The unaudited consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation, and subsidiaries (individually and collectively “Lakes” or the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed and/or omitted. 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 January 1,December 30, 2012, previously filed with the SEC, 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 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.

All material intercompany accounts and transactions have been eliminated in consolidation.

Rocky Gap is consistent with Lakes’ strategycurrently undergoing renovation of developing, operating,existing convention center space and owning or managing casino resort properties.

The financial position of the Rocky Gap Resort is included in the Company’s consolidated balance sheet as of September 30, 2012 and its results of operations for the period from August 3, 2012 through September 30, 2012 are included in the Company’s consolidated statements of operations and cash flows for the three and nine months ended September 30, 2012.  From the date of the acquisition of the Rocky Gap Resort on August 3, 2012 through September 30, 2012, Lakes recorded $1.7 million in revenue and no net earnings from the Rocky Gap Resort’s operations. The operating results of the Rocky Gap Resort are included in the Company’s consolidated statements of operations in the non-Indian casino projects segment.  Room revenue is recognized atsegment from the time of occupancy and food and beverage and retail revenue is recognized at the time of sale.

The following unaudited pro forma condensed consolidated financial results of operations for the three and nine months ended September 30,April 1, 2012 and October 2, 2011 are presented as if the acquisition had been completed at the beginning of each period presented:the period.  The amounts shown for the three months ended March 31, 2013 are based on actual results for the period:

These unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of each fiscal period presented, or of future results of the consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. The following adjustments have been made to the pro forma net earnings (loss) attributable to Lakes and pro forma earnings (loss) per share in the table above:

The majority of theNotes and interest receivable included in long-term assets related to Indian casino projects is in the formconsists of notes and interest receivable due from the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”) pursuant to the Company’s development financing, consulting and management agreement with the Shingle Springs Tribe for the Red Hawk Casino. Under the terms of the development and management agreement, Lakes made advances to the Shingle Springs Tribe of $74.4 million including interest accrued through the opening date of the Red Hawk Casino on December 17, 2008 (the “Transition Loan”). The repayment terms of the notesTransition Loan are dependent upon the operating performance of the Red Hawk Casino. Repayment of the notesTransition Loan is required only if distributable profits are available from the operation of the Red Hawk Casino. In addition, repayment of the notesTransition Loan and the management fees are subordinated to certain other financial obligations of the Red Hawk Casino. The order of priority of payments from the Red Hawk Casino’s cash flows has been as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe; repayment of various debt with interest accrued thereon (including the Company’s pre-construction advances)Transition Loan); management fees due to Lakes; other obligations, if any; and the remaining funds, if any, distributed to the Shingle Springs Tribe.

At January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired.   Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment as of SeptemberMarch 31, 2013 and December 30, 2012 and concluded that the notes receivable continue to be impaired.  This determination was based on the continued economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property.  As a result of these factors, Lakes determined it was probable that substantial amounts due would not be repaid within the contract term.  However, the Shingle Springs Tribe will remain legally obligated to repay any remaining amounts due to Lakes subsequent to the conclusion of the agreement.

In order to assist the Red Hawk Casino in increasing cash levels, allowed payments of principal on the preconstruction advances made byTransition Loan to Lakes, if any, are being deferred from March 2011 through December 2013.  These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes.  The notes and interest receivable carrying amounts at September 30, 2012 and January 1, 2012 represent the present value of expected future cash flows.

The management contract withagreement for the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month for the duration of the contract,agreement, which expires in December 2015.  Lakes is obligated to advance funds for these minimum guaranteed monthly payments when the casino operating results are not sufficient, and is repaid the advances in subsequent periods when operating results are sufficient.  As of SeptemberMarch 31, 2013 and December 30, 2012, no amount was outstanding under this obligation.  Lakes collected payments of $1.1 million under this obligation during the nine months ended September 30, 2012.

Intangible assets consist of costs associated with the acquisition of the development, financing and management contractsagreement with the Shingle Springs Tribe for the Red Hawk Casino and are periodically evaluated for impairment.  The intangible assets related to the Shingle Springs Tribe are being amortized through the end of the management contract, which expires in December 2015.

Information with respect to the intangible assets related to the Shingle Springs Tribe is summarized as follows (in thousands):

Lakes has an investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”), a privately-held company, that owns the Horseshoe Casino Cleveland in Cleveland, Ohio which opened to the public onin May 13, 2012, the casino development projectHorseshoe Casino Cincinnati in Cincinnati, Ohio which opened in March 2013, and the Thistledown RacetrackRacino in North Randall, Ohio.Ohio which added VLTs to its existing racetrack in April 2013. This investment is accounted for using the cost method since Lakes owns less than 20% of Rock Ohio Ventures and does not have the ability to significantly influence the operating and financial decisions of the entity. At SeptemberMarch 31, 2013 and December 30, 2012 and January 1, 2012, Lakes had invested a total of $20.2$21.0 million and $15.7$20.2 million, respectively, in Rock Ohio Ventures, which is included in investment in unconsolidated investee in the accompanying consolidated balance sheets.

During July 2011, Lakes entered into a program to locate a buyer for the land located in Vicksburg, Mississippi.  During the third quarter of 2012, Lakes agreed to sell the majority of the land for approximately $0.4 million, resulting in an impairment charge of approximately $1.3 million.  The sale of the land is expected to close during the fourth quarter of 2012.  As of September 30, 2012 and January 1, 2012, the land is carried at $0.4 million and $1.7 million, respectively, on the accompanying consolidated balance sheets, which is its estimated fair value less expected cost to sell.

Lakes also owns undeveloped land in Oklahoma related to its previous involvement in a potential casino project with the Iowa Tribe of Oklahoma.

As of SeptemberMarch 31, 2013 and December 30, 2012 and January 1, 2012, these parcels of land are carried at their combined estimated fair value of $1.1 million on the accompanying consolidated balance sheets.

During 2009, the Company became obligated to pay Mr. Jerry Argovitz and Mr. Kevin M. Kean each $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the Red Hawk Casino management contract,agreement, which commenced in December 2008. These obligations resulted from Mr. Argovitz’s and Mr. Kean’s elections under existing agreements with Lakes to relinquish their respective other rights related to the Red Hawk Casino project. As of SeptemberMarch 31, 2013 and December 30, 2012 and January 1, 2012, the remaining carrying amount of the liability was $4.8$4.3 million and $5.6$4.6 million, net of a $1.6$1.2 million and $2.3$1.4 million discount, respectively. Amounts payable during the next 12 fiscal months totaling $1.2$1.3 million, net of related discount, are included in current contract acquisition costs payable as of September 30, 2012.March 31, 2013.

Share-based compensation expense, which includes stock options and restricted stock units, was $0.1 million for each of the three and nine months ended September 30, 2012March 31, 2013 and October 2, 2011, respectively, were as follows (in thousands):April 1, 2012.

The Company uses the Black Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options which requires the consideration of historical employee exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate and the weighted average expected life of the options. There were 443,500 options granted during the three months ended March 31, 2013.  There were no options granted during the three and nine months ended September 30,April 1, 2012.  Four thousand options were granted during the three and nine months ended October 2, 2011.

There was no restricted stock activity during the three months ended March 31, 2013.  The following table summarizes Lakes’ restricted stock unit activity during the ninethree months ended September 30, 2012 and October 2, 2011:April 1, 2012:

For all periods, basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings (loss) attributable to Lakes Entertainment, Inc. by the weighted-average common shares outstanding. Diluted EPS in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings (loss) attributable to Lakes Entertainment, Inc. by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options of 1,528,0391,918,481 and 1,527,6611,528,039 for the three and nine months ended September 30,March 31, 2013 and April 1, 2012, respectively, and 1,672,138 for the three and nine months ended October 2, 2011, were not used to compute diluted earnings (loss) per share because the effects would have been anti-dilutive.

There was no income tax benefit for the first quarter of 2013 because there is no remaining potential to carry back losses to prior years and future realization of the benefit is uncertain.  The income tax benefit for the ninethree months ended September 30,April 1, 2012 and October 2, 2011 was $2.2$2.0 million and $0.5 million, respectively.resulted from Lakes’ income tax benefit in the current year period is primarily due to its ability to carry back estimated 2012its taxable losslosses to a prior year and receive a refund of taxes previously paid.  In the prior period, the income tax benefit was primarily due to 2011 timing differences and related valuation allowances.  The Company’s effective tax rates were (227)%0% and (5)(1,097)% for the ninethree months ended September 30,March 31, 2013 and April 1, 2012, and October 2, 2011, respectively. For the ninethree months ended September 30,March 31, 2013, the effective tax rate differs from the federal tax rate of 35% primarily due to limitation of the benefit because of uncertainty of future realization.  For the three months ended April 1, 2012, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes and discrete items recognized.  For the nine months ended October 2, 2011, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes and changes in valuation allowance due to 2011 timing differences.

Lakes has recorded income taxes receivable of $5.5 million and $3.5$2.2 million for the periods ended SeptemberMarch 31, 2013 and December 30, 2012 and January 1, 2012, respectively, related to the Company’s ability to carry back 2012 taxable losses to a prior year and receive a refund of taxes previously paid.

Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies.  Management has evaluated all available evidence and has determined that negative evidence continues to outweigh positive evidence for the realization of deferred tax assets and as a result continues to provide a full valuation allowance against its deferred tax assets.

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

The Company’s financial instruments consist of cash and cash equivalents, notes and interest receivable and other long-term assets related to Indian casino projects, cost method investments, accounts payable and contract acquisition costs payable.

For the Company’s cash and cash equivalents, accounts payable and current portion of contract acquisition costs payable, the carrying amounts approximate fair value because of the short duration of these financial instruments.

The decline in general economic conditionsIn connection with the closing of the acquisition of Rocky Gap, Lakes entered into a 40 year operating ground lease (the “Lease Agreement”) with the Maryland DNR for approximately 268 acres in the United States may have or continueRocky Gap State Park on which Rocky Gap is situated.  The Lease Agreement contains an option to have a negative impact onrenew for 20 years after the local economic conditions nearinitial 40-year term.  Payments are due under the properties Lakes owns and/or manages and may negatively impact Lakes’ management fees andLease Agreement according to the availability of credit to finance Lakes’ development projects.following terms:

On May 17, 2012, Lakes received service of a breach of contract lawsuit filed in the Franklin County Court of Common Pleas, Franklin County, Ohio by Quest Media Group, LLC (“Quest”) with respect to an  agreement (the “Agreement”) entered into between Lakes Ohio Development, LLC (a wholly owned subsidiary of Lakes) (“Lakes Ohio Development”) and Quest on March 9, 2010.  The Agreement relates to Quest assisting Lakes Ohio Development in partnering with Rock Ohio Ventures, LLC and Penn Ventures, LLC (“Penn Ventures”) with respect to funding the proposed citizen-initiated referendum in November 2009 to amend the Ohio constitution to permit one casino each in Cleveland, Cincinnati, Toledo and Columbus, Ohio. The lawsuit alleges, among other things, that Lakes breached the Agreement by selling Lakes Ohio Development’s interest in the Toledo and Columbus, Ohio casino projects to Penn Ventures, LLC to Penn, failing to pay the proper fee to Quest as a result of such sale, and incorrectly calculating the costs that are to be offset against Quest’s fee.  The lawsuit seeks unspecified compensatory damages in excess of $25,000, punitive damages, declaratory and injunctive relief.  The lawsuit names as defendants Lakes Entertainment, Inc., Lakes Ohio Development, LLC and Lyle Berman, Chairman and CEO of Lakes. Lakes removed the case to federal court and answered the pleadings.  The case is still in the early stages of discovery.  Lakes believes the suit to be without merit and intends to vigorously defend itself in this lawsuit.

Lakes and its subsidiaries are involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, and although unable to estimate the minimum costs, if any, to be incurred in connection with these matters, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon Lakes’ unaudited consolidated financial statements. Accordingly, no provision has been made with regard to these matters.

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 Indian Casino Projects segment includes operations and assets related to the development, financing, and management of gaming-related properties for the Shingle Springs Tribe the Pokagon Band of Potawatomi Indians, and the Jamul Tribe.  The Non-Indian Casino Projects segment includes results and/or assets related to the development, financing, and management of gaming-related properties in Maryland and Ohio.  The total assets in “Corporate and Eliminations” below primarily relate to Lakes’ cash and cash equivalents and the Lakes corporate office building. 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.