UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

FORM ~~10-Q (Mark~~10-Q/A

Amendment No. 1

(Mark One) ~~[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~


þ		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~~ July 1, 2007


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

130 Cheshire Lane, Suite 101 Minnetonka, Minnesota (Address of principal executive offices)		55305 (Zip Code)

(952) 449-9092 ~~(Registrant's~~
(Registrant’s telephone number, including area code)

Indicate by check mark whether the ~~registrant~~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]~~þ No ~~[ ]~~o

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

Large Accelerated Filer o Accelerated Filer þ Non Accelerated Filer o

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

As of ~~November 10, 2004,~~August 6, 2007, there were ~~22,250,634~~24,406,175 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 ~~---------~~
	Explanatory Note		3

PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets as of ~~3 October 3, 2004~~July 1, 2007 (unaudited) and December ~~28, 2003~~31, 2006		5
	Unaudited Condensed Consolidated Statements of ~~Loss~~Earnings (Loss) and Comprehensive Earnings (Loss) for the 4 three months ~~ended October 3, 2004~~ and ~~September 28, 2003 Condensed Consolidated Statements of Loss for the nine 5~~six months ended ~~October 3, 2004~~July 1, 2007 and ~~September 28, 2003~~July 2, 2006		6
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~8 nine~~six months ended ~~October 3, 2004~~July 1, 2007 and ~~September 28, 2003 6~~ July 2, 2006		7
	Notes to Unaudited Condensed Consolidated Financial Statements 7		8
ITEM 2. ~~MANAGEMENT'S~~	MANAGEMENT’S DISCUSSION AND 24 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
ITEM 3.	QUANTITATIVE AND QUALITATIVE 37 DISCLOSURES ABOUT MARKET RISK		45
ITEM 4.	CONTROLS AND PROCEDURES 37		46
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS 38		46
ITEM 1A.	RISK FACTORS		46
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		48
ITEM 6.	EXHIBITS ~~AND REPORTS ON FORM 8-K 41~~		48
302 Certification of CEO
302 Certification of CFO
906 Certification of Chief Executive Officer and Chief Financial Officer

Explanatory Note for Amendment No. 1 on Form 10-Q/A

Lakes Entertainment, Inc. (“Lakes” or the “Company”) is filing this amendment no. 1 (this “Amendment”) to its Quarterly Report on Form 10-Q for the period ended July 1, 2007 (“Original Form 10-Q”) which was originally filed with the Securities and Exchange Commission on August 10, 2007, to amend and restate financial statements for the six months ended July 1, 2007. The restatement adjusts the Company’s accounting for a warrant to purchase shares of Lakes’ common stock which was issued to a lender in connection with a financing agreement during 2006. The restatement has no effect on the Company’s cash flows or liquidity. In addition, the restatement has no effect on the Company’s condensed consolidated statement of earnings for the three months ended July 1, 2007.

Background

During the first quarter of 2006, a warrant to purchase 4,460,000 shares of the Company’s common stock was issued to a lender in connection with a financing agreement (1,250,000 were immediately exercisable). The estimated fair value of the exercisable portion of the warrant, approximately $4.7 million at inception, was originally reported erroneously as an increase in additional paid-in capital. The Company’s management has determined that, because the shares underlying the warrant were not registered for resale until February 28, 2007, the fair value of the warrant should have been recorded as a liability and adjusted to its estimated fair value at each subsequent balance sheet date through February 28, 2007, pursuant to Emerging Issues Task Force 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock(“EITF 00-19”).

Accordingly, Lakes is amending its condensed consolidated financial statements as of and for the six months ended July 1, 2007. The adjustment in accounting results in a decrease in interest expense of approximately $2.3 million for the six months ended July 1, 2007, related to the first quarter 2007 adjustment to fair value of the warrant as of February 28, 2007, the date the shares underlying the warrant were registered for resale. Since the shares underlying the warrant were registered for resale effective February 28, 2007, the warrant liability was reclassified to additional paid-in capital and no further fair value adjustments have been recorded since that date, pursuant to the guidance in EITF 00-19.

Amendment to Form 10-Q

The following sections of the Original Form 10-Q have been revised to reflect the restatement: Part I — Item 1 — Financial Statements, Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I - Item 4 - Controls and Procedures and Part II — Item 6 — Exhibits. Except to the extent relating to the restatement of our condensed consolidated financial statements described above, the condensed consolidated financial statements and other disclosures in this Amendment do not reflect any events that have occurred after the Original Form 10-Q was initially filed on August 10, 2007.

Effects of Restatement

The following table sets forth the effects of the restatement relating to the warrant accounting on affected line items within the previously reported condensed consolidated balance sheet and condensed consolidated statement of earnings (loss) as of and for the six months ended July 1, 2007, for the three and six months ended July 2, 2006, respectively and as of December 31, 2006. The restatement has no effect on the Company’s condensed consolidated statement of earnings for the three months ended July 1, 2007. The restatement has no effect on the Company’s cash flows, liquidity or earnings from operations for any period presented.


	As of and for the six months
	ended July 1, 2007
	As
	previously
(in thousands, except per share data):	reported			Restated
Additional paid-in capital	$	188,824		$	187,659
Retained earnings		27,398			28,563
Interest expense, other (*)		(2,588	)		(316	)
Net loss		(4,076	)		(1,804	)
Loss per share — basic and diluted		(0.24	)		(0.14	)


	As of
	December 31, 2006
	As
	previously
(in thousands, except per share data):	reported		Restated
Warrant liability	$	—	$	5,816
Additional paid-in capital		176,419		171,710
Retained earnings		34,357		33,250


	For the three months
	ended July 2, 2006
	As
	previously
(in thousands, except per share data):	reported			Restated
Interest expense, other (*)	$	(1,303	)	$	(2,458	)
Net earnings		3,248			2,093
Earnings per share — basic		0.14			0.09
Earnings per share — diluted		0.13			0.08


	For the six months
	ended July 2, 2006
	As
	previously
(in thousands, except per share data):	reported			Restated
Interest expense, other (*)	$	(1,834	)	$	(4,640	)
Net earnings		14,932			12,126
Earnings per share — basic		0.66			0.54
Earnings per share — diluted		0.61			0.49


*		Restated amount includes the quarterly fair value adjustment related to the long-term liability associated with the warrant as of February 28, 2007, the date on which the shares underlying the warrant were registered for resale.

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 ======== ========
~~The accompanying~~
Condensed Consolidated Balance Sheets
(In thousands)


	July 1, 2007			December 31, 2006
	(Unaudited)
	(restated)			(restated)
Assets
Current assets:
Cash and cash equivalents	$	18,629		$	9,759
(balances include $1.5 million and $8.4 million of WPT Enterprises, Inc. cash)
Restricted cash		—			12,738
Investments in marketable securities		56,612			59,863
(balances include $33.0 million and $31.3 million of WPT Enterprises, Inc. short-term investments)
Accounts receivable		3,350			2,963
Other current assets		1,984			2,706

Total current assets		80,575			88,029

Property and equipment, net		16,877			17,460

Long-term assets related to Indian casino projects:
Notes receivable from Indian tribes		78,566			164,308
Land held for development		8,121			16,790
Intangible assets		57,349			54,279
Other		5,244			8,450

Total long-term assets related to Indian casino projects		149,280			243,827
Other assets:
Restricted cash		347			453
Investments		2,923			2,923
Deferred tax asset		6,354			6,248
Debt issuance costs		—			1,972
Other long-term assets		201			264

Total other assets		9,825			11,860

Total Assets	$	256,557		$	361,176


Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	2,392		$	5,345
Income taxes payable		16,301			14,593
Accrued payroll and related costs		2,003			2,480
Deferred revenue		2,557			4,740
Accrued interest		—			312
Other accrued expenses		1,635			1,879

Total current liabilities		24,888			29,349

Long-term debt, other, net of unamortized discount of $0.9 million at December 31, 2006		—			104,471
Warrant liability		—			5,816

Total long-term liabilities		—			110,287

Total liabilities		24,888			139,636


Commitments and contingencies

Minority interest in subsidiary		15,207			16,764


Shareholders’ equity:
Series A preferred stock, $.01 par value; authorized 7,500 shares; 4,458 issued and outstanding at July 1, 2007 and December 31, 2006, respectively		45			45
Common stock, $.01 par value; authorized 200,000 shares; 24,356 and 22,949 issued and outstanding at July 1, 2007, and December 31, 2006, respectively		244			229
Additional paid-in capital		187,659			171,710
Retained earnings		28,563			33,250
Accumulated other comprehensive loss		(49	)		(458	)

Total shareholders’ equity		216,462			204,776

Total liabilities and shareholders’ equity	$	256,557		$	361,176

See notes ~~are an integral part of these~~to unaudited condensed consolidated financial ~~statements. 3~~ statements

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED STATEMENTS OF LOSS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)~~
(unaudited) THREE MONTHS ENDED ------------------ OCTOBER 3, 2004 SEPTEMBER 28, 2003 --------------- ------------------ REVENUES: License fee income $ 2,974 $ 377 -------- -------- Total Revenues 2,974 377 -------- -------- COSTS 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 ======== ========
~~The accompanying~~
Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
(In thousands, except per share data)
(Unaudited)


	Three months ended						Six months ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
				(restated)			(restated)			(restated)
Revenues:
License fee income	$	6,072		$	8,750		$	9,839		$	13,426
Host fees, sponsorship, online gaming and other		1,671			2,305			2,425			4,094
Management, consulting and development fees		386			165			835			330

Total revenues		8,129			11,220			13,099			17,850

Costs and expenses:
Selling, general and administrative		9,966			8,833			19,721			18,015
Production costs		3,087			4,176			5,239			6,596
Loss on abandonment of online gaming assets		2,270			—			2,270			—
Net impairment losses		—			—			331			—
Depreciation and amortization		191			139			386			272

Total costs and expenses		15,514			13,148			27,947			24,883


Net realized and unrealized gains on notes receivable		8,939			17,647			9,104			33,123


Earnings (loss) from operations		1,554			15,719			(5,744	)		26,090


Other income (expense):
Interest income		5,495			657			6,633			1,090
Interest expense, related party		—			—			—			(137	)
Interest expense, other		—			(2,458	)		(316	)		(4,640	)
Amortization of debt issuance costs		—			(176	)		(95	)		(312	)
Loss on extinguishment of debt		—			(6,821	)		(3,830	)		(6,821	)
Gain on sale of investment		—			—			—			5,675
Other		22			(10	)		28			76

Total other income (expense), net		5,517			(8,808	)		2,420			(5,069	)


Earnings (loss) before income taxes and minority interest in net (earnings) loss of subsidiary		7,071			6,911			(3,324	)		21,021
Income taxes		348			3,837			656			6,547

Earnings (loss) before minority interest in net (earnings) loss of subsidiary		6,723			3,074			(3,980	)		14,474
Minority interest in net (earnings) loss of subsidiary		1,295			(981	)		2,176			(2,348	)


Net earnings (loss)		8,018			2,093			(1,804	)		12,126

Stock warrant inducement discount		1,444			—			1,444			—

Net earnings (loss) available to common shareholders		6,574			2,093			(3,248	)		12,126

Other comprehensive earnings (loss):
Unrealized loss on marketable securities, net of tax		(23	)		(855	)		—			(426	)
Change in estimated fair value of derivative		—			(161	)		409			(161	)

Comprehensive earnings (loss)	$	6,551		$	1,077			($2,839	)	$	11,539

Earnings (loss) available to common shareholders per share — basic	$	0.28		$	0.09			($0.14	)	$	0.54

Earnings (loss) available to common shareholders per share — diluted	$	0.25		$	0.08			($0.14	)	$	0.49

Weighted-average common shares outstanding — basic		23,829			22,875			23,427			22,642

Dilutive effect of common stock equivalents		2,077			2,041			—			1,862

Weighted-average common shares outstanding — diluted		25,906			24,916			23,427			24,504

See notes ~~are an integral part of these~~to unaudited condensed consolidated financial ~~statements. 4~~ statements

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 ======== ========
~~The accompanying~~
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


	Six Months Ended
	July 1, 2007			July 2, 2006
	(restated)			(restated)
OPERATING ACTIVITIES:
Net earnings (loss)		($1,804	)	$	12,126
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization		553			431
Amortization of debt issuance costs		95			688
Amortization of debt discount		33			17
Increase (decrease) in value of warrant liability		(2,272	)		2,806
Share-based compensation		2,443			3,689
Loss on extinguishment of debt		2,783			6,821
Loss on abandonment of online gaming assets		2,270			—
Net realized and unrealized gains on notes receivable		(10,165	)		(33,123	)
Gain on sale of investment		—			(5,675	)
Minority interest in net earnings (loss) of subsidiary		(2,176	)		2,348
Deferred income taxes		(105	)		3,769
Net impairment losses		331			—
Changes in operating assets and liabilities:
Accounts receivable		(405	)		1,022
Other current assets		427			617
Income taxes payable		270			2,642
Accounts payable		347			(1,094	)
Deferred revenue		(2,182	)		(1,799	)
Accrued expenses		(1,035	)		723

Net cash used in operating activities		(10,592	)		(3,992	)


INVESTING ACTIVITIES:
Purchase of marketable securities		(59,997	)		(39,346	)
Sale / maturity of marketable securities		63,257			21,722
Proceeds from sale of land held for development		8,758			—
Collections on notes receivable		3,690			2,865
Increases in long-term assets related to Indian casino projects		(13,495	)		(31,880	)
Proceeds from sale of investment		—			5,686
Purchase of property and equipment		(1,867	)		(2,886	)
Increase in other long-term assets		—			(445	)

Net cash provided by (used in) investing activities		346			(44,284	)


FINANCING ACTIVITIES:
Decrease in restricted cash		12,844			—
Debt issuance costs		—			(5,004	)
Restricted cash proceeds from long-term debt		—			19,090
Restricted cash proceeds from long-term debt available as of quarter end		—			(19,090	)
Unrestricted cash proceeds from long-term debt		—			109,860
Repayment of long-term debt		(105,000	)		(35,000	)
Repayment of long-term debt, related party		—			—
Cash proceeds from issuance of common and preferred stock		9,158			3,277
Increase in WPTE restricted cash		—			(197	)
Shareholder trading settlement		—			2,805
Cash proceeds from sale of participation notes		102,114			—

Net cash provided by financing activities		19,116			75,741


Net increase (decrease) in cash and cash equivalents		8,870			27,465

Cash and cash equivalents — beginning of period		9,759			9,912

Cash and cash equivalents — end of period	$	18,629		$	37,377

See notes ~~are an integral part of these~~to unaudited condensed consolidated financial ~~statements. 5~~ statements

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)~~
(UNAUDITED) NINE MONTHS ENDED ----------------- OCTOBER 3, 2004 SEPTEMBER 28, 2003 --------------- ------------------ OPERATING ACTIVITIES: Net loss ($ 9,636) ($ 1,840) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 456 394 Unit-based compensation expense 545 45 Equity in (earnings) loss
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The unaudited condensed consolidated financial statements of unconsolidated affiliates (366) 197 Deferred income taxes (1,509) - Minority interest 53 - Impairments 6,407 - Changes in operating assets and liabilities: Accounts receivable 456 (494) Income taxes (789) (782) Accounts payable (478) (48) Deferred revenue 3,562 (55) Accrued expenses 67 (2,763) Other 767 (459) -------- -------- Net Cash Used in Operating Activities (465) (5,805) -------- -------- INVESTING ACTIVITIES: Purchases of short-term investments (8,188) - Sales and maturities of short-term investments 1,000 - Payments for land held under contract for sale (327) (629) Payments received on land held under contract for sale - 16,766 Payments received (made) for land held for development (158) 13,416 Advances on notes receivable (12,200) (12,382) Proceeds from repayment of notes receivable - 1,000 Investment in and notes receivable from unconsolidated affiliates 1,181 (704) Decrease in restricted cash - 5,907 Increase in other long-term assets (533) (370) Payments for property and equipment, net (605) (30) -------- -------- Net Cash Provided by (Used in) Investing Activities (19,830) 22,974 -------- -------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 3,905 17 Net proceeds from issuance of common stock by subsidiary 32,405 - -------- -------- Net Cash Provided by Financing Activities 36,310 17 -------- -------- Net increase in cash and cash equivalents 16,015 17,186 Cash and cash equivalents - beginning of period 25,340 14,106 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 41,355 $ 31,292 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ - $ 74 Income taxes 165 9 Noncash operating activities: Capitalized television costs related to unit options issued to consultants 202 -
~~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., 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")~~, have been prepared pursuant to the ~~shareholders~~rules and regulations of ~~Grand Casinos, Inc. ("Grand"~~the Securities and Exchange Commission (“SEC”)~~. Lakes' primary business is~~ applicable to ~~develop and manage Indian-owned casino properties that offer~~interim financial information. Accordingly, certain information normally included in the ~~opportunity for long-term development~~annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed and/or omitted. As of ~~related entertainment facilities, including hotels, golf courses, theaters, recreational vehicle parks and other complementary amenities.~~July 1, 2007, Lakes ~~provides experienced corporate and casino management and develops and implements a wide scale~~owned approximately 61% 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, with 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~~(“WPTE”). Accordingly, Lakes’ unaudited condensed consolidated financial statements include the results of operations of WPTE, and substantially all of Lakes’ revenues for the periods reported have been derived from WPTE’s business. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as amended, previously filed with the SEC on October 19, 2007, 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.

Certain minor reclassifications to amounts previously reported have been made to conform to the current period presentation. These reclassifications had no effect on net earnings (loss) or shareholders’ equity as previously presented.

2. Restatement

Lakes’ condensed consolidated financial statements as of and for the six months ended July 1, 2007 have been restated to adjust the accounting for a warrant to purchase shares of Lakes’ common stock. During the first quarter of 2006, a warrant to purchase 4,460,000 shares of the Company’s common stock was issued to a lender in connection with a financing agreement (1,250,000 were immediately exercisable). The estimated fair value of the exercisable portion of the warrant, approximately $4.7 million at inception, was originally reported erroneously as an increase in additional paid-in capital. The Company’s management has determined that, because the shares underlying the warrant were not registered for resale until February 28, 2007, the fair value of the warrant should have been recorded as a liability and adjusted to its estimated fair value at each subsequent balance sheet date through February 28, 2007 pursuant to Emerging Issues Task Force 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock(“EITF 00-19”).

The restatement has no effect on the Company’s cash flows or liquidity and earnings from operations were not impacted in any period presented. The effects of the restatement by line item on the quarterly period condensed consolidated financial statements as of and for the six months ended July 1, 2007, for the three and six months ended July 2, 2006, respectively, and as of December 31, 2006, are shown below (in thousands, except per share data):

As of and
for the six months ended
July 1, 2007
As previously
(in thousands, except per share data): reported Restated
Additional paid-in capital $ 188,824 $ 187,659
Retained earnings 27,398 28,563
Interest expense, other (*) (2,588 ) (316 )
Net loss (4,076 ) (1,804 )
Loss per share — basic and diluted (0.24 ) (0.14 )

As of
December 31, 2006
As previously
(in thousands, except per share data): reported Restated
Warrant liability $ — $ 5,816
Additional paid-in capital 176,419 171,710
Retained earnings 34,357 33,250

For the
three months ended
July 2, 2006
As previously
(in thousands, except per share data): reported Restated
Interest expense, other (*) $ (1,303 ) $ (2,458 )
Net earnings 3,248 2,093
Earnings per share — basic 0.14 0.09
Earnings per share — diluted 0.13 0.08

For the
six months ended
July 2, 2006
As previously
(in thousands, except per share data): reported Restated
Interest expense, other (*) $ (1,834 ) $ (4,640 )
Net earnings 14,932 12,126
Earnings per share — basic 0.66 0.54
Earnings per share — diluted 0.61 0.49


*		Restated amount includes the quarterly fair value adjustment related to the long-term liability associated with the warrant as of February 28, 2007, the date on which the shares underlying the warrant were registered for resale.

See notes to unaudited condensed consolidated financial statements

3. Long-Term Assets Related to Indian Casino Projects

At July 1, 2007 and December 31, 2006, long-term assets related to Indian casino projects are primarily related to three separate ~~public company~~projects for the Pokagon Band of Potawatomi Indians (the “Pokagon Band”), Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”) and the Jamul Indian Village (the “Jamul Tribe”) as indicated in the following tables (in thousands):

July 1, 2007 (unaudited)
Shingle
Pokagon Springs Jamul
Band Tribe Tribe Other Total
Notes receivable, at estimated fair value $ — $ 50,417 $ 24,809 $ 3,340 $ 78,566
Intangible assets related to Indian casino projects (*) 23,573 21,674 11,116 986 57,349
Land held for development — — 6,751 1,370 8,121
Other 60 767 1,154 3,263 5,244

$ 23,633 $ 72,858 $ 43,830 $ 8,959 $ 149,280

December 31, 2006
Shingle
Pokagon Springs Jamul
Band Tribe Tribe Other Total
Notes receivable, at estimated fair value $ 100,544 $ 40,912 $ 20,754 $ 2,098 $ 164,308
Intangible assets related to Indian casino projects (*) 23,573 20,387 9,760 559 54,279
Land held for development — 8,739 6,710 1,341 16,790
Other 60 2,041 2,207 4,142 8,450

$ 124,177 $ 72,079 $ 39,431 $ 8,140 $ 243,827


(*)		Intangible assets consist primarily of contractual rights to develop, finance and/or manage Indian-owned casino properties. Amortization of intangible assets begins once the related project becomes operational, and is calculated using the straight line method over the term of the underlying contract. Amortization related to projects currently operating is not material for any periods presented in the accompanying unaudited condensed consolidated financial statements.

Pokagon Band.On March 2, 2007 (the “Settlement Date”), Lakes contracted with a group of investors for their participation in the loans made by Lakes to the Pokagon Band for the development of the Four Winds Casino Resort (“Pokagon Casino”), which loans have been assumed by the Pokagon Gaming Authority. As of the Settlement Date, the face value of Lakes’ notes receivable was approximately $104.2 million, including accrued interest of approximately $33.0 million. On the Settlement Date, Lakes transferred 100% of the Pokagon Gaming Authority loans to the participants in exchange for cash proceeds of approximately $102.1 million based upon the accreted value of the Pokagon Gaming Authority loans less a two percent discount, and incurred transaction fees of approximately $1.1 million. The transaction fees were recorded as a reduction of net realized and unrealized gains on notes receivable in the accompanying Unaudited Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss). Accordingly, based upon the previously recorded estimated fair value of the notes at December 31, 2006, Lakes realized a gain of $0.5 million as a result of the ~~completion of an initial public offering. Lakes remains a majority shareholder of WPTE, owning approximately 64%~~consummation of the ~~outstanding common stock.~~participation agreement.

The participation agreements also allow the participants to pledge or exchange the notes receivable and Lakes no longer has any rights or obligations to the loans and is isolated, even in default, from liability. As a result, ~~Lakes'~~the Pokagon notes receivable participation transaction has been treated as a sale pursuant to Statement of Financial Accounting Standards No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities(“SFAS No. 140”). The sale does not have any effect on Lakes’ related management agreement with the Pokagon Band.

The participation agreements entitled Lakes to appoint an agent for purposes of servicing and administering of the loans. Lakes has appointed Bank of America, N.A. (“BofA”) as its agent for purposes of servicing and administering of the loans. Lakes pays BofA an annual fee of approximately $20,000 for this service.

Shingle Springs Tribe.

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

As of July 1, 2007 As of December 31, 2006

Face value of note (principal and interest) $63,125 $55,942
($46,368 principal and
$16,757 interest) ($42,310 principal and
$13,632 interest)
Estimated months until casino opens (weighted-average of three scenarios) 18 months 28 months
Projected interest rate until casino opens 10.41% 9.98%
Projected interest rate during the loan repayment term 10.26% 9.76%
Discount rate 15% 15%
Repayment terms of note* 84 months —
Projected repayment terms of note** — 24 months
Probability rate of casino opening (weighting of four scenarios) 95% 85%


*		Note is payable in even monthly installments over the course of the management agreement subsequent to the casino opening.

**		Note was previously payable in varying monthly installments based on contract terms subsequent to the casino opening.

On June 28, 2007, an affiliate of the Shingle Springs Tribe closed on a $450 million senior note financing to fund the Foothill Oaks Casino project in Shingle Springs, California. Immediately following the closing of this financing, Lakes was repaid approximately $17.2 million by the Shingle Springs Tribe for land Lakes had previously purchased on behalf of the Shingle Springs Tribe, and for certain construction advances including accrued interest. Lakes, through a wholly-owned subsidiary, has management and development agreements with an affiliate of the Shingle Springs Tribe to develop and manage the Foothill Oaks Casino. Amounts owed to Lakes under the management and development agreements are subordinated to the senior note financing.

The net unrealized gains on notes receivable related to the Shingle Springs Tribe casino project were $7.7 million and $1.4 million for the three months ended July 1, 2007 and July 2, 2006, respectively, and $6.7 million and $2.5 million for the six months ended July 1, 2007 and July 2, 2006, respectively, and are included in the accompanying Unaudited Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss). The net unrealized gains for the three months and six months ended July 1, 2007, primarily related to the close of third party financing by the Shingle Springs Tribe, which resulted in an increased probability of opening of the casino development project with the Shingle Springs Tribe.

Jamul Tribe.

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

As of July 1, 2007 As of December 31, 2006

Face value of note (principal and interest) $38,527 $32,952
($28,230 principal and
$10,297 interest) ($24,509 principal and
$8,443 interest)
Estimated months until casino opens (weighted-average of three scenarios) 29 months 29 months
Projected interest rate until casino opens 10.41% 9.98%
Projected interest rate during the loan repayment term 10.38% 9.76%
Discount rate 15.75% 15.75%
Projected repayment terms of note 120 months 120 months
Probability rate of casino opening (weighting of four scenarios) 85% 85%

The net unrealized gains on notes receivable related to the Jamul Tribe casino project were $1.1 million and $0.9 million for the three months ended July 1, 2007 and July 2, 2006, respectively, and $1.7 million and $7.3 million for the six months ended July 1, 2007 and July 2, 2006, respectively, and are included in the accompanying Unaudited Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss).

4. Long-Term Debt

On March 2, 2007, Lakes repaid its $105 million credit agreement with BofA and certain lenders under a financing facility (the “Credit Agreement”), using proceeds received from the Pokagon notes receivable participation transaction (Note 2) in addition to amounts previously included in a restricted interest reserve account related to the Credit Agreement. Lakes incurred approximately $1.1 million in a prepayment penalty associated with the payoff of the Credit Agreement. The prepayment penalty, along with the remaining unamortized portion of the related debt issuance costs and unamortized discount of approximately $1.8 million and $0.9 million, respectively, were also written off, resulting in a loss on extinguishment of debt of approximately $3.8 million in the first quarter of 2007, which is included in the accompanying Unaudited Condensed Consolidated Statement of Earnings (Loss) and Comprehensive Earnings (Loss).

5. Stock Warrant

Pursuant to the terms and conditions of a financing agreement dated as of February 15, 2006 among Lakes, PLKS Funding, LLC and various subsidiaries of Lakes, PLKS Holdings, LLC (“PLKS”) was granted a warrant to purchase common shares of Lakes at $7.50 per share (the “Warrant”), which had an expiration date of February 15, 2013. During April 2007, PLKS exercised and purchased 102,500 shares underlying the Warrant at $7.50 per share and paid Lakes $0.8 million.

On May 4, 2007, Lakes and PLKS amended the exercise price of the Warrant (the “Amendment”). The Amendment reduced the exercise price of the Warrant from $7.50 per share to $6.50 per share for the remaining 1,147,500 shares underlying the Warrant. In consideration for the amended exercise price, PLKS agreed to, within two days of the execution of the Amendment, exercise the Warrant with respect to the remaining 1,147,500 shares underlying the Warrant and pay the aggregate exercise price of $7.5 million, which PLKS did on May 7, 2007. The

Company calculated the impacts of the Amendment’s reduction in the exercise price and of PLKS’s agreement to exercise the Warrant within two days of the Amendment’s execution on the fair value of the Warrant using a Black-Scholes pricing model; this calculation of the impacts consisted of valuing the Warrant with and without the Amendment in force. The variables used in the Black-Scholes model were the value of the common stock on which the Warrant was written, the Warrants’s exercise price, the period of time until the Warrant’s expected expiration date, the expected price volatility of the common stock, the zero-coupon risk-free interest rate applicable to the period of time until the Warrant’s expected expiration date, and the present value of the expected dividends on the common stock during the term of the Warrant. As a result of the reduction in exercise price of the Warrant, Lakes recognized a stock warrant inducement discount of approximately $1.4 million which is included in the determination of net earnings available to common shareholders in the accompanying Unaudited Condensed Consolidated Statement of Earnings (Loss) and Comprehensive Earnings (Loss).

6. Share-based Compensation

The following table summarizes the consolidated share-based compensation expense related to employee stock options and stock purchases and non-vested shares under SFAS 123(R) for the three months and six months ended July 1, 2007 and July 2, 2006, respectively, which was allocated as follows:

Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2007 2006 2007 2006
(In thousands)
Total cost of share-based payment plans $ 1,203 $ 1,424 $ 2,435 $ 3,676

No income tax benefit was recognized in the Company’s Unaudited Condensed Consolidated Statement of Earnings (Loss) and Comprehensive Earnings (Loss) for share-based compensation arrangements for the three months and six months ended July 1, 2007 and July 2, 2006. Management assessed the likelihood that the deferred tax assets relating to future tax deductions from share-based compensation will be recovered from future taxable income and determined that a valuation allowance is necessary to the extent that management currently believes it is more likely than not that tax benefits will not be realized. Managements’ determination is based primarily on historical earnings volatility, the relatively short operating history of WPTE, and the Company’s current stages of planned operational activities.

The Company and WPTE both use a Black-Scholes option-pricing model to value stock options, which requires the consideration of historical employee exercise behavior data and the use of a number of assumptions including volatility of the companies’ stock prices, the weighted-average risk-free interest rate, and the weighted-average expected life of the options. Since neither Lakes nor WPTE currently pays dividends, the dividend rate variable in the Black-Scholes model is zero.

The following values represent the average per grant for the indicated variables used to value options granted during the three months and six months ended July 1, 2007 and July 2, 2006, respectively. There have been no significant changes to the assumptions thus far in 2007 and none are expected during the remainder of 2007.

Lakes’ stock option plans:

Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
Key valuation assumptions: 2007 2006 2007 2006
Expected volatility 54.95 % 55.55 % 54.95 % 55.55 %
Expected dividend yield — — — —
Risk-free interest rate 4.89 % 5.10 % 4.89 % 5.10 %
Expected term (in years) 8.2 years 8.2 years 8.2 years 8.2 years

Expected volatility — The volatility assumption is based on the historical weekly price data of Lakes’ stock over a two-year period. Management evaluated whether there were factors during that period which were unusual and which would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors.

	•		Forfeiture rate — As share-based compensation expense recognized is based on awards ultimately expected to vest, expense for grants beginning upon adoption of SFAS 123(R) will be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has reviewed the historical forfeitures which are minimal, and as such will amortize the grants to the end of the vesting period and will adjust for forfeitures at the end of the term.

	•		Expected term — The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. It is based upon an analysis of the historical behavior of option holders during the period from September 1995 to July 1, 2007. Management believes historical data is reasonably representative of future exercise behavior.

	•		Risk free interest rate — The risk free interest rate assumption is based on the U.S. Treasury yield curve in effect at the time of grant and with maturities consistent with the expected term of options.

At the Company’s annual shareholder meeting, which was held on June 6, 2007, Lakes’ shareholders approved the 2007 Lakes Stock Option and Compensation Plan, which reserves a total of 500,000 shares of our common stock. Shares that are subject to awards that terminate, lapse or are cancelled or forfeited will be available again for grant under the 2007 Plan. The Company issues new shares of common stock upon exercise of options.

The following table summarizes Lakes’ stock option activity during the three months and six months ended July 1, 2007 and July 2, 2006:

Number of Common Shares
Weighted-Avg.
Options Available Exercise
Outstanding Exercisable for Grant Price
2007

Balance at December 31, 2006
4,716,400 3,712,350 35,500 $ 6.15
Authorized — — — —
Granted — — — —
Forfeited/cancel led/expired — — — —
Exercised (112,500 ) — — 5.82

Balance at April 1, 2007
4,603,900 4,025,750 35,500 $ 6.15
Authorized 500,000 —
Granted 2,500 — (2,500 ) 11.84
Forfeited/cancel led/expired (44,500 ) — 44,500 9.79
Exercised (74,500 ) — — 5.83

Balance at July 1, 2007
4,487,400 3,954,500 577,500 $ 6.13

2006

Balance at January 1, 2006
5,307,626 4,153,476 94,500 $ 6.03
Authorized — — — —
Granted 30,000 — (30,000 ) 9.77
Forfeited/cancel led/expired — — — —
Exercised (550,000 ) — — 5.65

Balance at April 2, 2006
4,787,626 3,711,626 64,500 $ 6.10
Authorized — — — —
Granted 5,000 — (5,000 ) 12.10
Forfeited/cancel led/expired (5,000 ) — 5,000 8.15
Exercised (25,000 ) — — 4.75

Balance at July 2, 2006
4,762,626 3,718,126 64,500 $ 6.11

The following table summarizes significant ranges of Lakes’ outstanding and exercisable options as of July 1, 2007:

Options Outstanding at July 1, 2007
Weighted- Options Exercisable at July 1, 2007
Average Aggregate Aggregate
Number Remaining Weighted-Average Intrinsic Number Weighted- Intrinsic
Range of Exercise Prices Outstanding Contractual Life Exercise Price Value Exercisable Average Price Value
$(3.25—3.63) 286,200 3.9 years $ 3.45 $ 2,390,622 286,200 $ 3.45 $ 2,390,622
(3.64 — 5.45) 2,374,700 1.7 years 4.22 18,027,678 2,374,700 4.22 18,027,678
(5.46 — 7.26) 60,000 6.5 years 7.18 278,100 45,000 7.18 208,575
(7.27 — 9.08) 1,438,500 6.2 years 8.13 5,297,276 1,099,000 8.13 4,047,068
(9.09 — 10.90) 72,000 6.5 years 10.36 104,320 27,050 10.48 35,936
(10.91 — 12.71) 91,000 7.6 years 11.47 37,200 41,050 11.43 17,647
(12.72 — 14.53) 95,000 7.6 years 14.00 — 44,500 14.04 —
(14.54 — 16.34) 5,000 7.5 years 16.11 — 2,000 16.11 —
(16.35 — 18.16) 65,000 6.8 years 17.91 — 35,000 17.97 —

4,487,400 3.7 years $ 6.13 $ 26,135,196 3,954,500 $ 5.64 $ 24,727,526

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on Lakes’ closing stock price of $11.81 on June 29, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three months and six months ended July 1, 2007 and July 2, 2006 were $0.5 million, $0.2 million, $1.0 million and $2.2 million, respectively. As of July 1, 2007, Lakes’ unrecognized share-based compensation related to stock options was approximately $2.0 million, which is expected to be recognized over a weighted-average period of 1.3 years.

WPTE stock option plan:

Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2007 2006 2007 2006
Expected volatility 72.22 % 78.91 % 73.03 % 81.57 %
Forfeiture rate 12.99 % 4.13 % 12.99 % 4.13 %
Expected dividend yield — — — —
Risk-free interest rate 4.84 % 5.06 % 4.65 % 4.68 %
Expected term (in years) 6 years 6.5 years 6 years 6.5 years

	•		Expected volatility — As WPTE has a relatively short operating history and no definitive peer or peer groups, expected volatility was based on historical volatility of WPTE’s stock price since it began trading in August 2004.

	•		Forfeiture rate — As share-based compensation expense recognized is based on awards ultimately expected to vest, expense for grants beginning upon adoption of SFAS 123(R) will be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. WPTE used historical data to estimate employee departure behavior in estimating future forfeitures.

	•		Expected term — Due to WPTE’s limited operating history including stock option exercises and forfeitures, WPTE calculated expected term using the “Simplified Method” in accordance with Staff Accounting Bulletin 107.

	•		Risk free interest rate — The risk free interest rate assumption is based on the U.S. Treasury yield curve in effect at the time of grant and with maturities consistent with the expected term of options.

The following table summarizes WPTE stock option activity during the three months and six months ended July 1, 2007 and July 2, 2006:

Number of Common Shares
Weighted-Avg.
Options Available Exercise
outstanding Exercisable for Grant Price
2007

Balance at December 31, 2006
2,318,166 1,050,200 983,501 $ 6.76
Authorized — — — —
Granted 287,000 — (287,000 ) 4.80
Forfeited/cancelled/expired (90,466 ) — 90,466 8.49
Exercised — — — —

Balance at April 1, 2007
2,514,700 1,010,533 786,967 $ 6.47
Authorized —
Granted 182,000 — (182,000 ) 4.53
Forfeited/cancelled/expired (85,667 ) — 85,667 5.25
Exercised (113,660 ) — — 0.0049

Balance at July 1, 2007
2,497,373 912,139 690,634 $ 6.67

2006

Balance at January 1, 2006
2,158,000 620,333 283,667 $ 7.14
Authorized — — — —
Granted 219,000 — (219,000 ) 6.20
Forfeited/cancelled/expired (159,333 ) — 159,333 8.13
Exercised (115,000 ) — — 0.0049

Balance at April 2, 2006
2,102,667 785,500 224,000 $ 7.36
Authorized — — 1,080,000 —
Granted 109,500 — (109,500 ) 5.18
Forfeited/cancelled/expired (153,501 ) — 153,501 10.07
Exercised (105,000 ) — — 0.0049

Balance at July 2, 2006
1,953,666 619,333 1,348,001 $ 7.42

The following table summarizes significant ranges of WPTE outstanding and exercisable options as of July 1, 2007:

Options Outstanding Options Exercisable
Weighted-Avg. Weighted- Aggregate Aggregate
Range of Number Remaining Avg. Exercise Intrinsic Number Weighted- Intrinsic
Exercise Prices Outstanding Contractual Life Price Value Exercisable Avg. Price Value
$0.0049 111,340 4.66 $ 0.0049 $ 454,835 111,340 $ 0.0049 $ 454,835
$3.93 — 4.80 824,000 9.58 4.46 4,800 — — —
$5.18 — 9.92 1,325,366 7.48 7.57 — 739,133 7.88 —
$11.95 — 14.51 220,667 8.12 12.19 — 56,000 12.70 —
$15.05 — 19.50 16,000 8.10 15.33 — 5,666 15.57 —

2,497,373 8.10 $ 6.67 $ 459,635 912,139 $ 7.26 $ 454,835

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on WPTE’s closing stock price of $4.09 on June 29, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three months and six months ended July 1, 2007 and July 2, 2006 were, $0.5 million, $0.8 million, $0.5 million and $1.4 million, respectively. As of July 1, 2007, total compensation cost related to non-vested share-based options not yet recognized was $3.5 million, which is expected to be recognized over the next 2.4 years on a weighted-average basis.

7. Earnings (Loss) Available to Common Shareholders Per Share

For all periods, basic earnings (loss) available to common shareholders per share is calculated by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during the applicable period. For the six months ended July 1, 2007 and the three months and six months ended July 2, 2006, respectively, diluted earnings (loss) available to common shareholders per share reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings (loss) available to common shareholders by the weighted-average of all common and potentially dilutive shares outstanding. Stock options were not included in the computation of diluted earnings (loss) available to common shareholders per share for the three months ended July 1, 2007 because the effects would have been anti-dilutive for that period.

8. Income Taxes

Lakes evaluated the ability to utilize deferred tax assets arising from net operating loss carryforwards, and other ordinary items and determined that a valuation allowance was appropriate at July 1, 2007 and December 31, 2006. Lakes evaluated all evidence and determined net losses (excluding net realized and unrealized gains and losses on notes receivable) generated over the past five years outweighed the current positive evidence that Lakes believes exists surrounding its ability to generate significant income from its long-term assets related to Indian casino projects. Therefore, Lakes recorded a 100% valuation allowance against its deferred tax assets related to net operating losses and other ordinary items at July 1, 2007, and December 31, 2006, which is the primary reason that Lakes’ effective tax rate is not comparable to the statutory federal rate of 35%.

Lakes has recorded deferred tax assets related to capital losses. The realization of these benefits is dependent on the generation of capital gains during the applicable carryforward periods. Lakes 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 and could be sold at a substantial gain. Lakes owns approximately 12.5 million shares of WPTE common stock valued at approximately $51 million as of July 1, 2007 based upon the closing stock price as reported by NASDAQ on June 29, 2007 of $4.09. Accordingly, Lakes has not established a valuation allowance for these deferred tax assets.

Lakes is currently disputing the results ~~continue~~of an audit by the Internal Revenue Service (“IRS”) for the fiscal years ended 2001 and 2000, and has been petitioned by the Louisiana Department of Revenue to pay additional Louisiana corporation income and/or franchise taxes for the fiscal years ended 1999 through 2002. Lakes may be required to pay taxes up to approximately $12 million plus interest and fees related to these two tax matters. Excluding these matters, Lakes is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years prior to 2003. See Note 8 for further discussion.

Effective January 1, 2007, Lakes adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). The adoption of FIN 48 resulted in an increase of $1.4 million in Lakes’ liability for unrecognized tax benefits, which was accounted for as a reduction of retained earnings as of January 1, 2007. The adoption of FIN 48 did not materially affect net operating loss carry forwards, the related deferred tax assets and valuation allowance thereon, or the income tax provision through July 1, 2007.

At the beginning of 2007, Lakes’ liability for uncertain tax positions was $10.1 million plus an additional $8.2 million for the possible payment of interest related to these tax liabilities. These tax liabilities are considered unrecognized tax benefits which would affect Lakes’ effective tax rate if recognized. Lakes records accrued interest related to uncertain tax positions in income tax expense. There were no significant changes in components of the liability in the first half of 2007.

Lakes files a consolidated U.S. federal income tax return, as well as income tax returns in various states.

Lakes believes it is reasonably possible that, within the next 12 months, it could recognize previously unrecognized tax benefits of between $0.6 million and $1.4 million as a result of the resolution of the IRS audit discussed above.

9. Contingencies

IRS tax audit.Lakes is under audit by the IRS for the fiscal years ended 2001 and 2000. The IRS is challenging the treatment of income categorized as a capital gain. If Lakes is unsuccessful in sustaining its position, Lakes may be required to pay up to approximately $3.2 million plus accrued interest related to tax on ordinary income. Lakes has recorded a liability for this matter including interest, as described in Note 7 above, which is included as part of income taxes payable on the accompanying Unaudited Condensed Consolidated Balance Sheets.

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 1999 through 2001 and additional Louisiana corporation franchise tax for the tax years ended 2000 through 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 in the amount of $8.6 million, plus interest, against Lakes for the taxable periods set forth above. Lakes maintains that it 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 were 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. Lakes has determined it is more likely than not it will be able to support its position related to this tax matter. As such, Lakes has recorded a liability for an estimated settlement related to this examination including accrued interest and fees, which is included as part of income taxes payable on the accompanying Unaudited Condensed Consolidated Balance Sheets.

WPTE litigation.On July 19, 2006, a legal action was commenced against WPTE by seven poker players that alleges, among other things, an unfair business practice of WPTE. On March 14, 2007, the plaintiffs filed a motion for summary judgment in the case and on April 12, 2007, WPTE filed its opposition to the motion. The parties are currently engaged in discovery and a trial date has been set for April 1, 2008. Although WPTE’s management is currently unable to predict the ultimate outcome of this matter, it believes that WPTE is not likely to sustain any material loss in connection therewith, and accordingly, no provision for loss has been recorded in connection therewith.

Miscellaneous legal matters.Lakes and its subsidiaries (including WPTE) are involved in various other inquiries, administrative proceedings, and pending or threatened 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 an unfavorable outcome in these matters is not probable. Furthermore, even in the event of an unfavorable outcome in one or all of these matters, the estimated effect on the unaudited condensed consolidated financial statements would not likely be material. Accordingly, no provision for loss has been recorded in connection therewith.

10. Segment Information

Lakes’ principal business is the development and management of gaming-related properties. Additionally, the Company is the majority owner of WPTE. Substantially all of Lakes’ and WPTE’s operations are conducted in the United States. Episodes of the World Poker Tour^® television series are distributed internationally by a third party distributor. Lakes’ 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 total assets in “Corporate and Eliminations” below primarily relate to Lakes’ short-term investments, deferred tax assets, Lakes’ corporate office building and construction in progress related to a Company-owned casino project in Vicksburg, Mississippi. Costs in “Corporate and Eliminations” 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 and Total
Projects Enterprises, Inc. Eliminations Consolidated
Total assets as of July 1, 2007 $ 148.9 $ 44.2 $ 63.3 $ 256.6
Total assets as of December 31, 2006 $ 242.8 $ 51.3 $ 67.1 $ 361.2
For the three months ended July 1, 2007 Revenue $ 0.4 $ 7.7 $ — $ 8.1
Earnings (loss) from operations 9.1 (3.6 ) (3.9 ) 1.6
Depreciation and amortization expense — 0.1 0.1 0.2
For the three months ended July 2, 2006 Revenue $ 0.2 $ 11.0 $ — $ 11.2
Earnings (loss) from operations 14.3 2.5 (1.1 ) 15.7
Depreciation and amortization expense — — 0.1 0.1
For the six months ended July 1, 2007 Revenue $ 0.8 $ 12.2 $ 0.1 $ 13.1
Earnings (loss) from operations 10.0 (6.5 ) (9.2 ) (5.7 )
Depreciation and amortization expense — 0.2 0.2 0.4
For the six months ended July 2, 2006 Revenue $ 0.4 $ 17.5 $ — $ 17.9
Earnings (loss) from operations 27.2 1.4 (2.5 ) 26.1
Depreciation and amortization expense — 0.1 0.2 0.3

11. Online Gaming Commitment and Related Loss on Abandonment of Online Gaming Assets

On April 23, 2007, WPTE entered into a three year software supply and support agreement (the “CryptoLogic Agreement”) with CryptoLogic Inc., and its wholly-owned subsidiary WagerLogic Limited, (collectively referred to as “CryptoLogic”). Pursuant to the CryptoLogic Agreement, CryptoLogic operates an online gaming site for WPTE featuring a poker room and casino games utilizing its proprietary software, in exchange for a percentage of the revenue generated from the site. WPTE is entitled to approximately 80% of net gaming revenues from the operation of the site. Under the CryptoLogic Agreement, WPTE is also a member in a centralized online gaming network (the “Network”) with several other licensees of CryptoLogic pursuant to which players are able to play on WPTE’s branded gaming site on the Network.

Prior to signing the Agreement with CryptoLogic, WPTE was developing its own proprietary online gaming platform internally, which management decided to abandon and replace with the CryptoLogic arrangement. As a result of signing the CryptoLogic Agreement, during the second quarter of 2007, WPTE wrote off approximately $2.3 million of capitalized costs related to the online gaming platform previously being internally developed. The assets written off consist primarily of software and computer equipment.

The online gaming site on the CryptoLogic platform became operational in June 2007, but operations during the quarter were not material.

12. Subsequent Events

Four Winds Casino and Resort.On August 2, 2007, the Four Winds Casino and Resort, owned by the Pokagon Band, opened to the public. The casino includes approximately 3,000 slot machines, 100 table games, a poker room, various restaurant and bar venues, a hotel, enclosed parking, a childcare facility and arcade, and various other resort amenities.

Lakes has a management contract with the Pokagon Band to manage the Four Winds Casino and Resort and pursuant to the terms of the management contract, is to receive approximately 24% of net income up to a certain level and 19% of the net income over that level, as a management fee. Lakes’ management fee is subordinated to a $305 million senior note financing and a $75 million furniture, furnishings and equipment financing, and also is subordinated to a minimum guaranteed monthly payment to the Pokagon Band. The term of the management contract, as amended, is five years from August 2, 2007.

WPTE agreement with China Leisure Sports Administrative Center.On August 6, 2007, WPTE entered into an agreement with a Chinese government-sanctioned body with authority over certain leisure sports, including the popular national card game “Traktor Poker.” Pursuant to the five year term of the agreement, WPTE will receive exclusive branding and certain marketing and sponsorship rights related to the China National Traktor Poker Tour. In exchange for these rights, WPTE will pay an annual fee, which starts at $505,000 in the first year and increases by 10% annually for the remaining four years of the agreement.

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

Overview

We develop, finance and manage Indian-owned casino properties. We currently have development and management agreements with five separate tribes for casino operations in Michigan, California, and Oklahoma, for a total of eight separate casino sites. We are also involved in other business activities including development of a non-Indian casino in Mississippi and the development of new table games for licensing to both Tribal and non-Tribal casinos. In addition, as of July 1, 2007, we owned approximately 61% of WPT Enterprises, Inc. (“WPTE”), a separate publicly held media and entertainment company. Our unaudited condensed consolidated financial statements include the results of operations of WPTE, ~~operations.~~and our revenues have been derived primarily from WPTE’s business.

WPTE creates internationally branded entertainment and consumer products driven by the development, production and marketing of televised programming based on gaming themes. WPTE created the World Poker Tour® (“WPT”), a television show based on a series of high-stakes poker tournaments that airs in the United States and has been licensed to telecast in more than 150 markets globally. WPTE also operates a real-money online gaming website which prohibits wagers from players in the United States and other restricted jurisdictions. WPTE currently licenses its brand to companies in the business of poker equipment and instruction, apparel, publishing, electronic and wireless entertainment, DVD/home entertainment, casino games, and giftware. WPTE is also engaged in the sale of corporate sponsorships. WPTE has ~~an agreement~~three operating units:

WPT Studios.WPTE’s multi-media entertainment division, generates revenue from the domestic and international licensing of broadcast and telecast rights and through casino host fees. Since WPTE’s inception, the WPT Studios division has been responsible for ~~a third season with~~73% of total revenue. WPTE licensed the WPT series Seasons One through Five to the Travel Channel, LLC ~~("TRV"~~(“TRV” or “Travel Channel”) for telecast in the United States under an exclusive license agreement (“WPT Agreement”). On April 2, 2007, WPTE entered into an agreement (the “GSN Agreement”) with Game Show Network, LLC (“GSN”), pursuant to which GSN agreed to license Season Six for ~~broadcast~~a $300,000 license fee per episode. WPTE received an average of $477,000 per episode for Season Five of the WPT television series from TRV. WPTE also has license agreements for the distribution of WPT and Professional Poker Tour (“PPT”) episodes into international territories for which WPTE receives license fees, net of WPTE’s agent’s sales fee and agreed upon sales and marketing expenses. WPTE also collects annual host fees from member casinos that host WPT events (WPTE’s member casinos).

Since WPTE’s inception, fees from TRV under the WPT Agreement and an agreement with TRV relating to the PPT series have been responsible for approximately 59% of WPTE’s total revenue. For each season covered by the WPT Agreement and related options, TRV has exclusive rights to exhibit the episodes in that season an unlimited number of times on its television network in the United States for four years (three years for the episodes in Season One). WPTE has produced five complete seasons of the WPT series under the WPT Agreement.

Under the TRV and GSN Agreements, TRV and GSN pay fixed license fees for each episode WPTE produces, which are payable at various times during the pre-production, production and post-production process and revenues are recognized upon receipt and acceptance of the completed episode. Television production costs related to WPT episodes are generally capitalized and charged to cost of revenues as revenues are recognized. Therefore, the timing and number of episodes involved in the various seasons of the series affect the timing of the revenues and expenses of the WPT Studios business. The following table describes the timing of Seasons One through Six of the World Poker Tour series, ~~on cable television.~~including the delivery and exhibition of the episodes each season:


	Date of	Number of
	Agreement or	Episodes
World Poker	Option for	(including		Production Period and Delivery	Initial Telecast of
Tour Season	Season	specials)		of Episodes	Episodes in Season
Season One	January 2003		15	February 2002 — June 2003	March 2003 — June 2003
Season Two	August 2003		25	July 2003 — June 2004	December 2003 — September 2004
Season Three	May 2004		21	May 2004 — April 2005	October 2004 — August 2005
Season Four	March 2005		21	May 2005 — April 2006	October 2005 — June 2006
Season Five	March 2006		22	May 2006 — April 2007	August 2006 — August 2007
Season Six	April 2007		23	May 2007 — April 2008	January 2008 — August 2008 (projected)

The agreement with TRV relating to the PPT series, which continues to cover the broadcast rights to Season One of the PPT, was substantially similar in structure to the TRV Agreement.

Under the WPT and PPT Agreements, TRV has the right to receive a percentage of WPTE’s adjusted gross revenues from international television licenses, product licensing and publishing, merchandising and certain other sources, after specified minimum amounts are met. For the six months ended July 1, 2007, WPTE recognized $0.4 million of Travel Channel participation expense that was recorded in cost of revenues.

WPT Global Marketing.Includes branded consumer products, sponsorship, and event management divisions. WPTE branded consumer products division generates revenue principally from royalties from the licensing of the WPTE brand to companies seeking to use the WPT brand and logo in the retail sales of their consumer products. In addition, this business unit generates revenue from direct sales of WPTE-produced branded merchandise. WPTE has generated significant revenues from existing licensees, including Hands-On Mobile and Take Two. WPTE also has ~~options~~licensees that are developing new licensed products including interactive television games from Pixel Play.

WPTE sponsorship and event management division generates revenue from corporate sponsorship and management of televised and live events. WPTE sponsorship program uses the professional sports model as a method to foster entitlement sponsorship opportunities and naming rights to major corporations. Anheuser-Busch has been the largest source of revenues through its sponsorship of Seasons Two, Three, Four and Five of the WPT series on TRV. In addition, WPTE had an agreement with Blue Diamond Almonds to sponsor the WPT Season Five Championship in April 2007 at the Bellagio. WPTE began recognizing revenues from these agreements when the Season Five programs were broadcast.

WPT Online.In 2005, WPTE began operating WPTonline.com through a license agreement with WagerWorks, Inc. (“WagerWorks”), under which WPTE licensed its brand to WagerWorks and WagerWorks shared a percentage of all net revenue it collected from the operation of the online poker room and online casino. WPTonline.com generated approximately $0.8 million in revenues, which are presented gross of WagerWorks costs, for ~~four additional seasons.~~the six months ended July 1, 2007, compared to costs of revenues of approximately $0.5 million. In June 2007, WPTonline.com ceased operations and the relationship with WagerWorks, Inc. was terminated as WPTE ~~receives a series of fixed license payments from TRV. Lakes has recently created~~transitioned to a new ~~division~~online software platform as described below.

In 2006, WPTE decided to ~~buy,~~develop its own software for its online poker room. WPTE licensed a software platform from CyberArts Licensing, LLC (“CyberArts”), and hired 30 employees in Israel to develop the software and a support infrastructure. On April 23, 2007, WPTE entered into a three year software supply and support agreement (the “CryptoLogic Agreement”) with CryptoLogic Inc., and its wholly-owned subsidiary WagerLogic Limited, (collectively referred to as “CryptoLogic”). As a result of WPTE’s decision to move away from the online gaming platform WPTE was developing based on the CyberArts software and stopping the development of WPTE’s own online gaming site, WPTE has written off certain property and equipment and related capitalized costs of approximately $2.3 million during the second quarter of 2007. In addition to the write off, WPTE curtailed its Israel operations and closed one of WPTE’s two offices. In WPTE’s Nahariya, Israel office, WPTE currently has 18 employees focused on marketing initiatives including affiliate marketing, search engine optimization and customer retention.

Pursuant to the CryptoLogic Agreement, CryptoLogic operates an online gaming site for WPTE featuring a poker room and casino games utilizing its proprietary software, in exchange for a percentage of the revenue generated from the site. WPTE is entitled to approximately 80% of net gaming revenues, as defined below, from the operation of the site. Under the CryptoLogic Agreement, WPTE is also a member in a centralized online gaming network with several other licensees of CryptoLogic pursuant to which players are able to play on WPTE’s branded gaming site on the online gaming network. As a condition of joining the Network WPTE has applied for a gaming license ~~and/or market new table game concepts for licensing~~in Malta which WPTE anticipates to ~~casinos. The Company~~be in effect by the third quarter of fiscal 2007, however, in the interim, WPTE is currently ~~testing~~licensed in Curacao, as are the other licensees in the Network.

On June 14, 2007 CryptoLogic delivered the poker software to WPTE and ~~marketing~~the go-live date was June 28, 2007. On July 26, 2007, CryptoLogic delivered 10 casino games (the “Initial Casino”), including multi-hand blackjack, European roulette and multiple interactive slots including their most popular casino games — Millionaire’s Club, Bejeweled and The Hulk. WPTE also has an option, exercisable at any time prior to July 1, 2008, to require CryptoLogic to provide WPTE’s customers with access to a ~~number~~full suite of ~~new games. See also Note 9. 7~~ LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) REVENUE RECOGNITION License fee income includescasino games within three months of such notice.

WPTE is entitled to the following ~~sources~~percentages of net gaming revenue: (a) 78% of the first $150,000 per month, (b) 79% of revenue in excess of $150,000 but less than $500,000 per month; and (c) 80% of the revenue in excess of $500,000 per month. CryptoLogic is entitled to earn the following annual minimum guaranteed revenues associated with WPTE’s online casino: $500,000 for the Initial Casino and $2,500,000 for the full suite of casino games. There is a one-time fee of $50,000 payable by WPTE ~~revenue. DOMESTIC TELEVISION:~~ for the initial preparation and launch of the site, and WPTE is required to pay a monthly fee of $7,500 for the management of tournaments, collusion detection, customer support and overall management of the poker room. In addition, WPTE is obligated to contribute 4% of poker room revenue for certain marketing initiatives.

If, at any time after the nine month anniversary of the go-live date, monthly gaming revenues fall below $500,000 for three consecutive months, CryptoLogic has the right to terminate the CryptoLogic Agreement on 90 days written notice. However, WPTE may prevent any such termination through payment of the shortfall of CryptoLogic’s percentage of such gaming revenue within 30 days of receipt of CryptoLogic’s notice of termination.

Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the three months and six months ended July 1, 2007, respectively.

Three months ended July 1, 2007 compared to the three months ended July 2, 2006

Revenues.Total revenues decreased by $3.1 million during the three months ended July 1, 2007 compared to the three months ended July 2, 2006. Domestic television license fees decreased $3.0 million in the second quarter of 2007 compared to the 2006 period. The decrease was primarily a result of the delivery of nine episodes of Season Five of the WPT television series in the second quarter of 2007 versus 10 episodes of Season Four of the WPT and nine episodes of the PPT delivered in the 2006 period. Online gaming, sponsorship and international television license revenues also decreased $0.5 million in the second quarter of 2007 compared to the 2006 period. The decrease of $0.6 million from online gaming revenue during 2007 was primarily due to lower levels of player activity versus the prior year period, as well as WPTE ceasing operations on the WagerWorks network in June of 2007 while transitioning WPTE’s online gaming operations to CryptoLogic. Product licensing revenues increased by approximately $0.2 million in the second quarter of 2007 compared to the 2006 period. The increase was primarily due to higher interactive gaming revenues from Take Two.

Lakes’ casino management fees were $0.4 million and $0.2 million during the second quarter of 2007 and the second quarter of 2006, respectively.

Selling, general and administrative expenses.Selling, general and administrative expenses increased approximately $1.1 million in the second quarter of 2007 compared to the 2006 period. The increase primarily related to additional headcount and development costs associated with WPTE’s online gaming efforts.

Production costs.Production costs decreased by approximately $1.1 million in the second quarter of 2007 compared to the 2006 period. The decrease was primarily a result of a decrease in production costs of $1.0 million as WPTE delivered fewer episodes in the 2007 period versus the 2006 period, as noted above. Overall gross margins for WPTE were 60% in the second quarter of 2007 compared to 62% in the second quarter of 2006. Domestic television licensing margins were 40% in the second quarter of 2007 compared to 51% in the same period in 2006. This decrease was principally because of the delivery of nine episodes of WPTE’s PPT series in 2006 for which the production costs had been expensed in an earlier period. The lower domestic television margins in the 2007 period were largely offset by increased margin contribution from product licensing, international television and sponsorship.

Loss on abandonment of online gaming assets.WPTE wrote off approximately $2.3 million in the second quarter of 2007 in online gaming assets as a result of ceasing development of the stand-alone online gaming platform WPTE was developing based on the CyberArts software.

Net realized and unrealized gains on notes receivable.Net realized and unrealized gains on notes receivable were $8.9 million and $17.6 million for the three months ended July 1, 2007 and July 2, 2006, respectively. The net realized and unrealized gains in the second quarter of 2007 related primarily to our notes receivable from the Shingle Springs Band of Miwok Indians (“Shingle Springs Tribe”) and the Jamul Indian Village (“Jamul Tribe”) which are adjusted to estimated fair value based upon the current status of the related tribal casino projects.

Regarding the Shingle Springs Tribe, unrealized gains primarily related to the close of third party financing by the Shingle Springs Tribe, which resulted in an increased probability of opening of the casino development project with the Shingle Springs Tribe. The result was an unrealized gain of approximately $7.7 million during the second quarter of 2007.

Regarding the Jamul Tribe, unrealized gains primarily related to the change in management’s estimate of the projected casino opening date, which resulted in an unrealized gain of approximately $1.1 million in the second quarter of 2007.

During the second quarter of 2006, the net unrealized gains of $17.6 million related primarily to the close of third party financing by the Pokagon Band of Potawatomi Indians (“Pokagon Band”), which resulted in an increased probability of opening the casino development project with the Pokagon Band and triggered a retroactive interest rate adjustment on the Pokagon Band loans.

Other income (expense).Other income for the second quarter of 2007 was $5.5 million compared to other expense of $8.8 million for the second quarter of 2006. In conjunction with the close of the Shingle Springs Tribe’s $450 million senior note financing, the Shingle Springs Tribe repaid us for land we had previously purchased on its behalf and the related accrued interest. The repayment resulted in interest income of approximately $4.9 million in the second quarter of 2007.

In the second quarter of 2006, we refinanced substantially all of our long-term debt. As a result, we wrote-off the unamortized portion of the debt discount related to the issuance of common stock warrants ($4.3 million) as well as unamortized closing costs ($2.5 million), resulting in a loss on extinguishment of debt of approximately $6.8 million. In the first quarter of 2006, Lakes issued a warrant to PLKS Holdings, LLC (“PLKS”) in connection with a financing agreement. During the second quarter of 2006, we adjusted the liability related to this warrant to its estimated fair value, which resulted in an increase to interest expense of approximately $1.2 million.

Income taxes.The provision for income taxes was $0.4 million and $3.8 million for the three months ended July 1, 2007 and July 2, 2006, respectively. Our effective income tax rates were 5% and 48% for the second quarter of 2007 and the corresponding period of 2006, respectively. In the current year period, the provision consisted primarily of interest charges on the Louisiana state income tax dispute related to Lakes. The prior year period provision consisted of $3.5 million related to Lakes and $0.3 million related to WPTE and included approximately $2.0 million related to an IRS audit matter. The remainder of the provision for the prior period related primarily to Lakes’ reversal of a capital loss, which was reflected as a deferred tax asset, as a result of a settlement with the Kickapoo Traditional Tribe of Texas.

Minority interest.The minority interest in WPTE’s earnings (loss) was approximately ($1.3) million and $1.0 million for the three months ended July 1, 2007 and July 2, 2006, respectively. WPTE’s net earnings (losses) were ($3.3) million and $2.6 million for the three months ended July 1, 2007 and July 2, 2006, respectively.

Six months ended July 1, 2007 compared to the six months ended July 2, 2006

Revenues.Total revenues decreased by $4.8 million during the six months ended July 1, 2007 compared to the six months ended July 2, 2006. Domestic television license fees decreased $3.6 million in the first six months of 2007 compared to the 2006 period. The decrease was primarily the result of the delivery of 14 episodes of Season Five of the WPT television series in the first six months of 2007 versus 16 episodes of Season Four of the WPT and 10 episodes of the PPT delivered in the 2006 period. Online gaming, sponsorship and international television license revenues also decreased $2.0 million in the first six months of 2007 compared to the 2006 period. The decrease of $0.9 million from online gaming revenue during 2007 was primarily due to lower levels of player activity versus the prior year period. Event hosting and sponsorship revenues decreased $0.7 million due primarily to the timing of airing 10 Season Five episodes in the first six months of 2007 versus the airing of 14 episodes of Season Four of the WPT in the prior year period. International television licensing revenues decreased by $0.3 million as a result of fewer distribution agreements in the international marketplace. Product licensing revenues increased by approximately $0.3 million in the first six months of 2007 compared to the 2006 period. The increase was primarily due to higher interactive gaming revenues from Take Two.

Lakes’ casino management fees were $0.8 million and $0.3 million during the first six months of 2007 and the first six months of 2006, respectively.

Selling, general and administrative expenses.Selling, general and administrative expenses increased approximately $1.7 million in the first six months of 2007 compared to the 2006 period. The increase primarily related to additional headcount and development costs associated with WPTE’s online gaming efforts.

Production costs.Production costs decreased by approximately $1.4 million in the first six months of 2007 compared to the 2006 period. The decrease was primarily a result of a decrease in production costs of $1.2 million as WPTE delivered fewer episodes in the 2007 period versus the 2006 period, as noted above. Additionally, online gaming costs of revenues decreased $0.3 million in the first six months of 2007 versus the 2006 period due to lower revenues. Overall gross margins for WPTE were 57% in the first six months of 2007 compared to 62% in the first six months of 2006. Domestic television licensing margins were 40% in the first six months of 2007 compared to 49% in the same period in 2006. This decrease was principally because of the delivery of 10 episodes of WPTE’s PPT series in 2006 for which the production costs had been expensed in an earlier period. In addition, online gaming contributed to the overall lower margin in the first six months of 2007 as a result of an amendment of the agreement with WagerWorks that was effective in July of 2006, which significantly increased the percentage of revenues paid to it.

Loss on abandonment of online gaming assets.WPTE wrote off approximately $2.3 million in online gaming assets as a result of ceasing development of the stand-alone online gaming platform WPTE was developing based on the CyberArts software.

Impairment losses.Net impairment losses were $0.3 million for the six months ended July 1, 2007 versus none for the six months ended July 2, 2006. We recognized a $0.3 million impairment charge in the first quarter of 2007 related to the Trading Post casino project with the Pawnee Tribal Development Corporation (“Pawnee TDC”). The Pawnee TDC, together with its three wholly-owned subsidiaries, are referred to collectively as the “Pawnee Nation”.

Net realized and unrealized gains on notes receivable.Net realized and unrealized gains on notes receivable were $9.1 million and $33.1 million for the six months ended July 1, 2007 and July 2, 2006, respectively. The net realized and unrealized gains in the first six months of 2007 related primarily to our notes receivable from the Shingle Springs Tribe and the Jamul Tribe which are adjusted to estimated fair value based upon the current status of the related tribal casino projects.

Regarding the Jamul Tribe, unrealized gains primarily related to the change in management’s estimate of the projected casino opening date and the project’s repayment terms, which resulted in unrealized gains of approximately $1.7 million in the first six months of 2007.

During the first six months of 2006, unrealized gains of approximately $25 million related primarily to the increased probability of opening related to the casino development projects with the Pokagon Band and with the Jamul Tribe as well as the increased interest rate charged on the notes with the Jamul Tribe as a result of the development financing and services agreement entered into on March 30, 2006 with the Jamul Tribe, along with a retroactive interest rate adjustment on the Pokagon Band loans. In addition, we recognized gains of approximately $5.4 million related to a note receivable repayment and liability releases received from various venders related to the settlement with the Kickapoo Traditional Tribe of Texas.

Other income (expense).Other income for the first six months of 2007 was $2.4 million compared to other expense of $5.1 million for the first six months of 2006. In conjunction with the close of the Shingle Springs Tribe’s $450 million senior note financing, the Shingle Springs Tribe repaid us for land we had previously purchased on its behalf and the related accrued interest. The repayment resulted in interest income of approximately $4.9 million in the second quarter of 2007. In March 2007, Lakes contracted with a group of investors for their participation in the

loans made by Lakes to the Pokagon Band (and assumed by the Pokagon Gaming Authority) at an agreed upon price of 98% of the face value of the loans as of the settlement date of March 2, 2007. This participation arrangement was accounted for as a sale during 2007. Lakes’ then existing $105 million Credit Agreement was repaid with proceeds from the Pokagon notes receivable participation transaction. This repayment resulted in a loss on extinguishment of debt of approximately $3.8 million during the first quarter of 2007.

During the six months ended July 2, 2006, Lakes recorded an increase in interest expense of approximately $2.8 million related to the adjustment of its warrant liability to its estimated fair value. In February 2007, Lakes registered for resale the shares underlying the warrant issued to PLKS. As a result, the related warrant liability was adjusted to its estimated fair value at that time, which resulted in a decrease in interest expense of approximately $2.3 million for the six months ended July 1, 2007.

In the second quarter of 2006, we refinanced substantially all of our long-term debt. As a result, we wrote-off the unamortized portion of the debt discount related to the issuance of common stock warrants ($4.3 million) as well as unamortized closing costs ($2.5 million), resulting in a loss on extinguishment of debt of approximately $6.8 million. This activity was partially offset by a WPTE gain on sale of securities of $5.7 million related to a sale of 630,000 shares of common stock of PokerTek, Inc.

Income taxes.The provision for income taxes was $0.7 million and $6.5 million for the six months ended July 1, 2007 and July 2, 2006, respectively. Our effective income tax rates were (12%) and 27% for the first six months of 2007 and the corresponding period of 2006, respectively. In the current year period, the provision primarily related to interest charges on the Louisiana state income tax dispute.

In the prior year period, the provision consisted of $4.9 million related to Lakes and $1.6 million related to WPTE. Lakes’ provision included approximately $2.0 million related to an IRS audit matter and $2.0 million related to the reversal of deferred tax assets related to the losses that were reversed during the period related to the Kickapoo Traditional Tribe of Texas. The remainder of Lakes’ provision primarily consisted of interest charges on the Louisiana state income tax dispute.

Minority interest.The minority interest in WPTE’s earnings (loss) was approximately ($2.2) million and $2.3 million for the six months ended July 1, 2007 and July 2, 2006, respectively. WPTE’s net earnings (losses) were ($5.6) million and $6.2 million for the six months ended July 1, 2007 and July 2, 2006, respectively.

Liquidity and Capital Resources

At July 1, 2007, our Unaudited Condensed Consolidated Balance Sheet included cash and cash equivalents and short-term investment balances of $75.2 million, comprised of Lakes cash of $17.1 million, Lakes short-term investments of $23.6 million, WPTE cash of $1.5 million and WPTE short-term investments of $33.0 million. WPTE cash and short-term investments will not be used in Lakes’ business.

Pursuant to the terms and conditions of a financing agreement dated as of February 15, 2006 among Lakes, PLKS Funding, LLC and various subsidiaries of Lakes, PLKS was granted a warrant to purchase 1,250,000 common shares of Lakes at $7.50 per share (“Warrant”). During April 2007, PLKS exercised and purchased 102,500 shares underlying the Warrant at $7.50 per share and paid Lakes $0.8 million.

On May 4, 2007, as described in “Results of Operations”, Lakes and PLKS reduced the exercise price of the Warrant from $7.50 per share to $6.50 per share for the remaining 1,147,500 shares underlying the Warrant. In consideration for the reduced exercise price, PLKS agreed to exercise and purchase the remaining 1,147,500 shares underlying the Warrant for an aggregate exercise price of $7.5 million, which was paid to Lakes on May 7, 2007.

On June 28, 2007, Lakes was repaid approximately $17.2 million by the Shingle Springs Tribe for land Lakes had previously purchased on its behalf, certain construction advances, and accrued interest. This payment was made concurrently with the close of the Shingle Springs Tribe’s $450 million senior note financing of their project.

As a result of the recent cash receipts from PLKS and the Shingle Springs Tribe, we now have greater flexibility to meet additional capital needs.

Our agreements with our tribal partners require that we provide certain financing 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.

We believe that our casino development projects currently in progress and included in the table below 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 we would incur substantial or complete losses on our notes receivable from Indian tribes and related intangible assets associated with the acquisition of the management, development, consulting and financing contracts. In addition, if our current casino development projects are not completed or, upon completion, fail to successfully compete in the highly competitive market for gaming activities, we may lack the funds to compete for and develop future gaming or other business opportunities and our business could be adversely affected to the extent that we may be forced to cease our operations entirely.

Following is a table summarizing remaining contractual obligations as of July 1, 2007 (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) Jamul Tribe(2) $ — $ — $ — $ — $ —
Shingle Springs Tribe(3) — — — — —
Pokagon Band(4) — — — — —
Iowa Tribe of Oklahoma (“Iowa Tribe”) — Ioway Project(5) — — — — —
Lakes’ operating lease(6) 0.7 0.7 — — —
WPTE operating leases(7) 3.5 0.8 1.8 0.9 —
WPTE purchase obligations(8) 2.9 1.2 1.4 0.3 —

$ 7.1 $ 2.7 $ 3.2 $ 1.2 $ —


(1)		We 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 (see (2), (3) and (5) below). Any guarantees by us or similar off-balance sheet liabilities will increase our 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 1, 2007.

(2)		Effective March 30, 2006, we entered into a development financing and services agreement with the Jamul Tribe. As part of the agreement, we will use our best efforts to obtain financing from which advances will be made to the Jamul Tribe of up to $350 million to pay for the design and construction of a casino project. It has been determined that the proposed gaming facility will be reduced in size and scope. The current plan is for the gaming facility to decrease in size and become a solely class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe will be modified to reflect the new economics of the revised casino plan but will not be subject to approval by the State of California or the NIGC.

(3)		The development agreement between Lakes and the Shingle Springs Tribe, as amended, provides for pre-construction advances Lakes may make to the Shingle Springs Tribe in the form of a transition loan and land loan up to a maximum combined amount of $75.0 million, but it does not contractually require us to make such advances.

(4)		We will be obligated to pay an amount to an unrelated third party once the Pokagon Casino is open and we are the manager of the casino. The amount is payable quarterly for five years and is only payable if we are the manager and the casino is open and operational. The payment is part of a settlement and release agreement associated with our obtaining the management contract with the Pokagon Band. The maximum liability over the five-year period is approximately $11 million. We will also be obligated to pay approximately $3.3 million to a different third party on behalf of the Pokagon Band in accordance with the management contract which is payable once the casino opens over 24 months.

(5)		We have agreed to make advances to the Iowa Tribe subject to a project budget to be agreed upon by us and the Iowa Tribe and certain other conditions. The development loan will be for preliminary development costs under the Ioway project budget. We have also agreed to use reasonable efforts to assist the Iowa Tribe in obtaining permanent financing for any projects developed under the Iowa consulting agreement.

(6)		We lease an airplane under a non-cancelable operating lease that expires on May 1, 2008.


(7)		WPTE operating lease obligations include rent payments for WPTE corporate offices pursuant to two lease agreements. For the first lease, monthly lease payments began at approximately $38,000 and escalate to approximately $45,000 over the six-year lease term. For the second lease, monthly payments began at approximately $28,000 and escalate up to approximately $33,000 over the five year lease term. The lease obligations presented include rent payments for WPTE’s Israel office facility in Nahariya. The amounts set forth in the table above include monthly lease payments through June 2011.

(8)		WPTE purchase obligations include minimum guarantees to CryptoLogic and operational expenses associated with WPTE’s online gaming division, as well as a $0.5 million payment to the China Leisure Sports Administrative Center (“CLSAC”) for exclusive marketing and sponsorship opportunities. Additionally, included in purchase obligations are open purchase orders of approximately $0.2 million as of July 1, 2007. These liabilities are included in Other Accrued Expenses within the Unaudited Condensed Consolidated Balance Sheets.

We have incurred cumulative development and land development costs of approximately $6.4 million and $2.9 million, respectively, relating to the development of a Company-owned non-Indian casino in Vicksburg, Mississippi. These costs are included in property and equipment as construction in progress and land, respectively. We have received various regulatory approvals to develop our own casino near Vicksburg, Mississippi. Lakes does not expect to pursue further development of this project until 2008.

Our major use of cash over the past three years has been pre-construction financing provided to our tribal partners and on-going corporate costs. We may be required to pay taxes up to approximately $12 million plus interest and fees over the next twelve months related to two tax matters.

Our cash requirements do not include construction-related costs that will be incurred when projects begin construction. The construction of our casino projects will depend on the ability of the tribes and/or Lakes 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 our results of operations and financial condition. In order to assist the tribes, we may be required to guarantee the tribes’ debt financing or otherwise provide support for the tribes’ obligations. Guarantees by us, if any, will increase our potential exposure in the event of a default by any of these tribes.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited condensed consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, long-term assets related to Indian casino projects, deferred television costs, investments, litigation costs, income taxes, share-based compensation and derivative financial instruments. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements.

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 ~~the World Poker Tour domestic~~WPTE television series ~~to TRV~~ is recognized as earned under the following criteria established by the American Institute of Certified Public Accountants Statement of Position ~~("SOP")~~(SOP) No. 00-2,Accounting by Producers or Distributors of ~~Films: - - Persuasive evidence of an arrangement exists - -~~ Films(SOP 00-2):

	•		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 ~~arrangement, has been delivered or is available for immediate and unconditional delivery - - The~~TRV Agreements, WPTE recognizes domestic television license ~~period has begun and~~revenues upon the customer can begin its exploitation, exhibition or sale - - The seller's price 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~~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 ~~terms of the contract. INTERNATIONAL TELEVISION: Revenue for international distribution of the television series is recognized as earned under the criteria of SOP 00-2, which is noted above.~~distributor has received payment. Additionally, WPTE presents international distribution license fee revenues net of the ~~distributor's~~distributor’s fees, as the distributor is the primary ~~obligator~~obligor in the transaction with the ultimate ~~customer. PRODUCT LICENSING:~~customer pursuant to Emerging Issues Task Force (“EITF”) 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent(“EITF 99-19”).

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~~WPTE presents product licensing fees gross of licensing commissions, which are recorded as selling and administrative expenses because 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 service provider, for online poker and casino activity during the previous month. WPTE expects to receive similar statements from CryptoLogic, WPTE’s current online gaming provider during the third quarter of 2007. In accordance with EITF 99-19, WPTE presents online gaming revenues gross of the service provider costs, (including the service provider’s management fee, ~~revenues~~royalties, credit card processing and chargebacks that are recorded as cost of revenues) as 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. WPTE includes certain promotional expenses related to free bets and deposit bonuses along with customer chargebacks as deductions of revenue. All other promotional expenses are generally recorded as sales and marketing expenses.

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. ~~SPONSORSHIP:~~ Sponsorship revenues are recognized as the episodes that feature the sponsor are aired. ~~DEFERRED REVENUE~~ Licensing advances and guaranteed payments collected, but not yet earned, by WPTE, as well as casino host ~~fee~~fees 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 million 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 REPURCHASE costs:WPTE violated certain securities laws in connection with its initial public offering by sending out written e-mail 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 requirementsaccounts for a prospectus. These violations could require WPTE to repurchase shares sold in the offering to direct recipients of the e-mail 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 subject to such repurchase rights, and these shares are classified as common shares subject to repurchase. It is possible that indirect recipients of the written e-mail communications would assert that they have shares subject to repurchase rights with respect to shares purchased in the offering. WPTE believes that the repurchase rights do not extend to indirect recipients and would contest any such assertion vigorously; therefore, no such shares have been recorded in the common shares subject to repurchase. LAND HELD UNDER CONTRACT FOR SALE On December 28, 2001, the Company entered into agreements to sell the Polo Plaza shopping center property and the rights 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 $23.8 million and $7.5 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 the Polo Plaza transaction was recorded as a sale. As of October 3, 2004, the Company is owed $8 million (excluding interest) related to 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 million of the purchase price if the secured debt related 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 the Company can require to be repurchased anytime after December 24, 2006 for the remaining $4 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 the subordinated membership interest. 8 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As of October 3, 2004, 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 certain 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 by 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 Companydeferred television costs 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)~~
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- OCT. 3, 2004 SEPT. 28, 2003 OCT. 3, 2004 SEPT. 28, 2003 ------------ -------------- ------------ -------------- Net earnings (loss): As reported $ (1,718) $ (1,302) $ (9,636) $ (1,840) Add: Unit-based compensation expense 276 8 545 35 included in reported net earnings (loss) Less: Total stock-based compensation (640) (421) (1,627) (1,235) expense determined under the fair value method, net of related tax effects Pro forma (2,082) (1,715) (10,718) (3,040) Net earnings (loss) per share: As reported -- Basic $ (0.08) $ (0.06) $ (0.44) $ (0.09) Pro forma -- Basic (0.09) (0.08) (0.49) (0.14) As reported -- Diluted (0.08) (0.06) (0.44) (0.09) Pro forma -- Diluted (0.09) (0.08) (0.49) (0.14)
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):
~~Oct. 3, 2004 December 28, 2003 ------------ -----------------~~ Properties under development: Notes from the Pokagon Band of Potawatomi Indians with variable interest rates (not to exceed 10%) (5.75% at October 3, 2004), receivable in 60 monthly installments subsequent to commencement date $ 44,115 $ 41,729 Notes from the Shingle Springs Band of Miwok Indians with variable interest rates (6.75% at October 3, 2004), receivable in varying monthly installments based on contract terms subsequent to commencement date 31,687 24,428 Notes from Jamul Indian Village with variable interest rates (6.75% at October 3, 2004), receivable in 60 monthly installments subsequent to commencement date 13,958 12,336 Notes from the Nipmuc Nation with variable interest rates - 4,634 Other 1,179 1,555 --------- --------- Total notes receivable $ 90,939 $ 84,682 ========= =========
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 of the BIA's denial 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 litigation 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.
Casino Development Advances/Commitments ---------------------------------------------- (in millions) Remaining Pre-construction Land Held for Maximum Advances Development Commitment as of 10/3/04 as of 10/3/04 as of 10/3/04 ------------- ------------- ------------- Jamul Indian Village $14.0 $ 6.6 $ 9.4 Shingle Springs Band of Miwok Indians 31.7 7.4 0.9 Pokagon Band of Potawatomi Indians 44.1 - 24.4
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. 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 as of October 3, 2004, expiring April 30, 2005, are as follows (in thousands): Operating Leases ---------------- 2004 $150 2005 200 $350 INDEMNIFICATION AGREEMENT 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 Caesars Entertainment, Inc, the parent Company of Grand. 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):
Industry Segments Real Estate WPT Corporate & Total Development Enterprises, Inc. Eliminations Consolidated ----------- ----------------- ------------ ------------ Total Assets as of October 3, 2004 $ 135.9 $ 37.0 $ 26.8 $ 199.7 Total Assets as of December 28, 2003 126.1 2.5 41.5 170.1 For the Three Months Ended/ as of October 3, 2004 Revenue $ - $ 3.0 $ - $ 3.0 Net earnings (loss) - (0.5) (1.2) (1.7) Depreciation expense - - 0.2 0.2 For the Three Months Ended/ as of September 28, 2003 Revenue $ - $ 0.4 $ - $ 0.4 Net earnings (loss) - (0.4) (0.9) (1.3) Depreciation expense - - 0.1 0.1
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 aSOP 00-2. Deferred 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 of 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.~~relationships, because WPTE has insufficient operating history to enable such anticipation. 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~~TRV of the completed episode. ~~WPTE~~WPTE’s management currently estimates that 80% of the approximately ~~95% and 100% of~~$1.0 million in capitalized deferred television costs ~~as of October 3, 2004~~at July 1, 2007 are expected to be expensed in connection with episode deliveries by the end of fiscal ~~2004~~2007.

Share-based compensation expense:We measure share-based compensation expense pursuant to the Financial Accounting Standards Board (“FASB”) SFAS No. 123(R), which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Unaudited Condensed Consolidated Statement of Earnings (Loss) 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,Comprehensive Earnings (Loss).

We use the ~~Company's~~Black-Scholes option pricing method to establish fair value of options. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award.

Income taxes:We include interest expense relative to uncertain income tax matters in our income tax provision. In accordance with SFAS No. 109,Accounting for Income Taxeswe evaluated the ability to utilize deferred tax assets arising from net operating loss carryforwards, and other ordinary items and determined that a valuation allowance was appropriate at July 1, 2007 and December 31, 2006. We evaluated all evidence and determined net losses (excluding net realized and unrealized gains and losses on notes ~~receivable~~receivable) generated over the past five years outweighed the current positive evidence that we believe exists surrounding our ability to generate significant income from our long-term assets related to Indian ~~Tribes are generally~~casino projects. Therefore, we have recorded a 100% valuation allowance against these items at July 1, 2007, and December 31, 2006.

We have recorded deferred tax assets related to capital losses. The realization of these benefits is dependent on the generation of capital gains during the applicable carryforward periods. We believe we will have sufficient capital gains in the foreseeable future to utilize these benefits due to significant appreciation in our investment in WPTE, which has a minimal cost basis and could be sold at a substantial gain. We own approximately 12.5 million shares of WPTE common stock valued at approximately $51 million as of July 1, 2007 based upon the closing stock price as reported by NASDAQ on June 29, 2007 of $4.09.

WPTE’s current growth plans include international expansion primarily related to WPTE’s online gaming business, expansion of television and product licensing businesses, and entry into new branded gaming businesses. Although WPTE anticipates that all potential strategies will be accretive to earnings, WPTE is aware of the risks involved with an aggressive growth strategy. Therefore, based on WPTE’s limited and volatile earnings history combined with WPTE’s cautious optimism, WPTE has determined that a valuation allowance is necessary to the extent that management currently believes it is more likely than not that tax assets will not be recovered in the foreseeable future.

See Note 7 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report Form 10-Q above, for a discussion of the ~~pre-construction development~~effects of ~~gaming properties~~adopting FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxesin the first quarter of fiscal 2007.

Accounting for long-term assets related to ~~be managed by the Company. The Company has~~Indian casino projects:

Notes receivable.We have formal procedures governing ~~its~~our evaluation of opportunities for potential development projects ~~which it follows~~that we follow before entering into agreements to provide financial support for the development of these Indian owned casino projects. We determine whether there is probable future economic benefit prior to ~~those projects.~~recording any asset related to the Indian casino project. We initially evaluate the following 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?

	•		An evaluation by 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 us, including whether the project would be a financing, development and/or management opportunity.

We account for our notes receivable from and service contracts with the tribes as separate assets. The ~~repayment~~estimated fair value of the advances made to the tribes are accounted for as in-substance structured notes in accordance with the guidance contained in Emerging Issues Task Force Consensus No. 96-12,Recognition of Interest Income and Balance Sheet Classification of Structured Notes(“EITF No. 96-12”). Under their terms, the notes do not become due and payable unless and until the projects are ~~specific~~completed and operational. However, in the event our development activity is terminated prior to ~~each tribe and are largely dependent upon~~completion, we generally retain the ~~operating performance~~right to collect in the event of ~~each gaming property. However, repayments~~completion by another developer. Because the stated rate of the notes receivable ~~are required~~alone is not commensurate with the risk inherent in these projects (at least prior to ~~be made only if distributable profits are available from~~commencement of operations), the ~~operation~~estimated fair value of the notes receivable is generally less than the amount advanced. Costs incurred related ~~casinos. Repayments~~to Indian casino projects are ~~also subject~~not considered advanced to ~~certain distribution priorities specified~~the tribe until actually paid by us. 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.

Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current estimated fair value at each balance sheet date using then current assumptions including typical market discount rates, and expected repayment terms as may be affected by estimated future interest rates and opening dates, with the latter affected by changes in project-specific circumstances such as ongoing litigation, the ~~management contracts. In addition, repayment~~status of regulatory approvals and other factors previously noted. The notes receivable are not adjusted to a fair value estimate that exceeds the face value of the note plus accrued interest, if any. Due to uncertainties surrounding the projects, no interest income is recognized during the development period, but changes in estimated fair value of the notes receivable still held as of the balance sheet date are recorded as unrealized gains or losses in our Unaudited Condensed Statement of Earnings (Loss) and Comprehensive Earnings (Loss).

Upon opening of the casino, any difference between the then estimated fair value of the notes receivable and the ~~manager's fees~~amount contractually due under the ~~management contracts are subordinated to certain other financial obligations~~notes will be amortized into income using the effective interest method over the remaining term of the ~~respective tribes. On~~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 ~~monthly basis, Company management evaluates the collectibility of the Company's receivables, including notes receivable~~Loan.

Intangible assets related to Indian casino projects.Intangible assets related to the ~~Indian-owned casino~~acquisition of the management, development, ~~projects.~~consulting or financing contracts are accounted for using the guidance in SFAS No. 142Goodwill and Other Intangible Assets(“SFAS No. 142”). Pursuant to that guidance, the assets are periodically evaluated for impairment based on the estimated cash flows from the contract on an undiscounted basis. 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~~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. In accordance with SFAS No. 142, we will amortize the intangible assets related to the acquisition of the management, development, consulting or financing 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 our 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, we can sell it. We evaluate these assets for impairment in combination with intangible assets related to acquisition of management, development, consulting or financing 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. When paid, these amounts will be allocated between notes receivable and intangible assets related to the acquisition of management, development, consulting or financing 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. Also included in this category are receivables from related parties that are directly related to the development and opening of Lakes’ Indian casino projects.

In addition, we incur 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.

As of July 1, 2007 and December 31, 2006, the Unaudited Condensed Consolidated Balance Sheets include long-term assets related to Indian casino projects of $149.3 million and $243.8 million, respectively. The amounts are as follows by project (in thousands):

July 1, 2007 (unaudited)
Shingle
Pokagon Springs Jamul
Band Tribe Tribe Other Total
Notes receivable, at estimated fair value $ — $ 50,417 $ 24,809 $ 3,340 $ 78,566
Intangible assets related to Indian casino projects 23,573 21,674 11,116 986 57,349
Land held for development — — 6,751 1,370 8,121
Other 60 767 1,154 3,263 5,244

$ 23,633 $ 72,858 $ 43,830 $ 8,959 $ 149,280

December 31, 2006
Shingle
Pokagon Springs Jamul
Band Tribe Tribe Other Total
Notes receivable, at estimated fair value $ 100,544 $ 40,912 $ 20,754 $ 2,098 $ 164,308
Intangible assets related to Indian casino projects 23,573 20,387 9,760 559 54,279
Land held for development — 8,739 6,710 1,341 16,790
Other 60 2,041 2,207 4,142 8,450

$ 124,177 $ 72,079 $ 39,431 $ 8,140 $ 243,827

The key assumptions and criteria used in the determination of the estimated 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 our 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 is 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 value the notes receivable at estimated fair value (dollars in thousands):

Shingle Springs Tribe:

As of July 1, 2007 (unaudited) As of December 31, 2006
Face value of note (principal and interest) $63,125
($46,368 principal and
$16,757 interest) $55,942
($42,310 principal and
$13,632 interest)
Estimated months until casino opens (weighted-average of three scenarios) 18 months 28 months
Projected interest rate until casino opens 10.41% 9.98%
Projected interest rate during the loan repayment term 10.26% 9.76%
Discount rate 15% 15%
Repayment terms of note* 84 months —
Projected repayment terms of note** — 24 months
Probability rate of casino opening (weighting of four scenarios) 95% 85%


*		Note is payable in even monthly installments over the course of the management agreement subsequent to the casino opening.

**		Note was previously payable in varying monthly installments based on contract terms subsequent to the casino opening.

See discussion included below under ~~contract for sale~~“Description of each Indian casino project and evaluation of critical milestones — Shingle Springs.”

Jamul Tribe:

As of July 1, 2007 (unaudited) As of December 31, 2006
Face value of note (principal and interest) $38,527
($28,230 principa land
$10,297 interest) $32,952
($24,509 principal and
$8,443 interest)
Estimated months until casino opens (weighted-average of three scenarios) 29 months 29 months
Projected interest rate until casino opens 10.41% 9.98%
Projected interest rate during the loan repayment term Discount rate 10.38%
15.75% 9.76%
15.75%
Projected repayment terms of note 120 months 120 months
Probability rate of casino opening (weighting of four scenarios) 85% 85%

See discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Jamul Tribe”.

The following table represents a sensitivity analysis prepared by us of the notes receivable from the Jamul Tribe 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 (probability will not be adjusted in excess of 100%):

July 1, 2007 (unaudited)

Estimated Fair Sensitivity Analysis
Value Notes 5% Less One Year 5% Increased One Year
Receivable Probable Delay Both Probability Sooner Both
(In thousands)
Shingle Springs $ 50,417 $ 47,752 $ 48,621 $ 46,051 $ 53,082 $ 52,279 $ 55,041
Jamul $ 24,809 $ 23,347 $ 23,772 $ 22,370 $ 26,271 $ 25,891 $ 27,417

$ 75,226 $ 71,099 $ 72,393 $ 68,421 $ 79,353 $ 78,170 $ 82,458

December 31, 2006

Estimated Fair Sensitivity Analysis
Value Notes 5% Less One Year 5% Increased One Year
Receivable Probable Delay Both Probability Sooner Both
(In thousands)
Shingle Springs $ 40,912 $ 38,469 $ 39,269 $ 36,923 $ 43,355 $ 42,623 $ 45,166
Jamul $ 20,754 $ 19,548 $ 19,815 $ 18,664 $ 21,960 $ 21,738 $ 23,002

$ 61,666 $ 58,017 $ 59,084 $ 55,587 $ 65,315 $ 64,361 $ 68,168

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 was 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 table 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 1, 2007 and December 31, 2006. The notes receivable are carried on the Unaudited Condensed Consolidated Balance Sheets at July 1, 2007 and December 31, 2006 at their estimated fair values of $78.4 million and $63.8 million, respectively.

Balance at July 1, 2007 (unaudited)
Shingle
Advances Principal Balance Springs Jamul Other Total
(In thousands)
Note receivable, pre-construction(a), (c) $ 46,368 $ 27,280 $ 2,796 $ 76,444
Note receivable, land(b),(c) — 950 973 1,923

$ 46,368 $ 28,230 $ 3,769 $ 78,367

Balance at December 31, 2006
Shingle
Advances Principal Balance Springs Jamul Other Total
(In thousands)
Note receivable, pre-construction(a), (c) $ 42,310 $ 23,559 $ 1,386 $ 67,255
Note receivable, land(b),(c) — 950 756 1,706

$ 42,310 $ 24,509 $ 2,142 $ 68,961


(a)		We fund 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 we, in order to obtain the development agreement and management contract, agree to advance a monthly amount used by the tribe for a variety of tribal expenses.

(b)		We purchased land to be used and transferred to the tribe in connection with the casino project.

(c)		Amounts listed under the other column represents amounts advanced under the agreements with the Iowa Tribe.

The notes receivable pre-construction advances consist of the following principal amounts advanced to the Shingle Springs Tribe and Jamul Tribe at July 1, 2007 and December 31, 2006 (in thousands):

July 1, December 31,
Shingle Springs Tribe 2007 2006
(unaudited)
Monthly stipend $ 8,590 $ 7,690
Construction 1,922 1,657
Legal 14,193 13,790
Environmental 1,739 1,680
Design 11,230 9,554
Gaming license 3,726 3,626
Lobbyist 4,968 4,313

$ 46,368 $ 42,310

July 1, December 31,
Jamul Tribe 2007 2006
(unaudited)
Monthly stipend $ 4,760 $ 4,451
Construction 983 649
Legal 4,084 3,675
Environmental 2,250 1,985
Design 11,813 9,578
Gaming license 710 641
Lobbyist 2,680 2,580

$ 27,280 $ 23,559

Evaluation of impairment related to our long-term assets related to Indian casino projects, excluding the notes receivable, which are valued at fair value:

Management periodically evaluates ~~whether events~~the intangible assets, land held for development and ~~circumstances have occurred that may affect the recoverability~~other costs associated with each of the ~~net book value of these assets. If such events or circumstances indicate that~~projects for impairment. The assets are periodically evaluated for impairment based on 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~~estimated undiscounted cash flows ~~does not exceed~~from the management contract on an undiscounted basis. In the event the carrying value of the ~~asset,~~intangible assets, in combination with the ~~Company will recognize~~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 ~~loss.~~ 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. We (as predecessor to 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 the 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 our Indian casinos will be located and are updated quarterly based on evolving events and market conditions. In addition, we have many years of casino operations experience, which provides a basis for our revenue expectations. The projections were prepared by us not for purposes of the valuation at hand but rather for purposes of our and the tribes’ business planning.

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

Pokagon Band

April 1, 2007 December 31, 2006
No. of Class III slot machines 3,000 3,000
No. of Table games 90 90
No. of Poker tables 20 20
Win/Class III slot machine/day — 1st year $ 282 $ 282
Win/Table game/day — 1st year $ 1,481 $ 1,481
Win/Poker game/day — 1st year $ 1,025 $ 1,025
Expected increase in management fee cash flows Year 2 — 26.5% Year 2 — 26.5%
Year 3 — 4.3% Year 3 — 4.3%
Year 4 — 3.8% Year 4 — 3.8%
Year 5 — 4.1% Year 5 — 4.1%

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 $282 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

We and the Jamul Tribe have consulted with third party advisors as to the architectural feasibility of a plan to build a casino with related amenities such as parking on the six acres of reservation land held by the Jamul Tribe and have concluded that such a project could be successfully built assuming adequate financing can be obtained. As of July 1, 2007, we have included assumptions within our financial model that reflect current discussions with the Jamul Tribe to reduce the size of the planned casino facility as a result of comments received from various state agencies including representatives from the California Governor’s office related to the Jamul Tribe’s project. The gaming facility is currently planned to be a class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but will not be subject to approval by the State of California or the NIGC.

July 1, December 31,
2007 2006
(unaudited)
No. of Class II electronic gaming devices 1,000 1,000
No. of Table games 20 20
No. of Poker tables 5 5
Win/Class II electronic gaming devices/day — 1st year $ 250 $ 250
Win/Table game/day — 1st year $ 900 $ 900
Win/Poker table/day — 1st year $ 650 $ 650

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 a successful operation can be built.

Shingle Springs Tribe

July 1, 2007 December 31, 2006
(unaudited)
No. of Class III slot machines 349 349
No. of Class II electronic gaming devices 1,651 1,651
No. of Table games 100 100
Win/Class II & III electronic gaming devices/slot machine/day — 1st year $ 350 $ 350
Win/Table game/day — 1st year $ 1,275 $ 1,275
Expected increase (decrease) in management fee cash flows Year 2 — 17.6% Year 2 — 8.0%
Year 3 — 10.5% Year 3 — 7.5%
Year 4 — 7.9% Year 4 — 7.1%
Year 5 — 8.8% Year 5 — 6.4%
Year 6 — (4.0)% Year 6 — (12.3)%
(management fees were (management fees were
reduced in year six) reduced in year six)
Year 7 — 5.0% Year 7 — 11.7%

In the Shingle Springs Sacramento market, there is one other Indian casino that is managed by another public company. Management considered the available information related to this other Indian casino when projecting management fees from the Shingle Springs Casino project. 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 1, 2007 and December 31, 2006, we are not aware of any impairment indicators related to the recorded long-term assets related to the Shingle Springs or Jamul projects.

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

Shingle Springs Tribe

Business arrangement.Plans for the Shingle Springs Casino project include an approximately 278,000 square-foot facility (including approximately 88,000 square feet of gaming 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 project is currently planned to feature approximately 2,000 gaming devices and approximately 100 table games, a high stakes gaming room, as well as restaurants, enclosed parking and other facilities.

We acquired our initial interest in the development and management contracts for the Shingle Springs Casino project from Kean Argovitz Resorts- Shingle Springs, LLC (“KAR — Shingle Springs”) in 1999 and formed a joint venture, in which the contracts were held, between us and KAR — Shingle Springs. On January 30, 2003, we purchased the remaining KAR — Shingle Springs’ partnership interest in the joint venture. In connection with the purchase transaction, we 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, he may elect to serve as a consultant to us 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 us from the Shingle Springs Casino project 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 our subsidiary and then be entitled to obtain a 15% equity interest in our entity that holds the rights to the management contract with the Shingle Springs Casino project. If he is not found suitable or does not elect to purchase equity interests in our 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, as amended, provides for us 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 combined amount of $75.0 million. On June 28, 2007 an affiliate of the Shingle Springs Tribe closed on a $450 million senior note financing to fund the Foothill Oaks Casino project.

The amended development agreement provides for us to 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 our management services, we 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 our management fee is subordinated to the $450 million senior note financing of the Shingle Springs Tribe and a 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.

Our evaluation of the critical milestones.The following ~~discussion~~table outlines the status of each of the following primary milestones necessary to complete the Shingle Springs Casino project as of the end of the second quarter of fiscal 2007, fiscal 2006 and ~~analysis should be read in conjunction~~fiscal 2005. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones.


Critical Milestone	July 1, 2007	December 31, 2006	January 1, 2006
Federal recognition of the tribe	Yes	Yes	Yes

Possession of usable land corresponding with needs based on Lakes’ 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	Yes	Yes	N/A

Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan	Yes	Yes	Yes

NIGC approval of management contract in current and desired form	Yes	Yes — approval received in 2004.	Yes — approval received in 2004.

Resolution of all litigation and legal obstacles	No — See below.	No — See below.	No, Federal and state litigation regarding approval of highway interchange, environmental issues and other issues. — See below.

Financing for construction	Yes. On June 28, 2007 an affiliate of the Shingle Springs Tribe closed on a $450 million senior note financing to fund the Foothill Oaks Casino project in Shingle Springs, California.	No, however the Shingle Springs Tribe has engaged investment banks to assist with obtaining financing.	No, however the Shingle Springs 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.

Our evaluation and conclusion regarding the above critical milestones and progress:The Shingle Springs Tribe is a federally recognized tribe, has a compact with the ~~condensed consolidated financial statements~~State of California and ~~notes thereto~~owns approximately 160 acres of reservation land on which the casino can be built. During July 2004, we received notification from the NIGC that the development and ~~management's~~management contract between the Shingle Springs Tribe and us, allowing us to manage a Class II and Class III casino, was approved by the NIGC.

The Shingle Springs Casino project is currently planned to open with 349 Class III slot machines and approximately 1,650 Class II electronic gaming devices. Under the form of tribal-state compact first signed by the State of California with the Shingle Springs Tribe in 1999, the Shingle Springs Tribe is allowed to operate up to 350 Class III slot machines without licenses from the state. This form of compact allows California tribes to operate additional Class II electronic gaming devices. 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 II electronic gaming devices 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, the Shingle Springs Tribe has not amended its tribal-state compact. If the compact is not renegotiated and amended, the tribe could operate under its existing compact which allows for up to 350 Class III gaming devices and an unlimited number of Class II electronic gaming devices. Management believes that this number of gaming devices is adequate to equip the planned development, and therefore, the availability of additional slot licenses is not an issue that could prevent the project from progressing.

El Dorado County and Voices for Rural Living (“VRL”) commenced litigation in 2003 against the California regulatory agencies attempting to block the approval of the interchange. The litigation has resulted in various decisions in favor of the California regulatory agencies to proceed with the interchange and subsequent appeals by El Dorado County and VRL of those decisions over the next several years. For a more complete discussion ~~and analysis included in~~of the ~~Company's~~history of this litigation see Item 3 of our Annual Report on Form 10-K for the fiscal 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 effective31, 2006.

A construction permit for the ~~third quarter of 2005. Upon issuance of a final standard, the Company~~U.S. Highway 50 interchange, which 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 relatedprovide direct access to the ~~World Poker Tour series. WPTE receives fixed license payments from TRV subject to satisfaction of production milestones~~Shingle Springs Rancheria on which the Shingle Springs Casino project will be built, was issued on April 30, 2007 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~~construction began on the U.S. Highway 50 interchange on May 7, 2007.

Due to the ~~license fees resulting from~~close of the ~~season one episodes delivered to TRV~~$450 million senior note financing and construction progress made on the U.S. Highway 50 interchange, construction of the Foothill Oaks casino project commenced during ~~2003. In April 2004, TRV exercised its option to broadcast season three which is~~June of fiscal 2007 and also increased the ~~first~~estimated probability 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~~opening 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~~project from 85% 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~~95% in the second quarter of ~~2004 following~~2007.

As a result of achieving the ~~Nipmuc Nation being denied recognition~~critical milestones as described above, the casino is planned to open in November of 2008.

Jamul Tribe

Business arrangement.The Jamul Tribe has an ~~Indian Tribe~~approximate six-acre reservation on which the casino project is currently planned to be built. The reservation is located near San Diego, California.

Lakes acquired its initial interest in the development financing and ~~sovereign government within~~services agreement contracts for the ~~meaning of federal law by~~Jamul casino from Kean Argovitz Resorts-Jamul, LLC (“KAR — Jamul”) in 1999 and formed a joint venture in which the ~~Bureau of Indian Affairs. The Company believes that this impairment does not represent~~contracts were held between Lakes and KAR — Jamul. This development agreement and a ~~trend as~~management contract have been submitted to the ~~Company's~~NIGC for approval. On January 30, 2003, Lakes purchased the remaining ~~projects are with tribes that have received recognition by~~KAR — Jamul’s partnership interest in 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. injoint venture. 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 apurchase transaction, Lakes entered into 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 associatedagreements with the ~~sale~~two individual owners of ~~property in Las Vegas, Nevada. WPTE production costs increased from $2.4 million for~~KAR — Jamul (Mr. Kean and Mr. Argovitz). The term of 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. WPTEcontract is expected to ~~recognize approximately $3.1 million of this revenue~~be five or seven years. Under the current agreement with Mr. Kean, Mr. Kean may elect to serve as a consultant to Lakes 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 distributionterm 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 investmentscasino agreement if he is found suitable by relevant gaming regulatory authorities. In such event, Mr. Kean 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~~entitled to receive annual consulting fees equal to 20% of the management ~~contract~~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 agreement (but not during any renewal term of such agreement).

Under the current 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 20% equity interest in the Lakes entity that holds the rights to the development financing and services agreement with the ~~Coushatta~~Jamul Tribe. If he is not found 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 agreement (but not during any renewal term of such agreement).

Effective March 30, 2006, Lakes entered into a development financing and services agreement with the Jamul Tribe to assist the Jamul Tribe in ~~January 2002. In 2003,~~developing the ~~operating revenues derived from WPTE were offset almost entirely by production costs. In~~Jamul Casino which the ~~first nine months~~Jamul Tribe will manage. As part 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 thatcurrent agreement, Lakes will use its best efforts to obtain financing from which advances will be ~~able to realize value from these holdings equal~~made 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 PokagonJamul 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):
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 $ 9.4 $ - $ - $ - $ - Shingle Springs 0.9 - - - - Pokagon (2) 24.4 - - - - Operating Leases (4) 0.4 0.4 - - - WPTE Employee Obligation(5) 1.8 1.0 0.8 - - ------ ------ ------ ------ ------ $ 36.9 $ 1.4 $ 0.8 $ - $ - ====== ====== ====== ====== ======
(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~~$350 million to pay for ~~this project. However, there~~the design and construction of the Jamul Casino. There can be no assurance that ~~third-party~~third party financing will be available with acceptable terms, and if Lakes is unable to obtain the appropriate amount of financing for this project, the project may not be completed as planned.

Under the current development financing and services agreement, Lakes is entitled to receive a flat fee of $15 million for its development design services, and a flat fee of $15 million for its construction oversight services, payable evenly over the first five years after the opening date of the Jamul Casino. In connection with Lakes’ financing of the Jamul Casino, the Jamul Tribe is required to pay interest over a ten-year period on sums advanced by Lakes equal to the rate charged to Lakes for obtaining the necessary funds plus 5%. Amounts previously advanced by Lakes to the Jamul Tribe in connection with the Jamul Tribe’s proposed casino resort are included in the development financing and services agreement financing amount.

Under the current compact that the Jamul Tribe has with the State of California (the “State”) and based upon requirements in other compacts approved by the State in 2004, the Jamul Tribe completed a Tribal Environmental Impact Statement/Report that was approved by the Jamul Tribe’s General Council with a record of decision issued by the Jamul Tribe on December 16, 2006. Since that time, the Jamul Tribe has received comments from various state agencies including the representative from the California Governor’s office. The Jamul Tribe and the State met on several occasions in an attempt to address the State’s comments related to compact requirements. Based on the most recent meeting with the State, Lakes and the Jamul Tribe evaluated the Jamul Tribe’s alternatives of pursuing a new compact, complying with certain requirements in their existing compact or building and operating a casino based solely on class II electronic gaming devices. Since resolution of any requests by the State related to the Jamul Tribe’s existing compact or a proposed new compact may take more time than is acceptable to the Jamul Tribe, it has been determined that the proposed gaming facility will be reduced in size and scope. The current plan is for the gaming facility to decrease in size and become a solely class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but will not be ~~required~~subject to ~~provide~~approval by the State of California or the NIGC.

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 the second quarter of fiscal 2007, fiscal 2006 and fiscal 2005. Both the positive and negative evidence was reviewed during Lakes’ evaluation of the critical milestones.


Critical Milestone	July 1, 2007	December 31, 2006	January 1, 2006
Federal recognition of the tribe	Yes	Yes	Yes

Possession of usable land corresponding with needs based on Lakes’ 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.	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.


Critical Milestone	July 1, 2007	December 31, 2006	January 1, 2006
Usable county agreement, if applicable	N/A	N/A	N/A

Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan	Yes	Yes	Yes

NIGC approval of management contract in current and desired form	N/A as the Jamul Tribe and Lakes entered into a development financing and services agreement in March 2006, which does not need to be approved by the NIGC.	N/A as the Jamul Tribe and Lakes entered into a development financing and services agreement in March 2006, which does not need to be approved by the NIGC.	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.

Resolution of all litigation and legal obstacles	N/A, there has been some local opposition regarding the project.	N/A, there has been some local opposition regarding the project.	N/A, there has been some local opposition regarding the project, although no formal legal action has been taken.

Financing for construction	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.	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	Yes. The Jamul Tribe and the State of California have had a series of meetings to discuss what requirements the State has to either allow the project to be built as currently planned or to enter into a new compact similar to those approved in 2004 for other tribes in the State. The Jamul Tribe has decided to move forward with building a casino based solely on class II electronic gaming devices. This plan will decrease the size and scope of the project, but will allow it to move forward.	Yes. The Jamul Tribe and the State of California have had a series of recent meetings to discuss what requirements the State has to either allow the project to be built as currently planned or to enter into a new compact similar to those approved in 2004 for other tribes in the State. Based on these discussions, the Jamul Tribe is evaluating which of any of these requirements are acceptable or in lieu of a compact, building a casino based solely on class II electronic gaming devices.	No others known at this time by Lakes.

Lakes’ evaluation and conclusion regarding the above critical milestones and progress.We entered into a development financing and services agreement with the Jamul Tribe in March 2006 as discussed above which eliminated the need for land contiguous to the reservation land being taken into trust. There is no requirement that the NIGC approve the development financing and services agreement. The Jamul Casino is planned to be built on the Jamul Tribe’s existing six acres of reservation land. Reservation land qualifies for gaming without going through a land in trust process.

Under the form of tribal-state compact first signed by the State of California with the Jamul Tribe in 1999, the Jamul Tribe is allowed to operate up to 350 Class III slot machines without licenses from the state. This form of compact also allows California tribes to operate additional Class II electronic gaming devices. 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 II electronic gaming devices 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, the Jamul Tribe has not amended its tribal-state compact. If the compact is not renegotiated and amended the Jamul Tribe believes it could operate under its existing compact which allow for up to 350 Class III gaming devices and an unlimited number of Class II electronic gaming devices or the Jamul Tribe could choose to operate only Class II gaming devices without a compact and currently plans to do so. We believe this number of gaming devices is adequate under either approach to equip the planned development and therefore, we believe the availability of additional ~~financing. (3) Lakes may~~slot licenses should not prevent the project from progressing.

The process of getting the land contiguous to the reservation placed into trust has been slow. Therefore, during August of 2005, we and the Jamul Tribe formally announced plans to build the casino on the approximately six acres of reservation land held by the Jamul Tribe. The design of the project was changed 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.

We have consulted with third-party advisors as to the architectural feasibility of the alternative plan and have been assured that the project can be ~~required to provide~~successfully built on the reservation land. We have also completed economic models for various alternatives and concluded that each alternative would result in a ~~guarantee~~successful operation assuming that adequate financing can be obtained. Therefore, we believe this project will be successfully completed.

We and the leaders of ~~tribal debt financing or otherwise provide support~~the Jamul Tribe are currently evaluating plans for the ~~tribal obligations related~~casino facility to ~~any~~determine when construction will start and when casino operations will begin.

Iowa Tribe

Business arrangement.On March 15, 2005, Lakes, 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 ~~projects. Any guarantees by~~Iowa Tribe of Oklahoma, a federally-chartered corporation (collectively, the “Iowa Tribe”). The agreements are effective as of January 27, 2005. Lakes ~~or similar off-balance sheet liabilities~~ will ~~increase Lakes' potential exposure~~provide consulting services to assist the Iowa Tribe 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 “Ioway Casino”); and currently manages operations at the ~~event of a default by any of these tribes. No such guarantees or similar off-balance sheet liabilities existed~~Iowa Tribe’s existing Cimarron Casino, located in Perkins Oklahoma (the “Cimarron Casino”). Lakes will also provide management services for the Tribe’s casino operations 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~~planned Ioway Casino project subject 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 anyregulatory approval.

Each 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~~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 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 inare as follows:

Ioway Casino.For its gaming development consulting services under the ~~approximate amount of $9.8 million in the fourth quarter of 2004~~Iowa Consulting Agreement related to the ~~sale~~Ioway Casino, Lakes will receive a development fee of $4 million paid uponthe opening of the ~~Travelodge property~~Ioway Casino, and ~~repayment~~a flat monthly fee of $500,000 commencing upon the opening of the project.

Lakes has agreed to make advances to the Iowa Tribe pursuant to a project budget to be agreed upon by Lakes and the Iowa Tribe and certain other conditions. The development loan will be for preliminary development costs under the Ioway Casino budget. Lakes 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 Ioway Casino is subject to the approval of the NIGC and certain other conditions. For its performance under the Iowa Management Contract, Lakes 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. The Iowa Management Contract term is seven years from the first day that Lakes is able to commence management of the Ioway Casino 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 Ioway Casino has been in continuous operation for four years, 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 immediately due and payable if not already paid. Subject to certain conditions, Lakes agreed to make advances for the Ioway Casino’s working capital requirements, if needed, during the first month after the Commencement Date. The advances are to be repaid through an operating note payable from revenues generated by future operations of the Ioway Casino bearing interest at two percent over the prime rate. Lakes also agrees to fund any shortfall in certain minimum monthly Ioway Casino payments to the Iowa Tribe by means of non-interest bearing advances under the same operating note.

Cimarron Casino.Lakes 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. Lakes operated under the Cimarron Consulting agreement until the NIGC approved the Cimarron Management Contract on May 1, 2006, and Lakes is currently managing the Cimarron Casino under that agreement. The annual fee under the Cimarron Management Contract is 30% of net income in excess of $4 million. The fee under the Cimarron Consulting agreement consisted entirely of a ~~subordinated interest in~~limited flat monthly fee of $50,000.

Arrangement with Consultant.Lakes has an agreement with Kevin Kean that will compensate him for his consulting services (relating to the ~~Polo Plaza property in Las Vegas, Nevada. However,~~Iowa Tribe) rendered to Lakes. Under this arrangement, subject to Mr. Kean obtaining certain regulatory approvals, Mr. Kean will receive 20% of Lakes’ fee compensation that is received under the ~~Company has recently entered negotiations~~Iowa 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% of Lakes’ 30% share). This agreement provides that ~~may~~payments will be due to Mr. Kean when Lakes is paid by the Iowa Tribe.

Lakes’ Evaluation of the Ioway casino project.The following table outlines the status of each of the following primary milestones necessary to complete the Ioway Casino project as of the end of the second quarter of fiscal 2007, fiscal 2006 and fiscal 2005. Both the positive and negative evidence was reviewed during Lakes’ evaluation of the critical milestones:


Critical Milestone	July 1, 2007	December 31, 2006	January 1, 2006
Federal recognition of the tribe	Yes	Yes	Yes

Possession of usable land corresponding with needs based on Lakes’ project plan	Yes, the Iowa Tribe has Tribal members that own a 74-acre allotment on US Route 66 midway between the access points to Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has obtained the rights to purchase and/or lease this parcel from the allottees. An additional 100 acres of fee land has been purchased to provide the necessary site area for the beginning of the project.	Yes, the Iowa Tribe has members that own a 74-acre allotment on US Route 66 midway between the access points to Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has obtained the rights to purchase and/or lease this parcel from the allottees. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project.	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.


Critical Milestone	July 1, 2007	December 31, 2006	January 1, 2006
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, 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, 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.

Usable county agreement, if applicable	N/A	N/A	N/A

Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan	Yes	Yes	Yes

NIGC approval of management contract in current and desired form	No, submitted to the NIGC for review on April 22, 2005. The NIGC has provided their final comments to the Iowa Tribe on the management contract and the Iowa Tribe has approved the revisions and returned the contract to the NIGC for the final action. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative.	No, submitted to the NIGC for review on April 22, 2005. An EA is currently being prepared and is necessary for the management contract to be approved. Completion of the EA is expected by Spring 2007. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative.	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.

Resolution of all litigation and legal obstacles	None at this time.	None at this time.	None at this time.

Financing for construction	No. Preliminary discussions with lending institutions have occurred.	No. Preliminary discussions with lending institutions have occurred.	No. Preliminary discussions with lending institutions have occurred.

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. Long-term assets have been recorded as it is considered probable that the Ioway Casino project will result in ~~revisions~~economic benefit to us sufficient to recover our investment. Based upon the ~~current payment terms related~~above status of all primary milestones and the projected fees to ~~these properties.~~be earned under the consulting agreements and management contracts, no impairment has been recorded. The ~~Company also anticipates the receipt~~Ioway Casino could open as early as January 2009.

Pawnee Nation 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 partOklahoma

Business arrangement.In January 2005, we entered into three gaming development and consulting agreements and three separate management contracts with three wholly-owned subsidiaries 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~~Pawnee Nation in connection with ~~or arising out~~assisting the Pawnee Nation in developing, equipping and managing three separate casino destinations.

On December 1, 2006, we announced that the Pawnee Business Council declined to approve a proposed updated tribal agreement with our subsidiary relating to the Pawnee Trading Post Casino. The consulting agreement and management contract were originally entered into in January 2005, and since then several new members have been appointed to the Pawnee Business Council which has resulted in a substantial change in the Pawnee Business Council’s membership. We, the Pawnee TDC and its gaming subsidiaries (the tribal entities that own and operate the tribal casinos), which support approving the updated tribal agreement and our involvement in the projects, are evaluating how to proceed with the current project agreements given this action, including perhaps terminating the project agreements.

Recently issued accounting pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which will permit the option of choosing to measure certain ~~pending~~eligible items at fair value at specified election dates and ~~threatened claims~~report unrealized gains and ~~legal proceedings against Grand~~losses in earnings. SFAS No. 157 and ~~to pay all related settlements~~SFAS No. 159 will both become effective for our 2008 fiscal year and ~~judgments. The Company's indemnification obligations include~~we are currently evaluating the ~~obligation to provide the defense~~effect, if any, that they will have on our financial position, results of ~~all claims made in proceedings against Grand~~operations 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 believesoperating cash flows.

Seasonality

We believe that the operations of all casinos to be managed by ~~the Company~~us will be affected by seasonal factors, including holidays, weather and travel conditions. ~~WPTE's~~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

Regulation and taxes

We and the casinos to be managed by us are subject to extensive regulation by state gaming authorities. ~~The Company~~We 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 itwe may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on ~~the Company.~~us.

The gaming industry represents a significant source of tax ~~revenues.~~revenues to regulators. 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~~our future financial position, results of operations and ~~financial results. OFF-BALANCE SHEET ARRANGEMENTS The Company has~~cash flows.

Off-balance sheet arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ~~its~~our 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~~discussed.

Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 provides a ~~"safe harbor"~~“safe harbor” for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by ~~the Company~~Lakes with the United States Securities and Exchange Commission ~~(as~~(“SEC”) as well as information included in oral statements or other written statements made or to be made by ~~the Company)~~Lakes 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.~~Lakes.

These risks and uncertainties include, but are not limited to, need for financing to meet Lakes’ future operational and development needs; those relating to the inability to complete or possible delays in completion of ~~Lakes'~~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 or development 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)~~Lakes operates in a highly competitive ~~industries;~~industry; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; continued contracts with the Pawnee Nation as a result of the change in its business council membership; possible need for future financing to meet ~~Lakes'~~Lakes’ expansion goals; risks of entry into new businesses; reliance on ~~Lakes'~~Lakes’ management; and the fact that the ~~WPTE~~WPT Enterprises, Inc. (NASDAQ: WPTE) (“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~~Lakes’ consolidated results of operations or the market value of the WPTE shares held by Lakes, including WPTE’s significant dependence on The Travel Channel, L.L.C. as a current source of revenue and GSN as a future source of revenue, and the ~~Company, including inability~~risk that GSN will not exercise its options to ~~achieve financial results from~~air seasons of the ~~contemplated business expansion of WPTE; WPTE's relatively short operating history; reliance on~~WPT series beyond Season Six; the ~~agreement with TRV for most of our consolidated revenues; possible inability of WPTE's~~potential that WPTE’s television programming will fail to maintain a sufficient ~~audience~~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; reliance on the efforts of CryptoLogic to develop and ~~exposure to adverse trends~~maintain the online gaming website in compliance with WPTE’s business model and applicable gaming laws; the ~~television production business generally; possible increases in production expenses, compared to fixed license revenues for related episodes;~~ risk ~~of inability~~that WPTE may not be able to protect ~~WPTE's proprietary rights~~its entertainment concepts, current and future brands and other intellectual property rights; the risk that competitors with greater financial resources or ~~preserve~~marketplace presence might develop television programming that would directly compete with WPTE’s television programming; risks associated with future expansion into new or complementary businesses; the ~~value~~termination or impairment of ~~WPTE's brands; dependence on WPTE's~~WPTE’s relationships with ~~member casinos~~key licensing and strategic partners; and ~~reliance~~WPTE’s dependence on ~~Lakes'~~its senior management team. For more information, review Lakes’ filings with the Securities and ~~WPTE's management.~~Exchange Commission. For further information regarding the risks and uncertainties, see the ~~"Business -- Risk Factors"~~“Risk Factors” section in Item 1A of ~~the Company's~~our 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~~ 31, 2006.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~The Company's~~

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

Our 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,~~July 1, 2007, the carrying value of ~~the Company's~~our cash and cash equivalents approximates fair value. ~~The Company~~We also ~~holds~~hold short-term investments consisting of marketable debt securities (principally consisting of commercial paper, corporate bonds, and government securities) having a ~~weighted average~~weighted-average duration of one year or less. Consequently, such securities are not be subject to significant interest rate risk. ~~The Company's~~

Our primary exposure to market risk associated with changes in interest rates involves our long-term assets related to Indian casino projects in the ~~Company's~~form of notes receivable ~~related to loans~~due from our tribal partners for the development and construction of ~~Native American owned~~Indian-owned casinos. The loans ~~and related note balances~~ earn ~~various~~ interest ~~rates~~ based upon a defined reference rate. The floating interest rate ~~receivables~~ will generate more or less interest income if interest rates rise or fall. ~~Interest income is deferred during~~Our notes receivable from Indian tribes related to properties under development ~~of the casinos because realizability of~~bear interest generally at prime plus one percent or two percent, however, the interest is ~~contingent upon~~only payable if the ~~completion~~casino is successfully opened and ~~positive cash flow~~distributable profits are available from ~~operation~~casino operations. We record our notes receivable at fair value and subsequent changes in fair value are recorded as unrealized gains or losses in our Unaudited Condensed Consolidated Statement of ~~the casino.~~Earnings (Loss) and Comprehensive Earnings (Loss). As of ~~October 3, 2004, Lakes~~July 1, 2007, we had ~~$90.9~~$78.4 million of notes receivable, at fair value with a floating interest rate ~~notes receivables.~~(principal amount of $78.4 million). 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~~approximately $8.0 million. A reference rate increase of 100 basis points would result in an increase in ~~deferred~~ interest income of ~~$0.9~~$0.8 million. A 100 basis point decrease in the reference rate would result in a decrease of ~~$0.9~~$0.8 million in ~~deferred~~ interest income over the same ~~twelve month~~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~~Rules 13a-15(e) orand 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’s disclosure controls and procedures are effective.

We have considered the circumstances surrounding the restatement of our financial statements for the six months ended July 1, 2007, as disclosed in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Amendment No. 1 to our Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer reviewed and re-evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and Rule 15d — 15(e) promulgated under the Securities Exchange Act of 1934 as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Chief Executive Officer and our Chief Financial Officer determined that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report, notwithstanding the error requiring this restatement. This was based on their conclusion that the error was not indicative of inadequate disclosure controls and procedures.

There have been no ~~significant~~ changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal ~~controls~~control over financial reporting during the six months ended July 1, 2007 that have materially affected, or ~~in other factors that could significantly~~are reasonably likely to materially affect, ~~these controls subsequent to~~our internal control over financial reporting.

Management has considered the ~~date~~circumstances surrounding the restatement 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 CourtCompany’s financial statements 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 lawsuitssix months ended July 1, 2007, as disclosed in Note 2 of the ~~same nature against~~Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Amendment No. 1 to our Quarterly Report on Form 10-Q. After reviewing and analyzing the ~~same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in~~internal control processes surrounding the ~~United States District Court~~accounting for the ~~District of Nevada. Following a court order dismissing all pending pleadings and allowing~~transaction that caused the ~~plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging~~restatement, management concluded that the ~~defendants fraudulently marketed~~restatement of the financial statements was not caused by a material weakness in our internal control over financial reporting 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~~there was no effect on management’s assessment of the ~~federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed~~effectiveness of our internal control over financial reporting as of December 31, 2006 when our management concluded that, as of December 31, 2006, our internal control over financial reporting was effective based on the criteria set forth 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~~Committee of Sponsoring Organizations of the ~~plaintiffs. The~~Treadway Commission (“COSO”) in Internal Control-Integrated Framework.

Part II.
Other Information

ITEM 1.LEGAL PROCEEDINGS

WPTE litigation.On July 19, 2006, a legal action was commenced against WPTE by seven poker players that alleged that WPTE engaged in, among other things, unfair, anti-competitive business practices. On March 14, 2007, the plaintiffs ~~then~~ filed a motion ~~seeking class certification~~for summary judgment 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 denial of class certification. Management currently believes that 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 counterclaimon April 12, 2007 WPTE 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 relatingits opposition 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,motion. On May 22, 2007, 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 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. 38 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) Management currently believes that 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. 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 standardplaintiffs’ motion 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 thesummary judgment. A 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 that 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. 39 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (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, the Company and Grand entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand and certain affiliated companies. 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~~for April 1, 2008.

Miscellaneous legal matters.We and our subsidiaries (including WPTE) are involved in various other inquiries, administrative proceedings, and pending or threatened 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 an unfavorable outcome in these matters is not probable. Furthermore, even in the ~~final~~event of an unfavorable outcome in one or all of these matters, ~~including~~ the ~~matters discussed above, is~~estimated effect on the unaudited condensed consolidated financial statements would not likely be material. Accordingly, no provision for loss has been recorded in connection therewith.

ITEM 1A.RISK FACTORS

There have been no material changes to ~~have a material adverse effect upon~~our risk factors identified in the ~~Company's consolidated~~“Risk Factors” section in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 except for the following, which has been updated in its entirety:

We cannot guarantee the 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 Memorandumthe expansion 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~~business, which may negatively impact our financial results.

As of December 31, 2006, we, through our subsidiary Lakes Poker Tour, LLC, owned approximately 61% of the outstanding common stock of WPT Enterprises, Inc., referred to as WPTE. As a result, our consolidated results included WPTE operations. We cannot guarantee the financial results of the expansion of the World Poker Tour business, which may negatively impact our financial results. We can provide no assurance that WPTE will achieve its forecasted revenues, that WPTE will be able to expand its business, or that WPTE’s operations will positively impact our financial results because WPTE’s business is subject to many risks and uncertainties. These risks include, but are not limited to, WPTE’s significant dependence on the Travel Channel as a current source of revenue and GSN as a future source of revenue, and the risk that GSN will not exercise its options to air seasons of the WPT series beyond Season Six; difficulty of predicting the growth of WPTE’s online gaming business, which is a relatively new industry with an increasing number of market entrants; reliance on the efforts of CryptoLogic to develop and maintain WPTE’s online gaming website in compliance with WPTE’s business model and applicable gaming laws; the potential that WPTE’s television programming will fail to maintain a sufficient audience; 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. The Unlawful Internet Gambling Enforcement Act of 2006 prohibits online gambling in the United States of America. Congress passing of the Unlawful Internet Gambling Enforcement Act or future government regulation of online gaming in the United States may restrict the activities or affect the financial results of WPTE’s online gaming venture currently operating and WPTE’s new online gaming venture in development.

TRV had until April 1, 2007 to exercise its option to broadcast Season Six of the WPT television series. TRV did not exercise this option. On April 2, 2007, WPTE entered into an agreement with the GSN, pursuant to which GSN agreed to license Season Six for $300,000 per episode. The agreement also provides GSN options for Seasons Seven and Eight.

In addition to the risks related to WPTE’s business listed above, WPTE has updated its risk factors on the following matters:

	•		On April 23, 2007, WPTE entered into an agreement with CryptoLogic pursuant to which CryptoLogic operates and manages WPTE’s branded real-money gaming website, WorldPokerTour.com, solely in jurisdictions where online gaming is not restricted. WPTE cannot be assured that CryptoLogic’s operation of the site going forward will meet WPTE’s business expectations, the failure of which would have a material adverse impact on WPTE’s online gaming business.

	•		WPTE is currently reliant on CryptoLogic for WPTE’s gaming website compliance with all applicable regulations, including the initial verification that players who wish to wager are actually from non-restricted countries. In addition, WPTE relies on CryptoLogic and third party vendors to assure that players cannot place improper wagers on an on-going basis. If CryptoLogic’s compliance or verification is inadequate or WPTE’s third party verification tools fail, regulators in the U.S. or other jurisdictions may impose fines or other sanctions or threaten or take other actions that could adversely affect WPTE’s reputation and the revenues WPTE derives from the license of rights to CryptoLogic. Additionally, certain territories and foreign networks may restrict WPTE from incorporating marketing elements related to WPTE’s online site into WPTE’s international telecasts and certain laws or regulations may restrict the type of advertising in general in those territories. If these restrictions occur, WPTE’s costs of customer acquisition may be substantially higher than anticipated.

	•		WPTE has developed relationships with key strategic partners in many areas of WPTE’s business, including poker tournament event sponsorship, merchandise licensing, corporate sponsorship, Internet gaming and international distribution. If WPTE was to fail to manage its existing licensing relationships, this failure could have a material adverse effect on WPTE’s financial condition and results of operations. WPTE relies on a limited number of contracts under which third parties provide WPTE with services vital to WPTE’s business. If WPTE’s relationship with any third party was to be interrupted, or the services provided by any third party were to be delayed or deteriorate for any reason without being adequately replaced, WPTE business could be materially adversely affected. If WPTE is forced to find a replacement for any strategic partner, this could create disruption in WPTE’s business and may result in reduced

			revenues, increased costs or diversion of management’s attention and resources. In addition, while WPTE has significant control over its licensed products and advertising, WPTE does not have operational and financial control over third parties, and WPTE has limited influence with respect to the manner in which they conduct their businesses. If any strategic partner experiences a significant downturn in its business or were otherwise unable to honor its obligations to WPTE, WPTE’s business could be materially disrupted.

	•		WPTE intends to further expand business in foreign markets, including continued international distribution of WPTE’s U.S. telecasts, creating additional poker tours in foreign countries and distributing branded merchandise in foreign countries. WPTE’s international operations could be adversely affected by changes in political and economic conditions, trade protection measures and the status of regulatory requirements that may restrict the sales of WPTE products, increase costs of foreign production or other costs that prohibit Internet gaming activities in international jurisdictions. Also, changes in exchange rates between the U.S. dollar and other currencies could potentially result in significant increases in WPTE costs or decreases in earnings.

For a complete listing of WPTE’s risk factors, see its Annual Report on Form 10-K for the ~~quarter~~year ended ~~10/3/04)(portions of this exhibit have been omitted pursuant to a request for confidential treatment~~December 31, 2006, 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)its Quarterly Reports on Form ~~8-K (i)~~10-Q for the quarters ended April 1, 2007 and July 1, 2007.

ITEM 4.SUBMISSION OF MATTERS TO 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 VOTE OF SECURITY HOLDERS

	(a)		The Annual Meeting of Shareholders was held on June 6, 2007.

	(b)		At the Annual Meeting:

	(1)		All nominees for directors as listed in the proxy statement were elected with the following vote:

Affirmative Votes Authority Withheld
Lyle Berman 22,315,185 146,085
Timothy J. Cope 21,969,874 491,396
Morris Goldfarb 22,341,752 119,518
Neil I. Sell 18,071,083 4,390,187
Ray Moberg 22,345,734 115,536
Larry C. Barenbaum 22,344,952 116,318
Richard White 22,344,194 117,076

(2)

The adoption of the 2007 Stock Option and Compensation Plan was approved with the following vote:

Affirmative Votes Negative Votes Abstentions Broker Non-Vote
11,915,058 4,481,003 46,632 6,018,577

(3)

The appointment of Piercy, Bowler, Taylor & Kern, Certified Public Accountants and Business Advisors, a Professional Corporation, as the independent registered accounting firm serving as auditors of the Company was ratified with the following vote:

Affirmative Votes Negative Votes Abstentions Broker Non-Vote
22,372,757 38,950 49,563 —

ITEM 6.EXHIBITS


Exhibits		Description

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 Amendment No. 1 to 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 (Principal Executive Officer)


	/s/TIMOTHY J. COPE
	Timothy J. Cope
	President and Chief Financial Officer (Principal Financial and Accounting 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


	As of and
	for the six months ended
	July 1, 2007
	As previously
(in thousands, except per share data):	reported			Restated
Additional paid-in capital	$	188,824		$	187,659
Retained earnings		27,398			28,563
Interest expense, other (*)		(2,588	)		(316	)
Net loss		(4,076	)		(1,804	)
Loss per share — basic and diluted		(0.24	)		(0.14	)


	For the
	three months ended
	July 2, 2006
	As previously
(in thousands, except per share data):	reported			Restated
Interest expense, other (*)	$	(1,303	)	$	(2,458	)
Net earnings		3,248			2,093
Earnings per share — basic		0.14			0.09
Earnings per share — diluted		0.13			0.08


	July 1, 2007 (unaudited)
			Shingle
	Pokagon		Springs		Jamul
	Band		Tribe		Tribe		Other		Total
Notes receivable, at estimated fair value	$	—	$	50,417	$	24,809	$	3,340	$	78,566
Intangible assets related to Indian casino projects (*)		23,573		21,674		11,116		986		57,349
Land held for development		—		—		6,751		1,370		8,121
Other		60		767		1,154		3,263		5,244

	$	23,633	$	72,858	$	43,830	$	8,959	$	149,280


	As of July 1, 2007	As of December 31, 2006

Face value of note (principal and interest)	$63,125	$55,942
	($46,368 principal and $16,757 interest)	($42,310 principal and $13,632 interest)
Estimated months until casino opens (weighted-average of three scenarios)	18 months	28 months
Projected interest rate until casino opens	10.41%	9.98%
Projected interest rate during the loan repayment term	10.26%	9.76%
Discount rate	15%	15%
Repayment terms of note*	84 months	—
Projected repayment terms of note**	—	24 months
Probability rate of casino opening (weighting of four scenarios)	95%	85%


	Three Months Ended				Six Months Ended
	July 1,		July 2,		July 1,		July 2,
	2007		2006		2007		2006
	(In thousands)
Total cost of share-based payment plans	$	1,203	$	1,424	$	2,435	$	3,676


				Number of Common Shares
									Weighted-Avg.
	Options					Available			Exercise
	Outstanding			Exercisable		for Grant			Price
2007
Balance at December 31, 2006		4,716,400			3,712,350		35,500		$	6.15
Authorized		—			—		—			—
Granted		—			—		—			—
Forfeited/cancel led/expired		—			—		—			—
Exercised		(112,500	)		—		—			5.82

Balance at April 1, 2007		4,603,900			4,025,750		35,500		$	6.15
Authorized							500,000			—
Granted		2,500			—		(2,500	)		11.84
Forfeited/cancel led/expired		(44,500	)		—		44,500			9.79
Exercised		(74,500	)		—		—			5.83

Balance at July 1, 2007		4,487,400			3,954,500		577,500		$	6.13


2006
Balance at January 1, 2006		5,307,626			4,153,476		94,500		$	6.03
Authorized		—			—		—			—
Granted		30,000			—		(30,000	)		9.77
Forfeited/cancel led/expired		—			—		—			—
Exercised		(550,000	)		—		—			5.65

Balance at April 2, 2006		4,787,626			3,711,626		64,500		$	6.10
Authorized		—			—		—			—
Granted		5,000			—		(5,000	)		12.10
Forfeited/cancel led/expired		(5,000	)		—		5,000			8.15
Exercised		(25,000	)		—		—			4.75

Balance at July 2, 2006		4,762,626			3,718,126		64,500		$	6.11


	Options Outstanding at July 1, 2007
			Weighted-					Options Exercisable at July 1, 2007
			Average			Aggregate						Aggregate
	Number		Remaining	Weighted-Average		Intrinsic		Number		Weighted-		Intrinsic
Range of Exercise Prices	Outstanding		Contractual Life	Exercise Price		Value		Exercisable		Average Price		Value
$(3.25—3.63)		286,200	3.9 years	$	3.45	$	2,390,622		286,200	$	3.45	$	2,390,622
(3.64 — 5.45)		2,374,700	1.7 years		4.22		18,027,678		2,374,700		4.22		18,027,678
(5.46 — 7.26)		60,000	6.5 years		7.18		278,100		45,000		7.18		208,575
(7.27 — 9.08)		1,438,500	6.2 years		8.13		5,297,276		1,099,000		8.13		4,047,068
(9.09 — 10.90)		72,000	6.5 years		10.36		104,320		27,050		10.48		35,936
(10.91 — 12.71)		91,000	7.6 years		11.47		37,200		41,050		11.43		17,647
(12.72 — 14.53)		95,000	7.6 years		14.00		—		44,500		14.04		—
(14.54 — 16.34)		5,000	7.5 years		16.11		—		2,000		16.11		—
(16.35 — 18.16)		65,000	6.8 years		17.91		—		35,000		17.97		—

		4,487,400	3.7 years	$	6.13	$	26,135,196		3,954,500	$	5.64	$	24,727,526


	Options Outstanding								Options Exercisable
			Weighted-Avg.		Weighted-		Aggregate						Aggregate
Range of	Number		Remaining		Avg. Exercise		Intrinsic		Number		Weighted-		Intrinsic
Exercise Prices	Outstanding		Contractual Life		Price		Value		Exercisable		Avg. Price		Value
$0.0049		111,340		4.66	$	0.0049	$	454,835		111,340	$	0.0049	$	454,835
$3.93 — 4.80		824,000		9.58		4.46		4,800		—		—		—
$5.18 — 9.92		1,325,366		7.48		7.57		—		739,133		7.88		—
$11.95 — 14.51		220,667		8.12		12.19		—		56,000		12.70		—
$15.05 — 19.50		16,000		8.10		15.33		—		5,666		15.57		—

		2,497,373		8.10	$	6.67	$	459,635		912,139	$	7.26	$	454,835


	Industry Segments
	Indian
	Casino		WPT			Corporate and			Total
	Projects		Enterprises, Inc.			Eliminations			Consolidated
Total assets as of July 1, 2007	$	148.9	$	44.2		$	63.3		$	256.6
Total assets as of December 31, 2006	$	242.8	$	51.3		$	67.1		$	361.2
For the three months ended July 1, 2007 Revenue	$	0.4	$	7.7		$	—		$	8.1
Earnings (loss) from operations		9.1		(3.6	)		(3.9	)		1.6
Depreciation and amortization expense		—		0.1			0.1			0.2
For the three months ended July 2, 2006 Revenue	$	0.2	$	11.0		$	—		$	11.2
Earnings (loss) from operations		14.3		2.5			(1.1	)		15.7
Depreciation and amortization expense		—		—			0.1			0.1
For the six months ended July 1, 2007 Revenue	$	0.8	$	12.2		$	0.1		$	13.1
Earnings (loss) from operations		10.0		(6.5	)		(9.2	)		(5.7	)
Depreciation and amortization expense		—		0.2			0.2			0.4
For the six months ended July 2, 2006 Revenue	$	0.4	$	17.5		$	—		$	17.9
Earnings (loss) from operations		27.2		1.4			(2.5	)		26.1
Depreciation and amortization expense		—		0.1			0.2			0.3


	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) Jamul Tribe(2)	$	—	$	—	$	—	$	—	$	—
Shingle Springs Tribe(3)		—		—		—		—		—
Pokagon Band(4)		—		—		—		—		—
Iowa Tribe of Oklahoma (“Iowa Tribe”) — Ioway Project(5)		—		—		—		—		—
Lakes’ operating lease(6)		0.7		0.7		—		—		—
WPTE operating leases(7)		3.5		0.8		1.8		0.9		—
WPTE purchase obligations(8)		2.9		1.2		1.4		0.3		—

	$	7.1	$	2.7	$	3.2	$	1.2	$	—


	As of July 1, 2007 (unaudited)	As of December 31, 2006
Face value of note (principal and interest)	$63,125 ($46,368 principal and $16,757 interest)	$55,942 ($42,310 principal and $13,632 interest)
Estimated months until casino opens (weighted-average of three scenarios)	18 months	28 months
Projected interest rate until casino opens	10.41%	9.98%
Projected interest rate during the loan repayment term	10.26%	9.76%
Discount rate	15%	15%
Repayment terms of note*	84 months	—
Projected repayment terms of note**	—	24 months
Probability rate of casino opening (weighting of four scenarios)	95%	85%


	Estimated Fair		Sensitivity Analysis
	Value Notes		5% Less		One Year				5% Increased		One Year
	Receivable		Probable		Delay		Both		Probability		Sooner		Both
	(In thousands)
Shingle Springs	$	50,417	$	47,752	$	48,621	$	46,051	$	53,082	$	52,279	$	55,041
Jamul	$	24,809	$	23,347	$	23,772	$	22,370	$	26,271	$	25,891	$	27,417

	$	75,226	$	71,099	$	72,393	$	68,421	$	79,353	$	78,170	$	82,458


	Balance at July 1, 2007 (unaudited)
	Shingle
Advances Principal Balance	Springs		Jamul		Other		Total
	(In thousands)
Note receivable, pre-construction(a), (c)	$	46,368	$	27,280	$	2,796	$	76,444
Note receivable, land(b),(c)		—		950		973		1,923

	$	46,368	$	28,230	$	3,769	$	78,367


	Balance at December 31, 2006
	Shingle
Advances Principal Balance	Springs		Jamul		Other		Total
	(In thousands)
Note receivable, pre-construction(a), (c)	$	42,310	$	23,559	$	1,386	$	67,255
Note receivable, land(b),(c)		—		950		756		1,706

	$	42,310	$	24,509	$	2,142	$	68,961


	July 1,		December 31,
Shingle Springs Tribe	2007		2006
	(unaudited)
Monthly stipend	$	8,590	$	7,690
Construction		1,922		1,657
Legal		14,193		13,790
Environmental		1,739		1,680
Design		11,230		9,554
Gaming license		3,726		3,626
Lobbyist		4,968		4,313

	$	46,368	$	42,310


	July 1,		December 31,
Jamul Tribe	2007		2006
	(unaudited)
Monthly stipend	$	4,760	$	4,451
Construction		983		649
Legal		4,084		3,675
Environmental		2,250		1,985
Design		11,813		9,578
Gaming license		710		641
Lobbyist		2,680		2,580

	$	27,280	$	23,559


	April 1, 2007		December 31, 2006
No. of Class III slot machines		3,000		3,000
No. of Table games		90		90
No. of Poker tables		20		20
Win/Class III slot machine/day — 1st year	$	282	$	282
Win/Table game/day — 1st year	$	1,481	$	1,481
Win/Poker game/day — 1st year	$	1,025	$	1,025
Expected increase in management fee cash flows	Year 2 — 26.5%		Year 2 — 26.5%
	Year 3 — 4.3%		Year 3 — 4.3%
	Year 4 — 3.8%		Year 4 — 3.8%
	Year 5 — 4.1%		Year 5 — 4.1%


	Affirmative Votes		Authority Withheld
Lyle Berman		22,315,185		146,085
Timothy J. Cope		21,969,874		491,396
Morris Goldfarb		22,341,752		119,518
Neil I. Sell		18,071,083		4,390,187
Ray Moberg		22,345,734		115,536
Larry C. Barenbaum		22,344,952		116,318
Richard White		22,344,194		117,076


Affirmative Votes	Negative Votes		Abstentions		Broker Non-Vote
11,915,058		4,481,003		46,632		6,018,577