balances of $48.5 million. Included in this amount was WPTE cash and cash equivalents and short-term investments of $33.6 million, which as discussed above, will be used in WPTE's business and not used in Lakes' business. 3. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Lakes and its wholly-owned and majority-owned subsidiaries. The portion of the income applicable to non-controlling interests in the majority-owned operations is reflected as minority interest in the accompanying consolidated statement of loss. Investments in unconsolidated affiliates representing 50% or less of voting interests are accounted for on the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. Lakes' investments in unconsolidated affiliates include a 50 percent ownership interest in PCG Santa Rosa, LLC, a joint venture formed to develop a casino on Indian-owned land in California and a 50% ownership interest in 2022 Ranch, LLC, a joint venture formed to develop and/or sell approximately 2000 acres owned by the joint venture in Eastern San Diego County. This land was sold during the first quarter of 2004. The sale of the land reduced Lakes' investment in 2022 Ranch to less than $0.1 million. The condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, in accordance with the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the condensed consolidated financial statements have been condensed or omitted. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the nine months ended October 3, 2004 are not necessarily indicative of the results that may be expected for the year ending January 2, 2005. The condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 28, 2003. 10 4. STOCK-BASED COMPENSATION At October 3, 2004, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In connection with the initial public offering of WPTE and the conversion of World Poker Tour, LLC (see Note 1) into a Delaware corporation named "WPT Enterprises, Inc.", each of World Poker Tour, LLC's limited liability company units was converted into shares of common stock. WPTE adopted a 2004 Stock Incentive Plan that is authorized to grant stock-based awards to purchase up to 3,120,000 shares of WPTE common stock, including options to purchase up to 1,120,000 shares of WPTE common stock issued to WPTE employees and consultants that were outstanding under World Poker Tour, LLC's 2002 Plan at the time of the conversion. In addition, during August and September of 2004, WPTE granted stock options to purchase an additional 1,412,000 shares, including 1,340,000 shares to employees and 72,000 shares to non-employee directors. 11 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The Company accounts for the WPTE 2004 stock incentive plan and the World Poker Tour, LLC 2002 unit-based employee compensation plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Compensation expense for unit option grants issued to employees was recorded to the extent the fair market value of the units on the date of grant exceeds the option price. Compensation expense for restricted 2002 unit grants was measured based on the fair market value of the units on the date of grant. The compensation expense was amortized ratably over the vesting period of the awards. The Company accounts for WPTE unit-based consultant compensation according to the recognition and measurement principles of EITF 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense for unit option grants issued to consultants is recorded at the fair market value of the options at the measurement date, defined as the date the options vest and services have been provided. The WPTE options resulting from conversion of the WPTE unit options become exercisable in quarterly installments on each of the first four anniversaries of the date of the grant and each installment expires six years after being exercisable. The employee must be employed by WPTE on the anniversary date in order to vest in any units that year. If the employee is terminated (voluntarily or involuntarily) prior to the vesting of any portion of a unit option, the unvested portion will be forfeited. For WPTE unit options issued to certain employees in March 2002, deferred stock compensation for the unit options is measured at the units' fair value in excess of the exercise price on the date of grant and is being amortized over the vesting period of four years. For WPTE unit options issued to consultants in March 2002, compensation expense is measured at the option's fair value. Fair value is measured when the unit options vest in annual installments on each of the first four anniversaries of the date of the grant. Compensation expense is estimated in periods prior to vesting based on the then current fair value. Changes in the estimated fair value of unvested options are recorded in the periods the change occurs. No stock-based employee compensation cost is reflected in net income for WPTE stock options granted to employees and non-employee directors in August and September 2004, as all options granted had an exercise price equal to the market value of the underlying common stock on the dates of grant. The following table illustrated the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation under the Lakes' and WPTE option plans and unit-based employee and consultant compensation under the WPTE Plans (in thousands except per share data). 12 ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)~~

5. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS The ownership, development, management and operation of gaming facilities are subject to extensive federal, state, provincial, tribal and/or local laws, regulation, and ordinances, which are administered by the relevant regulatory agency or agencies in each jurisdiction. These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally concern the responsibility, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations. The Company is prohibited by the Indian Gaming Regulatory Act from having an ownership interest in any casino it manages for Indian tribes. The management contracts govern the relationship between the Company and the tribes with respect to the management of the casinos. The development portion of the agreements commences with the signing of the respective contracts and continues throughout the construction phase until the casino is open for business; thereafter, the management portion of the respective management contracts continues for a period up to seven years. Under the terms of the contracts, the Company, as manager of the casino, receives a percentage of the distributable profits (as defined in the contract) of the operations as a management fee after payment of certain priority distributions, a cash contingency reserve, and guaranteed minimum payments to the tribes. Lakes has a contract to be the exclusive developer and manager of an Indian-owned gaming resort near New Buffalo, Michigan with the Pokagon Band of Potawatomi Indians. The Company has formed partnerships that hold contracts to develop and manage two casinos to be owned by Indian tribes in California, one near San Diego with the Jamul Indian Village, and the other near Sacramento with the Shingle Springs Band of Miwok Indians. 13 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. NOTES RECEIVABLE The notes receivable from Indian Tribes result from costs incurred by the Company for the development of gaming properties under which the Company has signed management contracts. The Company has formal procedures governing its evaluation of opportunities for potential development projects which it follows before entering into agreements to provide financial support for the development of these properties. The repayment terms related to these notes receivable are specific to each tribe and are largely dependent upon the operating performance of each gaming property. Repayments of the aforementioned notes receivable are required to be made only if distributable profits are available from the operation of the related casinos. Repayments are also subject to certain distribution priorities specified in the management contracts. In addition, repayment of the notes receivable and the manager's fees under the management contracts are subordinated to certain other financial obligations of the respective tribes. Notes receivable consist of the following (in thousands):

Interest income on notes receivable from Indian Tribes related to properties under development is deferred because realizability of the interest is contingent upon the completion and positive cash flow from operation of the casino. Interest deferred during the development period is recognized over the remaining life of the note using the effective interest method. As of October 3, 2004 and December 28, 2003, $19.2 million and $15.2 million of interest on notes related to properties under development has been deferred. 14 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The terms of these notes require the casinos to be constructed and to generate positive cash flows prior to the Company receiving repayment. As such, an estimate of the fair value of these notes requires an assessment of the timing of the construction of the related casinos and the profitability of the related casinos. Due to the significant uncertainty involved in such an assessment, the Company does not believe that it is practicable to accurately estimate the fair value of these notes with the degree of precision necessary to make such information meaningful. On a monthly basis, Company management evaluates the collectibility of the Company's receivables, including notes receivable related to the Indian-owned casino development projects. In the Company's experience, if a project is successfully completed, the cash flows are more than sufficient to fund the debt service. Therefore, in evaluating the receivables related to casino projects, the principal ongoing assessment involves the likelihood of project completion. If a significant event occurs that causes management to believe that the project will likely not be successfully completed, then the Company will recognize an impairment on the related receivables. A portion of the notes due from the Pokagon Tribe in the approximate amount of $23.6 million resulted from funds advanced by the Company for the Tribe's purchase of the development project land. The Company has a first deed of trust against this property which will be relinquished when the land is placed into trust by the BIA. As part of the monthly assessment, the current status of each project is discussed, as well as any recent developments such as contract approvals, litigation, land in trust issues, or any other developments that may affect the project's status. Management looks at the same factors it initially considered with respect to the investment. The Company's policy is to assess assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and to record an impairment when the carrying value of the asset exceeds its fair value. During the second quarter of 2004, the Company recorded an impairment related to the Nipmuc Nation notes receivable in the amount of $5.9 million. This amount was included in the total impairment charge of $6.4 million related to the Nipmuc Nation project. The notes receivable related to amounts advanced by the Company to the Nipmuc Nation since the Company entered a letter of intent with the Nipmuc Nation in August 2000. The impairment was recorded upon issuance by the BIA in June 2004 of its final determination denying the Nipmuc Nation's application for federal recognition. Although the determination can be appealed with the Bureau of Indian Affairs, the Company determined in June 2004 that in the Company's opinion successful completion of the project is unlikely given that a successful appeal would involve a challenge to a final determination of the ~~BIA. 15~~ ~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) With the exception~~actual deficiency was made and based on that determination a payment of ~~the BIA's denial~~$1.4 million was made during August 2005.

The airplane lease was amended on May 1, 2005, which allows for a base term of federal recognition for the Nipmuc Nation in June 2004, no events have occurred during 2004 that would cause management to believe that its other projects will not be successfully completed. Various litigationone year and regulatory issues have caused delays to the Company's current development projects. Management believes that the three pending projects will ultimately be completed. 16 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. INCOME TAXES The Company is currently under examination in various states for income and franchise tax matters. The Internal Revenue Service has completed a field exam of the Company's tax returns for the years ended December 30, 2001 and December 31, 2000. The Company has recorded a reserve assessment related to these examinations and other tax matters. The reserve is reflected as part of income taxes payable on the accompanying consolidated balance sheets. No income tax benefit was recorded related to impairment losses of $6.4 million in the second quarter of 2004, due to the uncertainty of realizability. 8. COMMITMENTS AND CONTINGENCIES: TRIBAL COMMITMENTS Our management contracts with our tribal partners require that we provide financial support related to project development, in the form of loans.

For the Pokagon project, the Company has agreed to provide additional financing from its own funds if financing to the Tribe at an interest rate not to exceed 13% is not available from third parties. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Currently, it appears that third-party financing will be available for this project. However, there can be no assurance that third-party financing will be available and that Lakes will not be required to provide this additional financing. Lakes may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects. Any guarantees by Lakes or similar off-balance sheet liabilities will increase Lakes' potential exposure in the event of a default by any of these tribes. WPTE EMPLOYEE OBLIGATION WPTE employee obligation includes the base salaries payable to three WPTE executives under their respective employment agreements.two one-year renewal terms. Total ~~payments of $1.8 million are due within the next three years under these agreements. 17~~ LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) LEASES The Company leases an airplane, under a non-cancelable operating lease. Approximate future minimum lease payments due under this lease asare approximately $2.0 million payable ratably over the three-year lease term. Under the lease agreement, the Company has the option of October 3, 2004, expiring April 30, 2005, are as follows (in thousands): Operating Leases ---------------- 2004 $150 2005 200 $350 INDEMNIFICATION AGREEMENT As a partrenewing the lease, purchasing the airplane at amounts which range from approximately $5.2 million to

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

$5.8 million or facilitating the sale of the ~~transaction establishing Lakes as a separate public company on December 31, 1998,~~aircraft at the end of each term included in the up to three year lease term; however at the conclusion of the lease, the Company agreed to indemnify Grand through December 28, 2004 against all costs, expenses and liabilities incurred in connection with or arising out of certain pending and threatened claims and legal proceedings against Grand and to pay all related settlements and judgments. The Company's indemnification obligations include the obligation to provide the defense of all claims made in proceedings against Grand and to pay all related settlements and judgments. The Company believes that no further payments areis required to ~~be made pursuant to its indemnification obligations. The current carrying amount~~purchase the airplane or facilitate the sale of the ~~liability for~~airplane. The Company’s airplane lease contains a residual value guarantee of $5.2 million at the ~~Company's indemnification obligations is zero. As a part~~end of the indemnification agreement, Lakes agreed that it will not declare or pay any dividends, make any distribution on account of Lakes' equity interests, or otherwise purchase, redeem, defease or retire for value any equity interests in Lakes without the written consent of Caesars Entertainment, Inc, the parent Company of Grand. LEGAL PROCEEDINGS SLOT MACHINE LITIGATIONthree year lease term.


	*Legal Proceedings*


	*Slot Machine Litigation*

In 1994, William H. Poulos filed a class-action lawsuit in the United States District Court for the Middle District of Florida against various parties, including Grand and numerous other parties alleged to be casino operators or slot machine manufacturers. This lawsuit was followed by several additional lawsuits of the same nature against the same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in the United States District Court for the District of Nevada. 18 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Following a court order dismissing all pending pleadings and allowing the plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging that the defendants fraudulently marketed and operated casino video poker machines and electronic slot machines, and asserting common law fraud and deceit, unjust enrichment and negligent misrepresentation and claims under the federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed by the defendants seeking to have this new complaint dismissed or otherwise limited. In December 1997, the Court, in general, ruled on all motions in favor of the plaintiffs. The plaintiffs then filed a motion seeking class certification and the defendants opposed it. In June 2002, the District Court entered an order denying class certification. On August 10, 2004, the Ninth Circuit Court of Appeals affirmed the District Court's denial of class certification. Management currently believes the final outcome of this matter is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations, and currently an estimate of any possible loss cannot be made. WILLARD EUGENE SMITH LITIGATION On October 24, 2003, Lakes announced that it had been named as one of a number of defendants in a counterclaim filed in state court in Harris County, Texas by Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons and entities. In the counterclaim, Smith asserts that, under an alleged oral agreement with Kevin Kean, he is entitled to a percentage of fees to be received by the KAR entities or their principals relating to the Shingle Springs and Jamul casinos that Lakes' subsidiaries are developing in California. Smith also seeks recovery of damages through the remedy of either attachment of the management fees generated from the projects or avoidance of buyout agreements between Lakes and KAR based on their conduct with respect to the alleged agreement. Lakes believes the counterclaim against it is without merit. Lakes understands that the alleged oral agreement upon which Smith bases his claim was rendered null and void in a prior judgment issued against Smith by the Harris County, Texas state court in October 2000. However, in September 2003, the court vacated the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle Springs and Jamul projects on January 30, 2003. In the buyout agreements between Lakes and certain KAR entities and related principals, the KAR entities represented to Lakes that the KAR entities and their affiliates had no continuing agreements with any third party relating to the Shingle Springs and Jamul projects and agreed to indemnify Lakes and its affiliates from damages resulting from prior dealings of the KAR entities and related principals concerning the projects. Lakes will vigorously defend against the allegations made against it and will pursue its indemnification rights against the KAR entities and their principals under the buyout agreements if necessary. Discovery is continuing and the trial is scheduled for March 2005. Management currently believes the final outcome of this matter is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations, and currently an estimate of any possible loss cannot be made. 19 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) EL DORADO COUNTY, CALIFORNIA LITIGATION On January 3, 2003, El Dorado County filed an action in the Superior Court of the State of California, seeking to prevent the construction of a highway interchange that was approved by a California state agency. The action does not seek relief directly against Lakes. However, the interchange is necessary to permit the construction of a casino to be developed and managed by Lakes through a joint venture. The casino will be owned by the Shingle Springs Band of Miwok Indians. The matter was tried to the court on August 22, 2003. On January 2, 2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of California, issued his ruling on the matter. The Court denied the petition in all respects except one. As to the one exception, the Court sought clarification as to whether the transportation conformity determination used to determine the significance of the air quality impact of the interchange operations considered the impact on attainment of the state ambient air quality standard for ozone. The California Department of Transportation (Caltrans) prepared and filed the clarification addendum sought by the Court. Prior to the Court's determination of the adequacy of the clarification, El Dorado County and Voices for Rural Living appealed Judge Connelly's ruling to the California Court of Appeals on all of the remaining issues. The Company believes that appellants have not presented sufficient grounds to justify overturning the trial court's earlier conclusion and that the Company will prevail on the consolidated appeals of the County and Voices for Rural Living. A ruling with respect to the addendum was issued June 21, 2004 by the Superior Court of California, County of Sacramento. The ruling indicates that the addendum provided to the court by Caltrans did not provide a quantitative showing to satisfy the court's earlier request for a clarification on meeting the state ambient ozone standard. The court recognized that the information provided by Caltrans does qualitatively show that the project may comply with the state standard, but concluded that a quantitative analysis is necessary even though the court recognized that the methodology for that analysis "is not readily apparent". In addition, the ruling specifically states, "Moreover such methodology appears necessary for the CEQA analysis of transportation projects throughout the state, including transportation projects for which respondents (i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe and Lakes responded to the court with a revised submission in August 2004. Representatives of the California Air Resources Board and the Sacramento Area Council of Governments filed declarations supporting the revised submission to the court. Opposition to that revised submission was filed, a hearing on the revised submission took place on August 20, 2004 and the Court again found the revised submission of Caltrans, the Shingle Springs Tribe and Lakes to be inadequate. That ruling has been separately appealed to the California Court of Appeals. Management currently believes the final outcome of this matter is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations, as it believes, but there can be no assurance that, the courts' rulings will ultimately allow the project to commence. GRAND CASINOS, INC. LITIGATION In connection with the establishment of Lakes as a public corporation on December 31, 1998, via a distribution of its common stock to the shareholders of Grand, the Company and Grand entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand and certain affiliated companies. 20 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On August 13, 2004, an arbitrator awarded to the Company partial summary judgment on certain of the Company's claims against Grand under the tax sharing agreement. The dollar amount that will be awarded to the Company on these claims has not been determined, certain other claims by the Company under the agreement have not been decided, and no hearing date has been set to determine such dollar amount or decide such claims. OTHER LITIGATION Lakes is involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the final outcome of these matters, including the matters discussed above, is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations. 9. RELATED PARTY TRANSACTIONS Lakes has entered into a license agreement with Sklansky Games, LLC ("Sklansky) pursuant to which Lakes is developing a World Poker Tour No Limit Texas Hold `Em casino table game that uses certain of Sklansky's intellectual property rights. Lakes had also entered into a license agreement with WPT pursuant to which Lakes has obtained a license to utilize the World Poker Tour name and logo in connection with the development of this casino table game. Under the terms of this agreement, if Lakes elects to proceed with its development of the casino table game, Lakes will be required to pay WPTE a specified minimum annual royalty payment of 10% and Sklansky a specified minimum annual royalty payment of 30% of the gross revenue Lakes receives from its sale or lease of the game, whichever is greater. In addition to our indirect majority ownership in WPT Enterprises, Inc. through one of our wholly owned subsidiaries, Lyle Berman and his son, Brad Berman, own 28% and 44% equity interests in Sklansky, respectively. Lyle Berman also serves as Chairman and Chief Executive Officer of WPTE, and Brad Berman is a member of WPTE's Board of Directors. Effective as of February 24, 2004, WPTE entered into a non-exclusive license agreement with G-III Apparel Group, Ltd. ("G-III"). Morris Goldfarb, a Lakes director, is a director, Co-Chairman of the Board and Chief Executive Officer of G-III. Under the agreement, G-III licenses the World Poker Tour name, logo and trademark from WPTE in connection with G-III's production of certain types of apparel for distribution in authorized channels within the United States, its territories and possessions and in certain circumstances, Canada. As consideration for this non-exclusive license, G-III pays royalties and certain other fees to WPTE. 21 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 10. SEGMENT INFORMATION Lakes' principal business is the development and management of gaming related properties. Additionally, the Company is the majority owner of WPT Enterprises, Inc. (See Note 1). Substantially, all of our operations are conducted in the United States. Episodes of the World Poker Tour series are distributed internationally by a third party distributor. Lakes' reportable segments are as follows (in millions):

11. STOCK SPLIT During April of 2004, the Company's Board of Directors declared a two-for-one stock split, payable in the form of a 100% stock dividend on Lakes' outstanding common stock. The stock dividend was paid on May 3, 2004 to shareholders of record as of April 26, 2004. All share and per share data reflected in this quarterly report has been retroactively restated to give effect to the stock split. 22 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 12. SUBSEQUENT EVENTS On November 10, 2004, the Company announced that it had signed a Letter of Intent with the Kickapoo Traditional Tribe of Texas to negotiate an agreement with the Tribe to consult on the further development and operations of the Tribe's casino located in Eagle Pass, Texas. Subject to regulatory approval, the consulting agreement will be replaced by a management contract. The Tribe recently opened the expanded Luck Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. The casino currently consists of approximately 1,000 Class II type gaming devices, ten Kickapoo 21 tables and seventeen poker tables along with two restaurant outlets and a multi-functional outlet that seats over 2,000 customers. The Letter of Intent provides that the Tribe and Lakes will negotiate and enter into a consulting agreement and a management contract. The consulting agreement will be for a period of seven years or until approval by the National Indian Gaming Commission of a proposed seven year management contract, which will then replace the consulting agreement. If Lakes and the Tribe enter into the agreements, Lakes does not expect to receive any significant fees under these arrangements for at least twelve months. 23 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS BUSINESS OVERVIEW Lakes' primary business is to develop and manage Indian-owned casino properties that offer the opportunity for long-term development of related entertainment facilities, including hotels, theaters, recreational vehicle parks and other complementary amenities designed to enhance the customers' total entertainment experience and to differentiate facilities managed by lakes from its competitors. Lakes has entered into contracts with the following Indian Tribes for the development, management and/or financing of new gaming resorts, all of which are subject to various regulatory approvals and resolution of any existing litigation before construction can begin: - Shingle Springs Band of Miwok Indians near Sacramento, California - Pokagon Band of Potawatomi Indians near New Buffalo, Michigan - Jamul Indian Village near San Diego, California In November 2004, Lakes announced that it had entered into a letter of intent with an Indian tribe to negotiate a consulting agreement and, subject to regulatory approval, a management contract, for a casino project in Texas. Lakes has also explored, and will continue to explore, numerous other possible development projects. In addition, Lakes has recently created a new division to buy, license and/or market new table game concepts for licensing to casinos. The Company is currently testing and marketing a number of new games. Lakes also owns a majority interest in WPT Enterprises, Inc., ("WPTE"), a media and entertainment company engaged in the creation of branded entertainment through the development, production and marketing of televised programming based on poker and other gaming themes. WPTE's operations have principally revolved around the creation of the World Poker Tour brand through the production and licensing of a television series exhibited on the Travel Channel, LLC ("TRV") that is based on a circuit of previously-established high-stakes poker tournaments affiliated under the "World Poker Tour" name. During August of 2004, WPTE completed an initial public offering that yielded proceeds to WPTE of approximately $32.4 million, net of offering expenses and underwriting discounts. WPTE common stock is traded on the Nasdaq National Market. Lakes remains a majority shareholder of WPTE, owning approximately 64% of the outstanding common stock. Therefore, Lakes' consolidated results continue to include WPTE operations. Minority interest, representing the portion of WPTE's income or loss applicable to non-controlling interests in WPTE, is reflected in the consolidated statements of loss from the date of completion of the initial public offering. FINANCIAL OVERVIEW In 2003 and 2004, all of Lakes' consolidated revenues have been derived from the WPTE business, mainly from license fees for United States telecast of World Poker Tour episodes. License fees have depended on the number of episodes delivered to TRV in a particular period. Revenues from other parts of the WPTE business are relatively small but increasing. Lakes' casino operations have not 24 generated revenues since early 2002, when Lakes' last casino management agreement that carried over from the Distribution was terminated. The timing of future revenues from Lakes' casino business will depend on the successful opening of Lakes' proposed Pokagon, Shingle Springs and Jamul casino projects, which in turn will depend on the resolution of litigation, necessary regulatory approvals and other factors that have delayed the construction of those casinos. For the nine months ended October 3, 2004, Lakes reported a consolidated operating loss of $12.2 million. Lakes principal costs and expenses in 2003 and 2004 have consisted of the following categories: - - WPTE-related costs and expenses. WPTE production costs are generally deferred and matched with revenues from completed episodes. WPTE's gross margins were 40% for the first nine months of 2004 and 39% in the 2003 period. WPTE-related selling, general and administrative expenses increased significantly in 2004 due to business development and costs of WPTE becoming an independent public company. - - Selling, general and administrative expenses from Lakes' business activities. These expenses have generally been flat, with some fluctuations due to litigation expenses. - - Lakes impairment charges. Lakes has taken some significant impairment charges in recent years related to its investments in its Indian casino projects and several real estate holdings that carried over from its establishment as a public company via a distribution of its common stock to the shareholders ofLakes’ predecessor Grand Casinos Inc. on December 31, 1998 ("Distribution"). Lakes' impairment charge in the second quarter of 2004, relating to its investment in the Nipmuc casino project, contributed $6.4 million to the Company's net loss. The impairment was recorded upon issuance by the BIA in June 2004 of its final determination denying the Nipmuc Nation's application for federal recognition. The Company believes that this impairment does not represent a trend as the Company's remaining projects are with tribes that have received recognition by the Bureau of Indian Affairs. The Company maintains on its balance sheet an aggregate of $89.8 million in notes receivable and $14.1 million in land held for development relating to the Pokagon, Shingle Springs and Jamul casino projects. Management believes that although various litigation and regulatory issues associated with these development projects have caused delays, the ultimate successful completion of the three pending projects is still likely. However, the Company diligently monitors ongoing developments of each prospective casino project to evaluate whether successful completion of the project remains likely. If a significant event occurs that causes management to believe that the project will likely not be successfully completed, then the Company will recognize an impairment on the related receivables. Lakes also took impairment charges of $3 million in the fourth quarter of 2002 and $1 million in the fourth quarter of 2003 related to the carrying value of the Polo Plaza and Travelodge properties in Las Vegas. These properties were owned by Grand at the time of the Distribution and are not part of the Company's core business. The Company has contracted to sell these properties to Metroflag and has received an aggregate $16.8 million in payments. The impairment charges were related to the re-negotiation of the payment amounts and terms. The properties are currently carried on the Company's balance sheet in the aggregate amount of $11.9 million, included in investments and land held for sale. Company management recently entered negotiations with Metroflag that may result in further revisions to certain of the payment terms for one or both of the properties. However, the Company believes the amounts recorded on its balance sheet are collectible and the Company believes that it has adequate security in the event of non-payment. As of October 3, 2004, Lakes has an aggregate $48.5 million in cash and cash equivalents and short-term investments on its balance sheet. Of this amount, an aggregate $33.6 million consists of WPTE's cash and cash equivalents and short-term investments, which will be used by WPTE for its business and will not be available to Lakes. Lakes owns approximately 12.5 million shares, or approximately 64% of WPTE's outstanding common stock. This stock is currently restricted under a lock-up agreement with the underwriters of WPTE's public offering and applicable securities laws. There is no assurance that Lakes will be able to realize value from its holdings of WPTE shares equal to the market value of the shares. 25 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Additionally, Lakes continually evaluates other opportunities to diversify the Company's activities and bring in new revenue streams. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, which Lakes believes are the most critical to aid in fully understanding and evaluating its reported financial results, include the following: revenue recognition and realizability of notes receivable. REVENUE RECOGNITION: Revenue from the management of Indian-owned casino gaming facilities is recognized when earned according to the terms of the management contracts. Currently all of the Indian-owned casino projects that Lakes is involved with are in development stages and are not yet open. Therefore, until a project is open and operating, Lakes will not recognize revenue related to Indian casino management. Interest income on notes receivable from Indian tribes related to casino development projects is deferred because realizability of the interest is contingent upon the completion and generation of cash flow from the operation of the casino. Interest deferred during the development period is recognized over the remaining life of the note using the effective interest method. WPTE domestic and international television license fee revenues are recognized as earned by the American Institute of Certified Public Accountants Statement of Position (SOP) No. 00-2, Accounting by Producers or Distributors of Films. Revenue is recognized upon receipt and acceptance of episodes by the ultimate customer once the license period has begun. Currently, for international television license fees WPTE does not consider collectibility to be reasonably assured until the distributor has received payment. WPTE presents international distribution license fee revenues net of the distributor's fees, as the distributor is the primary obligator in the transaction with the ultimate customer. Product licensing revenues are recognized when the underlying royalties from the sales of the related products are earned. WPTE recognizes minimum revenue guarantees ratably over the term of the license or as earned royalties based on actual sales of the related products, if greater. Host fee revenues paid by host casinos are recognized as episodes are aired. Sponsorship revenues are recognized as episodes are aired. 26 Television costs related to WPTE's production of the World Poker Tour television series are included in "Other current assets" on the Company's balance sheet. Television costs include capitalizable direct costs, production overhead and development costs and are stated at the lower of cost or net realizable value based on anticipated revenue. WPTE has not currently anticipated any revenues in excess of those subject to existing contractual relationships. Marketing, distribution, and general and administrative costs are expensed as incurred. Capitalized television production costs for each episode of the World Poker Tour television series are expensed as revenues are recognized upon delivery and acceptance by the Travel Channel of the completed episode. WPTE currently estimates that approximately 95% and 100% of capitalized television costs as of October 3, 2004 are expected to be expensed by the end of fiscal 2004 and 2005, respectively. 27 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPAIRMENT OF LONG-TERM ASSETS: Currently, the Company's notes receivable from Indian Tribes are generally for the pre-construction development of gaming properties to be managed by the Company. The Company has formal procedures governing its evaluation of opportunities for potential development projects which it follows before entering into agreements to provide financial support to those projects. The repayment terms are specific to each tribe and are largely dependent upon the operating performance of each gaming property. However, repayments of the notes receivable are required to be made only if distributable profits are available from the operation of the related casinos. Repayments are also subject to certain distribution priorities specified in the management contracts. In addition, repayment of the notes receivable and the manager's fees under the management contracts are subordinated to certain other financial obligations of the respective tribes. On a monthly basis, Company management evaluates the collectibility of the Company's receivables, including notes receivable related to the Indian-owned casino development projects. In the Company's experience, if a project is successfully completed, the cash flows are more than sufficient to fund the debt service. Therefore, in evaluating the receivables related to casino projects, the principal ongoing assessment involves the likelihood of project completion. If a significant event occurs that causes management to believe that the project will likely not be successfully completed, then the Company will recognize an impairment on the related receivables. As part of the monthly assessment, the current status of each project is discussed, as well as any recent developments such as contract approvals, litigation, land in trust issues, among other developments that may affect the project's status. Management looks at the same factors it initially considered with respect to the investment. The Company's policy is to assess assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and to record an impairment if the carrying value of the asset exceeds its fair value. 28 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company currently holds land held for development and land held under contract for sale and periodically evaluates whether events and circumstances have occurred that may affect the recoverability of the net book value of these assets. If such events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the expected future undiscounted cash flows does not exceed the carrying value of the asset, the Company will recognize an impairment loss. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto and management's discussion and analysis included in the Company's Annual Report on Form 10-K for the year ended December 28, 2003. RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB issued an exposure draft of a proposed standard entitled "Share Based Payment", which would amend FAS No. 123, "Accounting for Stock-Based Compensation", and FAS No. 95, "Statement of Cash Flows". The proposed standard, if adopted, would require expensing stock options issued by the Company based on their estimated fair value at the date of grant and would be effective for the third quarter of 2005. Upon issuance of a final standard, the Company will evaluate the impact on our consolidated financial position and results of operations. 29 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS NINE MONTHS ENDED OCTOBER 3, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 28, 2003 Revenues Total revenues were $11.8 million for the nine months ended October 3, 2004 compared to $3.9 million for the same period in the prior year. Revenues for the current and prior year periods were derived primarily from television license fees related to the World Poker Tour series. WPTE receives fixed license payments from TRV subject to satisfaction of production milestones and other conditions. The increase in revenue is primarily due to increased license fees relating to a greater number of season two episodes delivered to TRV during 2004, compared to the license fees resulting from the season one episodes delivered to TRV during 2003. In April 2004, TRV exercised its option to broadcast season three which is the first of a possible five additional seasons. WPTE is currently in production of season three episodes and plans to begin to deliver completed season three episodes starting in the fourth quarter of 2004 and expects to begin to recognize revenues at that time. Also contributing to the increase was revenue of approximately $0.7 million related to WPTE-related licensing, $0.5 million in sponsorship revenues, $0.9 million in host fees and $0.2 million in merchandise included in total revenue for the nine months ended October 3, 2004 compared to $0.3 million in host fees for the nine months ended September 28, 2003. There were no significant WPTE-related licensing, sponsorship or merchandise revenues in the 2003 period. Costs and Expenses Total costs and expenses were $24.0 million and $7.6 million for the nine months ended October 3, 2004 and September 28, 2003, respectively. Included in 2004 costs and expenses is an impairment charge of approximately $6.4 million related to the impairment of Lakes' investment in the Nipmuc Nation casino development project. $5.9 million of the impairment was related to notes receivable in connection with the project and the remaining $0.5 million related to land held for development. This impairment charge was taken in the second quarter of 2004 following the Nipmuc Nation being denied recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs. The Company believes that this impairment does not represent a trend as the Company's remaining projects are with tribes that have received recognition by the Bureau of Indian Affairs. During the nine months ended September 28, 2003, costs and expenses were reduced by a reversal of unused litigation accrual of $3.2 million under the Company's prior agreement to indemnify Grand Casinos, Inc. in connection with the Stratosphere litigation matters. This reversal is not representative of a trend as there are no similar accruals on the Company's balance sheet. Selling, general and administrative expenses increased from $8.1 million for the nine months ended September 28, 2003 to $10.1 million for the nine months ended October 3, 2004. WPTE selling, general and administrative costs were $1.2 million for the nine months ended September 28, 2003 compared to $3.5 million for the nine months ended October 3, 2004. This increase is primarily due to an increase in legal and consulting fees incurred during the 2004 period associated with WPTE business development and an increase in WPTE payroll costs resulting from business growth and becoming a separate public company. Lakes' selling, general and administrative costs were $6.9 million for the nine months ended September 28, 2003 and $6.6 million for the nine months ended October 3, 2004. This decrease is primarily due to a decrease in professional fees which were incurred during the prior year period associated with the sale of property in Las Vegas, Nevada. WPTE production costs increased from $2.4 million for the nine months ended September 28, 2003 to $7.1 million for the nine months ended October 3, 2004. In the current year period, WPTE production costs and related episode revenues were recognized in the period the relative episode was delivered to TRV. 30 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) However, because WPTE did not have an executed agreement in 2002, when a portion of production costs related to the WPTE episodes delivered during the nine months ended September 28, 2003 were incurred, such costs were expensed in 2002 rather than being capitalized. The increase was also due to a greater number of episodes being delivered to TRV during the 2004 period compared to the 2003 period. Other Interest income was $0.2 million for the nine months ended October 3, 2004 compared to $0.6 million for the same period in the prior year. This decrease is primarily due to a decrease in interest earned on amounts owed to Lakes by Metroflag related to the properties sold to Metroflag by Lakes in Las Vegas, Nevada. Taxes Benefit for income taxes was $2.0 million and $1.3 million for the nine months ended October 3, 2004 and September 28, 2003, respectively. The effective tax rates were 17% and 41% for the nine months ended October 3, 2004 and September 28, 2003, respectively. The decrease in the effective rate was due to the provision of additional valuation allowances for tax benefits associated with the impairment of capital assets. Losses Per Common Share and Net Losses For the nine months ended October 3, 2004, basic and diluted losses per common share were $0.44, compared to basic and diluted losses of $0.09 per common share, for the same period in the prior year. Losses for the period ended October 3, 2004 were $9.6 million compared to $1.8 million for the nine months ended September 28, 2003. This increase in losses is primarily due to the impairment charge of $6.4 million taken in the current year period discussed above. THREE MONTHS ENDED OCTOBER 3, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 28, 2003 Revenues Total revenues were $3.0 million for the three months ended October 3, 2004, compared to $0.4 million in the prior year period. Revenues for the current and prior year periods were primarily derived from television license fees related to the World Poker Tour series. The increase in revenue is primarily due to increased license fees relating to a greater number of season two episodes delivered to TRV during the third quarter of 2004, compared to the license fees resulting from the season one episodes delivered to TRV during the third quarter of 2003. Also contributing to the increase was revenue of approximately $0.5 million related to WPTE-related licensing and $0.1 million in host fees included in total revenue for the three months ended October 3, 2004. There were no significant WPTE-related licensing and host fees revenues in the 2003 period. Costs and Expenses Total costs and expenses were $5.8 million and $2.6 million for the three months ended October 3, 2004 and September 28, 2003, respectively. WPTE selling, general and administrative costs were $0.5 million for the three months ended September 28, 2003 compared to $1.5 million for the three months ended October 3, 2004. This increase is primarily due to an increase in legal and consulting fees incurred during the 2004 period associated with WPTE business development and an increase in WPTE payroll costs resulting from growth related to becoming a separate public company. 31 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Lakes' selling, general and administrative costs were $1.7 million for the three months ended September 28, 2003 and $2.2 million for the three months ended October 3, 2004. This increase is primarily due to professional fees incurred related to business development. WPTE production costs increased from $0.3 million for the three months ended September 28, 2003 to $1.9 million for the three months ended October 3, 2004. This increase in production costs is primarily due to an increase in the number of episodes delivered to TRV during the third quarter of 2004, compared to the number of episodes delivered to TRV during the third quarter of 2003. Taxes Benefit for income taxes was $1.1 million and $0.9 million for the three months ended October 3, 2004 and September 28, 2003, respectively. The effective tax rates were 40% and 41% for the current and prior year quarters, respectively. Earnings Per Common Share and Net Earnings For the three months ended October 3, 2004, basic and diluted losses per common share were $0.08, compared to basic and diluted losses of $0.06 per share, for the same period in the prior year. Losses for the three months ended October 3, 2004 were $1.7 million compared to losses of $1.3 million for the three months ended September 28, 2003. This increase in losses relates primarily to the increased selling, general and administrative costs incurred by WPTE discussed above. Outlook It is currently contemplated that there will be no operating revenues for 2004 from existing casino development projects. WPTE revenues are expected to result primarily from broadcast license fees to be received from TRV, which has exercised its option to license the World Poker Tour Season Three programming that is currently in production. WPTE currently anticipates generating revenues of approximately $10.8 million from Season Three license fees under the Travel Channel agreement, depending on the number of episodes that ultimately comprise that season. WPTE is expected to recognize approximately $3.1 million of this revenue during the fourth quarters of fiscal 2004, with the rest being recognized in fiscal 2005. Other sources of expected revenues during the fourth quarter of 2004 include international television licensing revenues resulting from the distribution of the World Poker Tour's Season One and Two and product licensing fees. Subsequent to the initial public offering of WPTE, Lakes continues to own a majority of WPTE's equity. Therefore, WPTE's operating results continue to be consolidated with our results. FINANCIAL CONDITION At October 3, 2004, Lakes' consolidated balance sheet included unrestricted cash and cash equivalents and short-term investment balances of $48.5 million. Included in this amount was Lakes' cash of $13.8 million and Lakes'short-term investments of $1.1 million. Also included was WPTE cash of $27.6 million and WPTE short-term investments of $6.0 million. WPTE cash and investments will be used in WPTE's business and not used in Lakes' business. Lakes' has had no operating revenues from casino operations since the expiration of the management contract with the Coushatta Tribe in January 2002. In 2003, the operating revenues derived from WPTE were offset almost entirely by production costs. In the first nine months of 2004, operating revenues from WPTE operations were $11.8 million, and WPTE's net income was approximately $1.2 million. 32 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In August and September 2004, WPTE raised a total of approximately $32.4 million in cash proceeds from its initial public offering, net of underwriting discounts and estimated offering expenses. WPTE's cash resources are expected to be used for WPTE's business and will not be available for the Company's casino operations or other non-WPTE businesses. The initial public offering resulted in the termination of Lakes' obligation to fund WPTE operations under a limited revolving note receivable. Lakes currently holds 12,480,000 shares or approximately 64% of WPTE's common stock. Although WPTE common stock is traded on the Nasdaq National Market, the shares held by Lakes are not liquid assets, and there is no assurance that Lakes will be able to realize value from these holdings equal to the current or future market value of the shares. The Company's primary source of cash for its development of casino projects during the past two years has been from the planned sale of assets. During the first quarter of 2004, the 2022 Ranch land, which was owned by Lakes and its joint venture partner Land Baron West, LLC, was sold. Lakes received cash in the amount of approximately $1.7 million. Lakes also received proceeds of $16.8 million in May 2003 in connection with the sale of the Polo Plaza property. We expect that proceeds from the sale of assets will decrease in future periods. Our management contracts with our tribal partners require that we provide financial support for project development in the form of loans. These loans are interest bearing; however, the interest is deferred until the casino is built and has established profitable operations. In the event that the casinos are not built, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust. A portion of the notes due from the Pokagon Tribe in the approximate amount of $23.6 million resulted from funds advanced by the Company for the Tribe's purchase of the development project land. The Company has a first deed of trust against this property which will be relinquished when the land is placed into trust by the BIA. We currently believe that our existing casino development projects included in the table below will be constructed and achieve profitable operation; however, no assurance can be made that this will occur. If this does not occur, it is likely that Lakes would incur substantial or complete losses on its pre-construction advances. Following is a table summarizing remaining maximum contractual obligations as of October 3, 2004 (in millions):

(1) Remaining Casino Development Commitments are not due by period, but rather are expended as progress of each project dictates. Lakes anticipates that we will require additional capital through either public or private financings to meet the maximum casino development commitments. Currently, the Company believes that this will be necessary, when any of Lakes casino projects begin construction. (2) For the Pokagon project, the Company has agreed to provide additional financing from its own funds if financing at an interest rate not to exceed 13% is not available from third parties. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Currently, it appears that third-party financing will be available for this project. However, there can be no assurance that third-party financing will be available and that Lakes will not be required to provide this additional financing. (3) Lakes may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects. Any guarantees by Lakes or similar off-balance sheet liabilities will increase Lakes' potential exposure in the event of a default by any of these tribes. No such guarantees or similar off-balance sheet liabilities existed at October 3, 2004. (4) The Company leases an airplane, under a non-cancelable operating lease expiring April 30, 2005. (5) WPTE employee obligation includes the base salaries payable to three WPTE executives under their respective employment agreements. 33 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our major use of cash over the past three years has been Pre-construction Financing provided to our tribal partners. At October 3, 2004, Lakes had approximately $90.6 million in notes receivable from Indian tribes. We believe that our cash and cash equivalents, along with expected cash receipts, will be adequate to fund operating expenses and Pre-construction Financing for at least the remainder of 2004. It is anticipated that we will require additional capital through either public or private financings to meet the maximum casino development commitments outlined in the table above. Currently, the Company believes that this will be necessary when any of Lakes' casino projects begin construction. Lakes anticipates corporate costs, excluding WPTE which is not expected to require additional capital from Lakes, in the next twelve months to approximate $12.5 million. Additionally, development project-related costs are expected to approximate $10 million during the next twelve months. These development costs do not include possible additional construction-related costs that would be incurred if any of the projects were to begin construction during the next twelve months. As discussed above, the Company anticipates that it would be necessary to raise additional capital when any of the projects begin construction and believes such financing will be available based on preliminary discussions with prospective lenders. The Company currently has $14.9 million of cash and short-term investments exclusive of cash and short-term investments held by WPTE. The Company anticipates receiving cash payments in the approximate amount of $9.8 million in the fourth quarter of 2004 related to the sale of the Travelodge property and repayment of a subordinated interest in the Polo Plaza property in Las Vegas, Nevada. However, the Company has recently entered negotiations that may result in revisions to the current payment terms related to these properties. The Company also anticipates the receipt of a judgement related to Grand Casinos, Inc. litigation within the next twelve months (see Part II, Item 1. Legal Proceedings). The dollar amount that the Company will receive has not been determined. Management also believes that additional sources of liquidity are available if conditions necessitate additional capital. As a part of the transaction establishing Lakes as a separate public company on December 31, 1998, the Company agreed to indemnify Grand through December 28, 2004 against all costs, expenses and liabilities incurred in connection with or arising out of certain pending and threatened claims and legal proceedings against Grand and to pay all related settlements and judgments. The Company's indemnification obligations include the obligation to provide the defense of all claims made in proceedings against Grand and to pay all related settlements and judgments. The Company believes that no further payments are required to be made pursuant to its indemnification obligations. The current carrying amount of the liability for the Company's indemnification obligations is zero. As a part of the indemnification agreement, Lakes agreed that it will not declare or pay any dividends, make any distribution on account of Lakes' equity interests, or otherwise purchase, redeem, defease or retire for value any equity interests in Lakes without the written consent of Grand. SEASONALITY The Company believes that the operations of all casinos to be managed by the Company will be affected by seasonal factors, including holidays, weather and travel conditions. WPTE's license revenues are affected by the timetable for delivery of episodes to TRV. 34 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) REGULATION AND TAXES The Company is subject to extensive regulation by state gaming authorities. The Company will also be subject to regulation, which may or may not be similar to current state regulations, by the appropriate authorities in any jurisdiction where it may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on the Company. The gaming industry represents a significant source of tax revenues. From time to time, various federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on the Company's results of operations and financial results. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except for the financing commitments previously discussed, and except for Lakes' investments in unconsolidated affiliates (see Note 3). PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking, such as plans for future expansion and other business development activities as well as other statements regarding capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward looking information involves important risks and uncertainties that could significantly affect the anticipated results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to possible delays in completion of Lakes' casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management contracts; continued indemnification obligations to Grand Casinos; 35 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) highly competitive industries; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; possible need for future financing to meet Lakes' expansion goals; risks of entry into new businesses; reliance on Lakes' management; and the fact that the WPTE shares held by Lakes are currently not liquid assets, and there is no assurance that Lakes will be able to realize value from these holdings equal to the current or future market value of WPTE common stock. There are also risks and uncertainties relating to WPTE that may have a material effect on the Company's consolidated results of operations or the market value of the WPTE shares held by the Company, including inability to achieve financial results from the contemplated business expansion of WPTE; WPTE's relatively short operating history; reliance on the agreement with TRV for most of our consolidated revenues; possible inability of WPTE's programming to maintain a sufficient audience and exposure to adverse trends in the television production business generally; possible increases in production expenses, compared to fixed license revenues for related episodes; risk of inability to protect WPTE's proprietary rights or preserve the value of WPTE's brands; dependence on WPTE's relationships with member casinos and strategic partners; and reliance on Lakes' and WPTE's management. For further information regarding the risks and uncertainties, see the "Business -- Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2003. 36 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK; CONTROLS AND PROCEDURES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents and marketable securities. The Company's main investment objectives are the preservation of investment capital and the maximization of after-tax returns on its investment portfolio. Consequently, the Company invests with only high-credit-quality issuers and limits the amount of credit exposure to any one issuer. The Company does not use derivative instruments for speculative or investment purposes. The Company's cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of October 3, 2004, the carrying value of the Company's cash and cash equivalents approximates fair value. The Company also holds short-term investments consisting of marketable debt securities (principally consisting of commercial paper, corporate bonds, and government securities) having a weighted average duration of one year or less. Consequently, such securities are not be subject to significant interest rate risk. The Company's primary exposure to market risk associated with changes in interest rates involves the Company's notes receivable related to loans for the development and construction of Native American owned casinos. The loans and related note balances earn various interest rates based upon a defined reference rate. The floating rate receivables will generate more or less interest income if interest rates rise or fall. Interest income is deferred during development of the casinos because realizability of the interest is contingent upon the completion and positive cash flow from operation of the casino. As of October 3, 2004, Lakes had $90.9 million of floating rate notes receivables. Based on the applicable current reference rates and assuming all other factors remain constant, deferred interest income for a twelve month period would be $5.7 million. A reference rate increase of 100 basis points would result in an increase in deferred interest income of $0.9 million. A 100 basis point decrease in the reference rate would result in a decrease of $0.9 million in deferred interest income over the same twelve month period. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or Rule 15d - 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that Lakes Entertainment, Inc.'s disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above. 37 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SLOT MACHINE LITIGATION In 1994, William H. Poulos filed a class-action lawsuit in the United States District Court for the Middle District of Florida against various parties, including Grand and numerous other parties alleged to be casino operators or slot machine manufacturers. This lawsuit was followed by several additional lawsuits of the same nature against the same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in the United States District Court for the District of Nevada. Following a court order dismissing all pending pleadings and allowing the plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging that the defendants fraudulently marketed and operated casino video poker machines and electronic slot machines, and asserting common law fraud and deceit, unjust enrichment and negligent misrepresentation and claims under the federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed by the defendants seeking to have this new complaint dismissed or otherwise limited. In December 1997, the Court, in general, ruled on all motions in favor of the plaintiffs. The plaintiffs then filed a motion seeking class certification and the defendants opposed it. In June 2002, the Court entered an order denying class certification. On August 10, 2004, the Ninth Circuit Court of Appeals affirmed the District ~~Court's~~Court’s denial of class certification. On September 14, 2005, the United States District Court for the District of Nevada granted the defendants’ motions for summary judgment, and judgment was entered against the plaintiffs on that same day. The defendants have also filed motions seeking the payment of costs and attorney fees and defendants have until December 28, 2005 to complete their briefing on the motions.

The Company has not recorded any liability for this matter as currently an estimate of any possible loss cannot be made. Management currently believes that the final outcome of this matter is not likely to have a material adverse effect upon the ~~Company's~~Company’s consolidated financial ~~position or results of operations, and currently an estimate of any possible loss cannot be made. WILLARD EUGENE SMITH LITIGATION~~statements.


	*Willard Eugene Smith Litigation*

On October 24, 2003, Lakes announced that it had been named as one of a number of defendants in a counterclaim filed in state court in Harris County, Texas by Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), and related persons and entities. In the counterclaim, Smith ~~asserts~~asserted that, under an alleged oral agreement with Kevin Kean, he is entitled to a percentage of fees to be received by the KAR ~~entities~~Entities or their principals relating to the Shingle Springs and Jamul ~~casinos~~Casinos that ~~Lakes'~~Lakes’ subsidiaries are developing in California. Smith also ~~seeks~~sought recovery of damages through the remedy of either attachment of the management fees generated from the projects or avoidance of buyout agreements between Lakes and KAR based on their conduct with respect to the alleged agreement. ~~Lakes believes~~Trial for the ~~counterclaim against it is without merit. Lakes understands that~~above litigation commenced in April 2005. In May 2005, the ~~alleged oral agreement upon which Smith bases his claim was rendered null and void~~jury in ~~a prior judgment issued against Smith by~~ the ~~Harris County, Texas~~ state court case reached a verdict in ~~October 2000. However, in September 2003,~~favor of Lakes and the ~~court vacated the prior judgment against Smith. Lakes acquired KAR's interests~~other defendants. The jury in the ~~Shingle Springs and Jamul projects on January 30, 2003. In the buyout agreements between Lakes and certain KAR entities and related principals, the KAR entities represented to Lakes~~case found that ~~the KAR entities and their affiliates had~~there was no ~~continuing agreements~~agreement with ~~any third party~~Smith relating to the ~~Shingle Springs and Jamul projects and agreed~~ongoing monthly payments for the percentage of management fees. The jury also found that Smith was not entitled to ~~indemnify Lakes and its affiliates from damages~~damages. As a result of the ~~KAR entities and related principals concerning the projects. Lakes will vigorously defend~~verdict against ~~the allegations made against it and will pursue its indemnification rights against the KAR entities and their principals under the buyout agreements if necessary. Discovery is continuing and~~Smith, a second phase of the trial, ~~is scheduled~~which would have sought to recover from Lakes any damages awarded, will not be necessary. Smith filed a Motion for ~~March 2005. 38~~ a Partial Retrial on the issue of damages which was denied automatically by operation of law. Smith failed to timely file an appeal to the Texas Court of Appeals, so the judgment has become final.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~PART II OTHER INFORMATION (CONTINUED) Management currently believes that the final outcome of this matter is not likely~~

Notes to have a material adverse effect upon the Company's consolidated financial position or results of operations, and currently an estimate of any possible loss cannot be made. EL DORADO COUNTY, CALIFORNIA LITIGATIONUnaudited Condensed Consolidated Financial Statements — (Continued)


	*El Dorado County, California Litigation*

On January 2, 2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of California, issued his ruling on the ~~matter. The Court denied~~matter denying the petition in all respects except one. As to the one exception, the ~~Court~~court sought clarification as to whether the transportation conformity determination used to determine the significance of the air quality impact of the interchange operations considered the impact on attainment of the state ambient air quality standard for ozone. The California Department of Transportation ~~(Caltrans)~~(CalTrans) prepared and filed the clarification addendum sought by the ~~Court.~~court. Prior to the ~~Court's~~court’s determination of the adequacy of the clarification, El Dorado County and Voices for Rural Living appealed Judge ~~Connelly's~~Connelly’s ruling to the California Court of Appeals on all of the remaining issues. The Company believes that appellants have not presented sufficient grounds to justify overturning the trial court's earlier conclusion, and that the Company will prevail on the consolidated appeals of the County and Voices for Rural Living.

A ruling with respect to the addendum was issued June 21, 2004 by the Superior Court of California, County of Sacramento. The ruling ~~indicates~~indicated that the addendum provided to the court by ~~Caltrans~~CalTrans did not provide a quantitative showing to satisfy the ~~court's~~court’s earlier request for a clarification on meeting the state ambient ozone standard. The court recognized that the information provided by ~~Caltrans~~CalTrans does qualitatively show that the project may comply with the state standard, but concluded that a quantitative analysis is necessary even though the court recognized that the methodology for that analysis ~~"is~~“is not readily ~~apparent"~~apparent”. In addition, the ruling specifically ~~states, "Moreover~~stated, “Moreover such methodology appears necessary for the ~~CEQA~~California Environmental Quality Act analysis of transportation projects throughout the state, including transportation projects for which respondents (i.e. ~~Caltrans)~~CalTrans) have approval authority.~~" Caltrans,~~” CalTrans, the Shingle Springs Tribe and Lakes responded to the court with a revised submission in August 2004. Representatives of the California Air Resources Board and the Sacramento Area Council of Governments filed declarations supporting the revised submission to the court. Opposition to that revised submission was filed, a hearing on the revised submission took place on August 20, 2004, and the ~~Court~~court again found the revised submission of ~~Caltrans,~~CalTrans, the Shingle Springs Tribe and ~~lakes~~Lakes to be inadequate. That ruling ~~has been~~was separately appealed to the California Court of ~~Appeals. Management currently~~Appeals (the “Court”) and an oral argument for these appeals and the appeals of El Dorado County and Voices of Rural Living was held before the Court on August 29, 2005. The Court issued its decision on these appeals on November 8, 2005. The Court ruled in favor of CalTrans’ appeal, rejecting the El Dorado County’s argument that the transportation conformity analysis did not conform to state standards. The Court also rejected all but two of the legal claims asserted in the appeal by El Dorado County and Voices for Rural Living against the environmental impact report (“EIR”) prepared by CalTrans for the interchange that will connect Highway 50 to the Shingle Springs Rancheria. For the remaining two issues, the Court held that CalTrans must supplement its environmental analysis by adding some discussion to the air quality chapter to further explain the project’s contribution to overall vehicular emissions in the region, and that CalTrans also must evaluate whether a smaller casino and hotel would reduce environmental impacts. The Court acknowledged CalTrans lacks jurisdiction to require the Tribe to develop a smaller casino, but nevertheless required some discussion of this alternative in the interchange EIR.

The Company has not recorded any liability for this matter as management believes the Courts’ rulings will ultimately allow the project to commence. However there can be no assurance that the final outcome of this matter is not likely to have a material adverse effect upon the ~~Company's~~Company’s unaudited condensed consolidated financial ~~position or results of operations as it believes, but there can be no assurance that, the courts' rulings will ultimately allow the project to commence. 39~~ statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~PART II OTHER INFORMATION (CONTINUED) GRAND CASINOS, INC. LITIGATION~~

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)


	*Grand Casinos, Inc. Litigation*

In connection with the establishment of Lakes as a public corporation on December 31, 1998, via a distribution of its common stock to the shareholders of Grand Casinos, the Company and Grand Casinos entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand Casinos and certain affiliated ~~companies. On August 13, 2004, an arbitrator awarded to the Company partial summary judgment on certain~~companies of ~~the Company's~~Grand Casinos. Lakes asserted claims against Grand Casinos for amounts to which Lakes believed it was entitled under the tax sharing agreement. ~~The dollar amount~~On December 1, 2004, Lakes entered into a settlement agreement with Grand Casinos and its parent company, Park Place Entertainment Corporation (now known as Caesars Entertainment, Inc.), pursuant to which Lakes received $11.3 million in December 2004 in satisfaction of its prior claim and its future rights to the tax benefits that were the subject of the dispute. Lakes will be ~~awarded~~required to provide reimbursement for its share of the disallowed benefits. This settlement income has been recorded as other income in the consolidated statement of loss for the year ended January 2, 2005. Lakes has not recorded any tax related to the settlement payment of $11.3 million, as Lakes believes this settlement is not taxable to Lakes.


	*Louisiana Department of Revenue Litigation Tax Matter*

The Louisiana Department of Revenue maintains a position that Lakes owes additional Louisiana corporation income tax for the period ended January 3, 1999 and the tax years ended December 31, 1999 through December 31, 2001 and additional Louisiana corporation franchise tax for the tax years ended December 31, 2000 through December 31, 2002. This determination is the result of an audit of Louisiana tax returns filed by Lakes for the tax periods at issue and relates to the reporting of income earned by Lakes in connection with the managing of two Louisiana-based casinos. On December 20, 2004, the Secretary of the Department of Revenue of the State of Louisiana filed a petition to collect taxes against Lakes in the 19th Judicial District Court, East Baton Rouge Parish, Louisiana, Docket No. 527596, Section 23. In the petition to collect taxes the Department of Revenue of the State of Louisiana asserts that additional corporation income tax and corporation franchise tax in the amount of $8.6 million, excluding interest, are due by Lakes for the taxable periods set forth above. Lakes maintains that it has remitted the proper Louisiana corporation income tax and Louisiana corporation franchise tax for the taxable periods at issue. On February 14, 2005, Lakes filed an answer to the petition to collect taxes asserting all proper defenses and maintaining that no additional taxes are owed and that the petition to collect taxes should be dismissed. Management intends to vigorously contest this action by the Louisiana Department of Revenue. However, Lakes may be required to pay up to the $8.6 million assessment plus interest if Lakes is not successful in this matter. The Company has recorded a reserve related to this examination, which is reflected as part of income taxes payable on the Company’s consolidated balance sheets.


	*Other Litigation*

Lakes is involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the final outcome of these ~~claims has~~matters is not likely to have a material adverse effect upon the Company’s consolidated financial statements.


8.	SEGMENT INFORMATION

Lakes’ principal business is the development and management of gaming related properties. Additionally, the Company is the majority owner of WPTE owning approximately 62% of WPTE’s outstanding common stock. Substantially, all operations of the Company and WPTE are conducted in the United States. Episodes of the World Poker Tour television series produced by WPTE are distributed internationally by a third party distributor. The segments reported below (in millions) are the segments of the Company for which separate financial information is available and for which operating results are evaluated by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The amounts in the Corporate and

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

Eliminations column below have not been allocated to the other segments because these costs are not easily allocable and to do so would not be practical.


	Industry Segments

	Indian
	Casino			WPT			Corporate &			Total
	Projects			Enterprises, Inc.			Eliminations			Consolidated

Total assets as of July 3, 2005	$	138.0		$	36.3		$	37.3		$	211.6
Total assets as of January 2, 2005		127.2			37.1			44.8			209.1
For the Three Months Ended July 3, 2005
Revenue	$	—		$	6.6		$	—		$	6.6
Net earnings (loss)		(1.5	)		(0.4	)		(3.8	)		(5.7	)
Depreciation expense		—			—			0.1			0.1
For the Six Months Ended July 3, 2005
Revenue	$	—		$	10.7		$	—		$	10.7
Net earnings (loss)		1.0			(2.0	)		(6.8	)		(7.8	)
Depreciation expense		—			0.1			0.1			0.2
For the Three Months Ended July 4, 2004, restated
Revenue	$	—		$	4.7		$	—		$	4.7
Net earnings (loss)		(5.4	)		0.9			(2.1	)		(6.6	)
Depreciation expense		—			—			0.1			0.1
For the Six Months Ended July 4, 2004, restated
Revenue	$	—		$	8.9		$	—		$	8.9
Net earnings (loss)		(4.9	)		1.7			(3.8	)		(7.0	)
Depreciation expense		—			0.1			0.2			0.3


9.	IMPAIRMENT CHARGES

During the second quarter of 2004, the BIA issued its final determination denying the application of the Nipmuc Nation of Massachusetts (“Nipmuc Nation”) for federal recognition. Although the Nipmuc Nation is appealing the determination with the BIA, Lakes made a decision to discontinue funding the project. Lakes recorded an unrealized loss on notes receivable of $0.8 million related to the fair value of the note receivable from the Nipmuc Nation. Lakes also recorded an impairment charge of $5.8 million related to other long-term assets related to the Nipmuc Nation Indian casino project.


10.	SUBSEQUENT EVENTS


	*Membership Interest in Metroflag Polo, LLC*

On July 15, 2005, the Company received a $5.0 million payment from Metroflag Polo, LLC (“Metroflag”), in full satisfaction of the Company’s membership interest in Metroflag, which approximated the carrying value of the asset on the unaudited condensed consolidated balance sheet. Accordingly, no gain or loss will be recorded in future periods related to this transaction.


	*Kickapoo Project*

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)

existing Lucky Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. During the third quarter of fiscal 2005 the Company’s relationship with the Kickapoo Tribe deteriorated and in November 2005, Lakes and the Kickapoo Tribe terminated their business relationship. During the three months and six months ended July 3, 2005, the Company recorded unrealized losses of $1.3 million and $1.8 million, respectively, related to the Kickapoo project. During the third quarter of fiscal 2005, the Company recognized an impairment charge of $0.1 million related to the intangible asset related to the acquisition of the management contract. In addition the Company recognized unrealized losses related to advances made for project costs and project costs incurred that Lakes may be required to pay as a result of the terminated relationship in the amounts of $0.3 million and $3.8 million, respectively during the third quarter of fiscal 2005. As of October 2, 2005, Lakes owns approximately 18 acres of land near the Kickapoo site with a cost basis of approximately $0.7 million.

The Company is negotiating with the Kickapoo Tribe to resolve all of the financial terms of the contracts including repayment of the advances, payment of unpaid project costs incurred, a possible sale of the land owned by Lakes to the Kickapoo Tribe, and to formally terminate the gaming operations consulting agreement, management contract, and related ancillary agreements relating to the project.


	*Financing Facility*

On December 16, 2005, Lakes closed on a $20 million financing facility with the Lyle Berman Family Partnership (the “Partnership”). An initial draw of $10 million was made under the facility on December 16, 2005, and the remaining $10 million can be drawn in $5 million increments over time as needed. Any funds drawn under the facility bear interest at the rate of 12% per annum and are due and payable on the third anniversary of the first advance drawn. No commitment fees, closing fees or loan servicing fees were assessed or paid in connection with the facility. Lakes may prepay the facility in whole or in part without penalty. Lyle Berman, Lakes’ Chairman and Chief Executive Officer, does not have an ownership or other beneficial interest in the Partnership. Neil Sell, a Director of Lakes, is one of the trustees of the irrevocable trusts that are the partners in the Partnership.

The financing facility is secured by substantially all of the personal property of Lakes and its subsidiaries other than WPTE, including all fees or rights to cash flow from Lakes’ casino projects, as well as by its real property located at 130 Cheshire Lane, Minnetonka, Minnesota (which is the location of the Company’s principal offices), its real estate mortgage from the Pokagon Band and its shares of WPTE. The financing facility is also guaranteed by certain of the Company’s subsidiaries other than WPTE. The facility permits Lakes to separately sell up to 3.5 million WPTE shares without application of the proceeds from such sale to pay down draws under the financing facility so long as the per share price of WPTE shares does not fall below $3.00 per share, in which case the pro rata portion of the proceeds shall be applied to the financing facility based upon the difference between the share price and the minimum share price of $3.00. The sale of WPTE shares above 3.5 million shares will trigger mandatory prepayment of the financing facility.

In consideration for the financing facility, Lakes issued to the Partnership warrants for the purchase of up to 2 million shares of its common stock at a purchase price of $7.88 per share that expire in December 2012. The warrants contain customary demand and piggyback registration rights for the shares of common stock underlying the warrants. The warrants will not become exercisable if Lakes’ borrowings under the facility do not exceed $10 million in the aggregate and all amounts owed under the facility are repaid in full on or before February 28, 2006. In addition, Lakes agreed to use its best efforts to cause WPTE to file a registration statement by no later than April 15, 2006 thus allowing for the possible resale of all WPTE shares pledged by Lakes to the Partnership. If Lakes were to sell more than the 3.5 million shares of WPTE, such proceeds would first be used to pay down the financing facility. Lakes has agreed to pay substantially all of the costs incurred in the preparation and filing of such registration statement.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)


	*WPTE Investment in PokerTek*

At October 2, 2005, WPTE had a nominal investment, consisting of a 15% ownership interest in (carried at cost), and a loan receivable from PokerTek, a company that offers an electronic poker table called the PokerPro system that provides a fully automated poker room environment to tribal and commercial casinos and card clubs. On October 14, 2005, PokerTek announced a public offering of 2,000,000 shares of common stock at a price of $11 per share. Concurrently with the public offering, WPTE’s ownership interest was diluted to 11.7% (1,080,000 shares), and PokerTek repaid WPTE the outstanding loan amount at its maturity value of $185,000. WPTE’s shares in PokerTek are restricted, thus prohibiting any sale of such shares in the market for six months. Nevertheless, in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities, WPTE will adjust its investment to fair market value and classify it as “available for sale” in the fourth quarter of 2005, since WPTE does not expect to have any cash needs or plans to sell these shares in the foreseeable future. Accordingly, WPTE will record net unrealized gains and losses from this investment in a separate component of shareholder’s equity (i.e. within the “accumulated other comprehensive earnings” line item in the stockholders’ equity section of the balance sheet) beginning in the fourth quarter of 2005.


	*WPTE Lawsuit With the Travel Channel*

On September 19, 2005, WPTE filed suit in the California Superior Court seeking to keep the Travel Channel, LLC (“TRV”) from interfering with WPTE’s prospective contractual relationship with third party networks in connection with the sale of the broadcast rights to the Professional Poker Tour (“PPT”), and to clarify and enforce WPTE’s rights with respect to the World Poker Tour television episodes. Under WPTE’s existing agreement with TRV for the World Poker Tour program (the “WPT Agreements”), TRV is afforded the right to negotiate exclusively with WPTE with respect to certain types of programming developed by WPTE during a 60 day period. Pursuant to the WPT Agreements, WPTE submitted the PPT to TRV and began negotiations but failed to reach an agreement with TRV within the allotted negotiation window. Consequently, WPTE began discussions with other networks. While WPTE later revived its attempts to reach a deal with TRV after TRV’s exclusive bargaining window had ended, WPTE ultimately received an offer from ESPN. WPTE submitted this offer to TRV pursuant to TRV’s contractual last right to match the deal as specified under the WPT Agreements. Thereafter, TRV sent letters to WPTE and ESPN asserting, among other things, that WPTE was not entitled to complete a deal for the PPT with a third party. Following TRV’s letters, WPTE filed suit on September 19, 2005, alleging that TRV breached the WPT Agreements and interfered with WPTE’s prospective contractual relationship with ESPN, and seeking a judicial declaration of WPTE’s rights under the WPT Agreements to produce non-World Poker Tour branded programs covering poker tournaments. Subsequent to WPTE filing, ESPN withdrew its offer to WPTE to acquire the broadcast rights to the PPT. On September 22, 2005, TRV and Discovery Communications, Inc. filed an answer and cross-complaint and subsequently filed a motion for judgment on the pleadings and an “anti-SLAPP” motion, both of which were denied on November 10, 2005. Despite WPTE’s dispute with TRV, WPTE remains committed to fulfilling its obligations to TRV in connection with the World Poker Tour series.


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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the adjustments relating to the restatement described in Note 3 in the unaudited condensed consolidated financial statements.

Overview

Lakes develops Indian-owned casino properties and intends to manage such casinos when applicable regulatory approvals have been received and we have satisfied other contingencies. Lakes currently has development and management agreements with five separate tribes for one new casino operation in Michigan, two in California, and with two tribes in Oklahoma for five various casino projects. Lakes is also involved in other businesses, including development of a non-Indian casino and the development of new table games for licensing to casinos. In addition, as of July 3, 2005, Lakes owned approximately 62% of WPTE, a separate publicly held media and entertainment company principally engaged in the development, production and marketing of gaming themed televised programming, the licensing and sale of branded products and the sale of corporate sponsorships. Lakes’ consolidated financial statements include the results of operations of WPTE, and in recent periods, all of Lakes’ revenues have been derived from WPTE’s business.

Financial Overview

In the first and second quarters of the fiscal year ended January 1, 2006 (“fiscal 2005”) and the first and second quarters of the fiscal year ended January 2, 2005 (“fiscal 2004”), all of Lakes’ consolidated revenues have been derived from the WPTE business, mainly from license fees for domestic telecast of World Poker Tour television episodes (“WPT”) and product licensing fees associated with the World Poker Tour brand and logo. There were minimal product licensing revenues in fiscal 2004. License fees have depended on the number of episodes delivered to The Travel Channel (“TRV”) in a particular period. Revenues from other parts of the WPTE business are relatively small but continue to grow.

Results of Operations


	*Six Months Ended July 3, 2005 Compared to the Six Months Ended July 4, 2004*


	Revenues

All revenues in fiscal 2005 and fiscal 2004 were related to WPTE business. Total revenues increased $1.8 million in fiscal 2005 to $10.7 million for the six months ended July 3, 2005 from $8.9 million for the six months ended July 4, 2004. Domestic television license revenues decreased by $1.6 million in the first six months of fiscal 2005 compared to the first six months of fiscal 2004. The reduction in domestic television license revenue reported in the first six months of fiscal 2005 reflected the delivery of only 13 episodes of Season Three compared to 18 Season Two episodes that were delivered during the fiscal 2004 period. International television licensing revenues increased by $0.9 million for the six months ended July 3, 2005, compared to the six months ended July 4, 2004, as WPTE increased distribution to more territories in the current period. Revenues for the six months ended July 3, 2005, also included $2.1 million more in product licensing revenues than the six months ended July 4, 2004 as WPTE licensees had substantially more product in the marketplace in fiscal 2005.

TRV exercised its option for Seasons Three and Four in May 2004 and March 2005, respectively, and has additional options for the following three seasons (Seasons Five through Seven) under which WPTE would receive fixed license fees for each episode WPTE produces. For each season covered by an option exercised by TRV, TRV will have exclusive rights to exhibit the programs in that season an unlimited number of times on its television network (or any other television network owned by the Discovery Channel) in the U.S. for four years.


	Costs and Expenses

Production costs are associated with WPTE costs of producing television series. WPTE cost of revenues increased by $2.4 million in the first six months of fiscal 2005 as compared to the first six months of fiscal 2004, and accordingly, overall gross margins were 29.3% in the first six months of fiscal 2005 compared to 42.2% in the first six months of fiscal 2004. Cost of revenues for the first six months of fiscal 2005 included approximately $3.0 million related to the premiere season of the PPT, as well as $4.6 million in production costs for Season Three episodes of the WPT. PPT production costs were expensed in this period rather than being capitalized because WPTE does not capitalize television production costs until a licensing agreement has been executed or WPTE has a firm commitment of revenue for the series. For the first six months of fiscal 2004, cost of revenues of $5.1 million was related primarily to the production of Season Two episodes of the WPT. There were no PPT production costs incurred during the first six months of fiscal 2004. Additionally, cost of revenues in the first six months of fiscal 2005 included approximately $1.0 million of non-cash compensation expense related to consultant stock options compared to $0.3 million in the first six months of fiscal 2004. Excluding the non-cash compensation expenses and PPT production costs expensed during the first six months of fiscal 2005, gross margin for the first six months of fiscal 2005 would have been 66.4% compared to 45.2% for the corresponding period in fiscal 2004, with the higher margin in fiscal 2005 due to increased revenues from product licensing, international licensing, and sponsorship.

Selling, general and administrative expenses increased by $7.0 million to $13.4 million for the six months ended July 3, 2005 from $6.4 million for the six months ended July 4, 2004. WPTE selling, general and administrative costs increased by $3.6 million for the six months ended July 3, 2005, compared to the six months ended July 4, 2004. This increase is primarily due to additional headcount costs, product licensing commissions and legal and audit fees incurred during the fiscal 2005 period associated with business development, increased product licensing revenues, growth and regulatory compliance costs related to being an independent public company following WPTE’s initial public offering in the third quarter of 2004. Lakes’ selling, general and administrative costs were $7.9 million for the six months ended July 3, 2005 and $4.5 million for the six months ended July 4, 2004. This increase of $3.4 million is primarily due to $0.8 million in additional rent expense related to a deficiency in the guaranteed residual value of the aircraft the Company leases, $1.2 million related to increased head count and related costs due to the new managed casino projects in Texas and Oklahoma and $1.3 million in professional service fees related to the new casino projects in Texas and Oklahoma as well as regulatory compliance costs.


	Net unrealized gain on notes receivable

Net unrealized gain on notes receivable was $1.9 million and $0.5 million for the six months ended July 3, 2005 and July 4, 2004, respectively, related to the adjustment to fair value of the Company’s notes receivable from Indian Tribes. These fair value calculations are determined ~~certain~~based on current assumptions related to the projects as discussed below under “Accounting for long-term assets related to Indian casino projects”. This increase is primarily related to increasing our estimate of the probability of the Pokagon Casino opening from 75% to 85% in the first six months of fiscal 2005 due to the favorable federal judge ruling in March 2005 (see further discussion below under the caption “Description of each Indian casino project and evaluation of critical milestones — Pokagon Band” specifically, the discussion regarding the critical milestone“Usable land placed in trust by Federal government.”The increase in the Pokagon notes receivable unrealized gain was partially offset by an unrealized loss of $1.8 million related to amounts advanced or project costs incurred on behalf of the Kickapoo Tribe. During the third quarter of fiscal 2005 the Company’s relationship deteriorated with the Kickapoo Tribe, resulting in an unrealized loss on notes receivable of $4.1 million. As of October 2, 2005, Lakes owns approximately 18 acres of land near the Kickapoo site with a cost basis of approximately $0.7 million. As a result of the terminated business relationship with the Kickapoo Tribe, Lakes intends to negotiate with the Kickapoo Tribe to reach an agreement to resolve all of the financial terms of the contracts including repayment of the advances, payment of the unpaid project costs incurred, possible sale of the land owned by Lakes to the tribe, and to formally terminate the gaming operations consulting agreement, management contract, and related ancillary agreements relating to the project.


	Other

Other income increased $0.7 million. Interest income was $0.8 million for the six months ended July 3, 2005 compared to $0.1 million for the same period in the prior year. This increase is primarily due to an increase in cash and equivalents and short-term investments related to WPTE raising proceeds and becoming a public entity in August 2004 and cash settlements and cash proceeds from real estate sales received by Lakes in fiscal 2004.


	Taxes

The Company recorded a tax provision of $0.7 million for the six-month period ended July 3, 2005 compared to a tax benefit of $0.9 million for the six-month period ended July 4, 2004. The loss before income taxes, equity in earnings of investments and minority interest was $7.8 million for the six months ended July 3, 2005 compared to a loss of $8.1 million for the six months ended July 4, 2004. In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (SFAS No. 109), Lakes evaluated the ability to utilize deferred tax assets relating to net operating loss carry forwards, deferred interest on advances made to Indian tribes and other ~~claims~~ordinary items and determined that a valuation allowance was appropriate. Lakes evaluated all evidence and determined the net losses generated over the past three years outweighed the current positive evidence that the Company believes exists surrounding its ability to generate significant income from its long-term assets related to Indian casino projects and its investments in its non-Indian casino business. The Company recorded a 100% valuation allowance against these items at July 3, 2005 and January 2, 2005. In addition, the Company recognized a deferred tax asset for capital losses related to asset impairment charges. The realization of these benefits is dependent on the generation of capital gains. The Company believes it will have sufficient capital gains in the future to utilize these benefits.


	Losses per common share and net losses

For the six months ended July 3, 2005, basic and diluted losses per common share were $0.35, compared to basic and diluted losses of $0.32 per common share, for the same period in the prior year. Net loss for the six months ended July 3, 2005 was $7.8 million compared to $7.0 million for the six months ended July 4, 2004.


	*Three Months Ended July 3, 2005 Compared to the Three Months Ended July 4, 2004*


	Revenues

All revenues in fiscal 2005 and fiscal 2004 were related to WPTE business. Total revenues increased by $1.9 million for the three months ended July 3, 2005 as compared to the same period in the prior year. Domestic television license revenues decreased by $0.1 million in the three months ended July 3, 2005 compared to the three months ended July 4, 2004. The reduction in domestic television license revenue reported in the second quarter of 2005 reflected the delivery of eight Season Three episodes compared to nine Season Two episodes delivered during the second quarter of fiscal 2004. International television licensing revenues increased by $0.6 million for the three months ended July 3, 2005 compared to the three months ended July 4, 2004 as WPTE increased distribution to more territories in the current period. Revenues for the three months ended July 3, 2005 also included $1.1 million more in product licensing revenues than the three months ended July 4, 2004 as WPTE licensees had substantially more product in the marketplace in fiscal 2005.


	Costs and Expenses

Production costs are associated with WPTE costs of producing television series. WPTE cost of revenues increased by $1.7 million in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004, and accordingly, overall gross margins were 33.7% in the second quarter of fiscal 2005 compared to 43.9% in the second quarter of fiscal 2004. Cost of revenues for the second quarter of fiscal 2005 included approximately $1.6 million related to the premiere season of the PPT, as well as $2.8 million in production costs for Season Three episodes of the WPT. PPT production costs were expensed in this period rather than

being capitalized because WPTE does not capitalize television production costs until a licensing agreement has been executed or WPTE has a firm commitment of revenue for the series. For the second quarter of fiscal 2004, cost of revenues of $2.6 million was related primarily to the production of Season Two episodes of the WPT. There was no PPT production costs incurred during the second quarter of fiscal 2004. Additionally, cost of revenues in the second quarter of fiscal 2005 included approximately $0.6 million of non-cash compensation expense related to consultant stock options compared to $0.2 million in the second quarter of fiscal 2004. Excluding the non-cash compensation expenses and PPT production costs expensed during quarter, gross margin for the second quarter of fiscal 2005 would have been 65.8% compared to 47.7% for the corresponding period in fiscal 2004, with the higher margin in fiscal 2005 due to increased revenues from product licensing, international licensing, and sponsorship.

Selling and administrative expenses increased by $3.8 million for the three months ended July 3, 2005, compared to the three months ended July 4, 2004. WPTE’s selling general and administrative expenses increased by $1.7 million primarily due to additional headcount costs, product licensing commissions, and legal and audit fees incurred during the fiscal 2005 period associated with business development, increased product licensing revenues, growth and regulatory compliance costs related to being an independent public company following WPTE’s initial public offering in the third quarter of fiscal 2004. Lakes’ selling general and administrative expenses increased by $2.1 million for the three months ended July 3, 2005, compared to the three months ended July 4, 2004 primarily due to $0.7 million related to increased head count and related costs due to the new casino projects, $1.0 million in professional service fees related to the new casino projects as well as regulatory compliance costs, $0.2 million in development costs associated with an “Automated System For Playing Live Casino Table Games” and $0.2 million in additional rent expense on the Company’s airplane it leases.

Impairment losses were $5.8 million during the three months ended July 4, 2004. During the three months ended July 4, 2004 the Company recognized a $5.8 million impairment charge related to long-term assets related to the Nipmuc Nation project. Lakes also recorded an unrealized loss on notes receivable of $0.8 million related to the fair value of the note receivable from the Nipmuc Nation. In June 2004, the BIA issued its final determination denying the Nipmuc Nation’s application for federal recognition. Although the Nipmuc Nation is appealing the determination with the BIA, Lakes made a decision to discontinue funding the project in the second quarter of fiscal 2004. At that time, Lakes recorded the impairment charge and an unrealized loss on notes receivable. Should the Nipmuc Nation become federally recognized and successfully open a casino operation (with or without Lakes’ assistance) Lakes is entitled to receive payment in full of its advances and deferred interest.


	*Net unrealized loss on notes receivable*

Net unrealized loss on notes receivable was $1.0 million and $0 for the three months ended July 3, 2005 and July 4, 2004, respectively, related to the adjustment to fair value of the Company’s notes receivable from Indian Tribes. These fair value calculations are determined based on current assumptions related to the projects as discussed below under “Accounting for long-term assets related to Indian casino projects”. The unrealized loss for the three months ended July 3, 2005 is primarily due to an unrealized loss of $1.3 million related to amounts advanced or costs incurred on behalf of the Kickapoo Tribe during the three months ended July 3, 2005. These fair value calculations are determined based on current assumptions related to the projects as discussed below under “Accounting for long-term assets related to Indian casino projects”. During the third quarter of fiscal 2005 the Company’s relationship deteriorated with the Kickapoo Tribe, resulting in an unrealized loss on notes receivable of $4.1 million. As of October 2, 2005, Lakes owns approximately 18 acres of land near the Kickapoo site with a cost basis of approximately $0.7 million. As a result of the terminated business relationship with the Kickapoo Tribe, Lakes intends to negotiate with the Kickapoo Tribe to reach an agreement to resolve all of the financial terms of the contracts including repayment of the advances, payment of the unpaid project costs incurred, possible sale of the land owned by Lakes to the tribe, and to formally terminate the gaming operations consulting agreement, management contract, and related ancillary agreements relating to the project. The unrealized loss is offset by unrealized gains of $0.3 million on the Company’s other Indian casino projects.


	Taxes

The Company recorded a tax provision of $0.4 million during the three months ended July 3, 2005 compared to a tax benefit of $0.5 million during the three months ended July 4, 2004. The loss before income taxes, equity in earnings (loss) of investment and minority interest was $5.5 million for the three months ended July 3, 2005 compared to a loss of $7.1 million for the three months ended July 4, 2004. In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (SFAS No. 109), Lakes evaluated the ability to utilize deferred tax assets relating to net operating loss carry forwards, deferred interest on advances made to Indian tribes and other ordinary items and determined that a valuation allowance was appropriate. Lakes evaluated all evidence and determined the net losses generated over the past three years outweighed the current positive evidence that the Company believes exists surrounding its ability to generate significant income from its long-term assets related to Indian casino projects and its investments in its non-Indian casino business. The Company recorded a 100% valuation allowance against these items at July 3, 2005 and January 2, 2005. In addition, the Company recognized a deferred tax asset for capital losses related to asset impairment charges. The realization of these benefits is dependent on the generation of capital gains. The Company believes it will have sufficient capital gains in the future to utilize these benefits.


	Losses per common share and net losses

For the three months ended July 3, 2005, basic and diluted losses per common share were $0.25, compared to basic and diluted losses of $0.30 per common share, for the same period in the prior year. Net loss for the three months ended July 3, 2005 was $5.7 million compared to $6.6 million for the three months ended July 4, 2004. The decrease in net loss is primarily due to the impairment charge of $5.8 million recognized during the three months ended July 4, 2004 offset by increased selling, general and administrative expenses, increased production costs, an increase in the tax provision and increased other expenses primarily related to unrealized losses on notes receivable during the three months ended July 3, 2005.

Liquidity and Capital Resources

At July 3, 2005, Lakes’ unaudited condensed consolidated balance sheet included unrestricted cash and cash equivalents and short-term investment balances of $51.0 million. Included in this amount was Lakes’ cash of $18.8 million. Also included were WPTE cash of $5.6 million and WPTE short-term investments of $26.6 million. WPTE cash and investments will not be used in Lakes’ business. As of July 3, 2005, Lakes’ has had no operating revenues from casino operations since the expiration of the management contract with the Coushatta Tribe in January 2002.

In August and September 2004, WPTE raised a total of approximately $32.4 million in cash proceeds from its initial public offering, net of underwriting discounts and estimated offering expenses. WPTE’s cash resources are expected to be used for WPTE’s business and will not be available for Lakes’ casino projects or other non-WPTE businesses. The initial public offering resulted in the termination of Lakes’ obligation to fund WPTE operations under a limited revolving note receivable. As of July 3, 2005, Lakes holds approximately 12.5 million shares or approximately 62% of WPTE’s common stock. Lakes’ will be subject to Rule 144 regarding volume limitations for sales of WPTE common stock.

The Company’s primary source of cash for its development of casino projects during fiscal 2004 and during fiscal 2005 has been from the planned sale of assets. During fiscal 2004, the 2022 Ranch land, which was owned by Lakes and its joint venture partner Land Baron West, LLC, was sold. Lakes received cash in the amount of approximately $2.5 million related to the sale of the land as well as through the settlement of a title dispute. Lakes received proceeds of $5.9 million in fiscal 2004 in connection with the sale of the Polo Plaza and adjacent Travelodge property and an additional $5.0 million received during 2005, pursuant to an option agreement with Metroflag. We expect that proceeds from the sale of assets will decrease in future periods. Additionally in December 2004, Lakes received $11.3 million in settlement of a tax sharing agreement with Grand Casinos. For a discussion of Lakes’ current efforts to secure financing for its operational and development needs see Note 10.

Our management contracts with our tribal partners require that we provide financial support for project development in the form of loans. These loans are interest bearing; however, the loans and related interest are not due until the casino is built and has established profitable operations. In the event that the casinos are not built, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust. A portion of the advances due from the Pokagon Band in the approximate amount of $24.1 million resulted from funds advanced by the Company for the Pokagon Band’s purchase of the land. The Company has a first deed of trust against this property, which will be relinquished when the BIA places the land into trust.

We currently believe that our existing casino development projects included in the table below (except for the project with the Kickapoo Tribe– see Note 10) will be constructed and achieve profitable operations; however, no assurance can be made that this will occur. If this does not occur, it is likely that Lakes would incur substantial or complete losses on its notes receivable from Indian tribes and related intangible assets associated with the acquisition of the management contracts. In addition, if Lakes’ current casino development projects are not completed or, upon completion, fail to successfully compete in the highly competitive market for gaming activities, Lakes may lack the funds to compete for and develop future gaming or other business opportunities and Lakes’ business could be adversely affected to the extent that it may be forced to cease its operations entirely.

Following is a table summarizing remaining contractual obligations as of July 3, 2005 (in millions):


		Payment Due by Period

				Less Than						More Than
Contractual Obligations		Total		1 Year		1-3 Years		3-5 Years		5 Years

Remaining casino development commitment(1)(3)
	Jamul	$	8.1	$	2.2	$	5.9	$	—	$	—
	Shingle Springs		5.4		2.3		3.1		—		—
	Pokagon(2)		27.6		1.8		25.8		—		—
	Kickapoo Traditional Tribe of Texas(1)(8)		1.1		1.1
	Iowa Tribe of Oklahoma(1)		0.8		0.8
	Pawnee Nation(1)		0.4		0.4
Operating leases(4)			3.5		1.9		1.3		0.3		—
WPTE operating leases(5)			2.9		0.5		0.9		1.0		0.5
WPTE purchase obligations(6)			0.3		0.2		0.1		—		—
WPTE employee obligations(7)			1.0		0.8		0.2		—		—

		$	51.1	$	12.0	$	37.3	$	1.3	$	0.5


(1)	Lakes anticipates that it will require additional capital through public or private financings or the sale of some or all of Lakes’ shares of WPTE to meet the remaining casino development commitments. See table below detailing tribal casino development commitments.

(2)	For the Pokagon Casino project, the Company has agreed to provide additional financing from its own funds if financing at an interest rate not to exceed 13% is not available from third parties. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Currently, it appears that third party financing will be available for this project. However, there can be no assurance that third party financing will be available and that Lakes will not be required to provide this additional financing. The Company will be obligated to pay an amount to an unrelated third party once the Pokagon Casino is open and Lakes is the manager of the casino. The amount is payable quarterly for five years and is only payable if Lakes is the manager of the casino. The payment is part of a settlement and release agreement associated with Lakes obtaining the management contract with the Pokagon Band. The maximum liability over the five-year period is approximately $11 million.


(3)	Lakes may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects. Any guarantees by Lakes or similar off-balance sheet liabilities will increase Lakes’ potential exposure in the event of a default by any of these tribes. No such guarantees or similar off-balance sheet liabilities existed at July 3, 2005.

(4)	The Company leases an airplane, under a non-cancelable operating lease expiring April 30, 2005. The lease was amended on May 1, 2005. The new term is for a period of up to three years.

(5)	Operating lease obligations include rent payments on WPTE’s corporate office space. Monthly lease payments began at approximately $38,000 and escalate to approximately $45,000 over the six-year lease term. The amount set forth in the table above assumes monthly lease payments through May 2011.

(6)	Purchase obligations include the following: Contractual obligations related to the establishment of our internet gaming site of $270,000 and a monthly retainer of $13,750 for investor relations services through September 2005.

(7)	Employee obligations include the base salaries payable to Steven Lipscomb, Audrey Kania and Robyn Moder under their respective employment agreements.

(8)	Lakes entered into consulting agreements and management contracts with the Kickapoo Tribe effective January 2005 to improve the performance of the gaming operations conducted at the Kickapoo Tribe’s existing Lucky Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. During the third quarter of fiscal 2005 the Company’s relationship with the Kickapoo Tribe deteriorated and in November 2005, Lakes and the Kickapoo Tribe terminated their business relationship.

Casino Development Advances/ Commitments

As of July 3, 2005


													Commitments in
											Lakes’ Cash		Excess of
			Land Held				Total		Remaining		and		Available Cash
	Pre-Construction		for		Total		Funding		Funding		Short-Term		and Short-Term
	Advances		Development		Funded		Commitment		Commitment		Investments		Investments

	(In millions)
Jamul Tribe(a)	$	15.3	$	6.6	$	21.9	$	30.0	$	8.1
Shingle Springs Tribe(b)		35.8		8.8		44.6		50.0		5.4
Pokagon Band(c)		45.4		—		45.4		73.0		27.6
Kickapoo Tribe(d)		0.6		0.3		0.9		2.0		1.1
Iowa Tribe(e)		0.1		0.1		0.2		1.0		0.8
Pawnee Tribe(f)		0.7		—		0.7		1.1		0.4

	$	97.9	$	15.8	$	113.7	$	157.1	$	43.4	$	18.8	$	24.6


(a)		Lakes plans to continue making advances on the remaining commitment to the Jamul Tribe on a monthly basis until the casino opens. Lakes plans to make advances of $1.1 million and $7.0 million during the third and fourth quarter of fiscal 2005 and fiscal 2006, respectively, to fulfill its remaining commitment to the Jamul Tribe.

(b)		Lakes plans to continue making advances on the remaining commitment to the Shingle Springs Tribe on a monthly basis until the casino opens. Lakes plans to make advances of $1.2 million and $4.2 million during the third and fourth quarters of fiscal 2005 and fiscal 2006, respectively, to fulfill its remaining commitment to the Shingle Springs Tribe.

(c)		Lakes plans to continue making advances on the remaining commitment to the Pokagon Band on a monthly basis until the casino opens. Lakes plans to make advances of $0.9 million, $15.9 million and $10.8 million during the third and fourth quarters of fiscal 2005, fiscal 2006 and fiscal 2007, respectively, to fulfill its remaining commitment to the Pokagon Band.


(d)		Lakes entered into consulting agreements and management contracts with the Kickapoo Tribe effective January 2005 to improve the performance of the gaming operations conducted at the Kickapoo Tribe’s existing Lucky Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. During the third quarter of fiscal 2005 the Company’s relationship with the Kickapoo Tribe deteriorated and in November 2005, Lakes and the Kickapoo Tribe terminated their business relationship. During the third quarter of fiscal 2005, the Company recognized an impairment charge of $0.1 million related to the intangible asset related to the acquisition of the management contract. In addition the Company recognized unrealized losses related to advances made for project costs and project costs incurred that Lakes may be required to pay as a result of the terminated relationship in the amounts of $0.3 million and $3.8 million, respectively, during the third quarter of fiscal 2005. As of October 2, 2005, Lakes owns approximately 18 acres of land near the Kickapoo site with a cost basis of approximately $0.7 million. Lakes intends to negotiate with the Kickapoo Tribe to reach an agreement to resolve all of the financial terms of the contracts including repayment of the advances, payment of unpaid project costs incurred, possible sale of the land owned by Lakes to the Kickapoo Tribe, and to formally terminate the gaming operations consulting agreement, management contract, and related ancillary agreements relating to the project.

(e)		Lakes plans to advance the remaining $0.8 million it has committed to the Iowa Tribe during fiscal 2005. In December 2005 the Iowa Tribe closed on third party financing related to the Cimarron Casino and repaid Lakes all amounts advanced related to that project. Additional amounts have and will be advanced to the Iowa Tribe for the new casino project based upon an approved budget yet to be finalized.

(f)		During the third quarter of fiscal 2005, Lakes made a commitment of $1.1 million to the Pawnee Nation based upon an approved budget related to the Trading Post project. Lakes plans to advance the remaining $0.4 million it has committed to the Pawnee Nation during fiscal 2005. Additional amounts will continue to be advanced to the Pawnee Nation for the new casino project and Travel Plaza project based upon an approved budget yet to be finalized.

During fiscal 2005, Lakes’ corporate costs, excluding WPTE, which is not expected to require additional capital from Lakes, will approximate $12.5 million. Development project-related costs are expected to approximate $24.0 million during fiscal 2005. Lakes’ unaudited cash balance, excluding WPTE cash was approximately $5.5 million as of December 9, 2005. Lakes’ on-going quarterly corporate costs are expected to approximate $3.5 million and on-going quarterly development project-related costs are expected to approximate $3.5 million, however a portion of these costs are discretionary and could be deferred if necessary. Additionally, the Company may be required to pay taxes, ranging from $0 to approximately $12 million plus interest and penalties, in fiscal 2006 related to two tax matters. It is anticipated that Lakes will require additional capital through public or private financings or the sale of some or all of Lakes’ shares of WPTE to meet operating expenses and development project-related costs during the remainder of fiscal 2005 and 2006 and the Company is currently considering various financing alternatives. In December 2005, Lakes obtained a $20 million financing facility from the Lyle Berman Family Partnership and received a $10 million draw on this facility on December 16, 2005 (see Note 10). Lakes plans to continue pursuing other financing alternatives and the Company believes the assets of Lakes provide sufficient collateral to obtain the necessary financing. The assets of Lakes include common shares of WPTE that have an estimated fair value of $82.6 million as of December 9, 2005, based on the public trading price, on that date, which may not be indicative of what Lakes could realize in a sale of its shares. The Company believes the shares of WPTE could be the source or part of the collateral for the additional financing.

Our major use of cash over the past three years has been pre-construction financing provided to our tribal partners. Lakes also anticipates that it may incur additional pre-construction costs which would require the Company to obtain additional sources of financing. These development costs do not include construction-related costs that would be incurred if any of the projects were to begin construction during the next twelve months. Management anticipates that it will be necessary to raise additional capital when any of the projects begin construction and believes such financing will be available based on preliminary discussions with prospective lenders. However, such financings may not be available when needed on terms acceptable to Lakes or at all. Moreover, any additional equity financings may be dilutive to Lakes’ shareholders, and any

debt financing may involve additional restrictive covenants. An inability to raise such funds when needed might require Lakes to delay, scale back or eliminate some of its expansion and development goals.

In addition, the construction of the Company’s Indian casino projects may depend on the ability of the tribes to obtain financing for the projects. If such financing cannot be obtained on acceptable terms, it may not be possible to complete these projects, which could have a material adverse effect on Lakes’ results of operations and financial condition. In order to assist the tribes, Lakes may be required to guarantee the tribes’ debt financing or otherwise provide support for the tribes’ obligations. Guarantees by Lakes, if any, will increase Lakes’ potential exposure in the event of a default by any of these tribes.

For the Pokagon Casino project, the Company has agreed to finance all phases of the project entirely from its own funds if financing at an interest rate of 13% or less is not available from the capital markets. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Currently, management believes that third-party financing will be available for this project. However, there can be no assurance third-party financing will be available and that Lakes will not be required to provide this additional financing.

As a part of the transaction establishing Lakes as a separate public company on December 31, 1998, the Company agreed to indemnify Grand Casinos through December 28, 2004 against all costs, expenses and liabilities incurred in connection with or arising out of certain pending and threatened claims and legal proceedings against Grand Casinos and to pay all related settlements and judgments. The indemnification period expired December 28, 2004 and Lakes does not have any further obligations. Lakes incurred no costs related to this matter in 2004.

Critical Accounting Policies and Estimates

Our consolidated unaudited financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. The significant accounting policies that Lakes believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following: revenue recognition, long-term assets related to Indian casino projects and income taxes.

Revenue recognition: Revenue from the management of Indian-owned casino gaming facilities is recognized in accordance with our policy described below under the caption “Accounting for long-term assets related to Indian casino projects.”

Revenue from the domestic and international distribution of WPTE’s television series is recognized as earned under the following criteria established by the American Institute of Certified Public Accountants Statement of Position (SOP) No. 00-2,Accounting by Producers or Distributors of Films:


	•	Persuasive evidence of an arrangement exists;

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

	•	The license period has begun and the customer can begin its exploitation, exhibition or sale;

	•	The seller’s price to the buyer is fixed and determinable; and

	•	Collectibility is reasonably assured.

In accordance with the terms of the TRV agreement, WPTE recognizes domestic television license revenues upon the receipt and acceptance of completed episodes. However, due to restrictions and practical limitations applicable to WPTE’s operating relationships with foreign networks, WPTE currently does not consider collectibility of international television license revenues to be reasonably assured, and accordingly, WPTE does not recognize such revenue until the distributor has received payment. Additionally, WPTE presents international distribution license fee revenues net of the distributor’s fees, as the distributor is the primary obligor in the transaction with the ultimate customer pursuant to the Financial Accounting Standards

Board (FASB) Emerging Issues Task Force (EITF) 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent.

Product licensing revenues are recognized when the underlying royalties from the sales of the related products are earned. WPTE recognizes minimum revenue guarantees ratably over the term of the license or as earned royalties based on actual sales of the related products, if greater. WPTE presents product licensing fees gross of licensing commissions, which are recorded as selling and administrative expenses as WPTE is the primary obligor in the transaction with the ultimate customer pursuant to EITF 99-19.

Online gaming revenues are recognized monthly based on detailed statements received from WagerWorks, WPTE’s online gaming partner, for online poker and casino activity throughout the previous month. In accordance with EITF 99-19, WPTE presents online gaming revenues gross of WagerWorks costs, including WagerWorks management fee, royalties, credit card processing and chargebacks that are recorded as cost of revenues, since WPTE has the ability to adjust price and specifications of the online gaming site, WPTE bears the majority of the credit risk and WPTE is responsible for the sales and marketing of the gaming site.

Event hosting fees are paid by host casinos for the privilege of hosting the events and are recognized as the episodes that feature the host casino are aired, and sponsorship revenues are recognized as the episodes that feature the sponsor are aired. Licensing advances and guaranteed payments collected, but not yet earned, by WPTE, as well as casino host fees and sponsorship receipts collected prior to the airing of episodes, are classified as deferred revenue in the accompanying balance sheets.

Deferred television costs: WPTE accounts for deferred television costs in accordance to SOP No. 00-2. Deferred television costs include capitalizable direct costs, production overhead and development costs and are stated at the lower of cost or net realizable value based on anticipated revenue. WPTE has not currently anticipated any revenues in excess of those subject to existing contractual relationships, since WPTE has insufficient operating history to enable such anticipation. Accordingly, television costs related to the new PPT series will continue to be expensed as incurred until a licensing agreement has been executed or WPTE has a firm commitment of revenue for the series. Marketing, distribution and general and administrative costs are expensed as incurred. Capitalized television production costs for each episode are expensed as revenues are recognized upon delivery and acceptance by the Travel Channel of the completed episode. Management of WPTE currently estimates that 92% of capitalized deferred television costs at July 3, 2005, are expected to be expensed in connection with episode deliveries by the end of fiscal 2005.

Accounting for long-term assets related to Indian casino projects:


	*Notes Receivable:*

Lakes is involved as the exclusive developer and manager of Indian-owned casino projects. The Company has formal procedures governing its evaluation of opportunities for potential development projects that it follows before entering into agreements to provide financial support for the development of these properties. Lakes determines that there is probable future economic benefit prior to recording any asset related to the Indian casino project. No asset related to an Indian casino project is recognized unless it is considered probable that the project will be built and result in an economic benefit to Lakes sufficient to recover the asset. Lakes initially evaluates the following six factors involving critical milestones that affect the probability of developing and operating a casino:


	•	Has the U.S. Government’s Bureau of Indian Affairs federally recognized the tribe as a tribe?

	•	Does the tribe hold or have the right to acquire land to be used for the casino site?

	•	Has the Department of the Interior put the land into trust for purposes of being used as a casino site?

	•	Has the tribe entered into a gaming agreement with the state in which the land is located, if required by the state?


	•	Has the tribe obtained approval by the National Indian Gaming Commission of the management agreement?

	•	Do other legal and political obstacles exist that could block development of the project and, if so, what is the likelihood of the tribe successfully prevailing?

In addition to the above factors, Lakes also considers economic and qualitative factors affecting Lakes’ future economic benefits from the project, including the following:


	•	An evaluation by Company management of the financial projections of the project given the project’s geographic location and the feasibility of the project’s success given such location;

	•	The structure and stability of the tribal government;

	•	The scope of the proposed project, including the physical scope of the contemplated facility and the expected financial scope of the related development;

	•	An evaluation of the proposed project’s ability to be built as contemplated and the likelihood that financing will be available; and

	•	The nature of the business opportunity to Lakes, including whether the project would be a financing, development and/or management opportunity.

The development phase of each relationship commences with the signing of the respective contracts and continues until the casinos open for business; thereafter, the management phase of the relationship, governed by the management contract, continues for a period of up to seven years. Lakes, as developer and manager, has the exclusive right and obligation to develop, manage, operate and maintain the casino and to train tribal members and others in the operation and maintenance of the casino during the term of the contract. The Company also makes advances to the tribes to fund certain portions of the projects, which bear interest generally at prime plus 1% or 2%. Repayment of the advances and accrued interest is only required if the casino is successfully opened and distributable profits are available from the casino operations. Under the management contract Lakes typically earns a management fee calculated as a percentage of the net income of the operations. In addition, repayment of the loans and the manager’s fees under the management contracts are subordinated to certain other financial obligations of the respective operations. Generally, the order of priority of payments from the casinos’ cash flows is as follows: a certain minimum monthly priority payment to the tribe, repayment of various senior debt associated with construction and equipping of the casino with interest accrued thereon, repayment of various debt with interest accrued thereon due to Lakes, management fee to Lakes, and other obligations, with the remaining funds distributed to the tribe.

The Company accounts for its advances to the tribes and its management contracts as separate elements. The advances made to the tribes are accounted for as structured notes in accordance with the guidance contained in Emerging Issues Task Force Consensus No. 96-12Recognition of Interest Income and Balance Sheet Classification of Structured Notes(EITF No. 96-12). Because repayment of the notes is required only if a casino is successfully opened, Lakes’ advances may be at risk to not be repaid for reasons other than failure of the borrower to pay the contractual amounts due because if the casinos are not built the notes will not become contractually due. Accordingly, pursuant to the guidance in EITF No. 96-12, Lakes records its advances to tribes at estimated fair value. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects, the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset related to the acquisition of the management contract. Subsequent to the initial recording, the two assets are accounted for separately.

Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current fair value at each balance sheet date based on current assumptions related to the projects. The notes receivable are not adjusted to an amount in excess of the face value of the note plus accrued interest. Changes in fair value are recorded as unrealized gains or losses on notes receivable in the Company’s statement of operations.

The determination of fair value requires that assumptions be made and judgments be applied regarding casino opening dates, interest rates, discount rates and probabilities of the projects opening based on a review of critical milestones. If casino opening dates, interest rates, discount rates or the probabilities of the projects opening change significantly, the estimated fair value of the related note receivable is adjusted accordingly and the Company could experience unrealized gains or losses that could be material.

Upon opening of the casino Lakes may conclude that it is no longer reasonably possible that the advances to Indian tribes would be at risk to not be repaid for reasons other than failure of the borrower to pay the contractual amounts due. In such situations, the notes receivable will be accounted for under the effective interest method upon opening of the casino and will no longer be adjusted to fair value at each balance sheet date. Any difference between the then estimated fair value of the advances and the amount contractually due under the notes will be amortized into income using the effective interest method over the remaining term of the note. Such notes would then be evaluated for impairment pursuant to Statement of Financial Accounting Standards No. 114“Accounting by Creditors for Impairment of a Loan.”


	*Intangible Assets Related to Acquisition of Management Contracts:*

Intangible assets related to the acquisition of the management contracts are accounted for using the guidance in Statement of Financial Accounting Standards No. 142Goodwill and Other Intangible Assets(FASB No. 142). Pursuant to that guidance, the assets are periodically evaluated for impairment based on the estimated cash flows from the management contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects described below, were to exceed the undiscounted cash flow, an impairment would be recorded. Such an impairment would be measured based on the difference between the fair value and carrying value of the assets. Lakes, in accordance with FASB No. 142, will amortize the intangible assets related to the acquisition of the management contracts under the straight-line method over the lives of the contracts which will commence when the related casinos open. In addition to the intangible asset associated with the cash advances to tribes described above, these assets include actual costs incurred to acquire Lakes’ interest in the projects from third parties.


	*Land Held for Development*

Included in land held for development is land held for possible transfer to Indian tribes for use in certain of the future casino resort projects. In the event that this land is not transferred to the tribes, the Company can sell it. Lakes evaluates these assets for impairment in combination with intangible assets related to acquisition of management contracts and other assets related to the Indian casino projects as discussed above.


	*Other*

Included in this category are costs incurred related to the Indian casino projects, which have not yet been included as part of the notes receivable because of timing of the payment of these costs. These amounts will ultimately be allocated between notes receivable and intangible assets related to the acquisition of management contracts and will be evaluated for changes in fair value or impairment, respectively, as described above. These amounts vary from period to period due to timing of payment of these costs.

In addition, Lakes incurs certain costs related to the projects that are not included in notes receivable, which are expensed as incurred. These costs include salaries, travel and certain legal costs.

The consolidated balance sheets as of July 3, 2005 (unaudited) and January 2, 2005 include long-term assets related to Indian casino projects of $135.9 million and $125.6 million, respectively, primarily related to three separate projects. The amounts are summarized by project (in thousands) as follows:


	July 3, 2005

			Shingle
	Pokagon		Springs		Jamul
	Band		Tribe		Tribe		Other		Total

	(Unaudited)
Notes receivable, at fair value	$	39,432	$	23,636	$	10,142	$	593	$	73,803
Intangible assets related to acquisition of management contracts		17,942		17,849		7,172		284		43,247
Land held for development		—		8,811		6,612		360		15,783
Other		65		1,337		667		976		3,045

Total long-term assets related to the Indian casino project	$	57,439	$	51,633	$	24,593	$	2,213	$	135,878


	January 2, 2005

			Shingle
	Pokagon		Springs		Jamul
	Band		Tribe		Tribe		Other		Total

Notes receivable, at fair value	$	35,931	$	21,775	$	9,345	$	15	$	67,066
Intangible assets related to acquisition of management contracts		17,604		16,698		6,789		5		41,096
Land held for development		—		8,772		6,661		—		15,433
Other		71		1,315		638		—		2,024

Total long-term assets related to the Indian casino project	$	53,606	$	48,560	$	23,433	$	20	$	125,619

The key assumptions used to estimate the fair value of the notes receivable are estimated casino opening date, projected interest rates, discount rates and probability of projects opening. The estimated casino opening date used in the valuation reflects the weighted average of three scenarios: a base case (which is based on the Company’s forecasted casino opening date) and one and two years out from the base case. The projected interest rates are based upon the one year U.S Treasury Bill spot yield curve per Bloomberg and the specific assumptions on contract term, stated interest rate and casino opening date. The discount rate for the projects is based on the yields available on certain financial instruments at the valuation date, the risk level of equity investments in general, and the specific operating risks associated with open and operating gaming enterprises similar to each of the projects. In estimating this discount rate, market data of other public gaming related companies was considered. The probability applied to each project is based upon a weighting of four different scenarios with the fourth scenario assuming the casino never opens. The first three scenarios assume the casino opens but applies different opening dates as discussed above. The probability weighting applied to each scenario captures the element of risk in these projects and is based upon the status of each project, review of the critical milestones and likelihood of achieving the milestones.

The following table provides the key assumptions used to estimate the fair value of the notes receivable (dollars in thousands):

Pokagon Band:


	As of July 3, 2005	As of January 2, 2005

Face value of note (principal and interest)	$58,482 ($45,366 principal and $13,116 interest)	$55,747 ($44,550 principal and $11,197 interest)
Estimated months until casino opens (weighted average of three scenarios)	33 months	33 months
Projected interest rate until casino opens	7.4%	6.8%
Projected interest rate during the loan repayment term	7.7%	8.2%
Discount rate	15%	15%
Repayment terms of note	60 months	60 months
Probability rate of casino opening (weighting of four scenarios)	85%	75%

A portion of the notes due from the Pokagon Band include funds advanced of approximately $24.1 million by the Company for the Pokagon Band’s purchase of land. The Company has a first deed of trust against substantially all of this property, which will be relinquished when the Bureau of Indian Affairs (“BIA”) places the land into trust.

The estimated probability rate was increased from 75% to 85% during the three months ended April 3, 2005, due to an evaluation of all critical milestones and due to the favorable federal judge ruling issued in March 2005 that will allow the land to be taken into trust by the Federal Government. Subsequently the Taxpayers of Michigan Against Casinos (“TOMAC”) filed for an appeal. The appeal hearing date was held on December 8, 2005 and a decision is pending. Due to the delay related to this litigation the weighted average estimated casino opening date was extended from December 2007 to April 2008 during the three-month period ended July 3, 2005.

TOMAC commenced the litigation against the Federal Government in 2001 after the U.S. Department of Interior issued a finding of no significant impact and recommended that land be taken into trust on behalf of the Pokagon Band. The land in trust issue has been the most significant critical milestone delaying the opening of the casino.

See further discussion included below under “Description of each Indian casino project and evaluation of critical milestones — Pokagon Band.”

Shingle Springs Tribe:


	As of July 3, 2005	As of January 2, 2005

Face value of note (principal and interest)	$42,393 ($35,765 principal and $6,628 interest)	$38,156 ($33,076 principal and $5,080 interest)
Estimated months until casino opens (weighted average of three scenarios)	36 months	36 months
Projected interest rate until casino opens	8.4%	7.9%
Projected interest rate during the loan repayment term	8.5%	8.7%
Discount rate	15%	15%
Projected repayment terms of note*	24 months	24 months
Probability rate of casino opening (weighting of four scenarios)	70%	70%


*	Payable in varying monthly installments based on contract terms subsequent to the casino opening.

As a result of delays related to litigation surrounding access to the reservation via an interchange, the weighted average estimated casino opening date was extended from April 2008 to July 2008 during the three-month period ended July 3, 2005 (see further discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Shingle Springs”).

Jamul Tribe:


	As of July 3, 2005	As of January 2, 2005

Face value of note (principal and interest)	$18,819 ($15,289 principal and $3,530 interest)	$17,306 ($14,467 principal and $2,839 interest)
Estimated months until casino opens (weighted average of three scenarios)	36 months	36 months
Projected interest rate until casino opens	8.4%	7.9%
Projected interest rate during the loan repayment term	8.8%	8.7%
Discount rate	15%	15%
Repayment terms of note	84 months	84 months
Probability rate of casino opening (weighting of four scenarios)	75%	75%

As a result of delays related to getting land contiguous to the reservation placed into trust, the weighted average estimated casino opening date was extended from April 2008 to July 2008 during the quarterly period ended July 3, 2005. Because of the slow process, during August of 2005, the Jamul Tribe and Lakes formally announced plans to build the casino on the approximately six acres of reservation land held by the Jamul Tribe. Reservation land qualifies for gaming without going through a land in trust process (see further discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Jamul Tribe”).

The fair value estimation requires that assumptions be made and judgments be applied regarding estimated casino opening dates, projected interest rates, discount rates and probabilities of the projects opening. If the assumptions used in the fair value calculation change significantly the Company could be exposed to unrealized gains or losses that could be material.

The following table represents a sensitivity analysis prepared by the Company of the notes receivable from the Jamul Tribe, Pokagon Band and Shingle Springs Tribe, based upon a change in the probability rate of the casino opening by five percentage points and the estimated casino opening date by one year:


	July 3, 2005		Sensitivity Analysis
	Fair Value
	Notes		5% Less		One Year				5% Increased		One Year
	Receivable		Probable		Delay		Both		Probability		Sooner		Both

Pokagon	$	39,432,132	$	37,351,065	$	37,094,098	$	35,150,562	$	41,513,200	$	41,935,614	$	44,163,945
Shingle Springs	$	23,636,132	$	21,920,408	$	22,259,674	$	20,642,269	$	25,351,856	$	25,096,262	$	26,916,281
Jamul	$	10,142,412	$	9,478,018	$	9,571,322	$	8,945,000	$	10,806,806	$	10,748,217	$	11,452,998

	$	73,210,676	$	68,749,491	$	68,925,094	$	64,737,831	$	77,671,861	$	77,780,093	$	82,533,224


	January 2, 2005		Sensitivity Analysis
	Fair Value
	Notes		5% Less		One Year				5% Increased		One Year
	Receivable		Probable		Delay		Both		Probability		Sooner		Both

Pokagon	$	35,931,000	$	33,957,913	$	33,825,802	$	29,583,071	$	37,904,088	$	38,197,409	$	40,321,591
Shingle Springs	$	21,775,000	$	20,252,095	$	20,453,118	$	19,024,633	$	23,297,905	$	23,184,255	$	24,807,821
Jamul	$	9,345,000	$	8,734,015	$	8,776,784	$	8,203,679	$	9,955,986	$	9,950,775	$	10,602,146

	$	67,051,001	$	62,944,022	$	63,055,704	$	56,811,384	$	71,157,979	$	71,332,440	$	75,731,558

The assumption changes used in the sensitivity analysis above are hypothetical. The effect of the variation in the probability assumption and estimated opening date on the estimated fair value of the notes receivable from Indian tribes were calculated without changing any other assumptions; in reality, changes in these factors may result in changes in another. For example, the change in probability could be associated with a change in discount rate, which might magnify or counteract the sensitivities.

The following represents the nature of the advances to the tribes. The table represents the total amount of advances, which represent the principal amount of the notes receivable, as of July 3, 2005 and January 2, 2005. The notes receivable are carried on the consolidated balance sheets at July 3, 2005 (unaudited) and January 2, 2005 at their estimated fair value of $73.8 million and $67.1 million, respectively.


	Balance at July 3, 2005

			Shingle
Advances Principal Balance	Pokagon		Springs		Jamul		Other		Total

Note receivable, pre-construction(a)	$	21,265	$	35,765	$	14,339	$	—	$	71,369
Note receivable, non - gaming land(b)		13,176		—		—		—		13,176
Note receivable, land(b)		10,925		—		950		—		11,875
Note receivable, other		—		—		—		771		771

	$	45,366	$	35,765	$	15,289	$	771	$	97,191


	Balance at January 2, 2005

			Shingle
Advances Principal Balance	Pokagon		Springs		Jamul		Other		Total

Note receivable, pre-construction(a)	$	20,449	$	33,076	$	13,517	$	—	$	67,042
Note receivable, non - gaming land(b)		13,176		—		—		—		13,176
Note receivable, land(b)		10,925		—		950		—		11,875
Note receivable, other		—		—		—		20		20

	$	44,550	$	33,076	$	14,467	$	20	$	92,113


(a)		Lakes advances funds to the tribes, which are related to certain costs incurred to develop the casino project. These costs relate to construction costs, legal fees in connection with various regulatory approvals

and litigation, environmental costs and design consulting, and Lakes, in order to obtain the development agreement and management contract, agrees to advance a monthly amount used by the tribe for a variety of tribal expenses.
(b) Lakes purchased land to be used and transferred to the tribe in connection with the casino project. At Pokagon, a portion of the land will be used by the tribe separate from the casino project land.

The notes receivable for pre-construction advances consist of the following principal amounts advanced to the tribes at July 3, 2005 and January 2, 2005 (in thousands):


Pokagon		July 3, 2005		January 2, 2005

Monthly stipend		$	8,875	$	8,125
Construction			2,581		2,580
Legal			1,381		1,379
Environmental			650		645
Design			7,778		7,720

	Total principal amount of pre-construction advances	$	21,265	$	20,449


Shingle Springs		July 3, 2005		January 2, 2005

Monthly stipend		$	5,790	$	4,980
Construction			1,621		1,605
Legal			11,324		10,290
Environmental			1,586		1,577
Design			9,254		9,120
Gaming license			3,326		3,226
Lobbyist			2,864		2,278

	Total principal amount of pre-construction advances	$	35,765	$	33,076


Jamul		July 3, 2005		January 2, 2005

Monthly stipend		$	3,604	$	3,319
Construction			159		159
Legal			2,960		2,606
Environmental			1,652		1,628
Design			3,659		3,640
Gaming license			474		429
Lobbyist			1,831		1,736

	Total principal amount of pre-construction advances	$	14,339	$	13,517


	*Lakes’ evaluation of impairment related to long-term assets related to Indian casino projects, excluding the notes receivable, which are valued at estimated fair value:*

Management periodically evaluates the intangible assets, land held for development and other costs associated with each of the projects for impairment. The assets are periodically evaluated for impairment based on the estimated cash flows from the management contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects were to exceed the undiscounted cash flow, an impairment would be recorded. Such impairment would be measured based on the difference between the fair value and carrying value of the assets.

The financial models prepared by management for each project are based upon the scope of each of the projects, which are supported by a feasibility study as well as a market analysis where the casino will be built. Lakes’ (as its predecessor Grand Casinos Inc.) began developing Indian casino projects in 1990 and demonstrated success from the day the first Indian casino opened in 1991 through the expiration of its Coushatta management contract in 2002. This success legitimizes many of the key assumptions supporting the financial models. Projections for each applicable casino development were developed based on analysis of published information pertaining to the particular markets in which the Company’s Indian casinos will be located. In addition, Lakes has many years of casino operations experience within the Company which provides a basis for its revenue expectations. The projections were prepared by Lakes not for purposes of the valuation at hand but rather for purposes of Lakes’ and the tribes’ business planning.

The primary assumptions included within management’s financial model for each Indian casino project is as follows:


	*Pokagon Band*


	July 3, 2005	January 2, 2005

No. of class III slot machines	3,000	3,000
No. of table games	100	100
No. of poker tables	20	20
Win/class III slot machine/day — 1^styear	$275	$275
Win/table game/day — 1^styear	$1,300	$1,300
Win/poker game/day — 1^styear	$1,000	$1,000
Expected increase (decrease) in management fee cash flows	Year 2 - (6.4%) (Decrease due to repayment of senior debt) Year 3 - 1.9% Year 4 - 3.6% Year 5 - 2.8%	Year 2 - (6.4%) (Decrease due to repayment of senior debt) Year 3 - 1.9% Year 4 - 3.6% Year 5 - 2.8%

With regard to the Pokagon Casino project in southwest Michigan, the competitive market consists primarily of five Northern Indiana riverboats. The State of Indiana publicly reports certain results from these riverboat casinos which supports the underlying assumptions in our projections. Specifically, the Northern Indiana trailing twelve months market average for slot machine revenue has consistently been above $300 win per unit per day or greater than $105,000 per machine per year which exceeds the $275 win per unit per day that we used in our Pokagon Casino projections. Of the five casinos in the market, two locations produced a win per unit less than our projections with three casinos producing win per unit revenue amounts greater than our forecast. The closest casino to our location consistently produces approximately $330 win per unit per day.


	*Jamul Tribe*


	July 3, 2005	January 2, 2005

No. of class III slot machines	349	349
No. of class II slot machines	1,651	1,651
No. of table games	65	65
No. of poker tables	10	10
Win/class III slot machine/day — 1^styear	$285	$285
Win/class II slot machine/day – 1^styear	$200	$200
Win/table game/day — 1^styear	$1,100	$1,100
Win/poker table/day — 1^styear	$650	$650
Expected increase (decrease) in management fee cash flows	Year 2 - (8.8%) (Decrease due to repayment of senior debt) Year 3 - 2.8% Year 4 - 2.9% Year 5 - 1.9% Year 6 - 2.8% Year 7 - 1.5%	Year 2 - (8.8%) (Decrease due to repayment of senior debt) Year 3 - 2.8% Year 4 - 2.9% Year 5 - 1.9% Year 6 - 2.8% Year 7 - 1.5%

The San Diego market contains other Indian-owned casinos in the surrounding area, each of which is self-managed. Because of the proprietary nature of those operations no public information is readily attainable. However, based on the apparent successful nature of their operations (large casinos which continually expand, new hotel developments, new golf courses, etc.) coupled with our knowledge of their operations, we feel that our forecast of operations is within the revenue metrics of the market.


	*Shingle Springs Tribe*


	July 3, 2005	January 2, 2005

No. of class III slot machines	349	349
No. of class II slot machines	1,651	1,651
No. of table games	100	100
No. of poker tables	20	20
Win/class III slot machine/day — 1^styear	$350	$350
Win/class II slot machine/day — 1^styear	$250	$250
Win/table game/day — 1^styear	$1,275	$1,275
Win/poker table/day — 1^styear	$624	$624
Expected increase (decrease) in management fee cash flows	Year 2 - (8.9%) (Decrease due to repayment of senior debt) Year 3 - 3.6% Year 4 - 3% Year 5 - 5.1% Year 6 - (17%) (Management fees were reduced in years six and seven) Year 7 - 10.8%	Year 2 - (8.9%) (Decrease due to repayment of senior debt) Year 3 - 3.6% Year 4 - 3% Year 5 - 5.1% Year 6 - (17%) (Management fees were reduced in years six and seven) Year 7 - 10.8%

In the Shingle Springs Sacramento market, there is one other Indian casino that is managed by another public company. Management took into consideration available information related to this other Indian casino when projecting management fees from the Shingle Springs Casino. Based on the apparent successful nature

of their operations coupled with our knowledge of their operations, we feel that our forecast of operations is within the revenue metrics of the market.

As of July 3, 2005 and January 2, 2005 no impairment was recognized on the Pokagon, Shingle Springs or Jamul projects.

Description of each Indian casino project and evaluation of critical milestones:


	*Pokagon Band*


	Business arrangement:

Lakes, in July 1999, entered into a development agreement and management contract with the Pokagon Band, a federally recognized tribe with a compact with the State of Michigan, to develop and manage a casino on approximately 675 acres in southwest Michigan. The first phase of the casino is planned to include approximately 3,000 slot machines, 100 table games, various restaurant and bar venues, enclosed parking, a childcare facility and arcade, and various other resort amenities.

The development agreement provides for Lakes to advance up to approximately $73.0 million for purchase of land and for the initial development phase of the project. The development agreement for the Pokagon project also provides that to the extent the Pokagon Band is unable to raise additional funding from third parties at an interest rate not to exceed 13%, Lakes will be required to provide additional financing of up to approximately $54.0 million. Based on extensive discussions with prospective lenders, it appears that third party financing will be available for this project; however, there can be no assurance that third party financing will be available at the time construction for the project begins. Lakes is not required to fund these amounts; however, if Lakes discontinued the funding prior to fulfilling the obligation, Lakes would forfeit the rights under the management contract.

Lakes will receive approximately 24% of net income up to a certain level and 19% of the net income over that level, as a management fee. The term of the management contract is currently planned for five years beginning when the casino opens to the public and may extend for a total of seven years under certain circumstances. Payment of Lakes’ management fee will be subordinated to senior indebtedness of the Pokagon casino. The Pokagon Band may terminate the management contract after five years from the opening of the casino if any of certain required elements of the project have not been ~~decided,~~developed or certain financial commitments to the Pokagon Band have not been met. The Pokagon Band may also buy out the management contract provisions after two years from the opening date. The buyout amount is calculated based upon the previous 12 months of management fees earned multiplied by the remaining number of years under the management contract, discounted back to the present value at the time the buyout occurs. The management fee and length of contract are subject to regulatory approval. If the land were taken into trust in 2006 then the casino could open as early as late 2007.

The Company will be obligated to pay an amount to an unrelated third party once the Pokagon Casino is open and Lakes is the manager of the casino. The amount is payable quarterly for five years and is only payable if Lakes is the manager of the casino. The payment is part of a settlement and release agreement associated with Lakes obtaining the management contract with the Pokagon Band. The maximum liability over the five-year period is approximately $11 million.


	Lakes’ evaluation of critical milestones:

The following table outlines the status of each of the following primary milestones necessary to complete the Pokagon project as of the end of fiscal year 2003 and 2004 and as of July 3, 2005. Both the positive and negative evidence was reviewed during Lakes’ evaluation of the critical milestones.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005

Federal recognition of the tribe	Yes	Yes	Yes
Possession of usable land corresponding with needs based on the Company’s project plan	Yes	Yes	Yes
Usable land placed in trust by Federal government	No — The Pokagon Band and Lakes continued to provide support for the case and in January 2003 the federal judge dismissed all issues except for the final issue and requested additional information from the BIA.	No — The additional information was submitted by the BIA in August 2004 and the lawsuit was still pending resolution as of January 2, 2005.	No — The additional information was submitted by the BIA in August 2004 and the lawsuit was still pending resolution as of January 2, 2005. Subsequently in March 2005 the federal judge dismissed the last remaining issue filed by Taxpayers of Michigan Against Casinos (TOMAC) and ruled in favor of the Pokagon Band allowing the land to be placed into trust by the BIA. During the required 60 day waiting period, TOMAC filed for an appeal. An agreement has been reached between the Department of Justice and TOMAC to not take the land into trust during the appeal process in exchange for TOMAC agreeing to a “fast track” hearing process. The appeal hearing date was held on December 8, 2005 and a decision is pending.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005

Usable county agreement, if applicable	Yes	Yes	Yes
Usable state compact that allows for gaming consistent with that outlined in the Company’s project plan	Yes	Yes	Yes
NIGC approval of management contract in current and desired form	No, submitted to the NIGC for review in 2000.	No, submitted to the NIGC for review in 2000 and approval is expected at approximately the same time the land is being placed into trust by the BIA.	No, submitted to the NIGC for review in 2000 and approval is expected at approximately the same time the land is being placed into trust by the BIA.
Resolution of all litigation and legal obstacles	No, pending litigation regarding land in trust — see below.	No, pending litigation regarding land in trust — see below.	No, pending litigation regarding land in trust — see below.
Financing for construction	No, however the Tribe engaged an investment banker to assist with obtaining financing.	No, however the Tribe engaged an investment banker to assist with obtaining financing.	No, however the Tribe engaged an investment banker to assist with obtaining financing.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	No others known at this time by Lakes.	No others known at this time by Lakes.	No others known at this time by Lakes.


	Lakes’ evaluation and conclusion regarding the above critical milestones and progress:

The Pokagon Band became a federally recognized tribe through an act of Congress prior to them entering into any agreements with Lakes. As part of this congressional action the Federal Government mandated that the Pokagon Band “shall” have land taken into trust on their behalf.

In 1999, Lakes entered into a development agreement and management contract with the Pokagon Band. At that time the Pokagon Band was federally recognized and they had a compact with the State of Michigan. During 1999 and 2000, Lakes purchased land on behalf of the Pokagon Band.

In January 2001, the U.S. Department of Interior issued a finding of no significant impact and recommended that land be taken into trust on behalf of the Pokagon Band. During the required 30-day waiting period a lawsuit was filed by the TOMAC against the federal government to stop the land in trust process. Lakes and the Pokagon Band continued to provide support for this case and believed it would be resolved in favor of the Band. The first hearing before the federal judge took place on December 2001. In March 2002, the judge eliminated several of TOMAC’s assertions and continued to review the remaining issues. In January 2003, the Judge dismissed all remaining issues except for one and requested additional information from the federal government (“BIA”) to support their conclusions on that one issue. Due to the fact that all issues except for one had been dismissed, Lakes continued to believe that it was probable that the land would be taken into trust and that the casino would open. The BIA submitted the additional information in August

2004; and in March 2005, the federal judge dismissed the last remaining issue filed by TOMAC making it possible for the land to be taken into trust for the gaming project. During the required 60-day waiting period, TOMAC filed for an appeal. An agreement has been reached between the Department of Justice and TOMAC to not take the land into trust during the appeal process in exchange for TOMAC agreeing to a “fast track” hearing process. The appeal hearing date was held on December 8, 2005 and a decision is pending. The federal lawsuit has been ~~set~~the most significant item delaying the opening of the casino. Lakes believes the outcome of this appeal will be favorable because of the sequence of events that have occurred in favor of the project to date, the existing state of the law and most recently, the March 2005 dismissal of the last remaining item in the lawsuit by the federal judge. The federal judge dismissed claims that the BIA had not completed a sufficient environmental assessment of the proposed casino site. Lakes believes this decision will be upheld during the appeal process because the evidence provided to the federal judge (including legal arguments), which was the federal judge’s basis for his favorable decision as to the sufficiency of the environmental assessment as it relates to the Pokagon project, has been reviewed by third-party advisors of both the Pokagon Band and Lakes, and we and our advisors continue to believe the environmental assessment that has been performed meets all necessary requirements for the land to be taken into trust. We expect approval of the management contract by the NIGC at approximately the same time the land is taken into trust by the BIA. Once the land is taken into trust, Lakes will help the Pokagon Band build and manage their casino development. Construction of the project could begin in mid to late 2006 with an expected opening date twelve months following the start of construction.


	*Shingle Springs*


	Business arrangement:

Plans for the Shingle Springs Casino project include an approximately 238,000 square-foot facility (including approximately 80,000 square feet of casino space) to be located adjacent to the planned Shingle Springs Rancheria exit, approximately 35 miles east of downtown Sacramento, on U.S. Highway 50. The Shingle Springs Casino is currently planned to feature approximately 2,000 gaming devices and approximately 100 table games, as well as restaurants, enclosed parking and other facilities.

Lakes acquired its initial interest in the development and management contracts for the Shingle Springs Casino from Kean Argovitz Resorts- Shingle Springs, LLC (“KAR — Shingle Springs”) in 1999 and formed a joint venture, in which the contracts were held, between Lakes and KAR — Shingle Springs. On January 30, 2003, Lakes purchased the remaining KAR — Shingle Springs’ partnership interest in the joint venture. In connection with the purchase transaction, Lakes entered into separate agreements with the two individual owners of KAR — Shingle Springs (Kevin M. Kean and Jerry A. Argovitz). Under the agreement with Mr. Kean, Mr. Kean may elect to serve as a consultant to Lakes during the term of the casino management contract if he is found suitable by relevant gaming regulatory authorities. In such event, Mr. Kean will be entitled to receive annual consulting fees equal to 15% of the management fees received by Lakes from the Shingle Springs Casino operations, less certain costs of these operations. If Mr. Kean is not found suitable by relevant gaming regulatory authorities or otherwise elects not to serve as a consultant, he will be entitled to receive annual payments of $1 million from the Shingle Springs Casino project during the term of the respective casino management contract (but not during any renewal term of such management contract).

Under the agreement with Mr. Argovitz, if he is found suitable by relevant gaming regulatory authorities he may elect to re-purchase his respective original equity interest in the Lakes’ subsidiary and then be entitled to obtain a 15% equity interest in Lakes’ management contract with the Shingle Springs Casino. If he is not found suitable or does not elect to purchase equity interests in the Lakes’ subsidiary, Mr. Argovitz would receive annual payments of $1 million from the Shingle Springs Casino project from the date of election through the term of the respective casino management contract (but not during any renewal term of such management contract).

The development agreement provides for Lakes to make certain pre-construction advances to the Shingle Springs Tribe in the form of a transition loan and land loan up to a maximum amount of $50.0 million. Lakes

is not required to fund these amounts; however, if Lakes discontinued the funding prior to fulfilling the obligation, Lakes would forfeit the rights under the management contract.

The agreement provides for Lakes to arrange for financing or, in its discretion, loan to the Shingle Springs Tribe in the form of a facility loan, funds for the costs of construction and initial costs of operation up to a maximum currently of $300 million. In addition, Lakes will assist in the design, development and construction of the facility as well as manage the pre-opening, opening and continued operations of the casino and related amenities for a period of seven years. As compensation for its management services, Lakes will receive a management fee between 21% and 30% of net income of the operations annually for the first five years, with a declining percentage in years six and seven, as that term is defined by the management contract. Payment of Lakes’ management fee will be subordinated to senior indebtedness of the Shingle Springs Casino and minimum priority payment to the Shingle Springs Tribe. The Shingle Springs Tribe may terminate the agreement after five years from the opening of the casino if any of certain required elements of the project have not been developed. The management contract includes provisions that allow the Shingle Springs Tribe to buy out the management contract after four years from the opening date. The buyout amount is calculated based upon the previous twelve months of management fees earned multiplied by the remaining number of years under the contract, discounted back to the present value at the time the buyout occurs.


	Lakes’ Evaluation of the Critical Milestones:

The following table outlines the status of each of the following primary milestones necessary to complete the Shingle Springs project as of the end of fiscal year 2003 and 2004 and as of July 3, 2005. Both the positive and negative evidence was reviewed during Lakes’ evaluation of the critical milestones.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005

Federal recognition of the tribe	Yes	Yes	Yes
Possession of usable land corresponding with needs based on the Company’s project plan	Yes	Yes	Yes
Usable land placed in trust by Federal government	Not necessary, as land is reservation land.	Not necessary, as land is reservation land.	Not necessary, as land is reservation land.
Usable county agreement, if applicable	N/A	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in the Company’s project plan	Yes	Yes	Yes
NIGC approval of management contract in current and desired form	No, submitted to the NIGC for review in 2000.	Yes — approval received in 2004.	Yes — approval received in 2004.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005


Resolution of all litigation and legal obstacles	No, Federal and state litigation regarding approval of highway interchange, environmental issues and other issues. — See below.	No, Federal and state litigation regarding approval of highway interchange, environmental issues and other issues. — See below.	No, Federal and state litigation regarding approval of highway interchange, environmental issues and other issues. — See below.
Financing for construction	No, however the Tribe has engaged investment banks to assist with obtaining financing.	No, however the Tribe has engaged investment banks to assist with obtaining financing.	No, however the Tribe has engaged investment banks to assist with obtaining financing.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	No others known at this time by Lakes.	No others known at this time by Lakes.	No others known at this time by Lakes.


	Lakes’ evaluation and conclusion regarding the above critical milestones and progress:

The Shingle Springs Tribe is a federally recognized tribe, has a compact with the State of California and owns approximately 160 acres of reservation land on which the casino can be built. During July 2004, Lakes received notification from the NIGC that the development and management contract between the Shingle Springs Tribe and Lakes, allowing Lakes to manage a Class II and Class III casino, was approved by the NIGC.

In January 2005, Lakes received a favorable ruling from the federal court on all federal issues with respect to the casino development planned by the Shingle Springs Tribe. El Dorado County is appealing the federal favorable ruling related to the project.

The most significant milestone yet to be achieved for this project is commercial access to the reservation on which the casino will be built. The Shingle Springs Tribe received state regulatory approval of a necessary interchange to access the tribal land during 2002. Neighboring El Dorado County and another local group commenced litigation in federal and state courts against the California regulatory agencies attempting to block the approval of the interchange. During January of 2004, the California Superior Court ruled in favor of the California Department of Transportation (“CalTrans”) on all of El Dorado County’s claims challenging CalTrans’ environmental review of the proposed casino project except that the court asked for clarification on one issue. The one remaining issue in the state case questions the state standards for ozone requirements of all of CalTrans projects throughout California. El Dorado County, Voices for Rural Living, CalTrans and the Shingle Springs Tribe filed an appeal and oral arguments on these appeals was heard in August 2005. In November 2005, the California Court of Appeal (“Court”) issued its decision on these appeals. The Court ruled in favor of CalTrans’ appeal, rejecting the El Dorado County’s argument that the transportation conformity analysis did not conform to state standards. The Court also rejected all but two of the legal claims asserted in the appeal by El Dorado County and Voices for Rural Living against the environmental impact report (“EIR”) prepared by CalTrans for the interchange that will connect Highway 50 to the Shingle Springs Rancheria. For the remaining two issues, the Court held that CalTrans must supplement its environmental analysis by adding some discussion to the air quality chapter to further explain the project’s contribution to overall vehicular emissions in the region, and that CalTrans also must evaluate whether a smaller casino and hotel would reduce environmental impacts. The Court acknowledged CalTrans lacks jurisdiction to require the Shingle Springs Tribe to develop a smaller casino, but nevertheless required some discussion of this alternative in the interchange EIR.

Lakes has monitored the lawsuit in California state court closely, and Lakes believes it is likely that the state court action will be ultimately resolved in favor of the project because the current ruling not only jeopardizes a significant amount of other transportation projects in the state of California, but also because it is contrary to California law. Under state and federal environmental rules, if just one project is stopped or postponed as a result of an environmental ruling similar to the one in this matter, all other ongoing and planned transportation projects likely would be required to satisfy the same air quality requirements imposed by the trial court in order to proceed and they could not do so, resulting in the loss of funding for such projects. Lakes believes that this final issue in state court will ultimately be overcome because the trial court ruling is not only without precedent, but it is contrary to existing case and statutory law. Accordingly, and in light of the trial court ruling’s far-reaching and devastating impact on ongoing road projects, Lakes expects the trial court’s ruling will be reversed on appeal, meaning this project and other road projects in the area will be allowed to move forward. Construction of the interchange and casino could begin as early as the third quarter of 2006 with an estimated opening date approximately 14 months after the start of the construction.

Under the form of tribal-state compact first signed by the State of California with both the Jamul and Shingle Springs tribes in 1999, each tribe is allowed to operate up to 350 Class III slot machines without licenses from the state. This form of compact allows tribes to operate up to an additional 1,650 Class III slot machines by obtaining licenses for the devices from the state. Under these tribal-state compacts, there is a state-wide limitation on the aggregate number of Class III slot machine licenses that are available. Tribes who have entered into new tribal-state compacts or amendments to the 1999 form of tribal-state compact in general are allowed to operate an unlimited number of Class III slot machines without the need for obtaining additional licenses, subject to the payment of additional fees to the state, including, in recent cases, fees based on a percentage of slot “net win.” Currently, neither the Jamul Tribe nor the Shingle Springs Tribe have amended their tribal-state compacts. If the compacts are not renegotiated and amended, the tribes could operate under their existing compacts which allows for up to 350 Class III gaming devices and an unlimited number of Class II gaming devices. Management believes that this number of gaming devices is adequate to equip the planned developments. Therefore, Lakes believes the availability of additional slot licenses is not an issue that could prevent the projects from progressing. The Shingle Springs project is currently planned to open with 349 Class III slot machines and approximate 1,650 Class II devices.


	*Jamul Tribe*


	Business arrangement:

The Jamul Tribe has an approximate six-acre reservation on which the casino project is currently planned to be built. The reservation is located near San Diego, California. Plans for the casino include approximately 2,000 gaming devices and approximately 85 table games along with various restaurants and related amenities.

Lakes acquired its initial interest in the development agreement and management contracts for the Jamul casino from Kean Argovitz Resorts-Jamul, LLC (“KAR — Jamul”) in 1999 and formed a joint venture in which the contracts were held between Lakes and KAR — Jamul. On January 30, 2003, Lakes purchased the remaining KAR — Jamul’s partnership interest in the joint venture. In connection with the purchase transaction, Lakes entered into separate agreements with the two individual owners of KAR — Jamul (Mr. Kean and Mr. Argovitz). The term of the contract is expected to be five or seven years. Under the agreement with Mr. Kean, Mr. Kean may elect to serve as a consultant to Lakes during the term of the casino management contract if he is found suitable by relevant gaming regulatory authorities. In such event, Mr. Kean will be entitled to receive annual consulting fees equal to 20% of the management fees received by Lakes from the Jamul Casino operations, less certain costs of these operations. If Mr. Kean is not found suitable by relevant gaming regulatory authorities or otherwise elects not to serve as a consultant, he will be entitled to receive annual payments of $1 million from the Jamul Casino project during the term of the respective casino management contract (but not during any renewal term of such management contract).

suitable or does not elect to purchase equity interests in the Lakes’ subsidiary, Mr. Argovitz may elect to receive annual payments of $1 million from the Jamul Casino project from the date of election through the term of the respective casino management contract (but not during any renewal term of such management contract).

The development agreement provides for Lakes to make certain pre-construction advances to the Jamul Tribe of up to $30 million. Lakes is not required to fund these amounts; however, if Lakes discontinued the funding prior to fulfilling the obligation, Lakes would forfeit the rights under the management contract. Lakes will receive a management fee between 18% and 30% of net income of the operations annually for seven years, subject to regulatory approval of the management contract and subject to a minimum priority monthly payment to the Jamul Tribe.

The Jamul Tribe may terminate the management contract after five years from the opening date of the casino if any of certain required elements of the project have not been developed. The management contract includes provisions that allow the Jamul Tribe to buy out the management contract after four years from the opening date. The buyout amount is calculated based upon the previous 12 months of management fees earned multiplied by the remaining number of years under the contract, discounted back to the present value at the time the buyout occurs.


	Lakes’ Evaluation of the Critical Milestones:

The following table outlines the status of each of the following primary milestones necessary to complete the Jamul project as of the end of fiscal year 2003 and 2004 and as of July 3, 2005. Both the positive and negative evidence was reviewed during Lakes’ evaluation of the critical milestones.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005

Federal recognition of the tribe	Yes	Yes	Yes
Possession of usable land corresponding with needs based on the Company’s project plan	Yes	Yes	Yes
Usable land placed in trust by Federal government	Yes, six acres is reservation land held by the Jamul Tribe on which the casino will be built. There is an additional 82 acres contiguous to the reservation land pending BIA approval to be placed into trust that could be used for additional development of the project. The Jamul Tribe and Lakes were in the process of preparing an EIS, as described below and completing the land in trust application.	Yes, six acres is reservation land held by the Jamul Tribe on which the casino will be built. There is an additional 82 acres contiguous to the reservation land pending BIA approval to be placed into trust that could be used for additional development of the project. The Jamul Tribe and Lakes prepared an EIS and trust application, which has been submitted to, reviewed and recommended for approval by the regional office of the BIA. The Washington, D.C. office of the BIA is currently reviewing the submission.	Yes, six acres is reservation land held by the Jamul Tribe on which the casino will be built. There is an additional 82 acres contiguous to the reservation land pending BIA approval to be placed into trust that could be used for additional development of the project. The Jamul Tribe and Lakes prepared an EIS and trust application, which has been submitted to, reviewed and recommended for approval by the regional office of the BIA. The Washington, D.C. office of the BIA is currently reviewing the submission.
Usable county agreement, if applicable	N/A	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in the Company’s project plan	Yes	Yes	Yes
NIGC approval of management contract in current and desired form	No, submitted for approval by the NIGC in 2000 and approval is not expected to occur until the process to place land in trust by the BIA is complete.	No, submitted for approval by the NIGC in 2000. We are in communication with the NIGC and have responded to initial comments. Approval is not expected until the process to place land in trust by the BIA is complete.	No, submitted for approval by the NIGC in 2000. We are in communication with the NIGC and have responded to initial comments. Approval is not expected until the process to place land in trust by the BIA is complete.


Critical Milestone	December 28, 2003	January 2, 2005	July 3, 2005

Resolution of all litigation and legal obstacles	N/A there has been some local opposition regarding the project, although no formal legal action has been taken.	N/A, there has been some local opposition regarding the project, although no formal legal action has been taken.	N/A, there has been some local opposition regarding the project, although no formal legal action has been taken.
Financing for construction	No	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place.	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	No others known at this time by Lakes.	No others known at this time by Lakes.	No others known at this time by Lakes.


	Lakes’ evaluation and conclusion regarding the above critical milestones and progress:

The Jamul Tribe is a federally recognized tribe with a compact with the State of California and has an approximate six acre reservation on which the casino is planned to be built. The primary effort in this project has been to place approximately 82 acres of land contiguous to the reservation into trust for gaming. Lakes acquired 101 acres of land contiguous to the six acres of reservation land of which 19 acres relate to land with certain easements, which will not be accepted into trust. The trust application, including an Environmental Impact Statement (“EIS”), has been prepared, submitted to, reviewed and recommended for approval by the regional office of the BIA. The Washington, D.C. office of the BIA is currently reviewing the submission to determine if the land should be taken into trust. There has been some local opposition regarding the project. An EIS is more rigorous to complete than a more typical EA (Environmental Assessment). The EIS was more intense and took longer to prepare but is considered a better method to address all potential environmental concerns surrounding this project and to mitigate potential future opposition that may delay the project.

The process of getting the land contiguous to the reservation placed into trust has been slow. Therefore, during August of 2005, the Jamul Tribe and Lakes formally announced plans to build the casino on the approximately six acres of reservation land held by the Jamul Tribe. Reservation land qualifies for gaming without going through a land in trust process. The approximate size of the casino and related guest amenities will not change in total, as the casino was always planned to be built on the reservation land. The approximate six-acre project would be built on various levels to accommodate essentially all of the same amenities that were planned for the project on the larger parcel of land. Therefore, the design of the project would change significantly from a complex of lower-level buildings spread out over a larger area to a multi-level resort built on a smaller parcel of land. Total square footage, nature or cost of the project are not expected to change significantly as it will be primarily the same project being built on a smaller footprint.

Lakes has consulted with third-party advisors as to the architectural feasibility of the alternative plan and has been assured that the project can be successfully built on the reservation land. The Company has completed economic models for each alternative and concluded that either would result in a successful operation assuming that adequate financing can be obtained. Therefore, the Company believes this project will

be successfully completed. The development agreement and management contract is subject to approval by the NIGC and is currently in the review process. A consulting agreement with the Jamul Tribe is also under consideration. Construction of the casino could begin in late 2006 with an estimated opening date of the casino 12 months thereafter.

Under the form of tribal-state compact first signed by the State of California with both the Jamul and Shingle Springs tribes in 1999, each tribe is allowed to operate up to 350 Class III slot machines without licenses from the state. This form of compact allows tribes to operate up to an additional 1,650 Class III slot machines by obtaining licenses for the devices from the state. Under these tribal-state compacts, there is a state-wide limitation on the aggregate number of Class III slot machine licenses that are available to tribes. Certain tribes have entered into new tribal-state compacts or amendments to the 1999 form of tribal-state compact that allow them to operate an unlimited number of Class III slot machines without the need for obtaining additional licenses, subject to the payment of additional fees to the state, including in recent cases, fees based on a percentage of slot “net win.” Currently, neither the Jamul tribe nor the Shingle Springs tribe have amended their tribal-state compacts. If the compacts are not renegotiated and amended the tribes could operate under their existing compacts which allow for up to 350 Class III gaming devices and an unlimited number of Class II gaming devices. This number of gaming devices is adequate to equip the planned developments. Therefore, Lakes believes the availability of additional slot licenses is not an issue that could prevent the projects from progressing. The Jamul project is currently planned to open with 349 Class III slot machines and approximate 1,650 Class II devices.


	*Pawnee Nation of Oklahoma*


	Business arrangement:

In January 2005, Lakes entered into three gaming development and consulting agreements (collectively “Pawnee Development and Consulting Agreements”) and three separate management contracts (collectively “Pawnee Management Contracts”) with three wholly-owned subsidiaries of the Pawnee Tribal Development Corporation (“Pawnee TDC)” referred to collectively as the “Pawnee Nation.” in connection with assisting the Pawnee Nation in developing, equipping and managing three separate casino destinations.

The largest of the casino resort developments will be located on approximately 800 acres of Indian gaming land owned by the Pawnee Nation in northern Oklahoma near the Kansas border. This project is planned to include a large first class casino, hotel and meeting space, multiple restaurants and bar venues, an entertainment and event center, a golf course and various other casino resort amenities. The first phase of the project is planned to include approximately 1,200 gaming devices, 24 table games, a poker room, various restaurants and bars, a 150-room hotel and parking.

The Pawnee Nation currently operates a “Travel Plaza” at the intersection of U.S. Highway 412 and State Highway 18, approximately 25 miles from Stillwater, Oklahoma. The Pawnee Nation intends to expand the Travel Plaza to include gaming and has engaged Lakes to assist with this project. When expanded, the planned project will open with approximately 150 gaming devices, four table games, and a full service restaurant and bar.

As compensation for the performance of its obligations under the management contract for each of these two locations, Lakes shall be entitled to receive a fee of 30% of net income of the respective casino (as defined in the contracts) for a period of five to seven years, depending on the scope of the facilities, less any amounts earned by any Company affiliate for consulting on the two projects. The management contracts are subject to approval of the NIGC and certain other conditions.

The Pawnee Nation also operates its “Trading Post” Casino, which currently includes approximately 65 gaming devices along with a retail convenience store and gas station in the town of Pawnee, Oklahoma. Lakes will assist in the management of this project and in its expansion if the Pawnee Nation decides to expand the casino. As compensation for its management services on this project, Lakes will receive a management fee of approximately 30% of net income, as defined in the agreement, based on the incremental net income produced at this location during the length of the management contract, expected to be from five

to seven years, depending on the scope of the facilities, less any amounts earned by any Company affiliate for consulting on the two projects subject to regulatory approval and certain other conditions.

Prior to the approval of the Pawnee Management Contracts by the NIGC, Lakes will provide services under the Pawnee Development and Consulting Agreements to each of the three Pawnee casino projects. Under these agreements Lakes will provide advances to the Pawnee Nation, if needed, from time to time to each particular project for preliminary development costs as agreed to by Lakes and the Pawnee Nation. Any advances made will accrue interest at prime plus two percent and be repayable in 24 equal monthly installments beginning on the 25^th day following the opening date for the project if the loan has not previously been repaid through the project permanent financing. The Pawnee Development and Consulting Agreements are for 12 years from the effective date of the agreements or until the project development fees and the project preliminary development loans have been fully paid, whichever date is later, subject to early termination. In addition to interest earned on the project preliminary development loan, Lakes will receive a development fixed fee equal to three percent of project costs at each location and a monthly consulting flat fee for each of the three projects of $5,000 for the Trading Post location, $25,000 for the Travel Plaza location and $250,000 for the new casino, per month for 120 months. The above development fixed fees shall be paid on the opening date of each of the projects. No monthly consulting fixed fee is earned or paid prior to the opening date of the project. After the opening date of the project the monthly consulting fixed fee shall be due and paid commencing on the 25^th day of the following calendar month and each successive month.

The Pawnee Development and Consulting Agreements and Pawnee Management Contracts are subject to NIGC review and include provisions for an early buyout of the Pawnee Development and Consulting Agreements and the Pawnee Management Contracts by the Pawnee Nation.

Arrangement with Consultant. The Company has executed an agreement stipulating that Kevin Kean will be compensated for his consulting services (relating to the Pawnee Nation) rendered to the Company. Under this arrangement, subject to Mr. Kean obtaining certain regulatory approvals, Mr. Kean will receive 20 percent of the Company’s fee compensation, earned under the Pawnee Development and Consulting Agreements and Pawnee Management Contracts with the Pawnee Nation (i.e., six percent of the incremental total net income or 20 percent of the Company’s 30 percent share). This agreement provides that payments will be due to Mr. Kean when the Company is paid by the Pawnee Nation.


	Lakes’ Evaluation of the three Pawnee Nation Projects:

The following table outlines the status of each of the following primary milestones necessary to complete the Pawnee Nation projects as of July 3, 2005:


Critical Milestone	New Casino Project	Travel Plaza	Trading Post

Federal recognition of the tribe	Yes	Yes	Yes
Possession of usable land corresponding with needs based on the Company’s project plan	Yes, the Tribe currently holds land in trust where the new casino will be built.	Yes, the Tribe is currently leasing land from tribal members, which is held in trust for the individual tribal members by the United States Government. The lease will need to be approved by the BIA.	Yes, the Trading Post is currently open.
Usable land placed in trust by Federal government	Yes, the Tribe currently holds land in trust where the Chilocco Casino will be built.	Yes, the Tribe is currently leasing land from tribal members, which is held in trust for the individual tribal members by the United States Government. The lease will need to be approved by the BIA.	Yes, the Trading Post is currently open.
Usable county agreement, if applicable	N/A	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in the Company’s project plan	Yes	Yes	Yes
NIGC approval of management contract in current and desired form	No, submitted to the NIGC for review on March 22, 2005. An EA will be prepared in order for the management contract to be approved.	No, submitted to the NIGC for review on March 22, 2005. An EA will be prepared in order for the management contract to be approved.	No, submitted to the NIGC for review on March 22, 2005.
Resolution of all litigation and legal obstacles	None at this time.	None at this time.	None at this time.


Critical Milestone	New Casino Project	Travel Plaza	Trading Post

Financing for construction	No, preliminary discussions with lending institutions has occurred.	No, preliminary discussions with lending institutions has occurred.	None needed.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	No others known at this time by Lakes.	The acquisition of other tribal land needs to be approved by the BIA.	No others known at this time by Lakes.


	Lakes’ evaluation and conclusion regarding the above critical milestones and progress:

Long-term assets have been recorded as it is considered probable that the three Pawnee Nation Projects will result in economic benefit to Lakes sufficient to recover Lakes’ investment. Based upon the above status of all primary milestones and the projected fees to be earned under the consulting agreements and management contracts, no impairment has been recorded. The Pawnee Trading Post is currently open and operating and the refurbishments were completed in the fourth quarter of fiscal 2005. The Pawnee Travel Plaza is currently open and expansion could be completed to include gaming as early as mid 2006. The Pawnee new casino project could open as early as mid 2007.


	*Iowa Tribe of Oklahoma*


	Business arrangement:

On March 15, 2005, the Company, through its wholly-owned subsidiaries, entered into consulting agreements and management contracts with the Iowa Tribe of Oklahoma, a federally recognized Indian Tribe, and The Iowa Tribe of Oklahoma, a federally-chartered corporation (collectively, the “Iowa Tribe”). The agreements are effective as of January 27, 2005. The Company will provide consulting services to assist the Iowa Tribe with two separate casino destinations in Oklahoma including (i) assisting in developing a new first class casino and ancillary amenities and facilities to be located on Indian land approximately 25 miles northeast of Oklahoma City along Route 66 (the “Development Project”); and (ii) assisting with operational efforts at the Iowa Tribe’s existing Cimarron Casino, located in Perkins Oklahoma (the “Cimarron Casino”). The Company will also provide management services for the Tribe’s casino operations at each location subject to regulatory approval.

Each of the projects has a gaming consulting agreement (“Iowa Consulting Agreement”) and a management contract (“Iowa Management Contract”), independent of the other project. Key terms relating to the agreements for the projects are as follows:

The Development Project. For its gaming development consulting services under the Iowa Consulting Agreement related to the Development Project, the Company will receive a development fee of two percent of the project costs of the Development Project, paid upon the opening of the Development Project, and a flat monthly fee of $500,000 for a period of 120 months commencing upon the opening of the project.

The Company has agreed to make advances to the Iowa Tribe, subject to a project budget to be agreed upon by the Company and the Iowa Tribe and certain other conditions. The development loan will be for preliminary development costs under the Development Project budget. The Company has also agreed to use reasonable efforts to assist the Iowa Tribe in obtaining permanent financing for any projects developed under the Iowa Consulting Agreement.

The Iowa Management Contract for the Development Project is subject to the approval of the NIGC and certain other conditions. For its performance under the Iowa Management Contract, the Company will be

entitled to receive management fees of approximately 30% of net income, as defined in the agreement, for each month during the term of the Iowa Management Contract less any amounts earned by any Company affiliate for consulting on the Development Project. The Iowa Management Contract term is seven years from the first day that the Company is able to commence management of the Development Project gaming operations under all legal and regulatory requirements (the “Commencement Date”), provided that the Iowa Tribe has the right to buy out the remaining term of the Iowa Management Contract after the Development Project has been in continuous operation for 60 months, for an amount based on the then present value of estimated future management fees. If the Iowa Tribe elects to buy-out the contract, all outstanding amounts owed to Lakes become payable if not already paid. Subject to certain conditions, the Company agrees to make advances for the Development Project’s working capital requirements, if needed, during the first six months after the Commencement Date. The advances are to be repaid through an operating note payable from revenues generated by future operations of the Development Project bearing interest at two percent over the prime rate. The Company also agrees to fund any shortfall in certain minimum monthly Development Project payments to the Iowa Tribe by means of non-interest bearing advances under the same operating note.

Cimarron Casino. The Company has entered into a separate gaming consulting agreement (“Cimarron Consulting Agreement”) and management contract (“Cimarron Management Contract”) with the Iowa Tribe with respect to the Cimarron Casino. Many of the material provisions of these two agreements are similar to those for the Development Project, except that: (i) the Cimarron Consulting Agreement is primarily for services related to the existing operations (with the possibility of further development); (ii) the Company will provide up to a $1 million business improvement loan rather than a preliminary development loan; (iii) the fee under the Cimarron Consulting Agreement will consist entirely of a limited flat monthly fee of $50,000; and (iv) the annual fee under the Cimarron Management Contract will be 30% of net income in excess of $4 million (reduced by any amounts earned by any Company affiliate for consulting services under the Cimarron Consulting Agreement).

Arrangement with Consultant. The Company has executed an agreement stipulating that Kevin Kean will be compensated for his consulting services (relating to the Iowa Tribe) rendered to the Company. Under this arrangement, subject to Mr. Kean obtaining certain regulatory approvals, Mr. Kean will receive 20 percent of the Company’s fee compensation that is received under the Iowa Consulting Agreement, Cimarron Consulting Agreement, Iowa Management Contract and Cimarron Management Contract with the Iowa Tribe (i.e., six percent of the incremental total net income or 20 percent of the Company’s 30 percent share). This agreement provides that payments will be due to Mr. Kean when the Company is paid by the Iowa Tribe.


	Lakes’ Evaluation of the two Iowa Tribe Projects:

The following table outlines the status of each of the following primary milestones necessary to complete the Iowa Tribe projects as of July 3, 2005:


	Development Project	Cimarron Casino

Federal recognition of the tribe	Yes	Yes
Possession of usable land corresponding with needs based on the Company’s project plan	Yes, the Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. These transactions will need to be approved by the BIA.	Yes, currently an open casino.


	Development Project	Cimarron Casino

Usable land placed in trust by Federal government	Yes, the Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. These transactions will need to be approved by the BIA.	Yes, currently an open casino.
Usable county agreement, if applicable	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in the Company’s project plan	Yes	Yes
NIGC approval of management contract in current and desired form	No, submitted to the NIGC for review on April 22, 2005. An EA will be prepared in order for the management contract to be approved.	No, submitted to the NIGC for review on April 22, 2005.
Resolution of all litigation and legal obstacles	Yes, the acquisition of other tribal land needs to be approved by the BIA.	No
Financing for construction	No, preliminary discussions with lending institutions have occurred.	Third party financing arrangements for the refurbishment project are in negotiations.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	No others known at this time by Lakes.	No others known at this time by Lakes.


	Lakes’ evaluation and conclusion regarding the above critical milestones and progress:

Long-term assets have been recorded as it is considered probable that the two Iowa Tribe Projects will result in economic benefit to Lakes sufficient to recover Lakes investment. Based upon the above status of all primary milestones and the projected fees to be earned under the consulting agreements and management contracts, no impairment has been recorded. The Cimarron Casino is currently open and refurbishment of the casino could be completed as early as mid 2006. The Development Project could open as early as mid 2007.


	*Kickapoo Tribe*

Lakes entered into consulting agreements and management contracts with the Kickapoo Tribe effective January 2005 to improve the performance of the gaming operations conducted at the Kickapoo Tribe’s existing Lucky Eagle Casino in Eagle Pass, Texas, located approximately 140 miles southwest of San Antonio. During the third quarter of fiscal 2005 the Company’s relationship with the Kickapoo Tribe deteriorated and in November 2005, Lakes and the Kickapoo Tribe terminated their business relationship. During the three months and six months ended July 3, 2005, the Company recorded unrealized losses of $1.3 million and $1.8 million, respectively, related to the Kickapoo project. During the third quarter of fiscal 2005, the Company recognized an impairment charge of $0.1 million related to the intangible asset related to the acquisition of the management contract. In addition the Company recognized unrealized losses related to advances made for project costs and project cost incurred that Lakes may be required to pay as a result of the terminated relationship in the amounts of $0.3 million and $3.8 million, respectively, during the third quarter

of fiscal 2005. As of October 2, 2005, Lakes owns approximately 18 acres of land near the Kickapoo site with a cost basis of approximately $0.7 million. As a result of the terminated business relationship with the Kickapoo Tribe, Lakes intends to negotiate with the Kickapoo Tribe to reach an agreement to resolve all of the financial terms of the contracts including repayment of the advances, payment of the unpaid project costs incurred, possible sale of the land owned by Lakes to the tribe, and to formally terminate the gaming operations consulting agreement, management contract, and related ancillary agreements relating to the project.

Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes. Under this method, the Company determines deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current years consolidated financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements.

Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, hence giving rise to deferred tax assets and liabilities. The Company must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, they must establish a valuation allowance. The Company has established a valuation allowance against all non-capital deferred income tax assets as of July 3, 2005 and January 2, 2005. The Company has established deferred tax assets related to unrealized investment losses and related carryovers as of July 3, 2005 and January 2, 2005. The Company believes it will have sufficient capital gains in the foreseeable future to utilize these benefits due to significant appreciation in its investment in WPTE. The Company owns approximately 12.5 million shares of WPTE common stock valued at approximately $82.6 million as of December 9, 2005 based upon the closing stock price as reported by Nasdaq on December 9, 2005 of $6.62. Lakes’ basis in the WPTE common stock is minimal.

Common stock subject to repurchase

WPTE violated certain securities laws in connection with its initial public offering by sending out written email communications to individuals that did not contain all of the information required to be in a prospectus and were not preceded or accompanied by a prospectus meeting the requirements for a prospectus. These violations could require WPTE to repurchase shares sold in the offering to direct recipients of the email communications for a period of up to one year at the offering price plus interest. WPTE sold 75,200 shares in the offering that were subject to such ~~dollar amount~~repurchase rights, and these shares are classified on our balance sheet as of July 3, 2005 and January 2, 2005 as common stock subject to repurchase. As of August 9, 2005, the one-year anniversary of WPTE’s initial public offering, WPTE’s repurchase obligation with respect to such shares expired, and these shares were reclassified as equity as of October 2, 2005.

Stock-based compensation:

We account for equity-based employee compensation under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employeesand related Interpretations. However, Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(SFAS No. 123R) was issued in December 2004 and requires that compensation cost related to share-based employee compensation transactions be recognized in the financial statements. Share-based employee compensation transactions within the scope of SFAS No. 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee share purchase

plans. We have not completed our evaluation or ~~decide~~determined the future impact of adopting SFAS No. 123R, which may be material to our results of operations when adopted no later than January 1, 2006. See Note 5 to our unaudited condensed consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for more information about Lakes’ accounting for compensation expenses, including the pro-forma effects on the periods presented had we applied SFAS 123,Accounting for Stock-Based Compensation.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Non-monetary Assets — An Amendment of APB Opinion No. 29, “Accounting for Non-monetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005, and has not had a material impact on the Company’s financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which amends FASB Statement No. 123 and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, SFAS No. 123(R) requires all companies to measure compensation expense for all share-based payments (including employee stock options) at fair value and recognize the expense over the related service period. Additionally, excess tax benefits, as defined in SFAS No. 123(R), will be recognized as an addition to paid-in capital and will be reclassified from operating cash flows to financing cash flows in the consolidated statements of cash flows. SFAS No. 123(R) will be effective January 1, 2006. We are currently evaluating the effect that SFAS No. 123(R) will have on our financial position, results of operations and operating cash flows.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 replaces APB Opinion No. 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statementsand changes the requirement for the accounting for and reporting of a change in accounting principles. SFAS No. 154 applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The provisions of SFAS No. 154 will be effective for accounting changes made in the fiscal year beginning after December 15, 2005. We do not presently expect to enter into any accounting changes in the foreseeable future that would be affected by adopting SFAS No. 154 when it becomes effective.

Seasonality

The Company believes that the operations of all casinos to be managed by the Company will be affected by seasonal factors, including holidays, weather and travel conditions. WPTE’s license revenues are affected by the timetable for delivery of episodes to TRV.

Regulation and Taxes

The Company is subject to extensive regulation by state gaming authorities. The Company will also be subject to regulation, which may or may not be similar to current state regulations, by the appropriate authorities in any jurisdiction where it may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on the Company.

The gaming industry represents a significant source of tax revenues. From time to time, various federal legislators and officials have proposed changes in tax law, or in the administration of such ~~claims. OTHER LITIGATION~~law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on the Company’s results of operations and financial results.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except for the financing commitments previously discussed and except for Lakes’ investments in unconsolidated affiliates.

Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking, such as plans for future expansion and other business development activities as well as other statements regarding capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition.

Such forward looking information involves important risks and uncertainties that could significantly affect the anticipated results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

These risks and uncertainties include, but are not limited to, the relisting of Lakes’ common stock on the Nasdaq Stock Market; need for current financing to meet Lakes’ operational and development needs; those relating to the inability to complete or possible delays in completion of Lakes’ casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management contracts; Lakes operates in a highly competitive industry; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; possible need for future financing to meet Lakes’ expansion goals; risks of entry into new businesses; reliance on Lakes’ management; and the fact that the WPTE shares held by Lakes are currently not liquid assets, and there is no assurance that Lakes will be able to realize value from these holdings equal to the current or future market value of WPTE common stock. Because Lakes’ consolidated results of operations include the results of WPTE operations, Lakes is also subject to risks and uncertainties relating to WPTE that may have a material effect on the Company’s consolidated results of operations or the market value of the WPTE shares held by the Company, including WPTE’s significant dependence on the Travel Channel as a source of revenue; the potential that WPTE’s television programming will fail to maintain a sufficient audience; difficulty of predicting the growth of WPTE’s online casino business, which is a relatively new industry with an increasing number of market entrants; the uncertainty of the regulatory environment for online gaming, which may affect WPTE’s ability to pursue its online gaming business fully or cause WPTE’s activities to be found to be in violation of applicable United States or foreign regulations; the risk that competitors with greater financial resources or marketplace presence might develop television programming that would directly compete with WPTE’s television programming; the risk that WPTE may not be able to protect its entertainment concepts, current and future brands and other intellectual property rights; risks associated with future expansion into new or complementary businesses; the termination or impairment of WPTE’s relationships with key licensing and strategic partners; and WPTE’s dependence on its senior management team. For further information regarding the risks and uncertainties, see the “Business — Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2005.


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

The Company’s financial instruments include cash and cash equivalents and marketable securities. The Company’s main investment objectives are the preservation of investment capital and the maximization of after-tax returns on its investment portfolio. Consequently, the Company invests with only high-credit-quality issuers and limits the amount of credit exposure to any one issuer. The Company does not use derivative instruments for speculative or investment purposes.

The Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of July 3, 2005, the carrying value of the Company’s cash and cash equivalents approximates fair value. The Company also holds short-term investments consisting of marketable debt securities (principally consisting of commercial paper, corporate bonds, and government securities) having a weighted average duration of one year or less. Consequently, such securities are not subject to significant interest rate risk.

The Company’s primary exposure to market risk associated with changes in interest rates involves the Company’s long-term assets related to Indian casino projects in the form of notes receivable due from its tribal partners for the development and construction of Indian-owned casinos. The loans earn interest based upon a defined reference rate. The floating interest rate will generate more or less interest income if interest rates rise or fall.

Lakes’ notes receivable from Indian tribes related to properties under development bear interest generally at prime plus one percent or two percent, however, the interest is only payable if the casino is successfully opened and distributable profits are available from casino operations. Lakes records its notes receivable at fair value and subsequent changes in fair value are recorded as income or expense in the Company’s consolidated statement of operations. As of July 3, 2005, Lakes had $73.8 million of notes receivable, at fair value with a floating interest rate (principal amount of $97.2 million, excluding advances to the Kickapoo Tribe). Based on the applicable current reference rates and assuming all other factors remain constant, interest income for a twelve month period would be approximately $7.6 million. A reference rate increase of 100 basis points would result in an increase in interest income of $1.0 million. A 100 basis point decrease in the reference rate would result in a decrease of $1.0 million in interest income over the same twelve-month period.


ITEM 4.	*CONTROLS AND PROCEDURES*

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) or Rule 15d — 15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that Lakes Entertainment, Inc.’s disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the three months ended July 3, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Part II

Other Information


ITEM 1.	*LEGAL PROCEEDINGS*

Slot Machine Litigation

In 1994, William H. Poulos filed a class-action lawsuit in the United States District Court for the Middle District of Florida against various parties, including Lakes’ predecessor, Grand Casinos, and numerous other parties alleged to be casino operators or slot machine manufacturers. This lawsuit was followed by several additional lawsuits of the same nature against the same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in the United States District Court for the District of Nevada. Following a court order dismissing all pending pleadings and allowing the plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging that the defendants fraudulently marketed and operated casino video poker machines and electronic slot machines, and

asserting common law fraud and deceit, unjust enrichment and negligent misrepresentation and claims under the federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed by the defendants seeking to have this new complaint dismissed or otherwise limited. In December 1997, the Court, in general, ruled on all motions in favor of the plaintiffs. The plaintiffs then filed a motion seeking class certification and the defendants opposed it. In June 2002, the District Court entered an order denying class certification. On August 10, 2004, the Ninth Circuit Court of Appeals affirmed the District Court’s denial of class certification. On September 14, 2005, the United States District Court for the District of Nevada granted the defendants’ motions for summary judgment, and judgment was entered against the plaintiffs on that same day. The defendants have also filed motions seeking the payment of costs and attorney fees and defendants have until December 28, 2005 to complete their briefing on the motions.

The Company has not recorded any liability for this matter as currently an estimate of any possible loss cannot be made. Management currently believes the final outcome of this matter is not likely to have a material adverse effect upon the Company’s consolidated financial statements.

Willard Eugene Smith Litigation

El Dorado County, California Litigation

On January 3, 2003, El Dorado County filed an action in the Superior Court of the State of California, seeking to prevent the construction of a highway interchange that was approved by a California state agency. The action, which was consolidated with a similar action brought by Voices for Rural Living and others, does not seek relief directly against Lakes. However, the interchange is necessary to permit the construction of a casino to be developed and managed by Lakes through a joint venture. The casino will be owned by the Shingle Springs Tribe. The matter was tried to the court on August 22, 2003. On January 2, 2004, Judge Lloyd G. Connelly, Judge of the Superior Court of the State of California, issued his ruling on the matter denying the petition in all respects except one. As to the one exception, the court sought clarification as to whether the transportation conformity determination used to determine the significance of the air quality impact of the interchange operations considered the impact on attainment of the state ambient air quality standard for ozone. The California Department of Transportation (CalTrans) prepared and filed the clarification addendum sought by the court. Prior to the court’s determination of the adequacy of the clarification, El Dorado County and Voices for Rural Living appealed Judge Connelly’s ruling to the California Court of Appeals on all of the remaining issues.

A ruling with respect to the addendum was issued June 21, 2004 by the Superior Court of the State of California, County of Sacramento. The ruling indicated that the addendum provided to the court by CalTrans did not provide a quantitative showing to satisfy the court’s earlier request for a clarification on meeting the state ambient ozone standard. The court recognized that the information provided by CalTrans does qualitatively show that the project may comply with the state standard, but concluded that a quantitative

analysis is necessary even though the court recognized that the methodology for that analysis “is not readily apparent”. In addition, the ruling specifically stated, “Moreover, such methodology appears necessary for the CEQA analysis of transportation projects throughout the state, including transportation projects for which respondents (i.e., CalTrans) have approval authority.” CalTrans, the Shingle Springs Tribe and Lakes responded to the court with a revised submission in August 2004. Representatives of the California Air Resources Board and the Sacramento Area Council of Governments filed declarations supporting the revised submission to the court. Opposition to that revised submission was filed, a hearing on the revised submission took place on August 20, 2004 and the court again found the revised submission of CalTrans, the Shingle Springs Tribe and Lakes to be inadequate. That ruling was separately appealed to the California Court of Appeals (the “Court”) and an oral argument for these appeals and the appeals of El Dorado County and Voices of Rural Living was held before the Court on August 29, 2005.

The Court issued its decision on the appeals on November 8, 2005. The Court ruled in favor of CalTrans’ appeal, rejecting the El Dorado County’s argument that the transportation conformity analysis did not conform to state standards. The Court also rejected all but two of the legal claims asserted in the appeal by El Dorado County and Voices for Rural Living against the environmental impact report (“EIR”) prepared by CalTrans for the interchange that will connect Highway 50 to the Shingle Springs Rancheria. For the remaining two issues, the Court held that CalTrans must supplement its environmental analysis by adding some discussion to the air quality chapter to further explain the project’s contribution to overall vehicular emissions in the region, and that CalTrans also must evaluate whether a smaller casino and hotel would reduce environmental impacts. The Court acknowledged CalTrans lacks jurisdiction to require the Shingle Springs Tribe to develop a smaller casino, but nevertheless required some discussion of this alternative in the interchange EIR.

The Company has not recorded any liability for this matter as management currently believes that the Court’s rulings will ultimately allow the project to commence. However, there can be no assurance that the final outcome of this matter is not likely to have a material adverse effect upon the Company’s consolidated financial statements.

Grand Casinos, Inc. Litigation

In connection with the establishment of Lakes as a public corporation on December 31, 1998, via a distribution of its common stock to the shareholders of Grand Casinos, the Company and Grand Casinos entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand Casinos and certain affiliated companies of Grand Casinos. Lakes asserted claims against Grand Casinos for amounts to which Lakes believed it was entitled under the tax sharing agreement. On December 1, 2004, Lakes entered into a settlement agreement with Grand Casinos and its parent company, Park Place Entertainment Corporation (now known as “Caesars Entertainment, Inc.” or “Caesars”), pursuant to which Lakes received $11.3 million in December 2004 in satisfaction of its prior claim and its future rights to the tax benefits that were the subject of the dispute. Lakes will be required to provide reimbursement for its share of the disallowed benefits. This settlement income has been recorded as other income in the consolidated statement of earnings (loss) for the year ended January 2, 2005. Lakes has not recorded any tax related to the settlement payment of $11.3 million, as Lakes believes this settlement is not taxable to Lakes.

Louisiana Department of Revenue Litigation Tax Matter

Louisiana asserts that additional corporation income tax and corporation franchise tax are due by Lakes for the taxable periods set forth above. Lakes maintains that it has remitted the proper Louisiana corporation income tax and Louisiana corporation franchise tax for the taxable periods at issue. On February 14, 2005, Lakes filed an answer to the petition to collect taxes asserting all proper defenses and maintaining that no additional taxes are owed and that the petition to collect taxes should be dismissed. Management intends to vigorously contest this action by the Louisiana Department of Revenue. Lakes may be required to pay up to the $8.6 million assessment plus interest if Lakes is not successful in this matter. The Company has recorded a reserve related to this examination, which is reflected as part of income taxes payable on the Company’s consolidated balance sheets.

WPTE litigation with TRV

On September 19, 2005, WPTE filed suit in the California Superior Court seeking to keep the Travel Channel from interfering with WPTE’s prospective contractual relationship with third party networks in connection with the sale of the broadcast rights to the PPT, and to clarify and enforce WPTE’s rights with respect to the WPT. Under WPTE’s existing agreement with TRV for the World Poker Tour program (the “WPT Agreements”), TRV is afforded the right to negotiate exclusively with WPTE with respect to certain types of programming developed by WPTE during a 60 day period. Pursuant to the WPT Agreements, WPTE submitted the PPT to TRV and began negotiations but failed to reach an agreement with TRV within the allotted negotiation window. Consequently, WPTE began discussions with other networks. While WPTE later revived its attempts to reach a deal with TRV after TRV’s exclusive bargaining window had ended, WPTE ultimately received an offer from ESPN. WPTE submitted this offer to TRV pursuant to TRV’s contractual last right to match the deal as specified under the WPT Agreements. Thereafter, TRV sent letters to WPTE and ESPN asserting, among other things, that WPTE was not entitled to complete a deal for the PPT with a third party. Following TRV’s letters, WPTE filed suit on September 19, 2005, alleging that TRV breached the WPT Agreements and interfered with WPTE’s prospective contractual relationship with ESPN, and seeking a judicial declaration of WPTE’s rights under the WPT Agreements to produce non-World Poker Tour branded programs covering poker tournaments. Subsequent to WPTE filing, ESPN withdrew its offer to WPTE to acquire the broadcast rights to the PPT. On September 22, 2005, TRV and Discovery Communications, Inc. filed an answer and cross-complaint and subsequently filed a motion for judgment on the pleadings and an “anti-SLAPP” motion, both of which were denied on November 10, 2005. Despite WPTE’s dispute with TRV, WPTE remains committed to fulfilling its obligations to TRV in connection with the World Poker Tour series.

Other Litigation

Lakes and its subsidiaries are involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the final outcome of these matters, including the matters discussed above, is not likely to have a material adverse effect upon the ~~Company's~~Company’s consolidated financial ~~position or results of operations. 40~~ LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amended and Restated Memorandum of Agreement Regarding Gaming Development and Management Agreement between Shingle Springs Band of Miwok Indians, a Federally Recognized Tribe and Lakes KAR Shingle Springs, LLC, a Delaware Limited Liability Company, dated October 13, 2003, as amended June 16, 2004, as approved by the National Indian Gaming Commission on July 19, 2004. 10.2 Amendment dated August 18, 2004 to Acquisition Master Agreement dated August 22, 2003, by and between The Travel Channel, LLC and WPT Enterprises, Inc. (f/k/a World Poker Tour, LLC) (incorporated by reference from Exhibit 10.1 to Form 10-Q of WPT Enterprises, Inc. for the quarter ended 10/3/04)(portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934). 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 --------------- (b) Reports on Form 8-K (i) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on July 7, 2004 (ii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on July 21, 2004 (iii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on August 10, 2004 41 statements.


ITEM 6.	*EXHIBITS*


31	.1	Certification of CEO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31	.2	Certification of CFO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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


	LAKES ENTERTAINMENT, INC.
	Registrant

	/s/ Lyle Berman

	Lyle Berman
	Chairman of the Board and Chief Executive Officer

	/s/ Timothy J. Cope

	Timothy J. Cope
	President and Chief Financial Officer

Dated: November 17, 2004 LAKES ENTERTAINMENT, INC. ------------------------- Registrant /s/ Lyle Berman --------------------------------------- Lyle Berman Chairman of the Board and Chief Executive Officer /s/ Timothy J. Cope --------------------------------------- Timothy J. Cope President and Chief Financial Officer 42


		and litigation, environmental costs and design consulting, and Lakes, in order to obtain the development agreement and management contract, agrees to advance a monthly amount used by the tribe for a variety of tribal expenses.

(b)		Lakes purchased land to be used and transferred to the tribe in connection with the casino project. At Pokagon, a portion of the land will be used by the tribe separate from the casino project land.