##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, 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
    September 28, 2008oro

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
  Large accelerated
    filer o

Accelerated
    filer þNon-accelerated
    filer o  (Do
    not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ




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##### 



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


FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets as of
    September 28, 2008 (unaudited) and December 30,
    2007


3Unaudited Condensed Consolidated Statements of
    Operations and Comprehensive Loss for the three months and nine
    months ended September 28, 2008 and September 30,
    2007


4Unaudited Condensed Consolidated Statements of
    Cash Flows for the nine months ended September 28, 2008 and
    September 30, 2007


5Notes to Unaudited Condensed Consolidated
    Financial Statements


6ITEM 2.


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


24ITEM 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


53ITEM 4.


CONTROLS AND PROCEDURES


54PART II. OTHER INFORMATIONITEM 1.


LEGAL PROCEEDINGS


55ITEM 1A.


RISK FACTORS


55ITEM 6.


EXHIBITS


56EX-31.1EX-31.2EX-32.1   2




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed Consolidated Balance Sheets
  September 28,2008


December 30,(Unaudited)


2007(In thousands)ASSETSCurrent assets:Cash and cash equivalents(balances include $5.2 million and $3.9 million of WPT
    Enterprises, Inc.)

$
12,057


$
9,248Investments in securities(balances include $3.9 million and $23.0 million of
    WPT Enterprises, Inc.)


3,883



53,546Accounts receivable


5,143



3,570Prepaid advertising


7,578



Other current assets


3,114



3,028Total current assets


31,775



69,392Property and equipment, net


16,583



16,633Long-term assets related to Indian casino projects:Notes receivable from Indian tribes


82,190



78,795Land held for development


7,663



7,631Intangible assets, net of accumulated amortization of
    $7.9 million and $2.8 million


62,728



65,910Other


5,084



5,176Total long-term assets related to Indian casino projects


157,665



157,512Other assets:Investments in securities(balances include $11.2 million and $4.2 million of
    WPT Enterprises, Inc.)


35,614



4,200Investment in unconsolidated investee


1,000



2,923Deferred tax asset


1,906



4,878Other long-term assets


558



563Total other assets


39,078



12,564Total assets

$
245,101


$
256,101LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,249


$
1,559Income taxes payable


15,905



16,272Accrued payroll and related costs


2,355



2,788Deferred revenue


1,010



2,870Short-term debt


11,697



Current portion of contract acquisition costs payable, net of
    $1.1 million discount


2,326



1,903Other accrued expenses


2,259



2,074Total current liabilities


36,801



27,466Long-term Liabilities:Contract acquisition costs payable, net of current portion and
    $1.7 million and $2.5 million discount


5,598



7,342Total liabilities


42,399



34,808Commitments and contingenciesMinority interest in subsidiary


9,380



13,995Shareholders equity:Series A convertible, nonvoting preferred stock,
    $.01 par value, with no dividend rights and no liquidation
    preference; authorized 7,500 shares; 4,458 issued and
    outstanding at December 30, 2007






45Common stock, $.01 par value; authorized
    200,000 shares; 26,015 and 24,516 issued and outstanding at
    September 28, 2008, and December 30, 2007, respectively


260



245Additional paid-in capital


197,773



190,228Retained earnings


(1,046
)


16,766Accumulated other comprehensive earnings (loss)


(3,665
)


14Total shareholders equity


193,322



207,298Total liabilities and shareholders equity

$
245,101


$
256,101    3




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed Consolidated Statements of Operations
    and Comprehensive Loss
  Three months ended


Nine months endedSeptember 28,


September 30,


September 28,


September 30,2008


2007


2008


2007(In thousands, except per share data)(Unaudited)Revenues:Management, consulting and development fees

$
8,370


$
2,580


$
18,816


$
3,415License fees


1,854



2,695



8,824



12,535Host fees, sponsorship, online gaming and other


991



1,732



4,093



4,158Total revenues


11,215



7,007



31,733



20,108Costs and expenses:Selling, general and administrative


13,341



10,058



38,175



29,747Production costs


997



1,355



6,452



6,594Amortization of intangible assets related to Indian casino
    projects


1,681



1,121



5,042



1,126Impairment losses


1,923







1,923



2,601Depreciation and amortization


219



192



617



573Total costs and expenses


18,161



12,726



52,209



40,641Net realized and unrealized gains (losses) on notes
    receivable


1,842



(600
)


984



8,503Loss from operations


(5,104
)


(6,319
)


(19,492
)


(12,030
)Other income (expense):Interest income


333



981



1,657



7,613Interest expense


(350
)


(330
)


(1,064
)


(646
)Loss on extinguishment of debt














(3,830
)Other


65



50



247



(17
)Total other income, net


48



701



840



3,120Loss before income taxes and minority interest in net loss of
    subsidiary


(5,056
)


(5,618
)


(18,652
)


(8,910
)Income taxes


2,393



453



3,512



1,142Loss before minority interest in net loss of subsidiary


(7,449
)


(6,071
)


(22,164
)


(10,052
)Minority interest in net loss of subsidiary


1,728



859



4,352



3,035Net loss


(5,721
)


(5,212
)


(17,812
)


(7,017
)Stock warrant inducement discount














1,444Net loss applicable to common shareholders

$
(5,721
)

$
(5,212
)

$
(17,812
)

$
(8,461
)Other comprehensive earnings (loss):Unrealized loss on securities, net of tax


(903
)


30



(3,679
)


30Change in estimated fair value of derivative














409Comprehensive loss

$
(6,624
)

$
(5,182
)

$
(21,491
)

$
(8,022
)Loss applicable to common shareholders per share 
    basic

$
(0.23
)

$
(0.21
)

$
(0.72
)

$
(0.36
)Weighted-average common shares outstanding 
    basic


25,184



24,393



24,906



23,758    4




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Condensed Consolidated Statements of Cash
    Flows
  Nine months endedSeptember 28,


September 30,2008


2007(In thousands)(Unaudited)OPERATING ACTIVITIES:Net loss

$
(17,812
)

$
(7,017
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation and amortization


808



818Amortization of debt issuance costs






95Amortization of debt discount






33Decrease in value of warrant liability






(2,272
)Amortization of intangible assets related to Indian casino
    projects


5,042



1,126Share-based compensation


985



3,607Loss on extinguishment of debt






2,783Net impairment losses


1,923



2,601Net realized and unrealized losses on notes receivable


(984
)


(9,565
)Minority interest in net loss of subsidiary


(4,352
)


(3,035
)Deferred income taxes


2,972



(85
)Changes in operating assets and liabilities:Accounts receivable


(1,573
)


(1,501
)Prepaid advertising


(7,578
)


Other current assets


(103
)


(666
)Income taxes payable


(367
)


601Accounts payable


(206
)


30Deferred revenue


(1,860
)


(281
)Accrued expenses


(246
)


(68
)Contract acquisition costs payable


(1,320
)


(227
)Net cash used in operating activities


(24,671
)


(13,023
)INVESTING ACTIVITIES:Purchase of securities


(13,887
)


(90,861
)Sale / redemption of securities


28,457



90,179Proceeds from sale of land held for development






8,758Collections on notes receivable


1,762



3,759Increases in long-term assets related to Indian casino projects


(4,948
)


(15,120
)Advances on notes receivable


(1,117
)


(3,029
)Purchase of property and equipment


(767
)


(2,158
)Increase in other long-term assets


35



Net cash provided by (used in) investing activities


9,535



(8,472
)FINANCING ACTIVITIES:Decrease in restricted cash


(18
)


12,844Proceeds from debt


12,000



Repayment of long-term debt


(309
)


(105,000
)Cash proceeds from issuance of common and preferred stock


6,272



9,699Cash proceeds from sale of notes receivable






102,114Net cash provided by financing activities


17,945



19,657Net increase (decrease) in cash and cash equivalents


2,809



(1,838
)Cash and cash equivalents  beginning of period


9,248



9,759Cash and cash equivalents  end of period

$
12,057


$
7,921    5




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes
    to Unaudited Condensed Consolidated Financial
    Statements
  1.
    Basis of
    presentation  and/or Form 10-K
      2.
    Fair
    value measurement  , Fair Value Measurements FAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active FAS 157-3) , FAS 157-3
      i.e. etc.
     6




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##### Table of Contents



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


Level 3


Total(In thousands)Municipal Bonds(*)

$
801


$



$
801Auction rate securities (ARS)(*)






34,525



34,525Corporate preferred securities(*)


3,691







3,691Certificates of deposit(*)


480







480Notes receivable from Indian Tribes (**)






82,190



82,190Total assets at estimated fair value (***)

$
4,972


$
116,715


$
121,687     (*)
    
    See Note 3.(**)
    
    See Note 4.(***)
    
    The Company chose not to elect the fair value option as offered
    by Statement of Financial Accounting Standards No. 159,
    The Fair Value Option for Financial Assets and Financial
    Liabilities  including an amendment of FAS 115,for its financial assets and liabilities that had not been
    previously carried at fair value. Therefore, material financial
    assets and liabilities not carried at fair value are still
    reported at carrying values.       7




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##### Table of Contents



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


Indian Tribes


TotalBeginning balance  December 30, 2007

$
38,400


$
78,795


$
117,195Total realized and unrealized gains (losses):Included in other comprehensive loss(*)


(3,650
)






(3,650
)Included in net unrealized gains on notes receivable






984



984Advances, net of allocation to intangible, other






2,411



2,411Settlements, net of purchases and issuances


(225
)






(225
)Ending balance  September 28, 2008 (unaudited)

$
34,525


$
82,190


$
116,715     (*)
    
    The Company considers the decline in the estimated fair value of
    its ARS to be temporary. Accordingly, the related unrealized
    loss is included in accumulated other comprehensive loss in the
    shareholders equity section of the balance sheet as of
    September 28, 2008.  3.
    Investments
    in securities  Form 10-Q.
    Gross


EstimatedUnrealized


FairSeptember 28, 2008

Cost


Gains (Losses)


Value(Unaudited)Maturity dates less than one yearCorporate preferred securities

$
3,707


$
(16
)


3,691Certificates of deposit


192







192$
3,899


$
(16
)

$
3,883Final maturity dates greater than one yearMunicipal bonds

$
800


$
1


$
801ARS


38,175



(3,650
)


34,525Certificates of deposit


288







288$
39,263


$
(3,649
)

$
35,614   8




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##### Table of Contents



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


EstimatedUnrealized


FairDecember 30, 2007

Cost


Gains (Losses)


ValueMaturity dates less than one yearU.S. treasury and agency securities

$
1,000


$



$
1,000ARS


38,400







38,400Short-term municipal bonds


1,000



1



1,001Corporate preferred securities


12,464



9



12,473Certificates of deposit


672







672$
53,536


$
10


$
53,546Maturity dates greater than one yearMunicipal bonds

$
1,827


$
(3
)

$
1,824Corporate preferred securities


1,985



7



1,992Certificates of deposit


384







384$
4,196


$
4


$
4,200     4.
    Long-term
    assets related to Indian casino projects  notes
    receivable     9




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##### Table of Contents



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


Springs


JamulBand


Tribe


Tribe


Other


TotalBalance, December 31, 2006

$
100,544


$
40,912


$
20,754


$
2,098


$
164,308Advances






5,321



5,606



2,639



13,566Sale of Pokagon Band notes receivable


(102,114
)














(102,114
)Allocation of advances to intangible assets






(1,536
)


(2,212
)


(641
)


(4,389
)Consulting contracts














195



195Changes in estimated fair value(*)


1,570



8,895



(2,742
)


(494
)


7,229Balance, December 30, 2007






53,592



21,406



3,797



78,795Advances, net






656



1,085



161



1,902Allocation of advances to intangible assets






(146
)


(565
)


(47
)


(758
)Consulting contracts














(57
)


(57
)Changes in estimated fair value(*)






(962
)


(975
)


(46
)


(1,983
)Balance, March 30, 2008






53,140



20,951



3,808



77,899Advances, net






175



944



45



1,164Allocation of advances to intangible assets






(38
)


(507
)


(13
)


(558
)Consulting contracts














(19
)


(19
)Changes in estimated fair value(*)






1,273



(172
)


24



1,125Balance, June 29, 2008






54,550



21,216



3,845



79,611Advances, net






525



721



34



1,280Allocation of advances to intangible assets






(93
)


(441
)


(9
)


(543
)Changes in estimated fair value(*)






4,368



(2,636
)


110



1,842Balance, September 28, 2008

$



$
59,350


$
18,860


$
3,980


$
82,190     (*)
    
    The changes in estimated fair value of notes receivable related
    to Indian casino projects are recorded as unrealized gains
    (losses) within the unaudited condensed consolidated statements
    of operations and comprehensive loss.  Pokagon Band.
  Shingle Springs Tribe.
 10




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
    As of September 28, 2008

As of December 30, 2007(Unaudited)Face value of note (principal and interest)

$72,865

$67,585($48,987 principal and $23,878 interest)

($47,632 principal and $19,953 interest)Estimated months until casino opens

3 months

12 monthsProjected interest rate until casino opens

7.00%

9.12%Projected interest rate during the loan repayment term

8.77%

10.16%Discount rate

15%

15%Repayment terms of note(*)

84 months

84 monthsProbability rate of casino opening

99%

95%     (*)
    
    Note is payable in even monthly installments over the seven-year
    term of the management agreement subsequent to the casino
    opening.         11




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  Jamul
    Tribe.
    As of September 28, 2008

As of December 30, 2007(Unaudited)Face value of note (principal and interest)

$47,719

$42,426($32,865 principal and $14,854 interest)

($30,114 principal and $12,312 interest)Estimated months until casino opens (weighted-average of three
    scenarios)

36 months

29 monthsProjected interest rate until casino opens

7.43%

9.12%Projected interest rate during the loan repayment term

9.76%

10.46%Discount rate

20.00%

20.00%Projected repayment terms of note

120 months

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

75%

85%        12




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  5.
    Other
    long-term assets related to Indian casino projects  Intangible assets.
  ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalBalance, December 31, 2006

$
23,573


$
20,387


$
9,760


$
559


$
54,279Allocation of advances






1,536



2,212



641



4,389Acquisition of contract rights


10,000











78



10,078Amortization(*)


(2,798
)










(7
)


(2,805
)Impairment loss














(31
)


(31
)Balance, December 30, 2007


30,775



21,923



11,972



1,240



65,910Allocation of advances






146



565



47



758Amortization(*)


(1,679
)










(2
)


(1,681
)Balance, March 30, 2008 (unaudited)


29,096



22,069



12,537



1,285



64,987Allocation of advances






38



507



13



558Amortization(*)


(1,679
)










(1
)


(1,680
)Balance, June 29, 2008 (unaudited)


27,417



22,107



13,044



1,297



63,865Allocation of advances






93



441



9



543Amortization(*)


(1,678
)










(2
)


(1,680
)Balance, September 28, 2008 (unaudited)

$
25,739


$
22,200


$
13,485


$
1,304


$
62,728     (*)
    
    Amortization expense primarily relates to the Four Winds Casino
    Resort, which commenced upon its opening in August of 2007.  Land held for development.
  Other.
 13




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  6.
    Contract
    acquisition costs payable      7.
    Credit
    line  and/or 30-day Form 10-Q.
  and/or
  8.
    Share-based
    compensation    Three Months Ended


Nine Months EndedSeptember 28,


September 30,


September 28,


September 30,2008


2007


2008


2007(In thousands)Total cost of share-based payment plans

$
125


$
1,172


$
985


$
3,607  14




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
        Lakes
    stock option plans:
  Three Months Ended


Nine Months EndedSeptember 28,


September 30,


September 28,


September 30,Key valuation assumptions:

2008


2007


2008


2007Expected dividend yield







*






Risk-free interest rate


4.01
%



*


3.78
%


4.89
%Expected term (in years)


8.18 years




*


8.18 years



8.20 yearsExpected volatility


57.92
%



*


52.48
%


54.95
%Forfeiture rate







*






     *
    
    There were no options granted during the three months ended
    September 30, 2007.  
    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 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 September 28, 2008.
    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. 15




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##### 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


price2008Balance at December 30, 2007


4,345,650



3,842,200



584,750


$
6.08Authorized














Granted


196,000







(196,000
)


5.73Forfeited/cancelled/expired














Exercised


(400,000
)










4.10Balance at March 30, 2008


4,141,650



3,798,200



388,750



6.25Authorized














Granted


75,000







(75,000
)


4.74Forfeited/cancelled/expired














Exercised


(40,000
)










5.41Balance at June 29, 2008


4,176,650



3,767,075



313,750



6.24Authorized














Granted


3,000







(3,000
)


4.99Forfeited/cancelled/expired


(31,000
)






31,000



7.30Exercised


(1,062,500
)










4.18Balance at September 28, 2008


3,086,150



2,701,775



341,750


$
6.942007Balance at December 31, 2006


4,716,400



3,712,350



35,500


$
6.15Authorized














Granted














Forfeited/cancelled/expired














Exercised


(112,500
)










5.82Balance at April 1, 2007


4,603,900



4,025,750



35,500



6.15Authorized










500,000



Granted


2,500







(2,500
)


11.84Forfeited/cancelled/expired


(44,500
)






44,500



9.79Exercised


(74,500
)










5.83Balance at July 1, 2007


4,487,400



3,954,500



577,500



6.13Authorized














Granted














Forfeited/cancelled/expired


(1,500
)






1,500



8.13Exercised


(75,000
)










5.63Balance at September 30, 2007


4,410,900



3,881,200



579,000


$
6.13  16




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
   Options outstanding at September 28, 2008Weighted-








Options exercisable at September 28, 2008average





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)


276,200



2.7 years


$
3.46


$
813,542



276,200


$
3.46


$
813,542(3.64  5.45)


990,200



2.5 years



4.33



2,063,438



810,200



4.25



1,752,358(5.46  7.26)


154,000



7.7 years



6.92



2,750



60,000



7.18



(7.27  9.08)


1,377,500



5.1 years



8.12







1,352,500



8.13



(9.09  10.90)


52,500



7.7 years



10.26







20,350



10.23



(10.91  12.71)


70,750



2.4 years



11.52







63,775



11.44



(12.72  14.53)


95,000



6.4 years



14.00







68,250



14.01



(14.54  16.34)


5,000



6.3 years



16.11







3,000



16.11



(16.35  18.16)


65,000



5.5 years



17.91







47,500



17.95



3,086,150



4.2 years


$
6.94


$
2,879,730



2,701,775


$
6.89


$
2,565,900     WPTE
    stock option plan:
  Three months ended


Nine months endedSeptember 28,


September 30,


September 28,


September 30,Key valuation assumptions:

2008


2007


2008


2007Expected dividend yield



*










Risk-free interest rate



*


4.07
%


3.38
%


4.46
%Expected term (in years)



*


6 years



6 years



6 yearsExpected volatility



*


69.89
%


69.95
%


71.98
%Forfeiture rate



*


16.71
%


20.58
%


16.71
%     *
    
    There were no options granted during the three months ended
    September 28, 2008.  
    Expected dividend yield  As WPTE 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)  Due to WPTEs limited
    operating history including stock option exercises and
    forfeitures, WPTE calculated expected term for each grant using
    the Simplified Method in accordance with Staff
    Accounting Bulletins 107 and 110. 17




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
   
    Expected volatility  As WPTE has a relatively short
    operating history and no definitive peer or peer groups,
    expected volatility was based on historical volatility of
    WPTEs stock price since it began trading in August 2004.
    Forfeiture rate  As share-based compensation expense
    recognized is based on awards ultimately expected to vest,
    expense for grants beginning upon adoption of SFAS 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. WPTE used historical
    data to estimate employee departure behavior in estimating
    future forfeitures.    Number of common sharesWeighted-avg.Options





Available


exerciseoutstanding


Exercisable


for grant


price2008Balance at December 30, 2007


2,920,857



1,322,206



267,150


$
5.66Authorized














Granted














Forfeited/cancelled/expired


(83,600
)






83,600



4.33Exercised














Balance at March 30, 2008


2,837,257



1,412,373



350,750



5.70Authorized














Granted


52,000







(52,000
)


1.26Forfeited/cancelled/expired


(33,950
)






33,950



4.66Exercised














Balance at June 29, 2008


2,855,307



1,466,040



332,700



5.63Authorized














Granted














Forfeited/cancelled/expired


(425,536
)






425,536



4.37Exercised














Balance at September 28, 2008


2,429,771



1,491,706



758,236


$
5.852007Balance at December 31, 2006


2,318,166



1,050,200



983,501


$
6.76Authorized














Granted


287,000







(287,000
)


4.80Forfeited/cancelled/expired


(90,466
)






90,466



8.49Exercised














Balance at April 1, 2007


2,514,700



1,010,533



786,967



6.47Authorized














Granted


182,000







(182,000
)


4.53Forfeited/cancelled/expired


(85,667
)






85,667



5.25Exercised


(113,660
)










0.0049Balance at July 1, 2007


2,497,373



912,139



690,634



6.67Authorized














Granted


220,000







(220,000
)


3.50Forfeited/cancelled/expired


(202,599
)






202,599



7.26Exercised














Balance at September 30, 2007


2,514,774



1,307,106



673,233


$
6.34  18




---



##### Table of Contents



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


111,340



3.41


$
0.0049


$
97,434



111,340


$
0.0049


$
97,434$ 1.26  4.80


906,165



8.80



3.21







171,400



4.48



$ 5.18  9.92


1,289,266



6.21



7.58







1,117,966



7.83



$11.95  14.51


117,000



6.86



12.23







85,000



12.35



$15.05  19.50


6,000



6.81



15.79







6,000



15.79



2,429,771



7.08


$
5.85


$
97,434



1,491,706


$
7.15


$
97,434       9.
    Loss per
    share    10.
    Income
    taxes     19




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
        11.
    Legal
    proceedings  Louisiana Department of Revenue litigation tax
    matter.
  Miscellaneous legal matters.
  12.
    Impairment
    losses     20




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  13.
    Segment
    information  ®
  Industry SegmentsIndiancasino


WPTE


Corporate &projects


Domestic


International


eliminations


ConsolidatedTotal assets as of September 28, 2008

$
163.5


$
27.0


$



$
54.6


$
245.1Total assets as of December 30, 2007

$
158.2


$
41.7


$



$
56.2


$
256.1For the three months ended September 28, 2008Revenue

$
8.4


$
2.0


$
0.8


$



$
11.2Earnings (loss) from operations


7.0



(4.6
)






(7.5
)


(5.1
)Depreciation and amortization






0.1







0.1



0.2Impairment losses






1.9











1.9Amortization of intangible assets related to Indian casino
    projects


1.7















1.7For the three months ended September 30, 2007Revenue

$
2.6


$
3.1


$
1.3


$



$
7.0Earnings (loss) from operations


0.1



(2.6
)






(3.8
)


(6.3
)Depreciation and amortization






0.1







0.1



0.2For the nine months ended September 28, 2008Revenue

$
18.8


$
9.1


$
3.8


$



$
31.7Earnings (loss) from operations


12.6



(11.9
)






(20.2
)


(19.5
)Depreciation and amortization






0.4







0.2



0.6Impairment losses






1.9











1.9Amortization of intangible assets related to Indian casino
    projects


5.0















5.0For the nine months ended September 30, 2007Revenue

$
3.4


$
13.2


$
3.4


$
0.1


$
20.1Impairment losses


0.3















0.3Earnings (loss) from operations


10.1



(9.1
)






(13.0
)


(12.0
)Depreciation and amortization






0.3







0.3



0.6Loss on abandonment of online gaming assets






2.3











2.3  21




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  14.
    Subsequent
    events  Dividend of WPTE stock owned by
    Lakes.
    As presented


Pro-formaAs of September 28, 2008Current assets

$
31.8


$
19.0Long-term assets related to Indian casino projects


157.7



157.7Other long-term assets


55.6



41.3Total assets

$
245.1


$
218.0Current liabilities

$
36.8


$
33.6Long-term liabilities


5.6



5.6Total liabilities


42.4



39.2Shareholders equity


202.7



178.8Total liabilities and shareholders equity

$
245.1


$
218.0   Three months endedSeptember 28, 2008


September 30, 2007As presented


Pro-forma


As presented


Pro-formaRevenue

$
11.2


$
8.4


$
7.0


$
2.6Loss from continuing operations


(5.1
)


(0.5
)


(6.3
)


(3.7
)Loss from discontinued operations






(4.6
)






(2.6
)Loss per share from continuing operations  basic


(0.23
)


(0.12
)


(0.21
)


(0.16
)Loss per share from discontinued operations  basic






(0.11
)






(0.05
)   Nine months endedSeptember 28, 2008


September 30, 2007As presented


Pro-forma


As presented


Pro-formaRevenue

$
31.7


$
18.8


$
20.1


$
3.5Loss from continuing operations


(19.5
)


(7.6
)


(12.0
)


(2.9
)Loss from discontinued operations






(11.9
)






(9.1
)Loss per share from continuing operations  basic


(0.72
)


(0.44
)


(0.36
)


(0.15
)Loss per share from discontinued operations  basic






(0.28
)






(0.21
)  22




---



##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to Unaudited Condensed Consolidated Financial
    Statements  (Continued)
  WPTE termination of online gaming software licensing
    agreement.
  Non-revolving line of credit loan
    agreement. Form 10-Q.
  Penn National Gaming, Inc.
    (Penn)
  UBS agreement.
  Ohio referendum. Form 10-Q
 23




---



##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
    
    We developed, and have a five-year contract to manage, the Four
    Winds Casino Resort for the Pokagon Band of Potawatomi Indians
    (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 and approximately 85 table games as well as multiple
    restaurants and bars, a parking garage, a hotel and other
    facilities.
    We are currently managing the Cimarron Casino for the Iowa Tribe
    of Oklahoma, a federally recognized Indian Tribe, and the Iowa
    Tribe of Oklahoma, a federally-chartered corporation
    (collectively, the Iowa Tribe) in Perkins, Oklahoma,
    under a seven-year management contract, which commenced in 2006.
    We have contracts to develop and subsequently manage for seven
    years the Red Hawk Casino, which is being built on the Rancheria
    of the Shingle Springs Band of Miwok Indians (the Shingle
    Springs Tribe) in El Dorado County, California,
    adjacent to U.S. Highway 50, approximately 30 miles
    east of Sacramento, California. The Red Hawk Casino is planned
    to open in late 2008.
    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 Interstate 94, approximately
    20 miles east of San Diego, California (the
    Jamul Casino). The Jamul Casino project has been
    delayed due to issues with access from Interstate 94 to the
    proposed Jamul Casino site. The Jamul Tribe has a driveway road
    leading to the Jamul Casino site. CalTrans issued a letter to
    the Jamul Tribe indicating that it will not currently allow the
    driveway road to be used to access a casino operation from
    Interstate 94. The Jamul Tribes outside counsel reviewed
    the letter and is of the opinion that the letter lacks legal
    merit.    
    We have a consulting agreement and management contract with the
    Iowa Tribe in connection with developing, equipping and managing
    the Ioway Casino Resort which is planned to be built near Route
    66 and approximately 25 miles northeast of Oklahoma City,
    Oklahoma. 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 need to be approved by the BIA. Lakes submitted its
    management contract with the Iowa Tribe for the Ioway Casino
    Resort to the National Indian Gaming Commission (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. 24




---



##### Table of Contents



Form 10-Q
    ® tm
    WPT Studios (tm)
   25




---



##### Table of Contents



one-hour
  case-by-case
    WPT Online
     26




---



##### Table of Contents



one-hour
    WPT Global Marketing
     27




---



##### Table of Contents



WPT China.
  22-25, 12-14,
  Results
    of Operations
  Form 10-Q
  Three
    months ended September 28, 2008 compared to the three
    months ended September 30, 2007
  Revenues.
  Selling, general and administrative
    expenses.
  Production costs.
 28




---



##### Table of Contents



Gross margins.
  Amortization of intangible assets related to Indian casino
    projects.
  Impairment losses. Form 10-Q).
  Net unrealized gains on notes receivable. Form 10-Q).
  Income taxes. Form 10-Q).
  Minority interest.
  Nine
    months ended September 28, 2008 compared to the nine months
    ended September 30, 2007
  Revenues.
  Selling, general and administrative
    expenses.
 29




---



##### Table of Contents



Production costs.
  Gross margins.
  Amortization of intangible assets related to Indian casino
    projects.
  Impairment losses. Form 10-Q).
  Net realized and unrealized gains on notes
    receivable. Form 10-Q).
  Other income. Form 10-Q).
    Income taxes.
 30




---



##### Table of Contents



Form 10-Q).
  Minority interest.
  Outlook.
    Form 10-Q
  Form 10-Q,
  Liquidity
    and Capital Resources
  Form 10-Q). Form 10-Q.
   31




---



##### Table of Contents



and/or 30-day Form 10-Q.
  Form 10-Q.
      Form 10-Q
  and/or
 32




---



##### Table of Contents



Payment due by periodLess than








More thanContractual 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)


7.9



2.3



3.3



2.3



Iowa Tribe  Ioway Project(5)


















Lakes operating lease(6)


3.8



0.4



0.8



0.8



1.8WPTE operating leases(7)


2.4



0.9



1.5







WPTE purchase obligations(8)


1.8



1.5



0.3







$
15.9


$
5.1


$
5.9


$
3.1


$
1.8     (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 also (2),
    (3) and (5) below). Any guarantees by us or similar
    off-balance sheet liabilities will increase our potential
    exposure in the event of a default by any of these tribes. No
    such guarantees or similar off-balance sheet liabilities existed
    at September 28, 2008.(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 offer solely class II electronic
    gaming devices 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 will not be subject to approval by the State of
    California or the NIGC.(3)
    
    The development agreement between Lakes and the Shingle Springs
    Tribe, as amended, provided for Lakes to make certain
    pre-construction advances to the Shingle Springs Tribe in the
    form of a transition loan and land loan up to a maximum combined
    amount of $75.0 million. On June 28, 2007, an
    affiliate of the Shingle Springs Tribe closed on a
    $450 million senior note financing to fund the Red Hawk
    Casino project. The transition loan remains outstanding as of
    September 28, 2008. On June 28, 2007, the land loan
    was repaid to Lakes, including accrued interest, in connection
    with the close of the $450 million senior note financing.(4)
    
    Upon opening of the Four Winds Casino Resort, we became
    obligated to pay approximately $11 million to an unrelated
    third party as part of an agreement associated with our
    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, which also became
    payable upon the opening of the casino. (See Note 6 to the
    unaudited condensed consolidated financial statements in
    Part I, Item 1 of this Quarterly Report on
    Form 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 33




---



##### Table of Contents



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)
    
    Lakes leases an airplane under a non-cancelable operating lease
    that expires on March 1, 2018.(7)
    
    WPTE operating lease obligations include rent payments for WPTE
    corporate offices pursuant to two lease agreements. For the
    first lease, monthly lease payments are approximately $40,000
    and escalate to approximately $45,000 over the remaining lease
    term. For the second lease, monthly lease payments are
    approximately $31,000 and escalate to approximately $33,000 over
    the remaining lease term. The amounts set forth in the table
    above include monthly lease payments through June 2011.(8)
    
    WPTE purchase obligations include the operational expenses
    associated with the development of WorldPokerTour.com. These
    obligations relate to the gaming and non-gaming aspects of the
    website. Also included are operational expenses related to WPT
    China. Additionally, included in purchase obligations are open
    purchase orders of approximately $0.2 million as of
    September 28, 2008, and a three year base retainer with
    Antonio Esfandiari, who serves as WPTEs spokesperson for
    ClubWPT.com.    and/or
        Critical
    Accounting Policies and Estimates
   34




---



##### 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.  99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent (EITF 99-19).
  EITF 99-19.
  EITF 99-19,
  EITF 99-19,
 35




---



##### Table of Contents



Deferred television costs. SOP 00-2.
  Share-based compensation expense.
  Income taxes. Accounting for Income Taxes
    (SFAS No. 109).
  Accounting for Uncertainty in Income Taxes
  Investments in securities. Accounting for Certain Investments in
    Debt and Equity Securities Form 10-Q.
   36




---



##### Table of Contents



and/or
  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;
    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.  No. 96-12, Recognition of Interest Income and balance Sheet
    Classification of Structured Notes No. 96-12).
   37




---



##### Table of Contents



Accounting by Creditors
    for Impairment of a Loan.
  Intangible assets related to Indian casino
    projects. Goodwill and Other Intangible Assets
  Land held for development.
  Other.
      September 28, 2008ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


Total(Unaudited)Notes receivable, at estimated fair value

$



$
59,350


$
18,860


$
3,980


$
82,190Intangible assets related to Indian casino projects


25,739



22,200



13,485



1,304



62,728Land held for development










6,815



848



7,663Other


60



767



913



3,344



5,084$
25,799


$
82,317


$
40,073


$
9,476


$
157,665   38




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##### Table of Contents



December 30, 2007ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalNotes receivable, at estimated fair value

$



$
53,592


$
21,406


$
3,797


$
78,795Intangible assets related to Indian casino projects


30,775



21,923



11,972



1,240



65,910Land held for development










6,783



848



7,631Other


60



767



1,061



3,288



5,176$
30,835


$
76,282


$
41,222


$
9,173


$
157,512       Shingle
    Springs Tribe:
  As of September 28, 2008

As of December 30, 2007(Unaudited)Face value of note (principal and interest)

$72,865

$67,585($48,987 principal and $23,878 interest)

($47,632 principal and $19,953 interest)Estimated months until casino opens

3 months

12 monthsProjected interest rate until casino opens

7.00%

9.12%Projected interest rate during the loan repayment term

8.77%

10.16%Discount rate

15%

15%Repayment terms of note(*)

84 months

84 monthsProbability rate of casino opening

99%

95%     (*)
    
    Note is payable in even monthly installments over the course of
    the management agreement subsequent to the casino opening.   39




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##### Table of Contents



Jamul
    Tribe:
  As of September 28, 2008

As of December 30, 2007(Unaudited)Face value of note (principal and interest)

$47,719

$42,426($32,865 principal and $14,854 interest)

($30,114 principal and $12,312 interest)Estimated months until casino opens (weighted-average of three
    scenarios)

36 months

29 monthsProjected interest rate until casino opens

7.43%

9.12%Projected interest rate during the loan repayment term

9.76%

10.46%Discount rate

20.00%

20.00%Projected repayment terms of note

120 months

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

75%

85%       September 28,
    2008
  Estimated fair


Sensitivity analysisvalue notes


5% less


One year





5% increased


One yearreceivable


probable


delay


Both


probability


sooner


Both(In thousands)Shingle Springs

$
59,350


$
56,304


$
55,274


$
52,434


$
*


$
*


$
*Jamul


18,860



17,624



16,959



15,850



20,096



20,979



22,356$
78,210


$
73,928


$
72,233


$
68,284


$
20,096


$
20,979


$
22,356     *
    
    These hypothetical scenarios are no longer applicable for
    Lakes notes receivable from the Shingle Springs Tribe as
    the probability of opening the casino is estimated at 99% and
    the estimated casino opening date is within three months of
    September 28, 2008.  December 30,
    2007
  Estimated fair


Sensitivity analysisvalue notes


5% less


One year





5% increased


One yearreceivable


probable


delay


Both


probability


sooner


Both(In thousands)Shingle Springs

$
53,592


$
50,732


$
50,998


$
48,275


$
56,452


$
56,316


$
59,319Jamul

$
21,406


$
20,151


$
19,540


$
18,395


$
22,661


$
23,450


$
24,826$
74,998


$
70,883


$
70,538


$
66,670


$
79,113


$
79,766


$
84,145    40




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##### Table of Contents



As of September 28, 2008ShingleAdvances Principal Balance

Springs


Jamul


Other(c)


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

$
48,987


$
31,915


$
3,729


$
84,631Note receivable, land(b)






950



986



1,936$
48,987


$
32,865


$
4,715


$
86,567   As of December 30, 2007ShingleAdvances Principal Balance

Springs


Jamul


Other(c)


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

$
47,632


$
29,164


$
3,490


$
80,286Note receivable, land(b)






950



986



1,936$
47,632


$
30,114


$
4,476


$
82,222     (a)
    
    We fund certain costs to develop the casino projects. 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 tribes for a variety of tribal
    expenses.(b)
    
    We purchased land to be used and transferred to the tribe in
    connection with the casino projects.(c)
    
    Amounts listed in the other column represents amounts advanced
    under the agreements with the Iowa Tribe.    September 28,


December 30,Shingle Springs Tribe

2008


2007(Unaudited)Monthly stipend

$
11,215


$
9,640Construction


1,922



2,141Legal


14,193



14,193Environmental


1,739



1,739Design


11,224



11,225Gaming license


3,726



3,726Lobbyist


4,968



4,968$
48,987


$
47,632   September 28,


December 30,Jamul Tribe

2008


2007(Unaudited)Monthly stipend

$
5,533


$
5,069Construction


1,996



1,210Legal


4,487



4,342Environmental


2,292



2,288Design


14,027



12,782Gaming license


883



779Lobbyist


2,697



2,694$
31,915


$
29,164  41




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##### Table of Contents



Evaluation
    of impairment related to our long-term assets related to Indian
    casino projects, excluding the notes receivable, which are
    valued at fair value:
        Jamul
    Tribe
    September 28,


December 30,2008


2007(Unaudited)No. of Class II electronic gaming devices


1,000



1,000No. of Table games


20



20No. of Poker tables


5



5Win/Class II electronic gaming devices/day  1st
    year

$
172


$
172Win/Table game/day  1st year

$
471


$
471Win/Poker table/day  1st year

$
312


$
312     Shingle
    Springs Tribe
   42




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##### Table of Contents



September 28,

December 30,2008

2007(Unaudited)No. of Class III slot machines

349

349No. of Class II electronic gaming devices

1,651

1,751No. of Table games

75

75Win/Class II & III electronic gaming devices/slot
    machine/day  1st year

$350

$350Win/Table game/day  1st year

$1,275

$1,275Expected increase (decrease) in management fee cash flows

Year 2  17.6%

Year 2  17.6%Year 3  10.5%

Year 3  10.5%Year 4  7.9%

Year 4  7.9%Year 5  8.8%

Year 5  8.8%Year 6  (4.0)%
    (management fees were
    reduced in year six)

Year 6  (4.0)%
    (management fees were
    reduced in year six)Year 7  5.0%

Year 7  5.0%       Description
    of each Indian casino project and evaluation of critical
    milestones:
  Pokagon
    Band
  Business arrangement.
  Shingle
    Springs Tribe
  Business arrangement.
 43




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##### Table of Contents



Our evaluation of the critical milestones.
 44




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##### Table of Contents



Critical milestone


September 28, 2008


December 30, 2007


December 31, 2006Federal recognition of the tribe


Yes


Yes


YesPossession of usable land corresponding with needs based on
    Lakes 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


Yes


YesUsable state compact that allows for gaming consistent with
    that outlined in Lakes project plan


Yes


Yes


YesNIGC approval of management contract in current and desired
    form


Yes


Yes


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


Yes  See below.


No  However, such obstacles have not interfered with
    construction of the highway interchange or the casino project to
    date. See below.


No  See below.Financing for construction


Yes.


Yes. On June 28, 2007 an affiliate of the Shingle Springs Tribe
    closed on a $450 million senior note financing to fund the Red
    Hawk Casino project in Shingle Springs, California. The Shingle
    Springs Tribe intends to seek commitments to fund approximately
    $65 million under secured furniture, furnishings and equipment
    financing to finance costs associated with equipping and
    furnishing the Red Hawk Casino.


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:
   45




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##### Table of Contents



Jamul
    Tribe
  Business arrangement. six-acre
 46




---



##### Table of Contents



Our evaluation of the critical milestones.
 47




---



##### Table of Contents



Critical milestone


September 28, 2008


December 30, 2007


December 31, 2006Federal recognition of the tribe


Yes


Yes


YesPossession of usable land corresponding with needs based on
    Lakes project plan


Yes


Yes


YesUsable 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/AUsable 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.


YesNIGC 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 and Lakes entered into a development
    financing and services agreement in March 2006, which does not
    need to be approved by the NIGC.Resolution of all litigation and legal obstacles


No (see below)


N/A, there has been some local opposition regarding the project.


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.


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


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


Yes. The 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 will
    not be subject to approval by the State of California or the
    NIGC. See below for a discussion relating to road access to the
    proposed Jamul Casino site.


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 will
    not be subject to approval by the State of California or the
    NIGC.


Yes. The Jamul Tribe and the State of California have had a
    series of recent meetings to discuss what requirements the State
    has to either allow the project to be built as currently planned
    or to enter into a new compact similar to those approved in 2004
    for other tribes in the State. Based on these discussions, the
    Jamul Tribe is evaluating which of any of these requirements are
    acceptable or in lieu of a compact, building a casino based
    solely on class II electronic gaming devices.   Our evaluation and conclusion regarding the above critical
    milestones and progress. land-in-trust
   48




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##### Table of Contents



Iowa
    Tribe
  Business arrangement.
    Ioway Casino Resort.
    Cimarron Casino.
 49




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##### Table of Contents



Arrangement with Consultant.
  Our evaluation of the Ioway Casino Resort.
  Critical milestone


September 28, 2008


December 30, 2007


December 31, 2006Federal recognition of the tribe


Yes


Yes


YesPossession 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 the majority of this parcel from
    the allottees. It is likely that approximately 14 acres of
    the 74-acre allotment will not be obtained, but the casino can
    be constructed on the remaining 60 acres held in majority
    by the Tribe. 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.


Yes, the Iowa Tribe has members that own a
    74-acre
    allotment on US Route 66 midway between the access points to
    Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has
    obtained the rights to purchase and/or lease this parcel from
    the allottees. An additional 100 acres of fee land has been
    optioned to provide the necessary site area for the beginning of
    the project.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/AUsable state compact that allows for gaming consistent with
    that outlined in Lakes project plan


Yes


Yes


Yes 50




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##### Table of Contents



Critical milestone


September 28, 2008


December 30, 2007


December 31, 2006NIGC 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 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 is currently being prepared and is necessary for the
    management contract to be approved. Completion of the EA is
    expected by Spring 2007. There have been no comments on the
    consulting agreement from the NIGC and is therefore considered
    operative.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
    has occurred.


No, however, preliminary discussions with lending institutions
    has 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.   Our evaluation and conclusion regarding the above critical
    milestones and progress.
    Recently
    issued accounting pronouncements
  Fair Value Measurements
  157-3, Determining Fair Value of a Financial Asset in a Market That
    Is Not Active (FSP 157-3). FSP 157-3 FSP 157-3
  142-3, Determination of the Useful Life of Intangible Assets (FAS 142-3). FSP 142-3
 51




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##### Table of Contents



Goodwill and
    Other Intangible Assets FSP 142-3
  Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51
    (SFAS No. 160),
  Seasonality
    Regulation
    and taxes
      Off-balance
    sheet arrangements
    Private
    Securities Litigation Reform Act
  Form 10-Q
     52




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##### Table of Contents



Form 10-K, Form 10-Q.
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK           53




---



##### Table of Contents



ITEM 4.
    CONTROLS
    AND PROCEDURES  Rules 13a-15(e)
   54




---



##### Table of Contents



Part II.
    Other Information  ITEM 1.
    LEGAL
    PROCEEDINGS  Miscellaneous
    legal matters.
    ITEM 1A.
    RISK
    FACTORS  Form 10-K,
  If we
    are unable to liquidate our investments to provide liquidity
    when and as needed, and we are unable to obtain additional
    financing in order to satisfy our cash requirements, we may be
    forced to delay, scale back or eliminate some of our expansion
    and development goals.
  Form 10-Q.
  Form 10-Q, Form 10-Q. and/or
    We may
    be adversely impacted by economic factors beyond our control and
    may incur additional impairment charges to our investment
    portfolio.
  Form 10-Q.
   55




---



##### Table of Contents



and/or
  ITEM 6.
    EXHIBITS  Exhibit

Description31
.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  56




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##### Table of Contents



SIGNATURES
  Form 10-Q
  LAKES ENTERTAINMENT, INC. Registrant
  /s/  LYLE
    BERMAN       /s/  TIMOTHY
    J. COPE       57