Golden Entertainment (GDEN) 10-Q 2009 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 29, 2009
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

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 telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer  þ
Non-accelerated filer o  (Do not check if a smaller reporting company)	Smaller reporting company o

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

As of May 5, 2009, there were 26,328,045 shares of Common Stock, $0.01 par value per share, outstanding.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX

			Page of
			Form 10-Q
PART I. FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS
		Consolidated Balance Sheets as of March 29, 2009 (unaudited) and December 28, 2008		3
		Unaudited Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss) for the three months ended March 29, 2009 and March 30, 2008		4
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 29, 2009 and March 30, 2008		5
		Notes to Unaudited Consolidated Financial Statements		6
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		34
	ITEM 4.	CONTROLS AND PROCEDURES		35
PART II. OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS		36
	ITEM 1A.	RISK FACTORS		36
	ITEM 6.	EXHIBITS		36
EX-31.1
EX-31.2
EX-32.1

2

Part I.
Financial Information

ITEM 1.  FINANCIAL STATEMENTS

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	March 29,
	2009			December 28,
	(Unaudited)			2008
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	9,866		$	6,170
Accounts receivable		3,588			2,407
Current portion of notes receivable from Indian tribes		7,070			9,151
Deferred tax asset		557			—
Other current assets		742			1,232
Total current assets		21,823			18,960
Property and equipment, net		10,913			10,985
Long-term assets related to Indian casino projects:
Notes receivable, net of current portion		56,032			54,705
Intangible assets, net of accumulated amortization of $12.1 million and $9.7 million		45,163			47,586
Land held for development		1,810			1,810
Other		4,677			4,781
Total long-term assets related to Indian casino projects		107,682			108,882
Other assets:
Investments in securities, including put rights		26,599			26,544
Other		62			73
Total other assets		26,661			26,617
Total assets	$	167,079		$	165,444
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	18,018		$	18,152
Current portion of contract acquisition costs payable, net of $1.0 and $1.1 million discount		1,844			2,089
Accounts payable		659			531
Income taxes payable		16,913			16,241
Accrued payroll and related costs		2,052			1,745
Other accrued expenses		1,008			1,383
Total current liabilities		40,494			40,141
Long-term liabilities:
Non-revolving line of credit		2,000			2,000
Contract acquisition costs payable, net of current portion and $1.2 million and $1.4 million discount		4,893			5,253
Long-term liabilities		6,893			7,253
Total liabilities		47,387			47,394
Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par value; authorized 200,000 shares; 26,328 and 26,237 common shares issued and outstanding at March 29, 2009 and December 28, 2008		263			262
Additional paid-in capital		201,698			201,082
Accumulated deficit		(82,269	)		(83,294	)
Total shareholders’ equity		119,692			118,050
Total liabilities and shareholders’ equity	$	167,079		$	165,444

See notes to unaudited consolidated financial statements

3

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)

	Three months ended
	March 29,			March 30,
	2009			2008
	(In thousands,
	except per share data)
	(Unaudited)
Revenues:
Management fees	$	7,266		$	4,580
License fees		12			20
Total revenues		7,278			4,600
Costs and expenses:
Selling, general and administrative		4,042			3,864
Ohio initiative costs		—			1,646
Impairment losses		569			—
Amortization of intangible assets related to Indian casino projects		2,479			1,681
Depreciation		73			88
Total costs and expenses		7,163			7,279
Net unrealized losses on notes receivable		(163	)		(1,983	)
Loss from operations		(48	)		(4,662	)
Other income (expense):
Interest income		1,862			481
Interest expense		(395	)		(365	)
Other		(8	)		52
Total other income (expense), net		1,459			168
Earnings (loss) before income taxes and discontinued operations		1,411			(4,494	)
Income taxes		386			688
Earnings (loss) before discontinued operations		1,025			(5,182	)
Discontinued operations, net of tax		—			(1,723	)
Net earnings (loss) applicable to common shareholders	$	1,025		$	(6,905	)
Other comprehensive loss:
Unrealized loss on securities, net of tax		—			(2,397	)
Other comprehensive earnings (loss)	$	1,025		$	(9,302	)
Earnings (loss) applicable to common shareholders per share — basic — continuing operations	$	0.04		$	(0.21	)
Earnings (loss) applicable to common shareholders per share — basic — discontinued operations	$	—		$	(0.07	)
Earnings (loss) applicable to common shareholders per share — basic	$	0.04		$	(0.28	)
Earnings (loss) applicable to common shareholders per share — diluted — continuing operations	$	0.04		$	(0.21	)
Earnings (loss) applicable to common shareholders per share — diluted — discontinued operations	$	—		$	(0.07	)
Earnings (loss) applicable to common shareholders per share — diluted	$	0.04		$	(0.28	)
Weighted-average common shares outstanding — basic		26,325			24,604
Dilutive effect of common stock equivalents		61			—
Weighted-average common shares outstanding — diluted		26,386			24,604

See notes to unaudited consolidated financial statements

4

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Three months ended
	March 29,			March 30,
	2009			2008
	(In thousands)
	(Unaudited)
OPERATING ACTIVITIES:
Net earnings (loss)	$	1,025		$	(6,905	)
Loss from discontinued operations		—			(1,723	)
Earnings (loss) from continuing operations		1,025			(5,182	)
Adjustments to reconcile net earnings (loss) from continuing operations to net cash provided by (used in) operating activities:
Depreciation		73			88
Amortization of debt issuance costs		8			—
Accretion of contra note receivable		(714	)		—
Mark to market, trading		(1,288	)		—
Put rights loss		1,234			—
Amortization of intangible assets related to Indian casino projects		2,479			1,681
Share-based compensation		83			147
Impairment losses		569			—
Net unrealized losses on notes receivable		163			1,983
Deferred income taxes		(557	)		380
Changes in operating assets and liabilities:
Accounts receivable		(1,180	)		(2,446	)
Other current assets		493			(546	)
Income taxes payable		672			(800	)
Accounts payable		235			155
Accrued expenses		(66	)		601
Contract acquisition costs payable		(604	)		(301	)
Net cash provided by (used in) continuing operations		2,625			(4,240	)
Net cash used in discontinued operations		—			(2,690	)
Net cash provided by (used in) operating activities		2,625			(6,930	)
INVESTING ACTIVITIES:
Purchase of securities		—			(2,700	)
Sale / redemption of securities		—			6,500
Collections on notes receivable		—			276
Increases in long-term assets related to Indian casino projects		(796	)		(2,153	)
Advances on notes receivable		(4	)		(1,117	)
Purchase of property and equipment		(3	)		(49	)
Proceeds from repayment of note receivable		1,476			—
Increase in other long-term assets		—			29
Net cash provided by continuing operations		673			786
Net cash provided by discontinued operations		—			3,865
Net cash provided by investing activities		673			4,651
FINANCING ACTIVITIES:
Repayment of line of credit		(135	)		—
Cash proceeds from issuance of common and preferred stock		533			1,675
Net cash provided by financing activities		398			1,675
Net increase (decrease) in cash and cash equivalents — continuing operations		3,696			(1,779	)
Cash and cash equivalents — beginning of period — continuing operations		6,170			5,396
Cash and cash equivalents — end of period — continuing operations	$	9,866		$	3,617

See notes to unaudited consolidated financial statements

5

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1.   Basis of presentation

The unaudited consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation (“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 condensedand/or omitted. Lakes owned approximately 61% of the outstanding common stock of WPT Enterprises, Inc. (“WPTE”), a separate publicly-held media and entertainment company until November 21, 2008 when all of these shares were distributed to Lakes’ shareholders through a noncash dividend. Operations of WPTE after the date of distribution are not included in Lakes’ consolidated results of operations, and historical operating results of WPTE up to that date are presented as discontinued operations (see Note 2). 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 onForm 10-K for the year ended December 28, 2008, previously filed with the SEC on March 13, 2009, 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 reclassifications to amounts previously reported have been made to conform to the current period presentation.

2.   Discontinued operations

On October 1, 2008, Lakes’ Board of Directors declared a noncash dividend consisting of all of the shares of WPTE then owned by Lakes. Lakes previously owned 12,480,000 or approximately 61% of the outstanding common stock of WPTE, a separate publicly-held media and entertainment company. The record date for the dividend was October 24, 2008, which established the shareholders of record entitled to the dividend, thereby allowing the determination of the ratio of WPTE shares to be distributed per Lakes share. The dividend ratio for shareholders of record on the record date was approximately 0.479 shares of WPTE common stock for each share of Lakes common stock. The date of distribution was November 21, 2008. Operations of WPTE after the date of distribution are not included in Lakes’ consolidated results of operations, and historical operating results of WPTE up to that date are presented as discontinued operations.

Revenues, net loss before income taxes and income taxes for the three months ended March 28, 2008, have been derived from historical financial information and reported in discontinued operations as follows (in thousands, unaudited):

Revenues	$	4,962
Net loss before income taxes	$	(1,723	)
Income taxes		—
Discontinued operations	$	(1,723	)

3.   Investments in securities

The Company’s investment portfolio is comprised of investments in auction rate securities (“ARS”). The types of ARS investments that the Company owns are backed by student loans, the majority of which are guaranteed under the Federal Family Education Loan Program (“FFELP”). As a result of the liquidity issues surrounding the Company’s ARS, the Company’s ARS have been classified as long-term investments in securities. See also Note 7 for a discussion of Lakes’ credit line agreement with UBS Financial Services, Inc (“UBS”).

6

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

In November 2008, the Company accepted an offer from UBS granting nontransferable rights (the “Rights”) to sell the Company’s ARS held by UBS at par value to UBS at any time during the period of June 30, 2010, through July 2, 2012. The Rights represent a free standing asset separate from the ARS. UBS’ obligation under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

The estimated fair value of the Rights was $3.1 million and $4.3 million as of March 29, 2009 and December 28, 2008, respectively. The $1.2 million decrease in the estimated fair value of the Rights is included in interest income in the unaudited consolidated statement of earnings (loss) and comprehensive earnings (loss) for the three months ended March 29, 2009. The Rights do not meet the definition of a derivative instrument under Statement of Financial Accounting Standards (“SFAS”) SFAS 133,Accounting for Derivative Instruments and Hedging Activities. Therefore, the Company has elected to measure the Rights at estimated fair value under SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”), which permits the Company to elect the fair value option for recognized financial assets, to match the changes in the estimated fair value of the ARS. The Company expects that future changes in the estimated fair value of the Rights will approximate fair value movements in the related ARS.

The Company classifies its ARS as trading securities pursuant to SFAS 115,Accounting for Certain Investments in Debt and Equity Securities, which reflects management’s intent to exercise its Rights during the period June 30, 2010 to July 3, 2012. As of March 29, 2009 and December 28, 2008, investments in securities with original maturity dates beyond three months consist of the following (in thousands):

			Gross			Estimated
			Unrealized			Fair
	Cost		Losses			Value
						(Note 4)
March 29, 2009 (unaudited)
Maturity considered greater than one year
Auction rate securities (trading securities)	$	26,775	$	(3,243	)	$	23,532
December 28, 2008
Maturity considered greater than one year
Auction rate securities (trading securities)	$	26,775	$	(4,532	)	$	22,243

The $1.3 million increase in the estimated fair value of the ARS is included in interest income in the unaudited consolidated statement of earnings (loss) and comprehensive earnings (loss) for the three months ended March 29, 2009.

4.   Fair Value Measurement

On December 31, 2007 (the first day of fiscal 2008), the Company adopted the methods of estimating fair value as described in Statement of Financial Accounting Standards 157, Fair Value Measurements(“SFAS 157”), to value certain of its financial assets. The adoption of SFAS 157 did not affect net income. Financial Accounting Standards Board (“FASB”) Staff PositionFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(“FSPFAS 157-3”),was issued in October 2008, and was retroactively effective for the quarter ended September 28, 2008. The implementation of FSPFAS 157-3 also did not have a material impact on the Company’s valuation techniques, financial position, results of operations or cash flows.

The Company’s financial instruments that are measured at estimated fair value use inputs from among the three levels of the fair value hierarchy set forth in SFAS 157, however, none of the Company’s financial assets that are presented at their estimated fair value are measured using Level 1 or Level 2 inputs. Level 3 inputs are unobservable inputs that reflect management’s estimates about the assumptions that market participants would use

7

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

in pricing the asset or liability. Management develops these inputs based on the best information available, including internally-developed data.

The Company’s financial assets that are carried at estimated fair value are summarized below (in thousands):

	March 29,		December 28,
	2009		2008
	(Unaudited)
Auction rate securities (“ARS”)(*)	$	23,532	$	22,243
Put Rights(*)(***)		3,067		4,301
Notes receivable from Indian Tribes(**)		10,711		10,703
	$	37,310	$	37,247

(*)	See Note 3.
(**)	See Note 5.
(***)	The Company has elected the fair value option as offered by SFAS 159, only for its Rights. Therefore, material financial assets and liabilities not carried at fair value are still reported at carrying values.

The Company utilizes valuation models based on management’s estimates of expected cash flow streams and discount rates to value these assets.

The following is a list of the most significant factors affecting the Company’s cash flows and discount rate estimates by financial asset type:

•  ARS — Credit ratings of the ARS and collateral securities, default rates, other market and liquidity circumstances.

•  Put Rights — Credit worthiness of UBS including its credit swap rate.

•  Notes receivable from Indian Tribes — Probability of the casino opening based on the status of critical project milestones and the expected opening date, estimated pre- and post-opening interest rates, contractual interest rate and other terms, yield rates on US Treasury Bills and other financial instruments, the risk/return indicators of equity investments in general, specific risks associated with operating the casino and similar projects, and scenario weighting alternatives.

The following table summarizes the activity for the Company’s financial instruments that are reported at estimated fair value utilizing Level 3 inputs (in thousands):

						Notes
						Receivable
						from
	ARS		Rights			Indian Tribes			Total
Beginning balance — December 28, 2008	$	22,243	$	4,301		$	10,703		$	37,247
Total realized and unrealized gains (losses):
Gains (losses) included in earnings(*)		1,289		(1,234	)		—			55
Unrealized gains on notes receivable		—		—			(163	)		(163	)
Advances, net of allocation to intangible, other		—		—			171			171
Ending balance — March 29, 2009 (unaudited)	$	23,532	$	3,067		$	10,711		$	37,310

(*) See Note 3.

8

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

5.   Long-term assets related to Indian casino projects — notes receivable

The majority of the assets related to Indian casino projects are in the form of notes receivable due from the Indian tribes pursuant to the Company’s development, financing, consulting and management agreements. The repayment terms of the loans are specific to each Indian tribe and are dependent upon the successful development and operating performance of each gaming facility. Repayment of the loans is required only if distributable profits are available from the operation of the related casinos. In addition, repayment of the loans and the development, financing, consulting and management fees under contracts are subordinated to certain other financial obligations of the respective operations. Generally, the order of priority of payments from the casinos’ cash flows is as follows: a certain minimum monthly priority payment to the Indian tribe; repayment of senior debt associated with construction and equipping of the casino with interest accrued thereon; repayment of various debt with interest accrued thereon due to Lakes; development, financing, consulting and management fees to Lakes, with the remaining funds distributed to the Indian tribe.

Information with respect to the notes receivable activity is summarized in the following table (in thousands):

	Shingle
	Springs			Jamul
	Tribe			Tribe			Other			Total
Balance, December 30, 2007	$	53,592		$	21,406		$	3,797		$	78,795
Advances, net		1,880			3,452			260			5,592
Allocation of advances to intangible assets		(426	)		(2,116	)		(78	)		(2,620	)
Consulting contracts		—			—			(75	)		(75	)
Current portion of notes receivable		(9,151	)		—			—			(9,151	)
Changes in estimated fair value(*), (**)		(1,893	)		(15,626	)		(317	)		(17,836	)
Balance, December 28, 2008		44,002			7,116			3,587			54,705
Advances		—			659			137			796
Repayments		(1,476	)		—			—			(1,476	)
Accretion of contra note receivable(**)		714			—			—			714
Allocation of advances to intangible assets		—			(569	)		(56	)		(625	)
Changes in estimated fair value(*)		—			(4	)		(159	)		(163	)
Changes in current portion of notes receivable		2,081			—			—			2,081
Balance, March 29, 2009 (unaudited)	$	45,321		$	7,202		$	3,509		$	56,032

(*)

The changes in estimated fair value of notes receivable related to Indian casino projects under development are recorded as unrealized gains (losses) within the consolidated financial statements.

(**)

The Company estimated the fair value of the notes receivable from the Shingle Springs Tribe in conjunction with the opening of the Red Hawk Casino on December 17, 2008. Pursuant to Lakes’ accounting policy (See critical accounting policy summary in Part I, Item 2 of this Quarterly Report onForm 10-Q), upon opening of the casino, the difference between the then estimated fair value of the notes receivable and the amount contractually due under the notes began being amortized into income using the effective interest method. This difference will fully amortize over the remaining term of the note. These notes are no longer adjusted to estimated fair value on a quarterly basis, but rather they are evaluated for impairment pursuant to SFAS 114,Accounting by Creditors for Impairment of a Loan.

9

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

Shingle Springs Tribe.  The terms and assumptions used to value Lakes’ notes receivable from the Shingle Springs Tribe at estimated fair value at December 17, 2008 are as follows (dollars in thousands):

	As of December 17, 2008
Face value of note (principal and interest)	$74,372
	($49,512 principal and $24,860 interest)
Projected interest rate during the loan repayment term	6.41%
Discount rate	18.50%
Repayment terms of note	84 months
Probability rate of casino opening	100%

Jamul Tribe.  The terms and assumptions used to value Lakes’ notes receivable from the Jamul Tribe at estimated fair value are as follows (dollars in thousands):

	As of March 29, 2009	As of December 28, 2008
	(Unaudited)
Face value of note (principal and interest)	$50,492	$49,171
	($34,226 principal and $16,266 interest)	($33,567 principal and $15,604 interest)
Estimated months until casino opens (weighted average of three scenarios)	64 months	64 months
Projected interest rate until casino opens	6.66%	6.45%
Projected interest rate during the loan repayment term	9.05%	8.32%
Discount rate(*)	24.50%	23.50%
Repayment terms of note	120 months	120 months
Probability rate of casino opening (weighting of four scenarios)	50%	50%

(*) During the first quarter of 2009, Lakes increased the discount rate to 24.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. The Jamul Casino project has been delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and Lakes has recorded significant impairment charges against its investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project.

10

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

Iowa Tribe.  The terms and assumptions used to value Lakes’ notes receivable from the Iowa Tribe at estimated fair value are as follows (dollars in thousands):

	As of March 29, 2009	As of December 28, 2008
	(Unaudited)
Face value of note (principal and interest)	$5,873 ($4,871 principal and $1,002 interest)	$5,660 ($4,734 principal and $926 interest)
Estimated months until casino opens	24 months	20 months
Projected interest rate until casino opens	5.77%	5.93%
Projected interest rate during the loan repayment term	6.84%	6.24%
Discount rate(*)	19.50%	18.50%
Repayment terms of note	24 months	24 months
Probability rate of casino opening	85%	85%

(*) During the first quarter of 2009, Lakes increased the discount rate to 19.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes.

6.   Other long-term assets related to Indian casino projects

Intangible assets.  Intangible assets consist of costs associated with the acquisition of the management, development, consulting or financing contracts related to tribal gaming projects and are periodically evaluated for impairment after they are initially recorded.

Information with respect to the intangible assets related to the acquisition of management, development, consulting or financing contracts by project is summarized as follows (in thousands):

				Shingle
	Pokagon			Springs			Jamul
	Band			Tribe			Tribe			Other			Total
Balance, December 30, 2007	$	30,775		$	21,923		$	11,972		$	1,240		$	65,910
Allocation of advances		—			426			2,116			78			2,620
Amortization		(6,715	)		(133	)		—			(8	)		(6,856	)
Impairment losses		—			—			(14,088	)		—			(14,088	)
Balance, December 28, 2008		24,060			22,216			—			1,310			47,586
Allocation of advances		—			—			569			56			625
Amortization		(1,678	)		(798	)		—			(3	)		(2,479	)
Impairment losses(*)		—			—			(569	)		—			(569	)
Balance, March 29, 2009 (unaudited)	$	22,382		$	21,418		$	—		$	1,363		$	45,163

(*) Due to continued uncertainty surrounding the Jamul Casino project, Lakes recognized an impairment of $0.6 million related to the intangible assets associated with this project during the first quarter of 2009.

Land held for development.  Land held for development is comprised of land held for possible transfer to Indian tribes for use in certain of the future casino resort projects. In the event that this land is not transferred to the tribes, the Company has the right to sell it. As of March 29, 2009, land held for development related to Indian casino

11

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

projects was $1.8 million. Lakes currently owns approximately 96 acres of land held for development located adjacent to the Jamul Casino project location, which is carried at $1.0 million as of March 29, 2009.

As of March 29, 2009, Lakes owns approximately 139 acres of land held for development located adjacent to the Ioway Casino Resort project location. Lakes has invested $0.8 million in land held for development, which is being held for future transfer to the Iowa Tribe.

Other.  As of March 29, 2009 and December 28, 2008 these assets consist primarily of amounts due from KAR Entities that were advanced in connection with the acquisition of contracts rights related to the Red Hawk Casino and the proposed Jamul Casino. See the discussion of these arrangements below in Part  I, Item 2 of this Quarterly Report onForm 10-Q, included under the captions “Description of each Indian casino project and evaluation of critical milestones — Shingle Springs Tribe” and “Description of each Indian casino project and evaluation of critical milestones — Jamul Tribe”, respectively.

7.   Debt

Credit Line.  During 2008, Lakes entered into a client agreement (the “Credit Line”) with UBS, which is collateralized by Lakes’ ARS held at UBS (Note 3) and is due and payable on demand with interest at30-day LIBOR plus one percent. As of March 29, 2009, approximately $18.0 million was outstanding under the Credit Line.

Non-revolving line of credit.  Also during 2008, Lakes closed on a two-year interest only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with First State Bank. The Loan Agreement is collateralized by real property in Minnetonka, Minnesota, which is carried at approximately $6.5 million and included within property and equipment, net on the unaudited consolidated balance sheet as of March 29, 2009. Amounts borrowed under the Loan Agreement bear interest at 8.95%. As of March 29, 2009, Lakes had drawn $2 million under the Loan Agreement.

8.   Contract acquisition costs payable

The Company is obligated to pay approximately $11 million to an unrelated third party as part of an agreement associated with the Company obtaining the management contract with the Pokagon Band. The obligation is payable quarterly over the term of the five-year management agreement for the Four Winds Casino Resort. The Company is also obligated to pay approximately $3 million over 24 months to a separate unrelated third party on behalf of the Pokagon Band in accordance with the management contract. As of March 29, 2009, remaining amounts owed under these agreements were $6.7 million.

During 2006, the Lyle Berman Family Partnership (the “Partnership”) purchased a portion of the $11 million obligation discussed above from an unrelated third party. The Partnership receives approximately $0.3 million per year of the payment stream related to this obligation during the five-year term of the management contract of the Four Winds Casino Resort. Lyle Berman, Lakes’ Chairman and Chief Executive Officer, does not have an ownership or any other beneficial interest in the Partnership. Neil I. Sell, a director of Lakes, is one of the trustees of the irrevocable trusts for the benefit of Lyle Berman’s children who are the partners in and sole beneficiaries of the Partnership.

9.   Share-based compensation

Share-based compensation expense, which includes stock options and restricted stock units, was $0.1 million for the three months ended March 29, 2009 and March 30, 2008. See Note 11 for a discussion of the income tax benefits related to share-based compensation.

Stock options.  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

12

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

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.

The following values represent the average per grant for the indicated variables used to value options granted during the three months ended March 29, 2009 and March 30, 2008, respectively. There have been no significant changes to the assumptions thus far in 2009 and none are expected during the remainder of 2009.

	Three Months Ended
	March 29,			March 30,
Key valuation assumptions:	2009			2008
Expected dividend yield		—			—
Risk-free interest rate		2.52	%		3.66	%
Expected term (in years)		7.69 years			8.18 years
Expected volatility		79.82	%		48.77	%
Forfeiture rate		—			—
Weighted-average grant-date fair value per share	$	2.46		$	3.35

•  Expected dividend yield — As the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.

•  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.

•  Expected term (in years) — 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 March 29, 2009. Management believes historical data is reasonably representative of future exercise behavior.

•  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 Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment-Revised 2004(“SFAS 123R”) will be reduced for estimated forfeitures. SFAS 123R 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.

13

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

The following table summarizes Lakes’ stock option activity during the three months ended March 29, 2009 and March 30, 2008 (unaudited):

	Number of common shares
									Weighted-avg.
	Options					Available			exercise
	outstanding			Exercisable		for grant			price
2009
Balance at December 28, 2008		2,862,964			2,498,864		343,150		$	6.60
Authorized		—			—		—			—
Granted(*)		337,000			—		(337,000	)		3.25
Forfeited/cancelled/expired		(109,423	)		—		109,423			4.29
Exercised		(91,041	)		—		—			3.80
Balance at March 29, 2009		2,999,500			2,455,700		115,573		$	6.24
2008
Balance at December 30, 2007		4,345,650			3,842,200		584,750		$	6.08
Authorized		—			—		—			—
Granted		196,000			—		(196,000	)		5.73
Forfeited/cancelled/expired		—			—		—			—
Exercised		(400,000	)		—		—			4.19
Balance at March 30, 2008		4,141,650			3,798,200		388,750		$	6.25

(*) Includes 140,000 of restricted stock units granted during the first quarter of 2009.

The following table summarizes significant ranges of Lakes’ outstanding and exercisable options as of March 29, 2009 (unaudited):

	Options outstanding at March 29, 2009
			Weighted-						Options exercisable at March 29, 2009
			Average				Aggregate						Aggregate
	Number		Remaining		Weighted-average		intrinsic		Number		Weighted-average		intrinsic
Range of exercise prices	outstanding		contractual life		exercise price		value		exercisable		exercise price		value
Restricted stock units		140,000
$  (3.25 — 3.63)		744,600		3.9 years	$	3.30	$	—		547,600	$	3.32	$	—
(3.64 — 5.45)		300,300		3.4 years		4.32		—		221,925		4.34		—
(5.46 — 7.26)		174,750		7.3 years		6.50		—		89,625		6.57		—
(7.27 — 9.08)		1,353,000		4.5 years		7.54		—		1,352,625		7.54		—
(9.09 — 10.90)		109,250		3.8 years		10.04		—		89,525		10.14		—
(10.91 — 12.71)		18,000		6.8 years		11.52		—		9,600		11.56		—
(12.72 — 14.53)		89,600		5.8 years		13.04		—		85,800		13.05		—
(14.54 — 16.34)		30,000		6.0 years		16.01		—		19,000		15.96		—
(16.35 — 16.84)		40,000		4.4 years		16.84		—		40,000		16.84		—
		2,999,500		4.7 years	$	6.24	$	—		2,455,700	$	6.80	$	—

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of that date. Based on Lakes’ closing stock price of $2.17 on March 29, 2009, none of the stock options granted by Lakes have an intrinsic value. The total intrinsic value of options exercised during the three months ended March 29, 2009 was not material. Options exercised during the three months ended March 30, 2008 did not have an intrinsic value. As of March 29,

14

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

2009, Lakes’ unrecognized share-based compensation was approximately $1.2 million, which is expected to be recognized over a weighted-average period of 2.5 years.

Lakes issues new shares of common stock upon the exercise of options.

Restricted stock units.  The following table summarizes Lakes’ restricted stock unit activity during the three months ended March 29, 2009 (unaudited):

			Weighted-average
	Restricted		grant-
	stock units		date fair value
Non-vested shares at December 28, 2008		—	$	—
Granted		140,000		3.25
Vested		—		—
Forfeited		—		—
Non-vested shares at March 29, 2009		140,000	$	3.25

As of March 29, 2009, Lakes’ unrecognized share-based compensation was approximately $0.4 million related to non-vested shares, which is expected to be recognized over a weighted-average of 2.8 years. No restricted stock units vested during the three months ended March 29, 2009.

10.   Earnings (Loss) per share

For all periods, basic earnings (loss) applicable to common shareholders per share (“EPS”) is calculated by dividing net earnings (loss) applicable to common shareholders by the weighted-average common shares outstanding. Diluted EPS in profitable years reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings (loss) applicable to common shareholders by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options applicable to common shareholders of 631,908 shares for the three months ended March 30, 2008, were not used to compute diluted loss per share applicable to common shareholders because the effects would have been anti-dilutive.

11.   Income Taxes

At December 28, 2008, the Company had recorded a 100% valuation allowance against the remaining deferred tax assets arising from net operating loss carryforwards and capital loss carryforwards. Management has evaluated all evidence and has determined that cumulative net losses generated over the past three years outweigh the current positive evidence that the Company believes exists surrounding its ability to generate significant income from its long-term assets related to Indian casino projects. However, the Company expects to release $3.3 million of deferred tax assets related to net operating loss carryforwards that will offset current book income, of which approximately $1.1 million will be credited to additional paid-in capital relating to the release of valuation allowances against tax windfall benefits related to share-based compensation from prior years.

The Company recorded $0.2 million of interest related to the uncertain tax positions to income tax expense for the three months ended March 29, 2009.

12.   Contingencies

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

15

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements — (Continued)

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 continue to vigorously contest this action by the Louisiana Department of Revenue. However, Lakes may be required to pay up to the $8.6 million assessment plus interest if Lakes is not successful in this matter. Lakes has recorded an estimated liability related to this examination including accrued interest and fees, which is included as part of income taxes payable on the accompanying consolidated balance sheets.

Red Hawk Casino.  Lakes may be required to pay Kevin Kean and Jerry Argovitz under their respective agreements with Lakes resulting from the opening of the Red Hawk Casino on December 17, 2008. See the discussion in Part  I, Item 2 of this Quarterly Report onForm 10-Q below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Shingle Springs Tribe”.

Miscellaneous legal matters.  Lakes and its subsidiaries are involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon Lakes’ unaudited consolidated financial statements.

13.   Subsequent Events

On April 1, 2009, the Company submitted an application to the Kansas Lottery Commission for a Gaming Facility Manager license to develop and operate a casino in the South Central Kansas Gaming Zone. Lakes has not yet been notified whether or not it will receive this license.

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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 or financing agreements with four separate tribes for casino operations in Michigan, California, and Oklahoma for a total of five separate casino projects as follows:

•  We developed, and have a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band in New Buffalo Township, Michigan near Interstate 94. We began managing the Four Winds Casino Resort when it opened to the public on August 2, 2007. The Four Winds Casino Resort is located near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, 72 table games, a 12-table poker room, a 165-room hotel, five restaurants, three bars, a child care facility and arcade, retail space and a parking garage.

•  We developed, and have a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Tribe in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. We began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,100 electronic gaming devices, 75 table games, six restaurants, six bars, retail space, a parking garage, a child care facility and arcade. To provide direct freeway access to the Red Hawk Casino, an affiliate of the Shingle Springs Tribe constructed a dedicated inter-change on U.S. Highway 50.

•  We are managing the Cimarron Casino for the Iowa Tribe in Perkins, Oklahoma, under a seven-year management contract, which commenced in 2006. The Cimarron Casino features approximately 375 electronic gaming machines.

•  We have contracts to develop and finance a casino to be built on the reservation of the Jamul Indian Village (the “Jamul Tribe”) located on State Highway 94, approximately 20 miles east of San Diego, California (the “Jamul Casino”). This project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and we currently expect to continue our involvement with this project.

•  We have a consulting agreement and management contract with the Iowa Tribe in connection with developing, equipping and managing a casino resort which is planned to be built near Route 66 and approximately 25 miles northeast of Oklahoma City, Oklahoma (the “Ioway Casino Resort”). 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. In January 2009, the BIA granted approval on the purchase of a60-acre allotment. The remaining transactions for the final 14 acres still require BIA approval. Lakes submitted its management contract with the Iowa Tribe for the Ioway Casino Resort to the NIGC for review in 2005. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract.

We have also explored, and continue to explore, other development projects with Indian tribes. We also explore other non-Indian casino development projects and other business activities.

On October 1, 2008, Lakes’ Board of Directors declared a noncash dividend consisting of all of the shares of WPTE then owned by Lakes. Lakes previously owned 12,480,000 or approximately 61% of the outstanding common stock of WPTE, a separate publicly-held media and entertainment company. The record date for the dividend was October 24, 2008, which established the shareholders of record entitled to the dividend, thereby allowing the determination of the ratio of WPTE shares to be distributed per Lakes share. The date of distribution was November 21, 2008. Operations of WPTE after the date of distribution are not included in Lakes’ consolidated results of operations, and historical operating results of WPTE up to that date are presented as discontinued operations.

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Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report onForm 10-Q for the three months ended March 29, 2009.

Three months ended March 29, 2009 compared to the three months ended March 30, 2008

Revenues.  Total revenues were $7.3 million for the first quarter of 2009 compared to $4.6 million for the first quarter of 2008. Lakes’ revenue increase of $2.7 million was primarily due to improved results from the Four Winds Casino Resort during the first quarter of 2009, as well as a full quarter contribution of management fees from the Red Hawk Casino, which opened to the public on December 17, 2008. The first quarter of 2009 and 2008 also included full quarter contributions from the Cimarron Casino.

Selling, general and administrative expenses.  Selling, general and administrative expenses were $4.0 million in the first quarter of 2009 compared to $3.9 million for the first quarter of 2008. For the first quarter of 2009, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.2 million, including share-based compensation, travel expenses of $0.9 million, and professional fees of $0.6 million. For the first quarter of 2008, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.2 million, including share-based compensation, travel expenses of $0.6 million, and professional fees of $0.6 million.

Ohio initiative costs.  Development costs associated with the Ohio casino resort initiative, which was terminated after the November 2008 election, were $1.6 million during the first quarter of 2008.

Impairment losses.  Impairment losses were $0.6 million in the first quarter of 2009. There were no impairment losses during the first quarter of 2008. Due to continued uncertainty surrounding the Jamul Casino project associated with delays in progress as well as ongoing issues in the credit markets and general economic uncertainties, we recognized an impairment during the first quarter of 2009.

Amortization of intangible assets related to Indian casino projects.  Amortization of intangible assets related to Indian casino projects for the first quarter of 2009 was $2.5 million compared to $1.7 million for the first quarter of 2008. The increase of $0.8 million related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened to the public on December 17, 2008. Amortization for the first quarter of 2008 related primarily to the intangible assets associated with the Four Winds Casino Resort.

Net unrealized losses on notes receivable.  Net unrealized losses on notes receivable relate primarily to our notes receivable from Indian tribes, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the first quarter of 2009, we reported net unrealized losses on notes receivable of $0.2 million, compared to net unrealized losses of $2.0 million in the prior-year period. Net unrealized losses in the first quarter of 2009 were related to the Jamul Casino project with the Jamul Tribe and Iowa Tribe’s Ioway Casino project due primarily to ongoing issues in the credit markets and general economic uncertainties. Net unrealized losses in the first quarter of 2008 were due primarily to a decrease in projected interest rates related to the notes receivable related to the Red Hawk Casino project with the Shingle Springs Tribe and the notes receivable related to the Jamul Casino project with the Jamul Tribe.

Other income (expense), net.  Other income (expense), net for the first quarter of 2009 was $1.5 million compared to $0.2 million for the first quarter of 2008. Other income (expense), net in the first quarter of 2009 is primarily associated with interest earned on the notes receivable from the Shingle Springs Tribe.

Income Taxes.  The income tax provision was $0.4 million and $0.7 million for the three months ended March 29, 2009 and March 30, 2008, respectively. Our effective tax rates were 27% and 15% for the first quarter of 2009 and the corresponding 2008 period, respectively. Lakes’ income tax provision in the current year period consists primarily of current income tax, and approximately $0.2 million of interest on a Louisiana tax audit matter (Note 12 to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q). In the prior year period, the income tax provision was primarily related to a valuation allowance

18

against deferred tax assets related to capital losses for the portion that were not expected to be realized, and approximately $0.3 million of interest on a Louisiana tax audit matter.

Liquidity and Capital Resources

As of March 29, 2009, we had $9.9 million in cash and cash equivalents and $23.5 million of long-term investments in securities recorded at estimated fair value. We currently believe that our cash and cash equivalents balance, our cash flows from operations and the financing sources discussed below will be sufficient to meet our working capital requirements during the next 12 months. However, our operating results and performance depend significantly on the current economic conditions and their impact on consumer spending in the casinos we manage. Declines in consumer spending may cause our revenue generated from the management of Indian casinos to be adversely impacted. Current economic conditions and issues in the credit markets may impact our ability to finance projects under development.

On October 1, 2008, Lakes’ Board of Directors declared a noncash dividend consisting of all of the shares of WPTE then owned by Lakes. The date of distribution was November 21, 2008. WPTE cash and investments have not been used in our business. The exclusion of WPTE from our consolidated financial statements does not have an impact on Lakes’ cash position.

All of our investments in securities are ARS, held by UBS and are classified as trading securities as of March 29, 2009. As a result of liquidity issues surrounding our ARS, our ARS are classified as long-term investments in securities. The types of ARS investments that we own are backed by student loans, the majority of which are guaranteed under the Federal Family Education Loan Program (“FFELP”). None of our investments in ARS qualify, or have ever been classified in our consolidated financial statements, as cash or cash equivalents.

In November 2008, we accepted an offer from UBS granting us nontransferable rights (the “Rights”) to sell our ARS held by UBS at par value to UBS at any time during the period of June 30, 2010, through July 2, 2012. We expect to sell our ARS under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. UBS’s obligation under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

During 2008, we entered into a credit agreement with UBS (the “Credit Line”) which is due and payable on demand with interest at30-day LIBOR plus one percent. As of March 29, 2009, approximately $18.0 million was outstanding under the Credit Line.

Also during 2008, we closed on a two-year interest only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with First State Bank. Amounts borrowed under the Loan Agreement bear interest at 8.95%. As of March 29, 2009, Lakes has drawn $2 million under the Loan Agreement.

During the first quarter of 2009, Lakes has recognized significant revenues from the management of Indian casino properties, and going forward Lakes expects this trend to continue as Lakes is managing the Cimarron Casino, the Four Winds Casino Resort and the Red Hawk Casino. However, because of the relatively short operating history of the casinos we manage, and the uncertainty in the economic environment, no assurance can be given that this will occur. Lakes’ agreements with tribal partners require that we provide certain financing for project development in the form of loans, which has been a major use of cash over the past three years, in addition to on-going corporate costs and costs incurred during 2008 for the Ohio casino resort initiative. These loans to our tribal partners 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.

Our cash forecast requirements do not include construction-related costs that will be incurred when pending and future development projects begin construction. The construction of our pending casino projects will depend on the ability of the tribesand/or Lakes to obtain additional financing for the projects, which based on the general economic environment, is subject to considerable uncertainty. 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 future results of operations, cash flows and financial condition. In order to assist the tribes, we may be required to

19

guarantee the tribes’ debt financing or otherwise provide support for the tribes’ obligations. Guarantees by us, if any, will increase our potential exposure to losses and other adverse consequences in the event of a default by any of these tribes.

If our casino development projects with the Iowa Tribe and the Jamul Tribe are not constructed or if constructed, do not achieve profitable operations in the highly competitive market for gaming activities, it is likely that we would incur substantial or complete losses on our related notes receivable and intangible assets associated with those projects. In addition, 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.

We have received various regulatory approvals to develop our own casino near Vicksburg, Mississippi. However, uncertainty exists surrounding the development of this project due primarily to changes in the economic environment and credit markets. As a result, the assets associated with the Vicksburg project are recorded at their estimated fair value of $5.4 million as of March 29, 2009.

The following table summarizes the remaining contractual obligations as of March 29, 2009 (in millions):

	Payment due by period
			Less than						More than
Contractual obligations	Total		1 year		1-3 years		3-5 years		5 years
	(Unaudited)
Remaining casino development commitment(1)
Jamul Tribe(2)	$	—	$	—	$	—	$	—	$	—
Shingle Springs Tribe(3)		—		—		—		—		—
Pokagon Band(4)		6.7		1.8		3.7		1.2		—
Iowa Tribe — Ioway Casino project(5)		—		—		—		—		—
Non-revolving line of credit(6)		2.0		—		2.0		—		—
Lakes operating lease(7)		4.5		0.4		0.9		0.9		2.3
	$	13.2	$	2.2	$	6.6	$	2.1	$	2.3

(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) 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 March 29, 2009.
(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 of up to $350 million from which advances will be made to the Jamul Tribe to pay for the design and construction of a casino project. The current plan is for a smaller scale gaming facility that will become a solely class II electronic gaming device facility which will not require a compact with the State of California. The agreement between Lakes and the Jamul Tribe is being modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State of California or the NIGC.
(3)	We may be required to pay Mr. Kean and Mr. Argovitz under their respective agreements with Lakes resulting from the opening of the Red Hawk Casino on December 17, 2008. See also the discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Shingle Springs Tribe”.
(4)	We are obligated to pay approximately $11 million to an unrelated third party as part of an agreement associated with us obtaining the management contract with the Pokagon Band, payable in quarterly installments over five years. We are also obligated to pay approximately $3 million over 24 months to a separate, unrelated third party on behalf of the Pokagon Band in accordance with the management contract. (Note 8 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q).
(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

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	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)	During 2008, Lakes closed on a two-year interest only $8.0 million non-revolving line of credit (the “Loan Agreement”) with First State Bank. Amounts borrowed under the Loan Agreement bear interest at 8.95%. See Note 7 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q).
(7)	Lakes leases an airplane under a non-cancelable operating lease that expires on March 1, 2018 and has certain other operating leases.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates 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, share-based compensation, income taxes, and long-term assets related to Indian casino projects. 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 consolidated financial statements.

Revenue recognition.  Revenue from the management, development, and financing of, and consulting with, Indian-owned casino gaming facilities is recognized as it is earned pursuant to each respective agreement. See further discussion below under the caption “Long-term assets related to Indian casino projects.”

Share-based compensation expense.  We use the 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. We determine the estimated fair value per share of restricted stock units as the closing stock price on the date of grant, as reported by the Nasdaq Global Market.

Income taxes.  We account for income taxes under the provisions of SFAS 109,Accounting for Income Taxes.  The determination of our income tax-related account balances requires the exercise of significant judgment by management. Accordingly, in estimating the annual effective income tax rate for interim financial reporting purposes, we assess the likelihood that deferred tax assets will be recovered from future taxable income and establish an appropriate valuation allowance when management believes recovery it is not more likely than not.

We also account for income tax uncertainties under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation 48,Accounting for Uncertainty in Income Taxesand record estimated penalties and interest related to income tax matters, including uncertain tax positions, as a component of income tax expense.

Long-term assets related to Indian casino projects:

Notes receivable.  We have formal procedures governing our evaluation of opportunities for potential Indian-owned casino development projects that we follow before entering into agreements to provide financial support for the development of these projects. We determine whether there is probable future economic benefit prior to 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?

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•  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, developmentand/or management opportunity.

We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in Emerging Issues Task Force96-12,Recognition of Interest Income and Balance Sheet Classification of Structured Notes. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available from the operations. However, in the event our development activity is terminated prior to completion, we generally retain the right to collect in the event of completion by another developer. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects (at least prior to commencement of operations), the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset, and the two assets are accounted for separately.

Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current 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 status of regulatory approval 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 consolidated statement of earnings (loss) and comprehensive earnings (loss).

Upon opening of the casino, any difference between the then estimated fair value of the notes receivables and the amount contractually due under the notes is amortized into income using the effective interest method over the remaining term of the note. Such notes would then be evaluated for impairment pursuant to SFAS 114Accounting by Creditors for Impairment of a Loan (“SFAS 114”).

Intangible assets related to Indian casino projects.  Intangible assets related to the acquisition of the management, development, consulting or financing contracts are accounted for using the guidance in SFAS 142,Goodwill and Other Intangible Assets(“SFAS 142”) and FASB Staff Position142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”). Pursuant to SFAS 142, the assets are periodically evaluated for impairment based on the estimated cash flows from the contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects described below, were to exceed the undiscounted cash flow, an impairment would

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be recorded. Such an impairment would be measured based on the difference between the fair value and carrying value of the assets. In accordance withFSP 142-3, we amortize the intangible assets related to the acquisition of the management, development, consulting or financing contracts under the straight-line method over the term of the contracts which 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 have the right to 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 are 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 non-reimbursable costs related to the projects that are not included in notes receivable, which are expensed as incurred. These costs include salaries, travel and certain legal costs.

The consolidated balance sheets as of March 29, 2009 and December 28, 2008 include long-term assets related to Indian casino projects of $107.7 million and $108.9 million, respectively. The amounts are as follows by project (in thousands):

	March 29, 2009
			Shingle
	Pokagon		Springs		Jamul		Iowa
	Band		Tribe		Tribe		Tribe		Other		Total
	(Unaudited)
Notes receivable(*)	$	—	$	45,321	$	7,202	$	3,509	$	—	$	56,032
Intangible assets related to Indian casino projects		22,382		21,418		—		1,363		—		45,163
Land held for development		—		—		960		850		—		1,810
Other		60		767		761		370		2,719		4,677
	$	22,442	$	67,506	$	8,923	$	6,092	$	2,719	$	107,682

	December 28, 2008
			Shingle
	Pokagon		Springs		Jamul		Iowa
	Band		Tribe		Tribe		Tribe		Other		Total
Notes receivable(*)	$	—	$	44,002	$	7,116	$	3,587	$	—	$	54,705
Intangible assets related to Indian casino projects		24,060		22,216		—		1,310		—		47,586
Land held for development		—		—		960		850		—		1,810
Other		60		767		847		388		2,719		4,781
	$	24,120	$	66,985	$	8,923	$	6,135	$	2,719	$	108,882

(*) In conjunction with the opening of the Red Hawk Casino on December 17, 2008 and pursuant to Lakes’ accounting policy, the notes receivable from the Shingle Springs Tribe are no longer adjusted to estimated fair value on a quarterly basis, but rather they are evaluated for impairment pursuant to SFAS 114. Approximately $7.1 million and $9.2 million of the notes receivable from the Shingle Springs Tribe are due within the next

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fiscal year and have been classified as a current asset in the unaudited consolidated balance sheet as of March 29, 2009 and December 28, 2008, respectively.

The key assumptions, estimates and criteria used in the determination of the estimated fair value of the notes receivable are primarily unobservable level three inputs, which are casino opening dates, pre- and post-opening date interest rates, discount rates and probabilities of projects opening. The estimated casino opening dates used in the valuations of the notes receivable related to Indian casino projects that are not yet under construction reflect 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. Once a casino project is under construction, the weighted-average scenarios are no longer used and only the planned opening date is used in the valuation. The 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 various possible scenarios with one scenario assuming the casino never opens. The other scenarios assume the casino opens but apply different opening dates. The probability-weighting applied to each scenario is intended to effectively capture 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):

Jamul Tribe:

	As of March 29, 2009	As of December 28, 2008
	(Unaudited)
Face value of note (principal and interest)	$50,492	$49,171
	($34,226 principal and $16,266 interest)	($33,567 principal and $15,604 interest)
Estimated months until casino opens (weighted-average of three scenarios)	64 months	64 months
Projected interest rate until casino opens	6.66%	6.45%
Projected interest rate during the loan repayment term	9.05%	8.32%
Discount rate(*)	24.50%	23.50%
Repayment terms of note	120 months	120 months
Probability rate of casino opening (weighting off our scenarios)	50%	50%

(*) During the first quarter of 2009, Lakes increased the discount rate to 24.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. See also the discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Jamul Tribe”.

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Iowa Tribe:

	As of March 29, 2009	As of December 28, 2008
	(Unaudited)
Face value of note (principal and interest)	$5,873	$5,660
	($4,871 principal and $1,002 interest)	($4,734 principal and $926 interest)
Estimated months until casino opens	24 months	20 months
Projected interest rate until casino opens	5.77%	5.93%
Projected interest rate during the loan repayment term	6.84%	6.24%
Discount rate(*)	19.50%	18.50%
Repayment terms of note	24 months	24 months
Probability rate of casino opening	85%	85%

(*) During the first quarter of 2009, Lakes increased the discount rate to 19.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. See also the discussion below included under the caption “Description of each Indian casino project and evaluation of critical milestones — Iowa Tribe”.

The following table represents a sensitivity analysis prepared by Lakes as of March 29, 2009 on the notes receivable from the Jamul Tribe and Iowa Tribe’s Ioway Casino, based upon changes in the probability rate of the casino opening by five percentage points and the estimated casino opening date by one year:

	Estimated fair		Sensitivity analysis
	value notes		5% less		One year				5% increased		One year
	receivable		probable		delay		Both		probability		sooner		Both
	(In thousands)
Jamul Tribe	$	7,202	$	6,514	$	6,228	$	5,638	$	7,890	$	8,336	$	9,137
Iowa Tribe		3,509		3,307		3,115		2,932		3,721		3,964		4,197
	$	10,711	$	9,821	$	9,343	$	8,570	$	11,611	$	12,300	$	13,335

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; however, in reality, changes in these factors may result in changes in another. For example, the change in probability could be associated with a change in discount rate, which might magnify or counteract the sensitivities.

The following represents the nature of the advances to the tribes for projects under development (the Jamul Tribe and the Iowa Tribe), which represent the principal amount of the notes receivable, as of March 29, 2009 and December 28, 2008 (in thousands).

	As of March 29, 2009
	Jamul		Iowa
Advances Principal Balance	Tribe		Tribe		Total
	(Unaudited)
Note receivable, pre-construction(a)	$	33,276	$	3,769	$	37,045
Note receivable, land(b)		950		1,102		2,052
	$	34,226	$	4,871	$	39,097

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	As of December 28, 2008
	Jamul		Iowa
Advances Principal Balance	Tribe		Tribe		Total
Note receivable, pre-construction(a)	$	32,617	$	3,746	$	36,363
Note receivable, land(b)		950		988		1,938
	$	33,567	$	4,734	$	38,301

(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.

The notes receivable pre-construction advances consist of the following principal amounts advanced to the Jamul Tribe and Iowa Tribe at March 29, 2009 and December 28, 2008 (in thousands):

	March 29,		December 28,
Jamul Tribe	2009		2008
	(Unaudited)
Monthly stipend	$	5,842	$	5,687
Construction		2,213		2,102
Legal		4,672		4,598
Environmental		2,292		2,292
Design		14,608		14,324
Gaming license		952		917
Lobbyist		2,697		2,697
	$	33,276	$	32,617

	March 29,		December 28,
Iowa Tribe	2009		2008
	(Unaudited)
Construction	$	253	$	253
Legal		256		252
Design		3,235		3,216
Gaming license		25		25
	$	3,769	$	3,746

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 the intangible assets, land held for development and other costs associated with each of the projects for impairment based on the estimated undiscounted cash flows from the applicable management contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects were to exceed the undiscounted cash flow, an impairment loss would be recorded, based on the difference between the estimated 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 Lakes predecessor Grand Casinos Inc.) began developing Indian casino projects in 1990 and demonstrated success from the day the first Indian casino opened in 1991 through the expiration of the Coushatta management contract in 2002. Additionally, we have been managing the Cimarron Casino since 2006, the Four Winds Casino Resort since August of 2007, and the Red Hawk Casino since December of 2008. Our successful history legitimizes many of the key assumptions supporting the financial models. Forecasts for each applicable casino development

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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 an additional resource on which to base our revenue expectations. The forecasts 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 the Jamul Casino project and the Ioway Casino project are as follows:

Jamul Tribe

Lakes 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. 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 is not currently believed to require approval by the State or the NIGC.

	March 28,		December 28,
	2009		2008
	(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	$	172	$	172
Win/Table game/day — 1st year	$	471	$	471
Win/Poker table/day — 1st year	$	312	$	312

The Jamul Casino project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project.

Iowa Tribe

	March 28,		December 28,
	2009		2008
	(Unaudited)
No. of Class II electronic gaming devices		1,000		1,200
No. of Table games		25		20
No. of Poker tables		—		5
Win/Class II electronic gaming devices/day — 1st year	$	160	$	232
Win/Table game/day — 1st year	$	450	$	1,171
Win/Poker table/day — 1st year	$	—	$	529

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

Pokagon Band

Business arrangement.  On August 2, 2007, the Four Winds Casino Resort in New Buffalo, Michigan opened to the public. We receive approximately 24% of net income up to a certain level and 19% of net income over that level, as a management fee. The term of the management contract is five years, which began on August 2, 2007. Payment of our management fee is subordinated to the Pokagon Gaming Authority’s senior indebtedness relating to the Four Winds Casino Resort. The Pokagon Band may also buy out the management contract after two years from the opening date. The buy out amount is calculated based upon the previous 12 months of management fees earned multiplied by the remaining number of years under the management contract, discounted back to the present value at the time the buy-out occurs. The NIGC approved the management contract in March 2006.

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Shingle Springs Tribe

Business arrangement.  On December 17, 2008, the Red Hawk Casino opened to the public. We receive a management fee equal to between 21% and 30% of net income (as defined by the management contract) of the operations annually for the first five years, with a declining percentage in years six and seven. Payment of our management fee is subordinated to the repayment of $450 million senior note financing of an affiliate of the Shingle Springs Tribe, the repayment of $77 million furniture, furnishings and equipment financing and a minimum priority payment to the Shingle Springs Tribe. Generally, the order of priority of payments from the Red Hawk Casino’s cash flows is as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe, repayment of various debt with interest accrued thereon, management fee to Lakes, and other obligations, with the remaining funds distributed to the Shingle Springs Tribe. 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 buy-out amount is based upon the previous 12 months of management fees earned multiplied by the remaining number of years under the contract, discounted back to the present value at the time the buy-out occurs. If the Shingle Springs Tribe elects to buy out the contract, all outstanding amounts owed to Lakes immediately become due and payable. The NIGC approved the management contract in July 2004, which was subsequently amended in April 2007.

We acquired our initial interest in the development and management contracts for the Red Hawk Casino from 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 Red Hawk 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 Red Hawk Casino project from the date of election through the term of the 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 Red Hawk 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 Red Hawk Casino project from the date of election through the term of the casino management contract (but not during any renewal term of such management contract). As of March 29, 2009, neither Mr. Kean nor Mr. Argovitz had provided evidence of suitability by relevant gaming authorities or elected to receive annual payments of $1 million as described above.

Jamul Tribe

The Jamul Casino project has been delayed due to various political and regulatory issues related to access from State Highway 94 to the proposed casino site. The Jamul Tribe first requested approval on a driveway road connection to State Highway 94, but was denied a permit by San Diego County (the “County”).

In September 2008, the BIA notified the Jamul Tribe that an access road on its land had been approved as an Indian Reservation Road (“IRR”), which would allow the Jamul Tribe to construct a second potential access point to the reservation without the need for a permit from County. The Jamul Tribe notified CalTrans of this additional access option but CalTrans viewed this access point no differently than the proposed driveway road connection to State Highway 94. The Jamul Tribe has filed a federal complaint requesting the Federal Court to order CalTrans to cease its efforts to impede the Jamul Tribe from using its lands for economic development purposes. After losing a motion to dismiss, CalTrans denied the allegations. The parties subsequently reached an agreement whereby the Jamul Tribe dismissed its lawsuit and CalTrans removed its contention of its ability to restrict access to the reservation, and agreed to work positively with the Jamul Tribe to expeditiously process the encroachment permit application.

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Business arrangement.  The Jamul Tribe has an approximatesix-acre reservation on which the casino project is currently planned to be built. The reservation is located near San Diego, California. 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 have met on several occasions in an attempt to address the State’s comments related to compact requirements. Throughout fiscal 2007, Lakes and the Jamul Tribe were evaluating 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. The proposed gaming facility has been reduced in size and scope because the State’s comments on the Jamul Tribe’s existing compact or a proposed new contract is expected to take more time than is currently acceptable to the Jamul Tribe. The current plan is for a smaller scale gaming facility that will become a solely class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe (discussed below) will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC.

Effective March 30, 2006, Lakes entered into a development financing and services agreement with the Jamul Tribe to assist the Jamul Tribe in developing the Jamul Casino which the Jamul Tribe will manage. As part of the current agreement, Lakes will use its best efforts to obtain financing of up to $350 million, from which advances will be made to the Jamul Tribe to pay for the design and construction of the Jamul Casino. 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 five percent. 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. However, as discussed above, this agreement is planned to be modified with resulting lower fees to Lakes. There is also no assurance that third party financing will be available with acceptable terms. If Lakes is unable to obtain the appropriate amount of financing for this project, the project may not be completed as planned.

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

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Our 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 March 29, 2009, December 28, 2008 and December 30, 2007. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones.

Critical milestone	March 29, 2009	December 28, 2008	December 30, 2007
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 the land is reservation land.	Not necessary, as land is reservation land.	Not necessary, as land is reservation land.
Usable county agreement, if applicable	N/A	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan	N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.	N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.	N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.
NIGC approval of management contract in current and desired form	N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.	N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.	N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.
Resolution of all litigation and legal obstacles	N/A, there has been some local opposition regarding the project.	No, see discussion above regarding the federal complaint filed by the Jamul Tribe against CalTrans.	N/A, there has been some local opposition regarding the project.
Financing for construction	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.	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 current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC.	Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC.	Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC.

Our 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 to be taken into trust. We believe that 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 aland-in-trust process. 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 successfully built on the reservation land.

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The Jamul Casino project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project.

Iowa Tribe

Business arrangement.  On March 15, 2005, Lakes entered into consulting agreements and management contracts with the Iowa Tribe of Oklahoma, a federally recognized Indian Tribe, and The Iowa Tribe of Oklahoma, a federally-chartered corporation (collectively, the “Iowa Tribe”). The agreements became effective as of January 27, 2005. Lakes will consult on development of the Ioway Casino Resort, a new first class casino with ancillary amenities and facilities to be located on Indian land approximately 25 miles northeast of Oklahoma City along Route 66, until regulatory approvals are received for the management contract for the Ioway Casino Resort. Lakes also manages operations at the Cimarron Casino, located in Perkins Oklahoma.

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

Ioway Casino Resort.  For its gaming development consulting services under the Iowa Consulting Agreement related to the Ioway Casino Resort, Lakes will receive a development fee of $4 million paid upon the opening of the Ioway Casino Resort, and a flat monthly fee of $500,000 for 120 months commencing upon the opening of the project. Lakes has also agreed to make advances to the Iowa Tribe, subject 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 Resort 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 Resort 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 Resort 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 Resort 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 Resort’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 Resort bearing interest at two percent over the prime rate. Lakes also agrees to fund any shortfall in certain minimum monthly Ioway Casino Resort 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 (the “Cimarron Consulting Agreement”) and management contract (the “Cimarron Management Contract”) with the Iowa Tribe with respect to the Cimarron Casino. Lakes has been operating under the Cimarron Management Contract since mid- 2006 after it was approved by the NIGC. Prior to that time, Lakes operated under the Cimarron Consulting Agreement and earned a flat monthly fee of $50,000. The annual fee under the Cimarron Management Contract is 30% of net income in excess of $4 million. The Cimarron Casino features approximately 375 electronic gaming machines.

Arrangement with Consultant.  Lakes has an agreement with Kevin Kean that will compensate him for his consulting services (relating to the 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 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

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provides that payments will be due to Mr. Kean when Lakes is paid by the Iowa Tribe, assuming he has been found suitable by the NIGC.

Our evaluation of the Ioway Casino Resort.  The following table outlines the status of each of the following primary milestones necessary to complete the Ioway Casino Resort as of March 29, 2009, December 28, 2008 and December 30, 2007. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones:

Critical milestone	March 29, 2009	December 28, 2008	December 30, 2007
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 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 substantially all of this parcel from the allottees. Approval from the BIA was obtained in January 2009 for 60 acres of the 74-acre allotment. The remaining 14 acres still require BIA approval. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project before the casino resort development can begin.	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 substantially all of this parcel from the allottees. Approval from the BIA was obtained in January 2009 for 60 acres of the 74-acre allotment. The remaining 14 acres still require BIA approval. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project before the casino resort development can begin.	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 substantially all of 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 before the casino resort development can begin.
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. An EA was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (“FONSI”) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. 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 was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (“FONSI”) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. 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 was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (“FONSI”) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative.
Resolution of all litigation and legal obstacles	None at this time.	None at this time.	None at this time.
Financing for construction	No, however, preliminary discussions with lending institutions have occurred.	No, however, preliminary discussions with lending institutions have occurred.	No, however, 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.

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Our 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 Resort will result in economic benefit to us sufficient to recover our investment. Based upon the above status of all primary milestones and the projected fees to be earned under the consulting agreements and management contracts, no impairment has been recorded.

The 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. In January 2009, the BIA granted approval on the purchase of a60-acre allotment. The remaining transactions for the final 14 acres still require BIA approval. Lakes submitted its management contract with the Iowa Tribe for the Ioway Casino Resort to the NIGC for review in 2005. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. Subject to obtaining the necessary regulatory approvals and availability of financing for the project, the Ioway Casino Resort could open as early as the spring of 2011.

Recently issued accounting pronouncements

In April 2009, the FASB issued FASB Staff Position157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(“FSP 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS 157, when the volume and level of activity for the asset or liability have significantly decreased.FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The implementation of this standard is not expected to have a material impact on our future financial position, results of operations or cash flows.

In April 2009, the FASB issued FASB Staff Position107-1 and APB28-1,Interim Disclosures about Fair Value of Financial Instruments(“FSP 107-1”), which, when effective, will require additional disclosures about fair value of financial instruments for interim reporting periods.FSP 107-1 is effective for interim and annual reporting periods ending after June 15, 2009. The implementation of this standard is not expected to have a material impact on our future financial position, results of operations or cash flows. In April 2009, the FASB also issued FASB Staff PositionsFAS 115-2 andFAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments(“FSPFAS 115-2 andFAS 124-2”), which amends the other-than-temporary impairment guidance in U.S. Generally Accepted Accounting Principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSPFAS 115-2 andFAS 124-2 will be effective for interim and annual reporting periods ending after June 15, 2009. The implementation of these three standards is not expected to have a material impact on our future financial position, results of operations or cash flows.

Seasonality

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

Regulation and taxes

We and the owners of the existing and planned casinos that we are and will be working with are subject to extensive regulation by state gaming authorities. 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 we may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on us.

The gaming industry represents a significant source of tax 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 our future financial position, results of operations and cash flows.

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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 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.

Private Securities Litigation Reform Act

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

These risks and uncertainties include, but are not limited to, need for potential future financing to meet Lakes’ development needs; those relating to the inability to complete or possible delays in completion of Lakes’ casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management or development contracts; Lakes operates in a highly competitive industry; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; possible need for future financing to meet Lakes’ expansion goals; risks of entry into new businesses, and reliance on Lakes’ management. For more information, review Lakes’ filings with the Securities and Exchange Commission. For further information regarding the risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report onForm 10-K for the year ended December 28, 2008.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents and investments in securities. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Consequently, we invest with only high-credit-quality issuers and limit the amount of credit exposure to any one issuer.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of March 29, 2009, the carrying value of our cash and cash equivalents approximates fair value. We also hold investments in debt securities (consisting of ARS). The types of ARS investments that we own are backed by student loans, the majority of which are guaranteed under the FFELP. None of our investments in ARS qualify, or have ever been classified in our consolidated financial statements, as cash or cash equivalents.

In November 2008, we accepted an offer from UBS granting us nontransferable rights to sell our ARS held by UBS at par value to UBS at any time during the period of June 30, 2010, through July 2, 2012. We expect to sell our ARS under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. UBS’s obligation under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights. During 2008, we entered into a Credit Line with UBS which is secured by our ARS held at UBS and is due and payable on demand with interest at30-day LIBOR plus one percent.

If UBS does not perform on its obligation to buy Lakes ARS during the period of June 30, 2010, through July 2, 2012, and if uncertainties in the capital and credit markets continue, these markets deteriorate further or we

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experience any ratings downgrades on any ARS investments in our portfolio, then we may incur losses on our ARS or the associated Rights, which would negatively affect our financial condition, cash flowand/or reported earnings.

Our primary exposure to market risk associated with changes in interest rates involves our long-term assets related to Indian casino projects in the form of notes receivable due from our tribal partners for the development and construction of Indian-owned casinos. The loans earn interest based upon a defined reference rate. The floating interest rate will generate more or less interest income if interest rates rise or fall. Our notes receivable from Indian tribes bear interest generally at prime plus one percent or two percent, however, the interest is only payable if the casino is successfully opened and distributable profits are available from casino operations. As of March 29, 2009, we had $63.1 million of notes receivable, with a floating interest rate (principal amount of $112.0 million). Based on the applicable current reference rates and assuming all other factors remain constant, interest income for a 12 month period would be approximately $5.9 million. A reference rate increase of 100 basis points would result in an increase in interest income of $1.1 million. A 100 basis point decrease in the reference rate would result in a decrease of $1.1 million in interest income over the same 12 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 underRules 13a-15(e) and Rule 15d — 15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that Lakes Entertainment, Inc.’s disclosure controls and procedures are effective.

There have been no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the three months ended March 29, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II.
Other Information

ITEM 1.   LEGAL PROCEEDINGS

We and our subsidiaries are involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon our unaudited consolidated financial statements.

ITEM 1A.   RISK FACTORS

There have been no material changes to our risk factors identified in the “Risk Factors” section in Item 1A of our Annual Report onForm 10-K, for the year ended December 28, 2008.

ITEM 6.   EXHIBITS

Exhibits			Description
	31	.1	Certification of CEO pursuant to Securities Exchange ActRules 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 ActRules 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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report onForm 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: May 8, 2009

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