<PAGE>

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

                                    FORM 10-Q

                                   (Mark One)

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

For the quarterly period ended July 4, 2004

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ______________ to _________________
                           Commission File No. 0-24993

                            LAKES ENTERTAINMENT, INC.
                            ------------------------
             (Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

           Yes [X]                                  No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

           Yes [ ]                                  No [X]

As of August 11, 2004, there were 22,225,884 shares of Common Stock, $0.01 par
value per share, outstanding. All share and per share data for periods prior to
May 3, 2004 has been retroactively restated to give effect to a two-for-one
stock split (the "Stock Split") in the form of a 100% stock dividend paid on May
3, 2004 to shareholders of record on April 26, 2004.

<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                      INDEX

<TABLE>
<CAPTION>
                                                                                    PAGE OF
                                                                                   FORM 10-Q
                                                                                   ---------
<S>                                                                                <C>
PART I.  FINANCIAL INFORMATION

         ITEM 1.   FINANCIAL STATEMENTS

                   Condensed Consolidated Balance Sheets as of                         3
                   July 4, 2004 and December 28, 2003

                   Condensed Consolidated Statements of Earnings for the               4
                   three months ended July 4, 2004 and June 29, 2003

                   Condensed Consolidated Statements of Comprehensive                  5
                   Earnings for the three months ended July 4, 2004
                   and June 29, 2003

                   Condensed Consolidated Statements of Loss for the six               6
                   months ended July 4, 2004 and June 29, 2003

                   Condensed Consolidated Statements of Comprehensive Loss             7
                   for the six months ended July 4, 2004 and June 29, 2003

                   Condensed Consolidated Statements of Cash Flows for                 8
                   the six months ended July 4, 2004 and June 29, 2003

                   Notes to Condensed Consolidated Financial Statements                9

         ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                  21
                   CONDITION AND RESULTS OF OPERATIONS


         ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         29


         ITEM 4.   CONTROLS AND PROCEDURES                                            29

PART II. OTHER INFORMATION

         ITEM 1.   LEGAL PROCEEDINGS                                                  30

         ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                32

         ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                   33
</TABLE>

                                       2
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                JULY 4, 2004     DECEMBER 28, 2003
                                                                ------------     -----------------
<S>                                                             <C>              <C>
ASSETS
Current Assets:
    Cash and cash equivalents                                      $ 19,405          $ 25,340
    Accounts receivable, net                                            323             1,038
    Deferred tax asset                                                5,385             5,385
    Prepaids                                                          2,878             2,119
    Other current assets                                                914             1,645
                                                                   --------          --------
Total Current Assets                                                 28,905            35,527
                                                                   --------          --------
Property and Equipment-Net                                            6,485             6,492
                                                                   --------          --------
Other Assets:
    Land held under contract for sale                                 4,863             4,612
    Land held for development                                        14,159            14,536
    Notes receivable                                                 88,135            84,682
    Investments                                                       7,893             8,717
    Deferred tax asset                                                7,472             6,634
    Other long-term assets                                            9,036             8,860
                                                                   --------          --------
Total Other Assets                                                  131,558           128,041
                                                                   --------          --------
TOTAL ASSETS                                                       $166,948          $170,060
                                                                   ========          ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
    Accounts payable                                               $  1,360          $  1,906
    Income taxes payable                                              7,042             7,215
    Accrued payroll and related costs                                   589               497
    Other accrued expenses                                            4,445             3,018
                                                                   --------          --------
Total Current Liabilities                                            13,436            12,636
                                                                   --------          --------
TOTAL LIABILITIES                                                    13,436            12,636
                                                                   --------          --------

COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
    Capital stock, $.01 par value; authorized 100,000 shares;
    22,226 and 21,474 common shares issued and outstanding
    at July 4, 2004, and December 28, 2003, respectively                222               215
    Additional paid-in-capital                                      136,290           132,291
    Retained Earnings                                                17,000            24,918
                                                                   --------          --------
Total Shareholders' Equity                                          153,512           157,424
                                                                   --------          --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                         $166,948          $170,060
                                                                   ========          ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                       3
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
                   (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                          (UNAUDITED)
                                                                       THREE MONTHS ENDED
                                                                       ------------------
                                                                  JULY 4, 2004      JUNE 29, 2003
                                                                  ------------      -------------
<S>                                                               <C>               <C>
REVENUES:
    License fee income                                              $  4,718           $  2,954
                                                                    --------           --------
       Total Revenues                                                  4,718              2,954
                                                                    --------           --------

COSTS AND EXPENSES:
    Selling, general and administrative                                3,155              3,788
    Production costs                                                   2,645              1,162
    Impairment losses                                                  6,407                  -
    Reversal of litigation and claims accrual                              -             (3,212)
    Depreciation and amortization                                        150                131
                                                                    --------           --------
       Total Costs and Expenses                                       12,357              1,869
                                                                    --------           --------
LOSS FROM OPERATIONS                                                  (7,639)             1,085
                                                                    --------           --------
OTHER INCOME (EXPENSE):
    Interest income                                                       43                314
    Equity in earnings (loss) of unconsolidated affiliates               (23)               (60)
    Other                                                                  -                 (1)
                                                                    --------           --------
       Total other income, net                                            20                253
                                                                    --------           --------

Earnings (loss) before income taxes                                   (7,619)             1,338
Provision (benefit) for income taxes                                    (461)               549
                                                                    --------           --------
NET EARNINGS (LOSS)                                                ($  7,158)          $    789
                                                                    ========           ========
BASIC EARNINGS (LOSS) PER SHARE                                    ($   0.32)          $   0.04
                                                                    ========           ========

DILUTED EARNINGS (LOSS) PER SHARE                                  ($   0.32)          $   0.04
                                                                    ========           ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                            22,212             21,276
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS                             -                  1
                                                                    --------           --------
WEIGHTED AVERAGE COMMON AND DILUTED
  SHARES OUTSTANDING                                                  22,212             21,277
                                                                    ========           ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                       4
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  (UNAUDITED)
                                                               THREE MONTHS ENDED
                                                               ------------------
                                                       JULY 4, 2004         JUNE 29, 2003
                                                       ------------         -------------
<S>                                                    <C>                  <C>
NET EARNINGS (LOSS)                                      ($7,158)                $789

OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX:
    Unrealized gains (losses) on securities                    -                    -
                                                          ------                 ----
COMPREHENSIVE EARNINGS (LOSS)                            ($7,158)                $789
                                                          ======                 ====
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                       5
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF LOSS
                    (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                 (UNAUDITED)
                                                               SIX MONTHS ENDED
                                                               ----------------

                                                       JULY 4, 2004      JUNE 29, 2003
                                                       ------------      -------------
<S>                                                    <C>               <C>
REVENUES:
    License fee income                                    $ 8,858            $ 3,504
                                                          -------            -------
       Total Revenues                                       8,858              3,504
                                                          -------            -------
COSTS AND EXPENSES:
    Selling, general and administrative                     6,415              5,866
    Production costs                                        5,117              2,063
    Impairment losses                                       6,407                  -
    Reversal of litigation and claims accrual                   -             (3,212)
    Depreciation and amortization                             293                259
                                                          -------            -------
       Total Costs and Expenses                            18,232              4,976
                                                          -------            -------
LOSS FROM OPERATIONS                                       (9,374)            (1,472)
                                                          -------            -------
OTHER INCOME (EXPENSE):
    Interest income                                            91                551
    Equity in loss of unconsolidated affiliates               396               (147)
    Other                                                      42                158
                                                          -------            -------
       Total other income, net                                529                562
                                                          -------            -------
Loss before income taxes                                   (8,845)              (910)
Benefit for income taxes                                     (927)              (372)
                                                          -------            -------
NET LOSS                                                 ($ 7,918)          ($   538)
                                                          =======            =======
BASIC LOSS PER SHARE                                     ($  0.36)          ($  0.03)
                                                          =======            =======
DILUTED LOSS PER SHARE                                   ($  0.36)          ($  0.03)
                                                          =======            =======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                 21,982             21,276
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS                  -                  -
                                                          -------            -------
WEIGHTED AVERAGE COMMON AND DILUTED
  SHARES OUTSTANDING                                       21,982             21,276
                                                          =======            =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                        6
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   (UNAUDITED)
                                                                SIX MONTHS ENDED
                                                        ------------------------------
                                                        JULY 4, 2004     JUNE 29, 2003
                                                        ------------     -------------
<S>                                                     <C>              <C>
NET LOSS                                                 ($ 7,918)          ($  538)

OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX:
    Unrealized gains (losses) on securities                     -                 -
                                                          -------            ------
COMPREHENSIVE LOSS                                       ($ 7,918)          ($  538)
                                                          =======            ======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                       7
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       (UNAUDITED)
                                                                                     SIX MONTHS ENDED
                                                                                     ----------------
                                                                              JULY 4, 2004       JUNE 29, 2003
                                                                              ------------       -------------
<S>                                                                           <C>                <C>
OPERATING ACTIVITIES:
     Net loss                                                                  ($  7,918)         ($    538)
     Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:
      Depreciation and amortization                                                  293                259
      Unit-based compensation expense                                                270                 27
      Equity in (earnings) loss of unconsolidated affiliates                        (396)               147
      Deferred income taxes                                                         (838)             1,418
      Impairments and write-downs                                                  6,407                  -
      Changes in operating assets and liabilities:
           Accounts receivable                                                       715               (832)
           Income taxes                                                             (173)            (1,252)
           Accounts payable                                                         (546)              (130)
           Accrued expenses                                                        1,519             (2,922)
           Other                                                                     (28)              (220)
                                                                                --------           --------
Net Cash Used in Operating Activities                                               (695)            (4,043)
                                                                                --------           --------
INVESTING ACTIVITIES:
     Payments for land held under contract for sale                                 (251)              (433)
     Payments received on land held under contract for sale                            -             16,765
     Payments made for land held for development                                    (122)            (1,591)
     Advances on notes receivable                                                 (9,383)            (6,642)
     Investment in and notes receivable from unconsolidated affiliates             1,242               (495)
     Increase in restricted cash, net                                                  -              5,906
     Increase in other long-term assets                                             (176)              (225)
     Reduction of (payments for) property and equipment, net                        (286)                 6
                                                                                --------           --------
Net Cash Provided by (Used in) Investing Activities                               (8,976)            13,291
                                                                                --------           --------
FINANCING ACTIVITIES:
     Proceeds from issuance of common stock                                        3,736                  -
                                                                                --------           --------
Net Cash Provided by Financing Activities                                          3,736                  -
                                                                                --------           --------

Net decrease in cash and cash equivalents                                         (5,935)             9,248
Cash and cash equivalents - beginning of period                                   25,340             14,106
                                                                                --------           --------
CASH AND CASH EQUIVALENTS - END OF PERIOD                                       $ 19,405           $ 23,354
                                                                                ========           ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the period for:
      Income taxes                                                              $     13           $      4
     Noncash operating activities:
      Capitalized television costs related to unit options issued to
         consultants                                                                 139                  -
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                       8
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    BUSINESS

Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the "Company")
was established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its common stock, par value $.01 per share (the "Common
Stock") to the shareholders of Grand Casinos, Inc. ("Grand").

Lakes' primary business is to develop and manage Indian-owned casino properties
that offer the opportunity for long-term development of related entertainment
facilities, including hotels, theaters, recreational vehicle parks and other
complementary amenities designed to enhance the customers' total entertainment
experience and to differentiate facilities managed by Lakes from its
competitors. Lakes provides experienced corporate and casino management and
develops and implements a wide scale of marketing programs. In conjunction with
this part of Lakes' business strategy, Lakes has entered into development and
management agreements relating to one casino project in Michigan and two casino
projects in California, with development of each subject to regulatory
approvals. Lakes has also explored, and will continue to explore, numerous other
possible development projects.

Formed in March 2002 as a joint venture, World Poker Tour, LLC ("WPT"), a 78%
owned subsidiary of Lakes, has created a circuit of previously-established poker
tournaments affiliated under the "World Poker Tour" name, and has produced the
World Poker Tour television series. WPT signed an agreement for a second season
with the Travel Channel, LLC ("TRV"), for broadcast of the World Poker Tour
series on cable television. TRV was also granted options for five additional
seasons. WPT receives a series of fixed license payments from TRV.

Lakes has recently created a new division to buy, license and/or market new
table game concepts for licensing to casinos. The Company is currently testing a
number of new games and there may be revenue from this effort beginning during
2004. See also Note 8.

LAND HELD UNDER CONTRACT FOR SALE

On December 28, 2001, the Company transferred title and ownership obligations of
the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction
with this transaction, Lakes transferred to Metroflag BP, LLC, rights to and
obligations of the adjacent Travelodge property consisting of a long-term land
lease and a motel operation. During 2002, Lakes and Metroflag restructured the
terms of the Polo Plaza and Travelodge property transactions due to
deteriorating economic conditions. The parties reduced the purchase price for
the Polo Plaza property from $23.8 million to $21.8 million.

During March of 2003, Lakes and Metroflag agreed to additional revisions to the
terms of the Polo Plaza and Travelodge property transactions. The parties
increased the price of the Polo Plaza property from $21.8 million to $25.8
million and extended the payment date to May 15, 2003. On the payment date,
$16.8 million of the purchase price was paid to Lakes in cash, $4.0 million was
paid through the issuance to Lakes of a preferred membership interest in
Metroflag and $4.0 million was paid through the issuance to Lakes of a
subordinated membership interest in Metroflag.

                                       9
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

Previously, Metroflag paid $1.0 million in cash as a down payment. Lakes can
require Metroflag to repurchase the $4.0 million preferred interest any time on
or after December 24, 2006. The subordinated interest must be repurchased for
$4.0 million at the time of repayment by Metroflag of an outstanding $3.5
million contractual commitment in connection with the Travelodge property, which
is scheduled on or before December 28, 2004.

In March of 2003, the parties decreased the sale price of the Travelodge
property from $7.5 million to $3.5 million. At that time, the contractual
commitment to pay Lakes was also decreased from $7.5 million to $3.5 million, as
a result of the increase in the purchase price of the Polo Plaza property
discussed above. During 2003, Lakes took a $1.0 million impairment charge on the
Travelodge property. If the Travelodge commitment is not repaid by December 28,
2004, ownership of the Travelodge lease rights would revert back to Lakes. If
this were to occur, the property would be recorded on Lakes' balance sheet at
the lower of its fair value or the adjusted basis of the investment related to
the Travelodge property. Lakes has also agreed to loan to Metroflag BP up to
$3.0 million related to Travelodge operating shortfalls through December 28,
2004. As of July 4, 2004 and December 28, 2003, the outstanding loan balance was
$2.4 million and $2.1 million, respectively. This loan is scheduled to be repaid
on December 28, 2004. If at any time the Polo Plaza property is sold and the
Travelodge commitment has not been repaid, Metroflag is required to repurchase
the subordinated interest for the lesser of $4.0 million or any portion of the
net cash proceeds from such sale or refinancing that exceeds $60.0 million.

LAND HELD FOR DEVELOPMENT

Included in land held for development is land held for possible transfer to
Indian tribes for use in future casino resort projects. During the second
quarter of 2004, an impairment related to the Nipmuc Nation land held for
development in the amount of $0.5 million was recorded related to the Nipmuc
Nation casino development project. This amount was included in the total
impairment charge of $6.4 million related to the Nipmuc Nation project. This
impairment occurred after the Nipmuc Nation was denied federal recognition as an
Indian Tribe and sovereign government within the meaning of federal law by the
Bureau of Indian Affairs (BIA).

2.    BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include
the accounts of Lakes and its wholly-owned and majority-owned subsidiaries.
Investments in unconsolidated affiliates representing 50% or less of voting
interests are accounted for on the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.

Lakes' investments in unconsolidated affiliates include a 50 percent ownership
interest in PCG Santa Rosa, LLC, a joint venture formed to develop a casino on
Indian-owned land in California and a 50% ownership interest in 2022 Ranch, LLC,
a joint venture formed to develop and/or sell approximately 2000 acres owned by
the joint venture in Eastern San Diego County. This land was sold during the
first quarter of 2004. The sale of the land reduced Lakes' investment in 2022
Ranch to less than $0.1 million.

                                       10
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

The condensed consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America for interim financial information, in accordance with
the rules and regulations of the Securities and Exchange Commission. Pursuant to
such rules and regulations, certain financial information and footnote
disclosures normally included in the condensed consolidated financial statements
have been condensed or omitted.

In the opinion of management, all adjustments considered necessary for fair
presentation have been included. Operating results for the three months ended
July 4, 2004 are not necessarily indicative of the results that may be expected
for the year ending January 2, 2005. The condensed consolidated financial
statements should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 28, 2003.

3.    STOCK-BASED COMPENSATION

At July 4, 2004, the Company has two stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.

WPT also has a unit-based compensation plan for both employees and consultants.
WPT has a 2002 Unit Option Plan (the "2002 Plan") which is approved to issue up
to an aggregate of 7,000 Class B non-voting units of WPT in connection with unit
option grants to employees and consultants. The options become exercisable in
quarterly installments on each of the first four anniversaries of the date of
the grant and each installment expires six years after being exercisable. The
employee must be employed by the Company on the anniversary date in order to
vest in any units that year. If the employee is terminated (voluntarily or
involuntarily) prior to the vesting of any portion of a unit option, the
unvested portion will be forfeited.

For WPT unit options issued to employees, deferred stock compensation for the
unit options is measured at the units' fair value in excess of the exercise
price on the date of grant and is being amortized over the vesting period of
four years. For WPT unit options issued to consultants, compensation expense is
measured at the option's fair value. Fair value is measured when the unit
options vest in annual installments on each of the first four anniversaries of
the date of the grant. Compensation expense is estimated in periods prior to
vesting based on the then current fair value. Changes in the estimated fair
value of unvested options are recorded in the periods the change occurs.

Additionally, on March 4, 2002, WPT granted 15,000 Class A voting units to its
President under a management agreement. The restricted units vest in four equal
installments annually beginning February 25, 2003. If there is a change of
control, all non-vested restricted units vest immediately.

                                       11
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

The Company accounts for the WPT unit-based employee compensation under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Compensation expense for
unit option grants issued to employees is recorded to the extent the fair market
value of the units on the date of grant exceeds the option price. Compensation
expense for restricted unit grants is measured based on the fair market value of
the units on the date of grant. The compensation expense is amortized ratably
over the vesting period of the awards.

The Company accounts for WPT unit-based consultant compensation according to the
recognition and measurement principles of EITF 96-18, Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Compensation expense for unit
option grants issued to consultants is recorded at the fair market value of the
options at the measurement date, defined as the date the options vest and
services have been provided.

The following table illustrated the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation under the Lakes' plans and unit-based employee and
consultant compensation under the WPT Plans (in thousands except per share
data).

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                          JULY 4, 2004   JUNE 29, 2003   JULY 4, 2004    JUNE 29, 2003
                                                          ------------   -------------   ------------    -------------
<S>                                                       <C>            <C>             <C>             <C>
Net earnings (loss):
    As reported                                             $(7,158)       $   789        $  (7,918)       $   (538)
    Add:  Unit-based compensation expense                       176             10              270              30
        included in reported net earnings
        (loss)
    Less:  Total stock-based compensation                      (537)          (423)            (987)           (817)
        expense determined under the fair
        value method, net of related tax effects

    Pro forma                                                (7,519)           376           (8,635)         (1,325)
Net earnings (loss) per share:
    As reported -- Basic                                    $ (0.32)       $  0.04        $   (0.36)       $  (0.03)
    Pro forma -- Basic                                        (0.34)          0.02            (0.41)          (0.06)
    As reported -- Diluted                                    (0.32)          0.04            (0.36)          (0.03)
    Pro forma -- Diluted                                      (0.34)          0.02            (0.41)          (0.06)
</TABLE>

                                       12
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

4.    MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS

The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulation, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations. The Company is prohibited by the Indian Gaming Regulatory Act from
having an ownership interest in any casino it manages for Indian tribes.

The management contracts govern the relationship between the Company and the
tribes with respect to the construction and management of the casinos. The
development portion of the agreements commences with the signing of the
respective contracts and continues until the casinos open for business;
thereafter, the management portion of the respective management contracts
continues for a period up to seven years. Under the terms of the contracts, the
Company, as manager of the casino, receives a percentage of the distributable
profits (as defined in the contract) of the operations as a management fee after
payment of certain priority distributions, a cash contingency reserve, and
guaranteed minimum payments to the tribes.

Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan with the Pokagon Band of
Potawatomi Indians. The Company has formed partnerships that hold contracts to
develop and manage two casinos to be owned by Indian tribes in California, one
near San Diego with the Jamul Indian Village, and the other near Sacramento with
the Shingle Springs Band of Miwok Indians.

The Company also has signed contracts with the Nipmuc Nation of Massachusetts
for development and management of a potential future gaming resort in the
eastern United States; however, in June 2004, this tribe was denied federal
recognition as an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs (BIA). As a result of this denial,
Lakes incurred an impairment charge of approximately $6.4 million during the
second quarter of 2004 related to the impairment of Lakes' investment in the
Nipmuc Nation casino development project.

5.    NOTES RECEIVABLE

The notes receivable from Indian Tribes result from costs incurred by the
Company for the development of gaming properties under which the Company has
signed management contracts. The repayment terms are specific to each tribe and
are largely dependent upon the operating performance of each gaming property.
Repayments of the aforementioned notes receivable are required to be made only
if distributable profits are available from the operation of the related
casinos. Repayments are also the subject of certain distribution priorities
specified in the management contracts. In addition, repayment of the notes
receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.

                                       13
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

Notes receivable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      July 4, 2004      December 28, 2003
                                                                                      ------------      -----------------
<S>                                                                                   <C>               <C>
Properties under development:

Notes from the Pokagon Band of Potawatomi Indians with variable interest rates
(not to exceed 10%) (5.25% at July 4, 2004), receivable in 60 monthly
installments subsequent to commencement date                                             $43,601          $41,729

Notes from the Shingle Springs Band of Miwok Indians with variable interest
rates (6.25% at July 4, 2004), receivable in varying monthly installments based
on contract terms subsequent to commencement date                                         29,896           24,428

Notes from Jamul Indian Village with variable interest rates (6.25% at July 4,
2004), receivable in 60 monthly installments subsequent to commencement date              13,496           12,336

Notes from the Nipmuc Nation with variable interest rates                                      -            4,634

Other                                                                                      1,142            1,555
                                                                                         -------          -------
Total notes receivable                                                                   $88,135          $84,682
                                                                                         =======          =======
</TABLE>

Interest income on notes receivable from Indian Tribes related to properties
under development is deferred because realizability of the interest is
contingent upon the completion and positive cash flow from operation of the
casino. Interest deferred during the development period is recognized over the
remaining life of the note using the effective interest method. As of July 4,
2004 and December 28, 2003, $17.4 million and $15.2 million of interest on notes
related to properties under development has been deferred.

The terms of these notes require the casinos to be constructed and to generate
positive cash flows prior to the Company receiving repayment. As such, an
estimate of the fair value of these notes requires an assessment of the timing
of the construction of the related casinos and the profitability of the related
casinos. Due to the significant uncertainty involved in such an assessment, the
Company does not believe that it is practicable to accurately estimate the fair
value of these notes with the degree of precision necessary to make such
information meaningful.

During the second quarter of 2004, an impairment related to the Nipmuc Nation
notes receivable in the amount of $5.9 million was recorded related to the
Nipmuc Nation casino development project. This amount was included in the total
impairment charge of $6.4 million related to the Nipmuc Nation project. This
impairment occurred after the Nipmuc Nation was denied federal recognition as an
Indian Tribe and sovereign government within the meaning of federal law by the
BIA.

                                       14
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

6.    INCOME TAXES

The Company is currently under examination in various states for income and
franchise tax matters. The Internal Revenue Service has completed a field exam
of the Company's tax returns for the years ended December 30, 2001 and December
31, 2000. The Company has recorded a reserve assessment related to these
examinations and other tax matters. The reserve is reflected as part of income
taxes payable on the accompanying consolidated balance sheets.

7.    COMMITMENTS AND CONTINGENCIES:

LEASES

The Company leases certain property and equipment, including an airplane, under
a non-cancelable operating lease. The airplane lease expired May 1, 2003 and was
renewed for a one-year period. The lease provides for one additional one-year
renewal term, which began May 1, 2004. Approximate future minimum lease
payments, due under this lease as of July 4, 2004, are as follows (in
thousands):

<TABLE>
<CAPTION>
                        Operating Leases
                        ----------------
<S>                     <C>
2004                         $300
2005                          200
                             ----
                             $500
                             ====
</TABLE>

PURCHASE OPTIONS

The Company has the right to purchase the airplane it leases during the renewal
terms for approximately $8 million.

INDEMNIFICATION AGREEMENT

As a part of the transaction establishing Lakes as a separate public company on
December 31, 1998, the Company agreed to indemnify Grand through December 28,
2004 against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings
against Grand and to pay all related settlements and judgments. The Company's
indemnification obligations include the obligation to provide the defense of all
claims made in proceedings against Grand and to pay all related settlements and
judgments. There is currently no known liability related to this
indemnification.

As a part of the indemnification agreement, Lakes agreed that it will not
declare or pay any dividends, make any distribution on account of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interests in Lakes without the written consent of Caesars Entertainment, Inc,
the parent Company of Grand.

                                       15
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

LEGAL PROCEEDINGS

SLOT MACHINE LITIGATION

In 1994, William H. Poulos filed a class-action lawsuit in the United States
District Court for the Middle District of Florida against various parties,
including Grand and numerous other parties alleged to be casino operators or
slot machine manufacturers. This lawsuit was followed by several additional
lawsuits of the same nature against the same, as well as additional defendants,
all of which were subsequently consolidated into a single class-action pending
in the United States District Court for the District of Nevada.

Following a court order dismissing all pending pleadings and allowing the
plaintiffs to re-file a single complaint, a complaint has been filed containing
substantially identical claims, alleging that the defendants fraudulently
marketed and operated casino video poker machines and electronic slot machines,
and asserting common law fraud and deceit, unjust enrichment and negligent
misrepresentation and claims under the federal Racketeering-Influenced and
Corrupt Organizations Act. Various motions were filed by the defendants seeking
to have this new complaint dismissed or otherwise limited. In December 1997, the
Court, in general, ruled on all motions in favor of the plaintiffs. The
plaintiffs then filed a motion seeking class certification and the defendants
opposed it. In June 2002, the Court entered an order denying class
certification, and the plaintiffs have appealed this order to the 9th Circuit
Court of Appeals. Briefing is complete, an oral hearing took place in January
2004, and no ruling has yet been issued.

WILLARD EUGENE SMITH LITIGATION

On October 24, 2003, Lakes announced that it had been named as one of a number
of defendants in a counterclaim filed in state court in Harris County, Texas by
Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons
and entities. In the counterclaim, Smith asserts that, under an alleged oral
agreement with Kevin Kean, he is entitled to a percentage of fees to be received
by the KAR entities or their principals relating to the Shingle Springs and
Jamul casinos that Lakes' subsidiaries are developing in California. Smith also
seeks recovery of damages and other relief from the KAR entities, Lakes and
certain affiliates based on their conduct with respect to the alleged agreement.

Lakes believes the counterclaim against it is without merit. Lakes understands
that the alleged oral agreement upon which Smith bases his claim was rendered
null and void in a prior judgment issued against Smith by the Harris County,
Texas state court in October 2000. However, in September 2003, the court vacated
the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle
Springs and Jamul projects on January 30, 2003. In the buyout agreements between
Lakes and certain KAR entities and related principals, the KAR entities
represented to Lakes that the KAR entities and their affiliates had no
continuing agreements with any third party relating to the Shingle Springs and
Jamul projects and agreed to indemnify Lakes and its affiliates from damages
resulting from prior dealings of the KAR entities and related principals
concerning the projects. Lakes will vigorously defend against the allegations
made against it and will pursue its indemnification rights against the KAR
entities and their principals under the buyout agreements if necessary.

                                       16
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

EL DORADO COUNTY, CALIFORNIA LITIGATION

On January 3, 2003, El Dorado County filed an action in the Superior Court of
the State of California, seeking to prevent the construction of a highway
interchange that was approved by a California state agency. The action does not
seek relief directly against Lakes. However, the interchange is necessary to
permit the construction of a casino to be developed and managed by Lakes through
a joint venture.

The casino will be owned by the Shingle Springs Band of Miwok Indians. The
matter was tried to the court on August 22, 2003. On January 2, 2004, Judge
Lloyd G. Connelly, Judge of the Superior Court for the State of California,
issued his ruling on the matter. The Court denied the petition in all respects
except one. As to the one exception, the Court sought clarification as to
whether the transportation conformity determination used to determine the
significance of the air quality impact of the interchange operations considered
the impact on attainment of the state ambient air quality standard for ozone.
The California Department of Transportation (Caltrans) prepared and filed the
clarification sought by the Court. Prior to the Court's determination of the
adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling
to the California Court of Appeals.

A ruling with respect to the casino development planned by the Shingle Springs
Rancheria was issued June 21, 2004 by the Superior Court of California, County
of Sacramento. The ruling indicates that the addendum previously provided to the
court by Caltrans did not provide a quantitative showing to satisfy the court's
earlier request for a clarification on meeting the state ambient ozone standard.
The court recognized that the information provided by Caltrans does
qualitatively show that the project may comply with the state standard, but
concluded that is insufficient. Rather the court is requiring a quantitative
analysis and the court recognizes that the methodology for that analysis "is not
readily apparent". In addition, the ruling specifically states, "Moreover such
methodology appears necessary for the CEQA analysis of transportation projects
throughout the state, including transportation projects for which respondents
(i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe
and Lakes responded to the court with a revised submission in August 2004.
Representatives of the California Air Resources Board and the Sacramento Area
Council of Governments filed declarations supporting our revised submission to
the court. Opposition to that revised submission has been filed, and a hearing
on the revised submission is scheduled on August 20, 2004.

GRAND CASINOS, INC. LITIGATION

In connection with the establishment of Lakes as a public corporation on
December 31, 1998, via a distribution of its common stock to the shareholders of
Grand, the Company and Grand entered into an agreement governing the sharing or
allocation of tax benefits accruing to Grand and certain affiliated companies.
On August 13, 2004, an arbitrator awarded to the Company partial summary
judgment on certain of the Company's claims against Grand under the tax sharing
agreement. The dollar amount that will be awarded to the Company on these claims
has not been determined, certain other claims by the Company under the agreement
have not been decided, and no hearing date has been set to determine such dollar
amount or decide such claims.

OTHER LITIGATION

Lakes is involved in various other inquiries, administrative proceedings, and
litigation relating to contracts and other matters arising in the normal course
of business. While any proceeding or litigation has an element of uncertainty,
management currently believes that the final outcome of these matters, including
the matters discussed above, is not likely to have a material adverse effect
upon the Company's consolidated financial position or results of operations.

                                       17
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

8.    RELATED PARTY TRANSACTIONS

Lakes has entered into a license agreement with Sklansky Games, LLC ("Sklansky)
pursuant to which Lakes is developing a World Poker Tour No Limit Texas Hold `Em
casino table game that uses certain of Sklansky's intellectual property rights.
Lakes had also entered into a license agreement with WPT pursuant to which Lakes
has obtained a license to utilize the World Poker Tour name and logo in
connection with the development of this casino table game. Under the terms of
this agreement, if Lakes elects to proceed with its development of the casino
table game, Lakes will be required to pay WPT a specified minimum annual royalty
payment of 10% of the gross revenue Lakes receives from its sale or lease of the
game, whichever is greater. In addition to our indirect majority ownership in
World Poker Tour, LLC through one of our wholly owned subsidiaries, Lyle Berman
and his son, Brad Berman, own 28% and 44% equity interests in Sklansky,
respectively. Lyle Berman also serves as Chairman and Chief Executive Officer of
WPT, and Brad Berman is a member of WPT's Board of Directors.

Effective as of February 24, 2004, WPT entered into a non-exclusive license
agreement with G-III Apparel Group, Ltd. ("G-III"). Morris Goldfarb, a Lakes
director, is a director, Co-Chairman of the Board and Chief Executive Officer of
G-III. Under the agreement, G-III licenses the World Poker Tour name, logo and
trademark from WPT in connection with G-III's production of certain types of
apparel for distribution in authorized channels within the United States, its
territories and possessions and in certain circumstances, Canada. As
consideration for this non-exclusive license, G-III pays royalties and certain
other fees to WPT.

Lakes provides general and administrative services to WPT that include
accounting, finance and treasury, tax, human resources/personnel, employee
benefits, retail, systems support and marketing support. As reimbursement of
compensation for these services, Lakes bills WPT an amount equal to the gross
wages of the Lakes employees that provide services to WPT based upon the actual
time incurred on WPT matters.

Effective as of March 4, 2002, Lakes Poker Tour, LLC, a wholly-owned subsidiary
of Lakes, entered into a loan agreement with WPT pursuant to which WPT is
allowed to borrow up to $4.0 million. The related promissory note of WPT accrues
interest at an annual rate of 6.2% and matures in full on March 4, 2005. Lakes
may terminate the loan agreement at any time and upon such termination, all
amounts advanced and accrued are due one year after the termination. WPT has
granted Lakes a security interest in all of WPT's assets to secure the loan. As
of July 4, 2004, there was a remaining balance of $0.2 million in principal and
interest under the promissory note.

9.    SEGMENT INFORMATION

Lakes' principal business is the development and management of gaming related
properties. Additionally, the Company is the majority owner of the World Poker
Tour, LLC. (See Note 1). Substantially, all of our operations are conducted in
the United States. Lakes' reportable segments are as follows (in millions):

                                       18
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         Industry Segments
                                                         -----------------
                                     Real Estate     World Poker    Corporate &        Total
                                     Development         Tour       Eliminations    Consolidated
                                     -----------         ----       ------------    ------------
<S>                                  <C>             <C>            <C>             <C>
   Total Assets as of
   July 4, 2004                       $  138.0         $  2.5        $  26.4         $  166.9

   Total Assets as of
   December 28, 2003                     126.1            2.5           41.5            170.1

   For the Three Months
   Ended/as of July 4, 2004
   Revenue                            $      -         $  4.7        $     -         $    4.7
   Net earnings (loss)                    (6.4)           0.9           (1.7)            (7.2)
   Depreciation expense                      -              -            0.2              0.2

   For the Three Months
   Ended/as of June 29, 2003
   Revenue                            $      -         $  3.0        $     -         $    3.0
   Net earnings (loss)                    (0.7)           1.3            0.2              0.8
   Depreciation expense                      -              -            0.1              0.1
</TABLE>

10.   STOCK SPLIT

During April of 2004, the Company's Board of Directors declared a two-for-one
stock split, payable in the form of a 100% stock dividend on Lakes' outstanding
common stock. The stock dividend was paid on May 3, 2004 to shareholders of
record as of April 26, 2004.

As a result of the stock split, shareholders received one additional share of
common stock for every share they held on the record date. Upon completion of
the split, the number of common shares outstanding was approximately 22.2
million. In connection with the stock split, the Company introduced a direct
registration program to provide for uncertified shares through Wells Fargo
Shareowner Services, the Company's transfer agent and registrar. As a result,
the additional shares were issued in "book-entry" form without stock
certificates and are registered on the books of the Company maintained by Wells
Fargo Shareowner Services.

11.   SUBSEQUENT EVENTS

In connection with the initial public offering of WPT Enterprises, Inc. (WPTE),
World Poker Tour, LLC converted from a Delaware limited liability company into a
Delaware corporation named "WPT Enterprises, Inc." on July 28, 2004. As a part
of the conversion, each of World Poker Tour, LLC's limited liability company
units was converted into 160 shares of common stock. Restricted units and unit
options were converted using the same ratio.

                                       19
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

WPTE adopted a 2004 Stock Incentive Plan that is authorized to grant stock-based
awards to purchase up to 3,120,000 shares of WPTE common stock, including
options to purchase up to 1,120,000 shares of WPTE common stock issued to WPTE
employees and consultants that were outstanding under World Poker Tour, LLC's
2002 Plan at the time of the conversion.

On August 9, 2004, the Securities and Exchange Commission declared effective a
registration statement of WPTE that registered the offer and sale of up to
4,000,000 shares of WPTE common stock, at $8.00 per share, in WPTE's initial
public offering and an additional 600,000 shares of WPTE common stock that may
be sold if the underwriters involved in the offering exercise their
over-allotment option. WPTE's common stock was approved for trading on The
Nasdaq Stock Market and began trading on August 10, 2004. The initial closing of
the offering, at which WPTE sold 4,000,000 shares of common stock, occurred on
August 13, 2004, with WPTE receiving proceeds of approximately $28.5 million,
net of estimated offering expenses and underwriting discounts. The underwriters
in the offering have an over-allotment option to purchase an additional 600,000
shares of WPTE common stock that expires on September 23, 2004. It is expected
that proceeds from the offering will be used to expand WPTE's entertainment
production business and for its working capital. There were no selling
shareholders participating in the offering. Lakes did not recognize a gain on
this transaction.

Following is summarized pro forma balance sheet data as of July 4, 2004. This
data has been adjusted to reflect the offering at the initial public offering
price of $8.00 per share of common stock.

<TABLE>
                                                           July 4, 2004
                                December 28, 2003      Actual       Pro Forma
                                -----------------      ------       ---------
<S>                             <C>                   <C>           <C>
Current Assets                      $ 35,527          $ 28,905      $ 57,405
Total Assets                         170,060           166,948       195,448
Current Liabilities                   12,636            13,436        13,436
Minority Interest                         --                --         9,662
Capital Stock                            215               222           222
Additional Paid-in Capital           132,291           136,290       155,128
Retained Earnings                     24,918            17,000        17,000
</TABLE>

                                       20
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

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

OVERVIEW

Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the "Company")
was established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its Common Stock, to the shareholders of Grand Casinos,
Inc. ("Grand").

As a result of the Distribution, Lakes operates the Indian casino management
business and holds various other assets previously owned by Grand. Lakes' main
business is the development, construction and management of casinos and related
hotel and entertainment facilities in emerging and established gaming
jurisdictions. Lakes has entered into contracts for the development, management
and/or financing of new casino operations, all of which are subject to various
regulatory approvals before construction can begin. Lakes has contracts to
develop and manage Indian-owned gaming resorts for the following:

      -     Shingle Springs Band of Miwok Indians near Sacramento, California

      -     Pokagon Band of Potawatomi Indians near New Buffalo, Michigan

      -     Jamul Indian Village near San Diego, California

In addition, Lakes owns options to purchase the patent rights for various new
casino games and is actively marketing these new games to the casino industry in
an attempt to license the games for use in their operations.

WPT Enterprises, Inc., (formerly known as World Poker Tour, LLC) a
majority-owned subsidiary of Lakes ("WPT"), has created a circuit of
previously-established poker tournaments affiliated under the "World Poker Tour"
name, and has produced the World Poker Tour television series. WPT signed an
agreement for a second season with the Travel Channel, LLC ("TRV") for broadcast
of the World Poker Tour series on cable television which is currently airing in
reruns. TRV was also granted options for five additional seasons and TRV has
exercised its option for the first of these five seasons, which is currently in
production. WPT receives a series of fixed license payments from TRV.

On August 9, 2004, the Securities and Exchange Commission declared effective a
registration statement of WPT that registered the offer and sale of up to
4,000,000 shares of WPT common stock, at $8.00 per share, in WPT's initial
public offering and an additional 600,000 shares of WPT common stock that may be
sold if the underwriters involved in the offering exercise their over-allotment
option. WPT's common stock was approved for trading on The Nasdaq Stock Market
and began trading on August 10, 2004. The initial closing of the offering, at
which WPT sold 4,000,000 shares of common stock, occurred on August 13, 2004,
with WPT receiving proceeds of approximately $28.5 million, net of estimated
offering expenses and underwriting discounts. The underwriters' over-allotment
option expires on September 23, 2004. It is expected that proceeds from the
offering will be used to expand WPT's entertainment production business and for
its working capital. There were no selling shareholders participating in the
offering. Lakes did not recognize a gain on this transaction and the proceeds
will be reflected as a minority interest.

                                       21
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Additionally, Lakes continually evaluates other opportunities to diversify the
Company's activities and bring in new revenue streams.

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies, which Lakes believes are the most critical
to aid in fully understanding and evaluating its reported financial results,
include the following: revenue recognition and realizability of notes
receivable.

REVENUE RECOGNITION: Revenue from the management of Indian-owned casino gaming
facilities is recognized when earned according to the terms of the management
contracts. Currently all of the Indian-owned casino projects that Lakes is
involved with are in development stages and are not yet open. Therefore, until a
project is open and operating, Lakes will not recognize revenue related to
Indian casino management. Interest income on notes receivable for Indian tribes
related to casino development projects is deferred because realizability of the
interest is contingent upon the completion and generation of cash flow from the
operation of the casino. Interest deferred during the development period is
recognized over the remaining life of the note using the effective interest
method. License revenue from the World Poker Tour series airing on TRV is
recognized upon delivery of completed episodes. WPT sponsorship and host casino
revenue is recognized upon airing of episodes. Any payments received in excess
of WPT revenue earned are deferred and recognized upon delivery or airing of
episodes.

IMPAIRMENT OF LONG-TERM ASSETS: Currently, the Company's notes receivable from
Indian Tribes are generally for the pre-construction development of gaming
properties to be managed by the Company. The repayment terms are specific to
each tribe and are largely dependent upon the operating performance of each
gaming property. Repayments of the notes receivable are required to be made only
if distributable profits are available from the operation of the related
casinos. Repayments are also subject to certain distribution priorities
specified in the management contracts. In addition, repayment of the notes
receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.
Management periodically evaluates the recoverability of such notes receivable
based on the current and projected operating results of the underlying facility
and an assessment of the underlying facility and an assessment as to the
likelihood of project completion. If the Company determines an impairment has
occurred, the notes receivable would be written down to their estimated fair
value. During the second quarter of 2004, an impairment related to the Nipmuc
Nation notes receivable in the amount of $5.9 million was recorded under these
provisions. This impairment occurred after the Nipmuc Nation was denied federal
recognition as an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs (BIA).

The Company currently holds land held for development and land held under
contract for sale. The Company periodically evaluates whether events and
circumstances have occurred that may affect the recoverability of the net book
value of these assets. If such events or circumstances indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of the asset. If the sum of
the expected future undiscounted cash flows does not exceed the carrying value
of the asset, the Company will recognize an impairment loss.

                                       22
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

During June 2004, the Company recognized an impairment loss of approximately
$0.5 million on land held for development related to the Nipmuc Nation project.
This amount was included in the total impairment charge of $6.4 million related
to the Nipmuc Nation project.

The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto and management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the year ended December 28, 2003.

RESULTS OF OPERATIONS

Revenues are calculated in accordance with accounting principles generally
accepted in the United States of America and are presented in a manner
consistent with industry practice.

SIX MONTHS ENDED JULY 4, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 29, 2003

Revenues

Total revenues were $8.9 million for the six months ended July 4, 2004 compared
to $3.5 million for the same period in the prior year. Revenues for the current
and prior year periods were derived primarily from license fees related to the
WPT series. The increase in revenue is primarily due to an increase in license
fees related to season two episodes delivered to TRV during 2004, compared to
license fees related to season one episodes delivered to TRV during 2003. Also
contributing to the increase was revenue of approximately $0.9 million related
to WPT-related licensing, sponsorship and merchandise included in total revenue
for the six months ended July 4, 2004. In April 2004, TRV exercised its option
to broadcast the first of a possible five additional seasons. WPT receives fixed
license payments from TRV subject to satisfaction of production milestones and
other conditions.

Costs and Expenses

Total costs and expenses were $18.2 million and $5.0 million for the six months
ended July 4, 2004 and June 29, 2003, respectively. Included in 2004 costs and
expenses is an impairment charge of approximately $6.4 million related to the
write-off of Lakes' investment in the Nipmuc Nation casino development project.
This impairment charge was the result of the Nipmuc Nation being denied
recognition as an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs. During the six months ended June
29, 2003, costs and expenses were reduced by a reversal of unused litigation
accrual of $3.2 million under the Company's prior agreement to indemnify Grand
Casinos, Inc. in connection with the Stratosphere litigation matters.

Selling, general and administrative expenses increased from $5.9 million for the
six months ended June 29, 2003 to $6.4 million for the six months ended July 4,
2004. This increase is primarily due to an increase in overhead costs associated
with the WPT which was partially offset by a decrease in professional fees
incurred during the 2004 period. WPT production costs increased from $2.1
million for the six months ended June 29, 2003 to $5.1 million for the six
months ended July 4, 2004. In the current year period, WPT production costs and
related episode revenues were recognized in the period the relative episode was
delivered to TRV.

                                       23
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

However, because WPT did not have an executed agreement in 2002, when a portion
of production costs related to the WPT episodes delivered during the six months
ended June 29, 2003 were incurred, such costs were expensed in 2002 rather than
being capitalized. The increase was also due to a greater number of episodes
being delivered to TRV during the 2004 period compared to the 2003 period.

Other

Interest income was $0.1 million for the six months ended July 4, 2004 compared
to $0.6 million for the same period in the prior year. This decrease is
primarily due to a decrease in interest earned on amounts owed to Lakes by
Metroflag related to the properties sold to Metroflag by Lakes in Las Vegas,
Nevada.

Losses Per Common Share and Net Losses

For the six months ended July 4, 2004, basic and diluted losses per common share
were $0.36, compared to basic and diluted losses of $0.03 per common share, for
the same period in the prior year. Losses for the period ended July 4, 2004 were
$7.9 million compared to $0.5 million for the six months ended June 29, 2003.
This increase in losses is primarily due to the impairment charge of $6.4
million taken in the current year period discussed above.

THREE MONTHS ENDED JULY 4, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 29, 2003

Revenues

Total revenues were $4.7 million for the three months ended July 4, 2004,
compared to $3.0 million in the prior year period. Revenues for the current and
prior year periods were primarily derived from license fees related to the WPT
series. The increase in revenue is primarily due to an increase in license fees
related to season two episodes delivered to TRV during the second quarter of
2004, compared to license fees related to season one episodes delivered to TRV
during the second quarter of 2003. Also contributing to the increase was revenue
of approximately $0.5 million related to WPT-related licensing, sponsorship and
merchandise included in total revenue for the three months ended July 4, 2004.

Costs and Expenses

Total costs and expenses were $12.4 million and $1.9 million for the three
months ended July 4, 2004 and June 29, 2003, respectively. Included in second
quarter 2004 costs and expenses is an impairment charge of approximately $6.4
million related to the write-off of Lakes' investment in the Nipmuc Nation
casino development project. This impairment charge was the result of the Nipmuc
Nation being denied recognition as an Indian Tribe and sovereign government
within the meaning of federal law by the Bureau of Indian Affairs. During the
three months ended June 29, 2003, costs and expenses were reduced by a reversal
of unused litigation accrual of $3.2 million under the Company's prior agreement
to indemnify Grand Casinos, Inc. in connection with the Stratosphere litigation
matters.

                                       24
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Selling, general and administrative expenses decreased from $3.8 million for the
three months ended June 29, 2003 to $3.2 million for the three months ended July
4, 2004. This decrease is primarily due to a decrease in professional fees
incurred during the 2003 period associated with the sale of property in Las
Vegas, Nevada. WPT production costs increased from $1.2 million for the three
months ended June 29, 2003 to $2.6 million for the three months ended July 4,
2004. In the current year period, WPT production costs and related episode
revenues were recognized in the period the relative episode was delivered to
TRV. However, because the TRV agreement was not executed until March 2003, and a
portion of production costs related to the WPT episodes delivered during the
three months ended June 29, 2003 were incurred before the execution of the
agreement, such costs were expensed prior to that three-month period rather than
being capitalized. This factor reduced production costs recognized during the
three months ended June 29, 2003.

Earnings Per Common Share and Net Earnings

For the three months ended July 4, 2004, basic and diluted losses per common
share were $0.32, compared to basic and diluted earnings of $0.04 per share, for
the same period in the prior year. Losses for the three months ended July 4,
2004 were $7.2 million compared to earnings of $0.8 million for the three months
ended June 29, 2003. This increase in losses relates primarily to the impairment
charge of $6.4 million related to the Nipmuc Nation taken during the three
months ended July 4, 2004.

Outlook

It is currently contemplated that there will be no operating revenues for 2004
from existing casino development projects. WPT expects to recognize the
remaining $2.0 million in revenue from the second season of the World Poker Tour
series, along with associated production costs during the third and fourth
quarters of 2004. WPT currently anticipates generating revenues of approximately
$10.8 million from Season Three license fees under the Travel Channel agreement,
depending on the number of episodes that ultimately comprise that season. WPT is
expected to recognize approximately $3.1 million of this revenue during the
third and fourth quarters of fiscal 2004, with the rest being recognized in
fiscal 2005.

Subsequent to the initial public offering of WPT, Lakes continues to own a
majority of WPT's equity. Therefore, WPT's operating results will continue to be
consolidated with our results.

In addition to the WPT business, Lakes continues to evaluate potential new
revenue-generating business opportunities. Lakes continues to closely monitor
its operating expenses.

FINANCIAL CONDITION

At July 4, 2004, Lakes had $19.4 million in unrestricted cash and cash
equivalents. Lakes' operating revenues from casino operations have been minimal
since the expiration of the management contract with the Coushatta Tribe in
January 2002. In 2003, the operating revenues derived from WPT were offset
almost entirely by production costs. In the first six months of 2004, operating
revenues from WPT operations were $8.9 million, and WPT's net income was
approximately $1.7 million.

                                       25
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

In August 2004, WPT raised approximately $28.5 million in cash proceeds from its
initial public offering, net of underwriting discounts and estimated offering
expenses. WPT's cash resources are expected to be used for WPT's business and
will not be available for the Company's casino operations or other non-WPT
businesses. The Company's primary source of cash for its casino operations
during the past two years has been from the planned sale of assets. We expect
that proceeds from the sale of assets will decrease in 2004. During the first
quarter of 2004, the 2022 Ranch land, which was owned by Lakes and its joint
venture partner Land Baron West, LLC, was sold. Lakes received cash in the
amount of approximately $1.7 million.

Our management contracts with our tribal partners require that we provide
financial support in the form of notes receivable prior to the beginning of
construction (the `Pre-construction Financing'). We also have commitments to
provide additional financing to our tribal partners to fund the construction of
the casinos (`the Construction Financing') if it is not available from other
sources. These notes are interest bearing; however, the interest is deferred
until the casino is built and has established profitable operations. In the
event that the casinos are not built, our only recourse is to attempt to
liquidate assets of the development, if any, excluding any land in trust. We
currently believe that our existing casino development projects included in the
table below will be constructed and achieve profitable operation; however, no
assurance can be made that this will occur. If this does not occur, it is likely
that Lakes would incur substantial or complete losses on its pre-construction
advances and any land held for development.

<TABLE>
<CAPTION>
                                            Casino Development Advances/Commitments
                                            ---------------------------------------
                                                           (in millions)

                                          Pre-construction    Land Held for     Remaining
                                              Advances         Development     Commitment
                                            as of 7/4/04       as of 7/4/04   as of 7/4/04
                                          -----------------   -------------   ------------
<S>                                       <C>                 <C>             <C>
Jamul Indian Village                            $13.5           $ 6.6            $ 9.9
Shingle Springs Band of Miwok Indians            29.9             7.4              2.7
Pokagon Band of Potawatomi Indians               43.6               -             24.9
</TABLE>

For the Pokagon project, the Company has agreed to provide additional financing
from its own funds if financing at an interest rate not to exceed 13% is not
available from third parties. If this occurs and Lakes is required to provide
all financing, this would be an additional commitment of up to approximately $54
million. Currently, it appears that third-party financing will be available for
this project. However, there can be no assurance that third-party financing will
be available and that Lakes will not be required to provide this additional
financing.

Lakes may be required to provide a guarantee of tribal debt financing or
otherwise provide support for the tribal obligations related to any of the
projects. Any guarantees by Lakes or similar off-balance sheet liabilities will
increase Lakes' potential exposure in the event of a default by any of these
tribes.

                                       26
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Our major use of cash over the past three years has been Pre-construction
Financing provided to our tribal partners. At July 4, 2004, Lakes had
approximately $88.1 million in notes receivable from Indian tribes. See Note 5
to the Consolidated Financial Statements.

We believe that our cash and cash equivalents, along with expected cash
receipts, will be adequate to fund operating expenses and Pre-construction
Financing in 2004. If the Pokagon casino project begins construction, it is
anticipated that we will require additional capital through either public or
private financings.

Lakes loaned $0.3 million to a former non-tribal partner in one of its Indian
casino development projects. Repayment is expected to be received from this
former partner's future consulting fees related to certain Indian casino
development projects. At July 4, 2004, $0.3 million is outstanding under this
agreement.

As a part of the transaction establishing Lakes as a separate public company on
December 31, 1998, the Company agreed to indemnify Grand through December 28,
2004 against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings
against Grand and to pay all related settlements and judgments. The Company's
indemnification obligations include the obligation to provide the defense of all
claims made in proceedings against Grand and to pay all related settlements and
judgments. There is currently no known liability related to this obligation.

As a part of the indemnification agreement, Lakes agreed that it will not
declare or pay any dividends, make any distribution on account of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interests in Lakes without the written consent of Grand.

SEASONALITY

The Company believes that the operations of all casinos to be managed by the
Company will be affected by seasonal factors, including holidays, weather and
travel conditions.

REGULATION AND TAXES

The Company is subject to extensive regulation by state gaming authorities. The
Company will also be subject to regulation, which may or may not be similar to
current state regulations, by the appropriate authorities in any jurisdiction
where it may conduct gaming activities in the future. Changes in applicable laws
or regulations could have an adverse effect on the Company.

The gaming industry represents a significant source of tax revenues. From time
to time, various federal legislators and officials have proposed changes in tax
law, or in the administration of such law, affecting the gaming industry. It is
not possible to determine the likelihood of possible changes in tax law or in
the administration of such law. Such changes, if adopted, could have a material
adverse effect on the Company's results of operations and financial results.

                                       27
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors, except
for the financing commitments previously discussed, and except for Lakes'
investments in unconsolidated affiliates (see Note 2).

PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-K
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as plans for future expansion and other business
development activities as well as other statements regarding capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition.

Such forward looking information involves important risks and uncertainties that
could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.

These risks and uncertainties include, but are not limited to, those relating to
possible delays in completion of Lakes' casino projects, including various
regulatory approvals and numerous other conditions which must be satisfied
before completion of these projects; possible termination or adverse
modification of management contracts; continued indemnification obligations to
Grand Casinos; highly competitive industries; possible changes in regulations;
reliance on continued positive relationships with Indian tribes and repayment of
amounts owed to Lakes by Indian tribes; possible need for future financing to
meet Lakes' expansion goals; risks of entry into new businesses; inability to
achieve financial results from the contemplated business expansion of WPT; WPT's
relatively short operating history; reliance on the agreement with TRV for most
of our consolidated revenues; possible inability of WPT's programming to
maintain a sufficient audience and exposure to adverse trends in the television
production business generally; possible increases in production expenses,
compared to fixed license revenues for related episodes; risk of inability to
protect WPT's proprietary rights or preserve the value of WPT's brands;
dependence on WPT's relationships with member casinos and strategic partners;
and reliance on Lakes' and WPT's management. For further information regarding
the risks and uncertainties, see the "Business -- Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
2003.

                                       28
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK;
                             CONTROLS AND PROCEDURES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company's cash and cash equivalents are not subject to significant interest
rate risk due to the short maturities of these instruments. As of July 4, 2004,
the carrying value of the Company's cash and cash equivalents approximates fair
value. The Company has in the past and may in the future obtain marketable debt
securities (principally consisting of commercial paper, corporate bonds, and
government securities) having a weighted average duration of one year or less.
Consequently, such securities would not be subject to significant interest rate
risk.

The Company's primary exposure to market risk associated with changes in
interest rates involves the Company's notes receivable related to loans for the
development and construction of Native American owned casinos. The loans and
related note balances earn various interest rates based upon a defined reference
rate. The floating rate receivables will generate more or less interest income
if interest rates rise or fall. Interest income is deferred during development
of the casinos because realizability of the interest is contingent upon the
completion and positive cash flow from operation of the casino. As of July 4,
2004, Lakes had $88.1 million of floating rate notes receivables. Based on the
applicable current reference rates and assuming all other factors remain
constant, deferred interest income for a twelve month period would be $5.1
million. A reference rate increase of 100 basis points would result in an
increase in deferred interest income of $0.9 million. A 100 basis point decrease
in the reference rate would result in a decrease of $0.9 million in deferred
interest income over the same twelve month period.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) or Rule 15d - 15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the
period covered by this quarterly report. Based on their evaluation, our chief
executive officer and chief financial officer concluded that Lakes
Entertainment, Inc.'s disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced above.

                                       29
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                     PART II
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SLOT MACHINE LITIGATION

In 1994, William H. Poulos filed a class-action lawsuit in the United States
District Court for the Middle District of Florida against various parties,
including Grand and numerous other parties alleged to be casino operators or
slot machine manufacturers. This lawsuit was followed by several additional
lawsuits of the same nature against the same, as well as additional defendants,
all of which were subsequently consolidated into a single class-action pending
in the United States District Court for the District of Nevada. Following a
court order dismissing all pending pleadings and allowing the plaintiffs to
re-file a single complaint, a complaint has been filed containing substantially
identical claims, alleging that the defendants fraudulently marketed and
operated casino video poker machines and electronic slot machines, and asserting
common law fraud and deceit, unjust enrichment and negligent misrepresentation
and claims under the federal Racketeering-Influenced and Corrupt Organizations
Act. Various motions were filed by the defendants seeking to have this new
complaint dismissed or otherwise limited. In December 1997, the Court, in
general, ruled on all motions in favor of the plaintiffs. The plaintiffs then
filed a motion seeking class certification and the defendants opposed it. In
June 2002, the Court entered an order denying class certification, and the
plaintiffs have appealed this order to the 9th Circuit Court of Appeals.
Briefing is complete, an oral hearing took place in January 2004, and no ruling
has yet been issued.

WILLARD EUGENE SMITH LITIGATION

On October 24, 2003, Lakes announced that it had been named as one of a number
of defendants in a counterclaim filed in state court in Harris County, Texas by
Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons
and entities. In the counterclaim, Smith asserts that, under an alleged oral
agreement with Kevin Kean, he is entitled to a percentage of fees to be received
by the KAR entities or their principals relating to the Shingle Springs and
Jamul casinos that Lakes' subsidiaries are developing in California. Smith also
seeks recovery of damages and other relief from the KAR entities, Lakes and
certain affiliates based on their conduct with respect to the alleged agreement.

Lakes believes the counterclaim against it is without merit. Lakes understands
that the alleged oral agreement upon which Smith bases his claim was rendered
null and void in a prior judgment issued against Smith by the Harris County,
Texas state court in October 2000. However, in September 2003, the court vacated
the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle
Springs and Jamul projects on January 30, 2003. In the buyout agreements between
Lakes and certain KAR entities and related principals, the KAR entities
represented to Lakes that the KAR entities and their affiliates had no
continuing agreements with any third party relating to the Shingle Springs and
Jamul projects and agreed to indemnify Lakes and its affiliates from damages of
the KAR entities and related principals concerning the projects. Lakes will
vigorously defend against the allegations made against it and will pursue its
indemnification rights against the KAR entities and their principals under the
buyout agreements if necessary.

                                       30
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                     PART II
                          OTHER INFORMATION (CONTINUED)

EL DORADO COUNTY, CALIFORNIA LITIGATION

On January 3, 2003, El Dorado County filed an action in the Superior Court of
the State of California, seeking to prevent the construction of a highway
interchange that was approved by a California state agency. The action does not
seek relief directly against Lakes. However, the interchange is necessary to
permit the construction of a casino to be developed and managed by Lakes through
a joint venture. The casino will be owned by the Shingle Springs Band of Miwok
Indians. The matter was tried to the court on August 22, 2003. On January 2,
2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of
California, issued his ruling on the matter. The Court denied the petition in
all respects except one. As to the one exception, the Court sought clarification
as to whether the transportation conformity determination used to determine the
significance of the air quality impact of the interchange operations considered
the impact on attainment of the state ambient air quality standard for ozone.
The California Department of Transportation (Caltrans) prepared and filed the
clarification sought by the Court. Prior to the Court's determination of the
adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling
to the California Court of Appeals.

A ruling with respect to the casino development planned by the Shingle Springs
Rancheria was issued June 21, 2004 by the Superior Court of California, County
of Sacramento. The ruling indicates that the addendum previously provided to the
court by Caltrans did not provide a quantitative showing to satisfy the court's
earlier request for a clarification on meeting the state ambient ozone standard.
The court recognized that the information provided by Caltrans does
qualitatively show that the project may comply with the state standard, but
concluded that is insufficient. Rather the court is requiring a quantitative
analysis and the court recognizes that the methodology for that analysis "is not
readily apparent". In addition, the ruling specifically states, "Moreover such
methodology appears necessary for the CEQA analysis of transportation projects
throughout the state, including transportation projects for which respondents
(i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe
and Lakes responded to the court with a revised submission in August 2004.
Representatives of the California Air Resources Board and the Sacramento Area
Council of Governments filed declarations supporting our revised submission to
the court. Opposition to that revised submission has been filed, and a hearing
on the revised submission is scheduled on August 20, 2004.

GRAND CASINOS, INC. LITIGATION

In connection with the establishment of Lakes as a public corporation on
December 31, 1998, via a distribution of its common stock to the shareholders of
Grand, the Company and Grand entered into an agreement governing the sharing or
allocation of tax benefits accruing to Grand and certain affiliated companies.
On August 13, 2004, an arbitrator awarded to the Company partial summary
judgment on certain of the Company's claims against Grand under the tax sharing
agreement. The dollar amount that will be awarded to the Company on these claims
has not been determined, certain other claims by the Company under the agreement
have not been decided, and no hearing date has been set to determine such dollar
amount or decide such claims.

OTHER LITIGATION

Lakes is involved in various other inquiries, administrative proceedings, and
litigation relating to contracts and other matters arising in the normal course
of business. While any proceeding or litigation has an element of uncertainty,
management currently believes that the final outcome of these matters, including
the matters discussed above, is not likely to have a material adverse effect
upon the Company's consolidated financial position or results of operations.

                                       31
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                     PART II
                          OTHER INFORMATION (CONTINUED)

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of Shareholders was held on June 11, 2004.

(b) At the Annual Meeting:

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

<TABLE>
<CAPTION>
                     Affirmative Votes     Authority Withheld
                     -----------------     ------------------
<S>                  <C>                   <C>
Lyle Berman               9,421,862           1,371,751
Timothy J. Cope           9,421,373           1,372,240
Morris Goldfarb          10,642,051             151,562
Ronald Kramer            10,641,452             152,161
Ray Moberg               10,641,473             152,140
Neil I. Sell              9,282,334           1,511,279
</TABLE>

      (2)   The proposal to approve the proposed amendments to the Lakes
            Entertainment, Inc. 1998 Stock Option and Compensation Plan was
            approved, with the following vote:

<TABLE>
<CAPTION>
Affirmative Votes       Negative Votes       Abstentions       Broker Non-Votes
-----------------       --------------       -----------       ----------------
<S>                     <C>                  <C>               <C>
   7,118,235               206,114             10,797              3,458,467
</TABLE>

      (3)   The proposal to approve the proposed amendments to the Lakes
            Entertainment, Inc. 1998 Director Stock Option Plan was approved,
            with the following vote:

<TABLE>
<CAPTION>
Affirmative Votes       Negative Votes       Abstentions       Broker Non-Votes
-----------------       --------------       -----------       ----------------
<S>                     <C>                  <C>               <C>
    5,915,338              1,408,921            10,887             3,458,467
</TABLE>

      (4)   The appointment of Deloitte & Touche, LLP as independent auditors of
            the Company was ratified with the following vote:

<TABLE>
<CAPTION>
Affirmative Votes         Negative Votes            Abstentions
-----------------         --------------            -----------
<S>                       <C>                       <C>
  10,619,462                164,128                 10,023
</TABLE>

                                       32
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                     PART II
                          OTHER INFORMATION (CONTINUED)

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   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 2002

      31.2     Certification of CFO pursuant to Securities Exchange Act Rules
               13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002

      32.1     Certification of Chief Executive Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002

      32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002

(b)   Reports on Form 8-K

      (i)      A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on April 7, 2004

      (ii)     A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on April 16, 2004

      (iii)    A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on April 19, 2004

      (iv)     A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on April 26, 2004

      (v)      A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on April 28, 2004

      (vi)     A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on May 4, 2004

      (vii)    A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 12. Results of Operations and
               Financial Condition, was filed on May 5, 2004

                                       33
<PAGE>

                   LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
                                     PART II
                          OTHER INFORMATION (CONTINUED)

(b)   Reports on Form 8-K (continued)

      (viii)   A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on May 17, 2004

      (ix)     A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on May 18, 2004

      (x)      A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 12. Results of Operations and
               Financial Condition, was filed on May 19, 2004

      (xi)     A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on June 14, 2004

      (xii)    A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on June 15, 2004

      (xiii)   A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on June 22, 2004

      (xiv)    A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
               Information and Exhibits, and Item 9. Regulation FD Disclosure,
               was filed on June 24, 2004

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<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.

Dated:  August 18, 2004                        LAKES ENTERTAINMENT, INC.
                                               -------------------------
                                               Registrant

                                               / s/ Lyle Berman
                                               ---------------------------------
                                               Lyle Berman
                                               Chairman of the Board and
                                               Chief Executive Officer

                                               /s/ Timothy J. Cope
                                               ---------------------------------
                                               Timothy J. Cope
                                               President and
                                               Chief Financial Officer

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