##### Table of Contents



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 1934For the quarterly period ended
    October 1, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
    OF THE SECURITIES EXCHANGE ACT OF 1934For 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)
   þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  INDEX
  Page ofForm
    10-QPART I.
    FINANCIAL INFORMATIONITEM 1.


FINANCIAL
    STATEMENTSCondensed
    Consolidated Balance Sheets as of October 1, 2006
    (Unaudited) and January 1, 2006


3Condensed
    Consolidated Statements of Earnings (Loss) and Comprehensive
    Earnings (Loss) (Unaudited) for the three months and nine months
    ended October 1, 2006 and October 2, 2005


4Condensed
    Consolidated Statements of Shareholders Equity (Unaudited)
    for the nine months ended October 1, 2006 and
    October 2, 2005


5Condensed
    Consolidated Statements of Cash Flows (Unaudited) for the nine
    months ended October 1, 2006 and October 2,
    2005


6Notes to Condensed
    Consolidated Financial Statements (Unaudited)


7ITEM 2.


MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


27ITEM 3.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


68ITEM 4.


CONTROLS AND
    PROCEDURES


68PART II.
    OTHER INFORMATIONITEM 1.


LEGAL
    PROCEEDINGS


69ITEM 1A.


RISK
    FACTORS


70ITEM 6.


EXHIBITS


71302 Certification of CEO302 Certification of CFO906 Certification of CEO and CFO   2




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
   Condensed Consolidated Balance Sheets
    October 1, 2006 and January 1, 2006
  (Unaudited)October 1,

January 1,2006

2006(In thousands)ASSETSCurrent Assets:Cash and cash equivalents

$
10,107


$
9,912(balance includes $9.0 million
    and $1.7 million of WPT Enterprises, Inc. cash)Short-term investments


65,677



26,735(balance includes
    $30.8 million and $26.7 million of WPT Enterprises,
    Inc. short-term investments)Accounts receivable, net of
    allowance of $0.0 million and $0.1 million


2,794



3,072Prepaid expenses


880



614Other current assets


1,755



1,810Total current assets


81,213



42,143Property and equipment, net


17,163



13,451Long-term assets related to Indian
    casino projects:Notes receivable from Indian tribes


149,221



87,062Land held for development


16,731



16,248Intangible assets related to Indian
    casino projects


54,063



46,088Other


4,856



3,360Total long-term assets related to
    Indian casino projects


224,871



152,758Other assets:Restricted cash


16,348



249Investments


2,936



10,640Deferred tax asset


4,526



6,852Debt issuance costs


2,073



19Other long-term assets


3,947



4,498Total other assets


29,830



22,258Total Assets

$
353,077


$
230,610LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
5,236


$
8,394Income taxes payable


14,047



10,933Accrued payroll and related costs


2,031



1,125Deferred revenue


5,139



5,150Other accrued expenses


2,714



2,159Total current liabilities


29,167



27,761Long-term debt, related party






10,000Long-term debt, other, net of
    unamortized discount of $1.0 million


104,637



Total Liabilities


133,804



37,761Commitments and contingenciesMinority interest in subsidiary


16,636



14,466Shareholders Equity:Series A preferred stock,
    $.01 par value; authorized 7,500 shares; 4,458 and 0
    issued and outstanding at October 1, 2006 and
    January 1, 2006, respectively


45



Common stock, $.01 par value;
    authorized 200,000 shares; 22,877 and 22,300 common shares
    issued and outstanding at October 1, 2006, and
    January 1, 2006, respectively


229



223Additional paid-in capital


174,519



154,301Retained earnings


28,541



13,410Accumulated other comprehensive
    earnings (loss)


(697
)


10,449Total shareholders
    equity


202,637



178,383Total Liabilities and
    Shareholders Equity

$
353,077


$
230,610    3




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed
    Consolidated Statements of Earnings (Loss) and Comprehensive
    Earnings (Loss)
  Three Months Ended


Nine Months EndedOctober 1,


October 2,


October 1,


October 2,2006


2005


2006


2005(In thousands, except per share data)(Unaudited)Revenues:License fee income

$
4,672


$
1,766


$
18,098


$
10,568Host fees, sponsorship and other


1,236



365



5,660



2,266Total Revenues


5,908



2,131



23,758



12,834Costs and Expenses:Selling, general and administrative


8,772



6,936



26,787



20,368Production costs


1,737



561



8,333



8,125Net impairment losses






94







94Amortization of debt issuance costs


139







450



Depreciation and amortization


164



133



437



337Total Costs and Expenses


10,812



7,724



36,007



28,924Net unrealized gains (losses) on
    notes receivable


5,788



(2,120
)


38,911



(241
)Earnings (Loss) From
    Operations


884



(7,713
)


26,662



(16,331
)Other Income
    (Expense):Interest income


1,209



443



2,299



1,256Interest expense, related party










(137
)


Interest expense, other


(3,210
)






(5,044
)


Loss on extinguishment of debt










(6,821
)


Realized gain on sale of investment


4,541







10,216



Other


5







81



Total other income, net


2,545



443



594



1,256Earnings (loss) before income
    taxes, equity in earnings of unconsolidated investees and
    minority interest in net (earnings) loss of subsidiary


3,429



(7,270
)


27,256



(15,075
)Income taxes


2,195



354



8,742



1,061Earnings (loss) before equity in
    earnings of unconsolidated investees and minority interest in
    net (earnings) loss of subsidiary


1,234



(7,624
)


18,514



(16,136
)Equity in earnings of
    unconsolidated investees, net of tax






1







7Minority interest in net (earnings)
    loss of subsidiary


(1,035
)


581



(3,383
)


1,317Net earnings (loss)

$
199


$
(7,042
)

$
15,131


$
(14,812
)Other comprehensive earnings
    (loss):Unrealized gains (losses) on
    marketable securities, net of tax


125



(37
)


(301
)


(73
)Change in estimated fair value of
    derivatives


(468
)






(629
)


Comprehensive earnings
    (loss)

$
(144
)

$
(7,079
)

$
14,201


$
(14,885
)Earnings (loss) per
    share  basic

$
0.01


$
(0.32
)

$
0.67


$
(0.66
)Earnings (loss) per
    share  diluted

$
0.01


$
(0.32
)

$
0.62


$
(0.66
)Weighted-average common shares
    outstanding  basic


22,876



22,300



22,720



22,296Dilutive effect of common stock
    equivalents


1,752







1,826



Weighted-average common shares
    outstanding  diluted


24,628



22,300



24,546



22,296    4




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed Consolidated Statements of
    Shareholders Equity
 Nine months ended October 1, 2006 and
    October 2, 2005
  AccumulatedAdditional





Other


TotalPreferred Stock


Common Stock


Paid-In


Retained


Comprehensive


ShareholdersShares


Amount


Shares


Amount


Capital


Earnings


Earnings (Loss)


Equity(In thousands)(Unaudited)2006Balances, January 1, 2006










22,300


$
223


$
154,301


$
13,410


$
10,449


$
178,383Other comprehensive loss


























(930
)


(930
)Realized gain on sale of investment


























(10,216
)


(10,216
)Issuance of preferred stock and
    warrants


4,458


$
45











4,709











4,754Issuance of stock on options
    exercised  net










577



6



3,232











3,238Subsidiary stock options issued to
    consultants and employees


















1











1Shareholder trading settlement


















2,805











2,805Effect of share-based compensation


















4,312











4,312Income tax benefit of stock option
    exercises


















3,945











3,945Net change in equity related to
    minority interest


















1,214











1,214Net earnings






















15,131







15,131Balances, October 1, 2006


4,458


$
45



22,877


$
229


$
174,519


$
28,541


$
(697
)

$
202,6372005Balances, January 2, 2005










22,253


$
223


$
157,895


$
25,280


$
(6
)

$
183,392Other comprehensive loss


























(73
)


(73
)Net proceeds from issuance of
    common stock by subsidiary


















28











28Reduction of deferred compensation


















4











4Issuance of stock on options
    exercised  net










47







150











150Subsidiary stock options issued to
    consultants and employees


















714











714Subsidiary common stock subject to
    repurchase


















643











643Subsidiary interest on common
    shares subject to repurchase


















(24
)










(24
)Net change in equity related to
    minority interest


















(1,094
)










(1,094
)Net loss






















(14,811
)






(14,811
)Balances, October 2, 2005










22,300


$
223


$
158,316


$
10,469


$
(79
)

$
168,929    5




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed Consolidated Statements of Cash
    Flows
 Nine months ended October 1, 2006 and
    October 2, 2005
  2006


2005(In thousands)(Unaudited)OPERATING ACTIVITIES:Net earnings (loss)

$
15,131


$
(14,812
)Adjustments to reconcile net
    earnings (loss) to net cash (used in) operating activities:Depreciation and amortization


691



528Amortization of debt issuance costs


450



Accretion of original issue discount


446



Share-based compensation


4,973



772Loss on extinguishment of debt


6,821



Net unrealized losses (gains) on
    notes receivable


(38,911
)


241Realized gain on sale of investment


(10,216
)


Minority interest in net earnings
    (loss) of subsidiary


3,383



(1,317
)Equity in earnings of
    unconsolidated investees






(7
)Deferred income taxes


5,495



42Net impairment losses






94Increases in operating (assets) and
    liabilities:Accounts receivable


294



529Prepaid expenses


(266
)


208Other current assets


214



(683
)Income taxes payable


3,114



5,162Accounts payable


(1,054
)


(421
)Deferred revenue


(11
)


1,484Accrued expenses


1,461



212Net Cash Used in Operating
    Activities


(7,985
)


(7,968
)INVESTING ACTIVITIES:Short-term investments, purchases


(78,202
)


(36,873
)Short-term investments,
    sales/maturities


39,351



38,260Proceeds from sale of land held
    under contract for sale






5,000Collections on notes receivable


2,955



Increases in long-term assets
    related to Indian casino projects


(37,412
)


(9,284
)Advances to unconsolidated investees


(2,923
)


(10
)Proceeds from unconsolidated
    investees






850Proceeds from sale of investment


10,236



Payments for other long-term assets






(693
)(Increase) decrease in other
    long-term assets


(78
)


197Purchase of property and equipment


(4,682
)


(1,599
)Net Cash Used in Investing
    Activities


(70,755
)


(4,152
)FINANCING ACTIVITIES:Proceeds from issuance of common
    and preferred stock


3,283



126Debt issuance costs


(5,004
)


Shareholder trading settlement


2,805



Repayment of debt


(35,000
)


Increase in restricted cash


(16,099
)


Restricted cash proceeds from
    long-term debt


19,090



Unrestricted cash proceeds from
    long-term debt


109,860



Net Cash Provided by Financing
    Activities


78,935



126Net Increase (Decrease) in Cash
    and Cash Equivalents


195



(11,994
)Cash and Cash
    Equivalents  Beginning of Period


9,912



28,717Cash and Cash
    Equivalents  End of Period

$
10,107


$
16,723    6




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes
    to Unaudited Condensed Consolidated Financial
    Statements
  1.
    Basis of
    Presentation:  Form 10-K
    53-week
    2.
    Long-Term
    Assets Related to Indian Casino Projects:    October 1, 2006ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalNotes receivable, at estimated
    fair value

$
84,218


$
33,776


$
25,228


$
5,999


$
149,221Intangible assets related to
    Indian casino projects


23,573



20,158



8,623



1,709



54,063Land held for development






8,712



6,679



1,340



16,731Other


60



1,462



2,462



872



4,856$
107,851


$
64,108


$
42,992


$
9,920


$
224,871   7




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  January 1, 2006ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalNotes receivable, at estimated
    fair value

$
44,028


$
26,550


$
12,957


$
3,527


$
87,062Intangible assets related to
    Indian casino projects


18,356



18,755



7,872



1,105



46,088Land held for development






8,836



6,643



769



16,248Other


93



1,600



828



839



3,360$
62,477


$
55,741


$
28,300


$
6,240


$
152,758     Pokagon
    Band:
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$100,352

$61,827$(71,176 principal and $29,176
    interest)

$(46,445 principal and $15,382
    interest)Estimated months until casino
    opens (weighted average of three scenarios)

13 months

32 monthsProjected interest rate until
    casino opens

9.0%

8.2%Projected interest rate during the
    loan repayment term

9.0%

8.2%Discount rate

15%

15%Repayment terms of note

60 months

60 monthsProbability rate of casino opening
    (weighting of four scenarios)

99%

90%    8




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Shingle
    Springs Tribe:
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$53,640

$46,446$(41,423 principal and $12,217
    interest)

$(37,905 principal and $8,541
    interest)Estimated months until casino
    opens (weighted average of three scenarios)

36 months

37 monthsProjected interest rate until
    casino opens

9.86%

9.2%Projected interest rate during the
    loan repayment term

9.78%

9.1%Discount rate

15%

15%Projected repayment terms of note*

24 months

24 monthsProbability rate of casino opening
    (weighting of four scenarios)

75%

70%        9




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Jamul
    Tribe (Note 8):
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$28,606

$21,247$(21,496 principal and $7,110
    interest)

$(16,858 principal and $4,389
    interest)Estimated months until casino
    opens (weighted average of three scenarios)

34 months

34 monthsProjected interest rate until
    casino opens

17.0%

9.2%Projected interest rate during the
    loan repayment term

17.0%

9.2%Discount rate

17.5%

15%Projected repayment terms of note*

24 months

84 monthsProbability rate of casino opening
    (weighting of four scenarios)

85%

80%         3.
    Restricted
    Cash:    4.
    Long-Term
    Investments:    other-than-temporary, 03-1, The
    Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments (EITF 03-1).
 10




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  5.
    Long-Term
    Debt:    one-to-one
     11




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
        6.
    Kickapoo
    Settlement:    7.
    Regulatory
    Approval of Management Agreements:  Pokagon
    Band:
   12




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    Iowa
    Tribe:
    8.
    Development
    Financing and Services Agreement with the Jamul Tribe:      9.
    Settlement
    Agreement with a Beneficial Owner:    10.
    Stock
    Options and Awards:  Lakes
    Stock Option Plans:
     13




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    WPTE
    Stock Option Plan:
      Valuation
    and Expense Information under SFAS 123(R):
  Share-Based Payment-Revised 2004
  Accounting for Stock Issued to Employees and
    related interpretations .
   14




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    Three Months Ended

Nine Months EndedOctober 1, 2006

October 1, 2006(In thousands)Total cost of share-based payment
    plans

$
1,283.1


$
4,959.7Amounts capitalized in deferred
    television costs


8.9



8.9Amounts charged against income,
    before income tax benefit

$
1,274.2


$
4,950.8Amount of related income tax
    benefit recognized in income






       Lakes
    valuation assumption summary:
  Three Months Ended

Nine Months EndedOctober 1, 2006

October 1, 2006Expected volatility


58.21
%


59.99
%Expected dividend yield






Risk-free interest rate


4.72
%


4.78
%Expected term (in years)


8.2 years



8.2 yearsWeighted-average fair value per
    share

$
5.31


$
6.84          15




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    WPTE
    valuation assumption summary:
  Three Months Ended

Nine Months EndedOctober 1, 2006

October 1, 2006Expected volatility


77.31
%


79.44
%Expected dividend yield






Risk-free interest rate


4.62
%


4.65
%Expected term (in years)


6.5 years



6.5 yearsWeighted-average fair value per
    share

$
2.96


$
3.60     
    Expected volatility  As WPTE has a relatively short
    operating history and no definitive peer or peer groups,
    expected volatility was based on historical volatility of
    WPTEs stock price since it began trading in August 2004.
    Forfeiture rate  WPTE used historical data to
    estimate employee departure behavior in estimating future
    forfeitures.
    Expected term  Due to WPTEs limited operating
    history including stock option exercises and forfeitures, WPTE
    calculated expected term using the Simplified Method
    in accordance with Staff Accounting Bulletin 107.
    Risk free interest rate  For periods consistent with
    the expected term of the share option, risk free interest rate
    is based on the U.S. Treasury yield curve in effect at the
    time of grant.  The following table summarizes Lakes stock option
    activity through the first nine months ended October 1,
    2006 and October 2, 2005:
  Number of Common SharesWeighted-Avg.Options





Available


ExerciseOutstanding


Exercisable


for Grant


Price2006Balance at January 1,
    2006


5,307,626



4,153,476



94,500


$
6.03Authorized


Granted


30,000







(30,000
)


9.77Forfeited/cancelled/expired














Exercised


(550,000
)










5.65Balance at April 2,
    2006


4,787,626



3,711,626



64,500


$
6.10Authorized


Granted


5,000







(5,000
)


12.10Forfeited/cancelled/expired


(5,000
)






5,000



8.15Exercised


(25,000
)










4.75 16




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Number of Common SharesWeighted-Avg.Options





Available


ExerciseOutstanding


Exercisable


for Grant


PriceBalance at July 2,
    2006


4,762,626



3,718,126



64,500


$
6.11Authorized


Granted


2,000







(2,000
)


7.92Forfeited/cancelled/expired


(1,500
)










5.67Exercised


(2,000
)










8.25Balance at October 1,
    2006


4,761,126



3,750,326



62,500


$
6.112005Balance at January 2,
    2005


5,193,676



3,591,276



266,000


$
5.72Authorized


Granted


155,000







(155,000
)


15.75Forfeited/cancelled/expired














Exercised


(57,550
)










5.67Balance at April 3,
    2005


5,291,126



3,641,326



111,000


$
6.01Authorized


Granted


10,000







(10,000
)


13.22Forfeited/cancelled/expired














Exercised














Balance at July 3,
    2005


5,301,126



3,641,326



101,000


$
6.03Authorized


Granted


6,500







(6,500
)


12.61Forfeited/cancelled/expired














Exercised














Balance at October 2,
    2005


5,307,626



3,762,726



94,500


$
6.03   The following table summarizes significant ranges of
    Lakes outstanding and exercisable options as of
    October 1, 2006:
  Options Outstanding at October 1, 2006Weighted-







Options Exercisable at October 1, 2006Average




Aggregate








AggregateNumber


Remaining

Weighted-Average


Intrinsic


Number


Weighted-


IntrinsicRange of Exercise Prices

Outstanding


Contractual Life

Exercise Price


Value


Exercisable


Average Price


Value$ (3.25  3.63)


287,000



4
.8 years

$
3.45


$
1,781,000



253,600


$
3.48


$
1,567,000(3.64  5.45)


2,510,700



2
.4 years


4.23



13,624,000



2,510,700



4.23



13,624,000(5.46  7.26)


104,926



4
.3 years


6.53



328,000



74,926



6.27



254,000(7.27  9.08)


1,530,000



6
.8 years


8.13



2,345,000



824,000



8.13



1,263,000(9.09  10.90)


77,000



8
.4 years


10.44







20,800



10.60



(10.91  12.71)


86,500



8
.2 years


11.47







20,050



11.41



(12.72  14.53)


95,000



8
.4 years


14.00







22,750



14.01



(14.54  16.34)


5,000



8
.3 years


16.11







1,000



16.11



(16.35  18.16)


65,000



7
.5 years


17.91







22,500



18.01



4,761,126



4
.4 years

$
6.11


$
18,078,000



3,750,326


$
5.30


$
16,707,000  17




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    The following table summarizes WPTE stock option activity
    through the three months and nine months ended October 1,
    2006 and October 2, 2005 :
  Number of Common SharesWeighted-Avg.Options





Available


ExerciseOutstanding


Exercisable


for Grant


Price2006Balance at January 1,
    2006


2,158,000



620,333



283,667


$
7.14Authorized


Granted


219,000







(219,000
)


6.20Forfeited/cancelled/expired


(159,333
)






159,333



8.13Exercised


(115,000
)










0.0049Balance at April 2,
    2006


2,102,667



785,500



224,000


$
7.36Authorized


Granted


109,500







1,080,000



5.18Forfeited/cancelled/expired


(153,501
)






(109,500
)


10.07Exercised


(105,000
)






153,501



0.0049Balance at July 2,
    2006


1,953,666



619,333



1,348,001


$
7.42Authorized


Granted


249,000







(249,000
)


4.22Forfeited/cancelled/expired


(15,333
)






15,333



13.50Exercised














Balance at October 1,
    2006


2,187,333



1,043,167



1,114,334


$
7.01 18




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Number of Common SharesWeighted-Avg.Options





Available


ExerciseOutstanding


Exercisable


for Grant


Price2005Balance at January 2,
    2005


2,561,000



560,000



559,000


$
4.61Authorized


Granted


24,500







(24,500
)


19.50Forfeited/cancelled/expired


(32,000
)






32,000



8.60Exercised


(640,000
)










0.0049Balance at April 3,
    2005


1,913,500



200,000



566,500


$
6.27Authorized


Granted


34,000







(34,000
)


17.25Forfeited/cancelled/expired


(31,500
)






31,500



8.31Exercised


(35,000
)










0.0049Balance at July 3,
    2005


1,881,000



165,000



564,000


$
6.55Authorized


Granted


355,000







(355,000
)


12.26Forfeited/cancelled/expired


(90,000
)






90,000



14.22Exercised


(3,333
)










8.00Balance at October 2,
    2005


2,142,667



611,667



299,000


$
7.17   The following table summarizes significant ranges of WPTE
    outstanding and exercisable options as of October 1,
    2006:
  Options Outstanding

Options ExercisableWeighted-Avg.

Weighted-

Aggregate





AggregateRange of

Number

Remaining

Avg. Exercise

Intrinsic

Number

Weighted-

IntrinsicExercise Prices

Outstanding

Contractual Life

Price

Value

Exercisable

Avg. Price

Value$ 0.0049


225,000



5.40


$
0.0049


$
844,898



225,000


$
0.0049


$
844,898$ 3.93 - 4.26


249,000



9.92



4.22















$ 5.18 - 9.92


1,458,833



8.20



7.59







758,334



8.05



$11.95 - 14.51


225,000



8.85



12.23







48,333



12.41



$15.05 - 19.50


29,500



8.83



15.54







11,500



15.79



2,187,333



8.18


$
7.01


$
844,898



1,043,167


$
6.60


$
844,898   in-the-money
   19




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Consolidated
    pro forma information required under
    SFAS 123:
    Three Months


Nine MonthsEnded


EndedOctober 2, 2005


October 2, 2005(In thousands, except pershare amounts)Net loss as reported

$
(7,042
)

$
(14,812
)Less: total share-based
    compensation expense  fair value method


(1,132
)


(3,176
)Pro forma net loss

$
(8,174
)

$
(17,988
)Net loss per share 
    basic and dilutedAs reported

$
(0.32
)

$
(0.66
)Pro forma

$
(0.37
)

$
(0.81
)   11.
    Earnings
    (Loss) Per Share:    12.
    Income
    Taxes:     20




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    13.
    Commitments
    and Contingencies:  Lakes
    Commitments and Contingencies
  Operating
    lease
    IRS tax
    audit
    Grand
    Casinos, Inc. settlement
    Tribal
    commitments
   21




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Tribal
    Casino Development Advances/Commitments
    As of October 1, 2006
  Pre-Construction

Land Held for

RemainingAdvances

Development

Commitment(In millions)Jamul Tribe

$
21.5


$
6.7


$
Shingle Springs Tribe


41.4



8.7



Pokagon Band


71.2







Iowa Tribe


1.6



0.7



Wholly-owned subsidiaries of the
    Pawnee Tribal Development Corporation (Pawnee TDC
    referred to collectively as the Pawnee Nation)


5.2







         Unlawful
    Internet Gambling Enforcement Act
    Legal
    proceedings
  El
    Dorado County, California litigation
   22




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
           23




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
      Louisiana
    Department of Revenue litigation tax matter
    WPTE
    litigation
    Other
    litigation
    14.
    Segment
    Information:  ®
 24




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    Industry SegmentsIndianCasino

WPT

Corporate and

TotalProjects

Enterprises, Inc.

Eliminations

ConsolidatedTotal assets as of October 1,
    2006

$
225.3


$
51.4


$
76.4


$
353.1Total assets as of January 1,
    2006

$
155.2


$
46.3


$
29.1


$
230.6For the three months ended
    October 1, 2006Revenue

$



$
5.9


$



$
5.9Earnings (loss) from operations


5.6



(0.4
)


(4.3
)


0.9Depreciation and amortization
    expense






0.1



0.2



0.3For the three months ended
    October 2, 2005Revenue

$



$
2.1


$



$
2.1Loss from operations


1.9



(1.8
)


(7.8
)


(7.7
)Depreciation and amortization
    expense






0.1







0.1For the nine months ended
    October 1, 2006Revenue

$
0.3


$
23.4


$
0.1


$
23.8Earnings (loss) from operations


38.1



1.0



(12.4
)


26.7Depreciation and amortization
    expense






0.2



0.7



0.9For the nine months ended
    October 2, 2005Revenue

$



$
12.8


$



$
12.8Earnings (loss) from operations


5.6



(4.3
)


(17.6
)


(16.3
)Depreciation and amortization
    expense






0.1



0.2



0.3   15.
    Financial
    Instruments:  Lakes
    interest rate swap agreement
       25




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Condensed Consolidated Financial
    Statements  (Continued)
      16.
    Subsequent
    Events:     26




---



##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
    ®
  WPT Studios tm
  ®
   27




---



##### Table of Contents



Date of TRV

Number ofAgreement or

EpisodesWorld Poker

Option For

(including

Production Period and DeliveryTour Season

Season

specials)

of Episodes to TRV

Initial Telecast of Episodes in SeasonSeason One

January 2003


15


February 2002  June 2003

March 2003  June
    2003Season Two

August 2003


25


July 2003  June 2004

December 2003 
    September 2004Season Three

May 2004


21


May 2004  April 2005

October 2004  August 2005Season Four

March 2005


21


May 2005  April 2006

October 2005  June 2006Season Five

March 2006


22


May 2006  April 2007
    (expected)

August 2006  August
    2007
    (expected)   tm
  two-hour
    WPT Consumer Products
  WPT Corporate Alliances
 28




---



##### Table of Contents



WPT Online Gaming
        day-to-day
 29




---



##### Table of Contents



Financial
    Overview
    Results
    of Operations
  Three
    Months Ended October 1, 2006 Compared to the Three Months
    Ended October 2, 2005
  Revenues
  Hands-on-Mobile
  Costs and
    expenses
    Selling,
    general and administrative expenses.
   30




---



##### Table of Contents



Net
    unrealized gains on notes receivable
        Other
    income (expense)
    Income
    Taxes
  Accounting for Income
    Taxes
  Minority
    interest
   31




---



##### Table of Contents



Nine
    Months Ended October 1, 2006 Compared to the Nine Months
    Ended October 2, 2005
  Revenues
    Costs and
    expenses
    Selling,
    general and administrative expenses
   32




---



##### Table of Contents



Net
    unrealized gains on notes receivable
            Other
    income (expense)
    Income
    Taxes
   33




---



##### Table of Contents



Minority
    interest
    Liquidity
    and Capital Resources
     34




---



##### Table of Contents



35




---



##### Table of Contents



Payment Due by PeriodLess than








More thanContractual Obligations

Total


1 year


1-3 years


3-5 years


5 yearsRemaining Casino Development
    Commitment(1)Jamul Tribe(2)

$



$



$



$



$
Shingle Springs Tribe(3)


















Pokagon Band(4)


















Pawnee Nation of Oklahoma
    (Pawnee Nation)  Travel Plaza(5)


















Iowa Tribe  Ioway
    Project(6)


















Operating leases(7)


1.3



0.8



0.5







BofA financing facility(8)


105.0











105.0



WPTE operating leases(9)


4.1



0.8



1.7



1.6



$
110.4


$
1.6


$
2.2


$
106.6


$
     (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. 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 October 1, 2006.(2)
    
    Effective March 30, 2006, we entered into a development
    financing and services agreement with the Jamul Tribe. As part
    of the agreement, we will use our best efforts to obtain
    financing from which advances will be made to the Jamul Tribe of
    up to $350 million to pay for the design and construction
    of the project. There can be no assurance that third party
    financing will be available. If we are unable to obtain the
    appropriate amount of financing for this project, the project
    may not be completed as planned. This agreement will help assist
    the Jamul Tribe in developing a casino with related
    amenities/services (Jamul Casino) on its existing
    six-acre reservation which the Jamul Tribe will manage. We will
    receive a flat fee of $15 million for our development
    design services, and a flat fee of $15 million for our
    construction oversight services, payable evenly over the first
    five years after the opening date of the Jamul Casino. In
    connection with our financing of the Jamul Casino, the Jamul
    Tribe will pay interest over a ten year period on sums advanced
    by us equal to the rate charged to us for obtaining the funds
    necessary plus 5%. Amounts previously advanced by us 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.(3)
    
    We may increase our commitment to the Shingle Springs Tribe by
    up to $10.0 million, subject to amendment of the
    development loan agreement and approval by the NIGC, which is
    currently in progress.(4)
    
    We will be obligated to pay an amount to an unrelated third
    party once the Pokagon Casino is open and we are the manager of
    the casino. The amount is payable quarterly for five years and
    is only payable if we are the manager and the casino is open and
    operational. The payment is part of a settlement and release
    agreement associated with our obtaining the management contract
    with the Pokagon Band. The maximum liability over the five-year
    period is approximately $11 million. We will also be
    obligated to pay approximately $3.3 million to a third
    party on behalf of the Pokagon Band; in accordance with the
    management contract which is payable once the casino opens over
    24 months.(5)
    
    Lakes made a commitment of $1.0 million to the Pawnee
    Nation related to the Travel Plaza project based upon an
    approved budget. In addition to the information in the above
    table, we have been advancing funds to the Pawnee Nation related
    to the Chilocco project. The funding amount is based upon an
    approved budget, yet to be finalized. Additional amounts are
    expected to be advanced to the Pawnee Nation for the new casino
    project and Travel Plaza project based upon an approved budget
    yet to be finalized.(6)
    
    We have agreed to make advances to the Iowa Tribe subject to a
    project budget to be agreed upon by us and the Iowa Tribe and
    certain other conditions. The development loan will be for
    preliminary development costs under the Ioway project budget. We
    have also agreed to use reasonable efforts to assist the Iowa
    Tribe in obtaining permanent financing for any projects
    developed under the Iowa consulting agreement. 36




---



##### Table of Contents



(7)
    
    We lease an airplane under a non-cancelable operating lease that
    expires on May 1, 2008.(8)
    
    On June 22, 2006, we closed on a $105 million
    financing facility. Any funds drawn on the facility bear
    interest at the rate of LIBOR plus 6.25% per annum, interest
    payable in arrears quarterly, and are due and payable in full on
    the fourth anniversary of the closing date.(9)
    
    WPTE operating lease obligations include rent payments for WPTE
    corporate offices pursuant to two lease agreements. For the
    first lease, monthly lease payments began at approximately
    $38,000 and escalate to approximately $45,000 over the six-year
    lease term. For the second lease, monthly payments began at
    approximately $28,000 and escalate up to approximately $33,000
    over the five year lease term. The amounts set forth in the
    table above assumes monthly lease payments through June 2011.          Critical
    Accounting Policies and Estimates
     37




---



##### Table of Contents



Revenue recognition:
  No. 00-2, Accounting by Producers or Distributors of Films (SOP 00-2):
  
    Persuasive evidence of an arrangement exists;
    The show/episode is complete, and in accordance with the terms
    of the arrangement, has been delivered or is available for
    immediate and unconditional delivery;
    The license period has begun and the customer can begin its
    exploitation, exhibition or sale;
    The sellers price to the buyer is fixed and determinable;
    and
    Collectibility is reasonably assured.  Reporting Revenue Gross as a Principal
    versus Net as an Agent
        Travel Channel (TRV)
    participation:
  Deferred television costs: SOP 00-2.
 38




---



##### Table of Contents



Investments:
  other-than-temporary, EITF 03-1.
  Share-Based Compensation Expense:
  Accounting for
    Stock-Based Compensation Accounting for Stock Issued to Employees
     39




---



##### Table of Contents



, Transition Election Related to
    Accounting for the Tax Effects of Share-Based Payment Awards
  Derivative Financial Instruments: Accounting for Derivative Instruments
    and Hedging Activities, as amended.
      Accounting
    for long-term assets related to Indian casino
    projects:
  Notes
    receivable:
    
    Has the U.S. Governments Bureau of Indian Affairs
    federally recognized the tribe as a tribe?
    Does the tribe hold or have the right to acquire land to be
    used for the casino site?
    Has the Department of the Interior put the land into trust
    for purposes of being used as a casino site?
    Has the tribe entered into a gaming agreement with the state
    in which the land is located, if required by the state?
    Has the tribe obtained approval by the National Indian Gaming
    Commission of the management agreement?
    Do other legal and political obstacles exist that could block
    development of the project and, if so, what is the likelihood of
    the tribe successfully prevailing?    
    An evaluation by management of the financial projections of
    the project given the projects geographic location and the
    feasibility of the projects success given such
    location;
    The structure and stability of the tribal government; 40




---



##### Table of Contents




    The scope of the proposed project, including the physical
    scope of the contemplated facility and the expected financial
    scope of the related development;
    An evaluation of the proposed projects ability to be
    built as contemplated and the likelihood that financing will be
    available; and
    The nature of the business opportunity to us, including
    whether the project would be a financing, development
    and/or
    management opportunity.  and/or
  No. 96-12. No. 96-12,
      Accounting by
    Creditors for Impairment of a Loan.
 41




---



##### Table of Contents



Intangible
    assets related to Indian casino projects:
  Goodwill and
    Other Intangible Assets
  Land held
    for development
    Other
        October 1, 2006ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalNotes receivable, at estimated
    fair value

$
84,218


$
33,776


$
25,228


$
5,999


$
149,221Intangible assets related to
    Indian casino projects


23,573



20,158



8,623



1,709



54,063Land held for development






8,712



6,679



1,340



16,731Other


60



1,462



2,462



872



4,856$
107,851


$
64,108


$
42,992


$
9,920


$
224,871   42




---



##### Table of Contents



January 1, 2006ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalNotes receivable, at estimated
    fair value

$
44,028


$
26,550


$
12,957


$
3,527


$
87,062Intangible assets related to
    Indian casino projects


18,356



18,755



7,872



1,105



46,088Land held for development






8,836



6,643



769



16,248Other


93



1,600



828



839



3,360$
62,477


$
55,741


$
28,300


$
6,240


$
152,758       Pokagon
    Band:
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$100,352

$61,827($71,176 principal and $29,176
    interest)

($46,445 principal and $15,382
    interest)Estimated months until casino opens
    (weighted-average of three scenarios)

13 months

32 monthsProjected interest rate until
    casino opens

9.0%

8.2%Projected interest rate during the
    loan repayment term

9.0%

8.2%Discount rate

15%

15%Repayment terms of note

60 months

60 monthsProbability rate of casino opening
    (weighting of four scenarios)

99%

90%    43




---



##### Table of Contents



Shingle
    Springs Tribe:
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$
53,640


$
46,446($
41,423 principal and $12,217 interest
)

($
37,905 principal and $8,541 interest
)Estimated months until casino
    opens (weighted-average of three scenarios)


36 months



37 monthsProjected interest rate until
    casino opens


9.86%



9.2%Projected interest rate during the
    loan repayment term


9.78%



9.1%Discount rate


15%



15%Projected repayment terms of note*


24 months



24 monthsProbability rate of casino opening
    (weighting of four scenarios)


75%



70%     *
    
    Payable in varying monthly installments based on contract terms
    subsequent to the casino opening.    Jamul
    Tribe (Note 8):
  As of October 1, 2006

As of January 1, 2006Face value of note (principal and
    interest)

$
28,606


$
21,247$
(21,496 principal and $7,110 interest
)

$
(16,858 principal and $4,389 interest
)Estimated months until casino
    opens (weighted-average of three scenarios)


34 months



34 monthsProjected interest rate until
    casino opens


17.0%



9.2%Projected interest rate during the
    loan repayment term


17.0%



9.2%Discount rate


17.5%



15%Projected repayment terms of note*


24 months



84 monthsProbability rate of casino opening
    (weighting of four scenarios)


85%



80%     *
    
    Payable in varying monthly installments based on contract terms
    subsequent to the casino opening.     44




---



##### Table of Contents



October 1, 2006Estimated Fair


Sensitivity AnalysisValue Notes


5% Less


One Year





5% Increased


One YearReceivable


Probable


Delay


Both


Probability


Sooner


Both(In thousands)Pokagon

$
84,218


$
79,976


$
80,114


$
76,080


$
85,066


$
88,532


$
89,424Shingle Springs

$
33,776


$
29,246


$
32,393


$
28,046


$
36,042


$
35,218


$
37,580Jamul

$
25,228


$
23,756


$
25,417


$
23,934


$
26,699


$
25,040


$
26,500$
143,222


$
132,978


$
137,924


$
128,060


$
147,807


$
148,790


$
153,504   January 1, 2006Estimated Fair


Sensitivity AnalysisValue Notes


5% Less


One Year





5% Increased


One YearReceivable


Probable


Delay


Both


Probability


Sooner


Both(In thousands)Pokagon

$
44,028


$
41,751


$
41,591


$
39,449


$
46,305


$
46,620


$
49,040Shingle Springs

$
26,550


$
24,633


$
25,187


$
23,367


$
28,467


$
27,985


$
30,005Jamul

$
12,957


$
12,176


$
12,322


$
11,581


$
13,739


$
13,626


$
14,450$
83,535


$
78,560


$
79,100


$
74,397


$
88,511


$
88,231


$
93,495       Balance at October 1, 2006ShinglePokagon


Springs


Jamul


Other


Total(In thousands)Note receivable,
    pre-construction(a),(c)

$
47,070


$
41,423


$
20,546


$
6,302


$
115,341Note receivable, non-gaming land(b)


13,176















13,176Note receivable, land(b),(c)


10,930







950



776



12,656$
71,176


$
41,423


$
21,496


$
7,078


$
141,173   Balance at January 1, 2006ShinglePokagon


Springs


Jamul


Other


Total(In thousands)Note receivable,
    pre-construction(a),(c)

$
22,344


$
37,905


$
15,908


$
3,904


$
80,061Note receivable, non-gaming land(b)


13,176















13,176Note receivable, land(b),(c)


10,925







950



570



12,445$
46,445


$
37,905


$
16,858


$
4,474


$
105,682     (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 45




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##### Table of Contents



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. With respect to the Pokagon
    Casino project, a portion of the land will be used by the tribe
    separate from the casino project land.(c)
    
    Amounts listed under the other column represents amounts
    advanced under the agreements with the Iowa Tribe and Pawnee
    Nation.    October 1,


January 1,Pokagon Band

2006


2006Monthly stipend

$
12,000


$
9,625Construction


23,411



2,635Legal


1,898



1,634Environmental


652



650Design


9,109



7,800$
47,070


$
22,344   October 1,


January 1,Shingle Springs Tribe

2006


2006Monthly stipend

$
7,290


$
6,390Construction


1,644



1,623Legal


13,524



12,195Environmental


1,663



1,588Design


9,528



9,306Gaming license


3,576



3,426Lobbyist


4,198



3,377$
41,423


$
37,905   October 1,


January 1,Jamul Tribe

2006


2006Monthly stipend

$
4,297


$
3,841Construction


516



326Legal


3,474



3,340Environmental


1,796



1,668Design


7,323



4,168Gaming license


607



511Lobbyist


2,533



2,054$
20,546


$
15,908   Evaluation
    of impairment related to our long-term assets related to Indian
    casino projects, excluding the notes receivable, which are
    valued at fair value:
   46




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##### Table of Contents



Pokagon
    Band
  October 1, 2006

January 1, 2006No. of Class III slot machines

3,000

3,000No. of Table games

90

90No. of Poker tables

20

20Win/Class III slot
    machine/day  1st year

$282

$275Win/Table game/day 
    1st year

$1,481

$1,444Win/Poker game/day 
    1st year

$1,025

$1,000Expected increase in management
    fee cash flows

Year 2  26.5%

Year 2  2.1%Year 3  4.3%

Year 3  1.9%Year 4  3.8%

Year 4  3.6%Year 5  4.1%

Year 5  2.8%     Jamul
    Tribe
  October 1,


January 1,2006


2006No. of Class III slot machines


349



349No. of Class II slot machines


1,651



1,651No. of Table games


65



65No. of Poker tables


10



10Win/Class III slot
    machine/day  1st year





$
307Win/Class II slot
    machine/day  1st year





$
220Win/Class II & III
    slot machine/day  1st year

$
235



Win/Table game/day 
    1st year

$
1,100


$
1,100Win/Poker table/day 
    1st year

$
650


$
650  47




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##### Table of Contents



Shingle
    Springs Tribe
  October 1, 2006

January 1, 2006No. of Class III slot machines

349

349No. of Class II slot machines

1,651

1,651No. of Table games

100

100No. of Poker tables

20

20Win/Class III slot
    machine/day  1st year



$350Win/Class II slot
    machine/day  1st year



$250Win/Class II & III
    slot machine/day  1st year

$350

Win/Table game/day 
    1st year

$1,275

$1,275Win/Poker table/day 
    1st year

$624

$624Expected increase (decrease) in
    management fee cash flows

Year 2  6.0%

Year 2  5.5%Year 3  5.1%

Year 3  4.3%Year 4  3.6%

Year 4  3.0%Year 5  5.0%

Year 5  5.1%Year 6  (20.1)%

Year 6  (17.0)%(management fees
    were reduced
    in years six and
    seven)

(management fees
    were reduced
    in years six and
    seven)Year 7  1.7%

Year 7  1.5%       Description
    of each Indian casino project and evaluation of critical
    milestones:
  Pokagon
    Band
  Business
    arrangement:
     48




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##### Table of Contents



Our
    evaluation of critical milestones:
    Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005Federal recognition of the
    tribe


Yes


Yes


YesPossession of usable land
    corresponding with needs based on our project plan


Yes


Yes


Yes 49




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##### Table of Contents



Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005Usable land placed in trust by
    Federal government


Yes


Yes  The additional
    information was submitted by the BIA in August 2004 and the
    lawsuit was still pending resolution as of January 1, 2006.
    In March 2005 the federal judge dismissed the last remaining
    issue filed by Taxpayers of Michigan Against Casinos
    (TOMAC) and ruled in favor of the Pokagon Band
    allowing the land to be placed into trust by the BIA. During the
    required 60 day waiting period, TOMAC filed for an appeal.
    The appeal hearing date was held on December 8, 2005. On
    January 6, 2006 the United States Court of Appeals for the
    District of Columbia Circuit ruled in favor of the Pokagon Band
    by affirming the Federal District Courts grant of summary
    judgment in the lawsuit by TOMAC versus the U.S. Department
    of the Interior. On January 27, 2006, the Federal
    Government took official action to acquire the Pokagon
    Bands
    675-acre
    parcel of land in New Buffalo Township, Michigan, into trust for
    the Pokagon Band. This official action by the Department of the
    Interior paves the way for the Pokagon Band to move forward with
    their Four Winds Casino Resort project.


No  The additional
    information was submitted by the BIA in August 2004 and the
    lawsuit was still pending resolution as of January 2, 2005.Usable county agreement, if
    applicable


Yes


Yes


Yes 50




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##### Table of Contents



Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005Usable state compact that
    allows for gaming consistent with that outlined in our project
    plan


Yes


Yes


YesNIGC approval of management
    contract in current and desired form


Yes


No, submitted to the NIGC for
    review in 2000 and approval is expected in April 2006 as the
    land was taken into trust by the BIA on January 27, 2006.


No, submitted to the NIGC for
    review in 2000 and approval is expected at approximately the
    same time the land is being placed into trust by the BIA.Resolution of all litigation
    and legal obstacles


No, The Michigan Supreme Court has
    now agreed to hear the appeal by TOMAC of its claims against
    various defendants, but not the Pokagon Band, that the Compact
    entered into with the State of Michigan is invalid. The Michigan
    Court of Appeals (lower court) refused to hear TOMACs
    argument. TOMAC is arguing that the Compact is invalid as the 8%
    payment to the Michigan Strategic Fund is unconstitutional and
    invalid (in that it illegally bypasses the appropriation
    requirement).


No. However on January 6,
    2006 the United States Court of Appeals for the District of
    Columbia Circuit ruled in favor of the Pokagon Band by affirming
    the Federal District Courts grant of summary judgment in
    the lawsuit by TOMAC versus the U.S. Department of the
    Interior.


No, pending litigation regarding
    land in trust.Financing for
    construction


Yes. Financing for the project was
    completed on June 22, 2006. A $305 million senior note
    financing and $75 million FF&E credit facility were
    completed on this date.


No, however the Tribe engaged an
    investment banker to assist with obtaining financing, which we
    expect to occur as early as mid 2006.


No, however the Tribe engaged an
    investment banker to assist with obtaining financing.Any other significant project
    milestones or contingencies, the outcome of which could have a
    material affect on the probability of project completion as
    planned


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.  51




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##### Table of Contents



Our evaluation and conclusion regarding the above critical
    milestones and progress:
    675-acre
        Shingle
    Springs Tribe
  Business
    arrangement:
       52




---



##### Table of Contents



53




---



##### Table of Contents



Our
    Evaluation of the Critical Milestones:
    Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005Federal recognition of the
    tribe


Yes


Yes


YesPossession of usable land
    corresponding with needs based on our project plan


Yes


Yes


YesUsable land placed in trust by
    Federal government


Not necessary, as land is
    reservation land.


Not necessary, as land is
    reservation land.


Not necessary, as land is
    reservation land.Usable county agreement, if
    applicable


Yes


N/A


N/AUsable state compact that
    allows for gaming consistent with that outlined in our project
    plan


Yes


Yes


YesNIGC approval of management
    contract in current and desired form


Yes  approval received
    in 2004.


Yes  approval received
    in 2004.


Yes  approval received
    in 2004.Resolution of all litigation
    and legal obstacles


No  See below.


No, Federal and state litigation
    regarding approval of highway interchange, environmental issues
    and other issues.
     See below.


No, Federal and state litigation
    regarding approval of highway interchange, environmental
    issues
    and other issues.
     See below.Financing for
    construction


No, however the
    Shingle Springs Tribe has engaged investment banks to assist
    with obtaining financing.


No, however the
    Shingle Springs Tribe has engaged investment banks to assist
    with obtaining financing.


No, however the
    Shingle Springs Tribe has engaged investment banks to assist
    with obtaining financing.Any other significant project
    milestones or contingencies, the outcome of which could have a
    material affect on the probability of project completion as
    planned


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.   Our
    evaluation and conclusion regarding the above critical
    milestones and progress:
   54




---



##### Table of Contents



55




---



##### Table of Contents



Jamul
    Tribe
  Business
    arrangement:
         56




---



##### Table of Contents



Our
    Evaluation of the Critical Milestones:
    Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005Federal recognition of the
    tribe


Yes


Yes


YesPossession of usable land
    corresponding with needs based on our project plan


Yes


Yes


YesUsable land placed in trust by
    Federal government


Not necessary, as land is
    reservation land.


Yes, six acres is reservation land
    held by the Jamul Tribe on which the casino will be built. There
    is an additional 82 acres contiguous to the reservation
    land pending BIA approval to be placed into trust that could be
    used for additional development of the project. The Jamul Tribe
    and Lakes prepared an EIS and trust application, which  has been
    submitted to, reviewed and recommended for approval by the
    regional office of the BIA. The Washington, D.C. office of
    the BIA is currently reviewing  the submission.


Yes, six acres is reservation land
    held by the Jamul Tribe on which the casino will be built. There
    is an additional 82 acres contiguous to the reservation
    land pending BIA approval to be placed into trust that could be
    used for additional development of the project. The Jamul Tribe
    and Lakes prepared an EIS and trust application, which has been
    submitted to, reviewed and recommended for approval by the
    regional office of the BIA. The Washington, D.C. office of
    the BIA is  currently reviewing the submission.Usable county agreement, if
    applicable


N/A


N/A


N/AUsable state compact that
    allows for gaming consistent with that outlined in our project
    plan


Yes


Yes


Yes 57




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##### Table of Contents



Critical Milestone


October 1, 2006


January 1, 2006


January 2, 2005NIGC approval of management
    contract in current and desired form


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


No, submitted for approval by the
    NIGC in 2000. We are in communication with the NIGC and have
    responded to initial comments. Approval is not expected until
    the process to place land in trust by the BIA is complete.


No, submitted for approval by the
    NIGC in 2000. We are in communication with the NIGC and have
    responded to initial comments. Approval is not expected until
    the process to place land in trust by the BIA is complete.Resolution of all litigation
    and legal obstacles


N/A, there has been some local
    opposition regarding the project, although no formal legal
    action has been taken.


N/A, there has been some local
    opposition regarding the project, although no formal legal
    action has been taken.


N/A, there has been some local
    opposition regarding the project, although no formal legal
    action has been taken.Financing for
    construction


No, however, preliminary
    discussions with investment bankers regarding assisting in
    obtaining financing have taken place.


No, however, preliminary
    discussions with investment bankers regarding assisting in
    obtaining financing have taken place.


No, however, preliminary
    discussions with investment bankers regarding assisting in
    obtaining financing have taken place.Any other significant project
    milestones or contingencies, the outcome of which could have a
    material affect on the probability of project completion as
    planned


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.   Our
    evaluation and conclusion regarding the above critical
    milestones and progress:
     58




---



##### Table of Contents



Pawnee
    Nation of Oklahoma
  Business
    arrangement:
         59




---



##### Table of Contents



Arrangement with Consultant.
 60




---



##### Table of Contents



Our Evaluation of the three Pawnee Nation Projects:
    Critical Milestone


Chilocco Casino Project


Travel Plaza


Trading PostFederal recognition of the
    tribe


Yes


Yes


YesPossession of usable land
    corresponding with needs based on our project plan


Yes, the Pawnee Nation currently
    holds land in trust where the Chilocco casino will be built.


Yes, the Pawnee Nation is
    currently leasing land from tribal members, which is held in
    trust for the individual tribal members by the United States
    Government. The BIA approved the lease documents on
    January 13, 2006.


Yes, the Trading Post is currently
    open.Usable land placed in trust by
    Federal government


Yes, the Pawnee Nation currently
    holds land in trust where the Chilocco Casino will be built.


Yes, the Pawnee Nation is
    currently leasing land from tribal members, which is held in
    trust for the individual tribal members by the United States
    Government. The BIA approved the lease documents on
    January 13, 2006.


Yes, the Trading Post is currently
    open.Usable county agreement, if
    applicable


N/A


N/A


N/AUsable state compact that
    allows for gaming consistent with that outlined in our project
    plan


Yes


Yes


YesNIGC approval of management
    contract in current and desired form


No, the EA for Chilocco was
    completed and published for comments as of November 26,
    2005. The comment period ended January 3, 2006 with no
    comments received. The NIGC has issued the FONSI and is expected
    to approve the management contract when it is in its final form.


No, the NIGC approved the Final EA
    and issued the FONSI. Upon agreement on the management and
    collateral document language the NIGC is free to approve the
    contract. The NIGC has stated they will complete this process
    approximately 30 days following approval of the Lakes
    Trading Post contract.


No, submitted to the NIGC for
    review on March 22, 2005. The NIGC had provided a second
    set of comments to which the Pawnee Nation and Lakes have
    provided a response.Resolution of all litigation
    and legal obstacles


None at this time.


None at this time.


None at this time. 61




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##### Table of Contents



Critical Milestone


Chilocco Casino Project


Travel Plaza


Trading PostFinancing for
    construction


No, preliminary discussions with
    lending institutions has occurred and the Pawnee Nation has
    issued a request for proposal. Several responses to the request
    for proposal have been received. A lender has not yet been
    selected.


No, The Pawnee Nation has received
    and approved, subject to minor negotiations, a commitment for
    financing from a lender for the desired amount.


None needed.Any other significant project
    milestones or contingencies, the outcome of which could have a
    material affect on the probability of project completion as
    planned


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.


No others known at this time by
    Lakes.   Our
    evaluation and conclusion regarding the above critical
    milestones and progress:
    Iowa
    Tribe
  Business
    arrangement:
      Ioway Project.
 62




---



##### Table of Contents



Cimarron Casino.
  Arrangement with Consultant.
 63




---



##### Table of Contents



Our
    Evaluation of the two Iowa Tribe Projects:
    Ioway Project


Cimarron CasinoFederal recognition of the
    tribe


Yes


YesPossession of usable land
    corresponding with needs based on our project plan


Yes, the Iowa Tribe is currently
    leasing and acquiring land from tribal members, which is held in
    trust for the individual tribal members by the United States
    Government. The Iowa Tribe has acquired signatures on deeds and
    the BIA has approved the transfers of title from more than 70%
    percent of the allottees to transfer their land interests to the
    Iowa Tribe. The remaining interests will be acquired through the
    Indian Lands Consolidation Act.


Yes, currently an open casino.Usable land placed in trust by
    Federal government


Yes, the Iowa Tribe is currently
    leasing and acquiring land from tribal members, which is held in
    trust for the individual tribal members by the United States
    Government. The Iowa Tribe has acquired signatures on deeds and
    the BIA has approved the transfers of title from more than 70%
    percent of the allottees to transfer their land interests to the
    Iowa Tribe. The remaining interests will be acquired through the
    Indian Lands Consolidation Act.


Yes, currently an open casino.Usable county agreement, if
    applicable


N/A


N/AUsable state compact that
    allows for gaming consistent with that outlined in our project
    plan


Yes


YesNIGC approval of management
    contract in current and desired form


No, submitted to the NIGC for
    review on April 22, 2005. An EA will be prepared in order
    for the management contract to be approved, which is expected to
    be completed in late 2006. There have been no comments on the
    consulting agreement from the NIGC and is therefore considered
    operative.


Yes, the NIGC approved the
    management contract in April 2006. 64




---



##### Table of Contents



Ioway Project


Cimarron CasinoResolution of all litigation
    and legal obstacles


None at this time, the acquisition
    of other tribal land is currently in process.


None at this time. The first part
    of the refurbished casino opened in May 2006.Financing for
    construction


No, preliminary discussions with
    lending institutions has occurred.


Permanent financing was obtained
    from a lending institution in December 2005 and Lakes was repaid
    all amounts outstanding under the business improvement loan.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.   Our
    evaluation and conclusion regarding the above critical
    milestones and progress:
    Kickapoo
    Tribe
    Litigation defense costs:
  Income taxes:
 65




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##### Table of Contents



Recently
    issued accounting pronouncements
  Fair Value Measurements
  Accounting for Uncertainty in Income Taxes Accounting for Income
    Taxes.
  Accounting for Certain Hybrid Instruments Accounting for Derivative
    Instruments and Hedging Activities, Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities.
 66




---



##### Table of Contents



Seasonality
    Regulation
    and taxes
      Off-balance
    sheet arrangements
    Private
    Securities Litigation Reform Act
  Form 10-Q
     67




---



##### Table of Contents



Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK        3-month
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Rules 13a-15(e)
   68




---



##### Table of Contents



Part II.

Other Information  ITEM 1.
    LEGAL
    PROCEEDINGS  El
    Dorado County, California litigation
         69




---



##### Table of Contents



WPTE
    litigation
    Other
    litigation
    ITEM 1A.
    RISK
    FACTORS  Form 10-K
  
    We are no longer subject to the risk that our common stock may
    not be re-listed on the Nasdaq Global Market, formerly the
    Nasdaq National Market. As previously announced, our common
    stock resumed trading on the Nasdaq Global Market on
    March 23, 2006 under the symbol LACO.
    On June 22, 2006, Lakes borrowed $105 million under a
    financing facility with BofA and the Lenders pursuant to the
    terms and conditions of a Credit Agreement among Lakes, Lakes
    Gaming and Resorts, LLC, BofA and the Lenders. Approximately
    $25.2 million of the initial draw was used to repay in full
    the aforementioned loan payable to PLKS.
    (Note 5) While the funds provided by the
    $105 million credit agreement with BofA allow us to move
    forward with our various casino development projects, we
    anticipate that we will incur additional pre-construction costs
    which will require us to obtain additional sources of financing
    during fiscal 2007 to meet our operational and development
    needs. Therefore, we will explore additional financing
    alternatives as needed. The financing is discussed in greater
    detail in Item 2 Managements Discussion and
    Analysis of Financial Condition and Results of Operations
    of this Quarterly Report on
    Form 10-Q. 70




---



##### Table of Contents




    We are no longer subject to the risk of financing all phases of
    the Pokagon Casino project as the Pokagon Band closed on a
    $305 million senior note financing in addition to a
    $75 million commitment for furniture, furnishings and
    equipment to fund the remainder of the Four Winds Casino
    project. The financing is discussed in greater detail in
    Item 2 Managements Discussion and Analysis of
    Financial Condition and Results of Operations of this
    Quarterly Report on Form
    10-Q.
    Warrants to purchase 3.21 million shares of common stock
    previously issued to PLKS have lapsed and are no longer
    exercisable.
    We cannot guarantee the financial results of the expansion of
    the World Poker Tour business, which may negatively impact our
    financial results. We can provide no assurance that WPTE will
    achieve its forecasted revenues, that WPTE will be able to
    expand its business, or that WPTEs operations will
    positively impact our financial results because WPTEs
    business is subject to many risks and uncertainties. These risks
    include, but are limited to, WPTEs short operating
    history, WPTEs dependence on its agreement with TRV,
    continued public acceptance of the World Poker Tour programming
    and brand, protection of WPTEs intellectual property
    rights, and WPTEs ability to successfully expand into new
    and complementary businesses, including internet gambling. The
    Unlawful Internet Gambling Enforcement Act of 2006 prohibits
    online gambling in the United States of America. Congress
    passing of the Unlawful Internet Gambling Enforcement Act or
    future government regulation of online gaming in the United
    States may restrict the activities or affect the financial
    results of WPTEs online gaming venture currently operating
    and WPTEs new online gaming venture in development.  ITEM 6.
    EXHIBITS  Exhibits
  31
.1

Certification of CEO pursuant to
    Securities Exchange Act
    Rules 13a-15(e)
    and
    15d-15(e) as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200231
.2

Certification of CFO pursuant to
    Securities Exchange Act
    Rules 13a-15(e)
    and
    15d-15(e) as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200232
.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  71




---



##### Table of Contents



SIGNATURES
  Form 10-Q
  LAKES ENTERTAINMENT, INC.
 Registrant
  
         
         72