##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the
    quarterly period ended October 3,
    2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File
    No. 0-24993
 LAKES ENTERTAINMENT,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Minnesota

41-1913991(State or other jurisdiction
    of incorporation or organization)

(I.R.S. Employer
    Identification No.)130 Cheshire Lane, Suite 101
    Minnetonka, Minnesota(Address of principal
    executive offices)

55305(Zip
    Code)   (952) 449-9092
 (Registrants telephone number, including area code)
  þ o
  Regulation S-T o o
  Rule 12b-2
  Large accelerated filer o
    Accelerated filer þ
    Non-accelerated filero
    Smaller reporting company o (Do not check if a smaller
    reporting company)
  Rule 12b-2 o þ




---



##### 



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


FINANCIAL STATEMENTS


3Consolidated Balance Sheets as of October 3,
    2010 (unaudited) and January 3, 2010


3Unaudited Consolidated Statements of Earnings for
    the three and nine months ended October 3, 2010 and
    September 27, 2009


4Unaudited Consolidated Statements of Cash Flows
    for the nine months ended October 3, 2010 and
    September 27, 2009


5Notes to Unaudited Consolidated Financial
    Statements


6ITEM 2.


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


19ITEM 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


36ITEM 4.


CONTROLS AND PROCEDURES


36PART II. OTHER INFORMATIONITEM 1.


LEGAL PROCEEDINGS


37ITEM 1A.


RISK FACTORS


37ITEM 6.


EXHIBITS


37EX-10.1EX-31.1EX-31.2EX-32.1   2




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##### Table of Contents



Part I.
    Financial Information  ITEM 1.
    FINANCIAL
    STATEMENTS  LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIESConsolidated Balance
    Sheets
  October 3, 2010


January 3, 2010(Unaudited)(In thousands)AssetsCurrent assets:Cash and cash equivalents

$
46,905


$
3,751Accounts receivable


3,960



1,457Current portion of notes receivable from Indian casino projects


7,864



6,671Deferred tax asset


58



111Investment securities, including rights






24,317Other


2,245



2,367Total current assets


61,032



38,674Property and equipment, net


5,169



5,334Long-term assets related to Indian casino projects:Notes receivable, net of current portion


47,749



46,100Notes receivable at fair value


10,141



13,254Intangible assets, net of accumulated amortization of $28.4 and
    $20.1 million


35,321



45,064Land held for development


960



1,813Other


4,991



4,324Total long-term assets related to Indian casino projects


99,162



110,555Other assets:Investment in unconsolidated investees


2,367



12,441Land held for development


5,069



4,900Deferred taxes and other


1,863



1,833Total other assets


9,299



19,174Total assets

$
174,662


$
173,737Liabilities and shareholders equityCurrent liabilities:Line of credit payable

$



$
16,346Non-revolving line of credit payable






2,000Current portion of contract acquisition costs payable, net of
    $1.3 and $2.1 million discount


1,341



2,232Income taxes payable


26,463



17,069Accounts payable


581



637Accrued payroll and related


1,047



890Other accrued expenses


593



927Total current liabilities


30,025



40,101Long-term contract acquisition costs payable, net of current
    portion and $2.6 and $4.1 million discount


6,128



10,197Total liabilities


36,153



50,298Commitments and contingenciesShareholders equity:Common stock, $.01 par value; authorized
    200,000 shares; 26,369 and 26,328 common shares issued and
    outstanding


264



263Additional paid-in capital


203,558



202,767Deficit


(65,313
)


(79,591
)Total shareholders equity


138,509



123,439Total liabilities and shareholders equity

$
174,662


$
173,737    3




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIESConsolidated Statements of
    Earnings
  Three Months Ended


Nine Months EndedOctober 3,


September 27,


October 3,


September 27,2010


2009


2010


2009(In thousands, except per share data)(Unaudited)Revenues:Management fees

$
8,155


$
6,602


$
19,876


$
20,916License fees


17



15



52



43Total revenues


8,172



6,617



19,928



20,959Costs and expenses:Selling, general and administrative


2,936



3,508



9,425



11,317Impairment losses


632



597



4,002



2,877Amortization of intangible assets related to operating casinos


2,785



2,624



8,355



7,630Depreciation


65



69



196



211Total costs and expenses


6,418



6,798



21,978



22,035Net unrealized gains on notes receivable


450



904



762



3,247Earnings (loss) from operations


2,204



723



(1,288
)


2,171Other income (expense):Gain on divestiture of cost method investment


23,100







23,100



Interest income


1,682



1,669



5,776



5,284Interest expense


(446
)


(509
)


(1,678
)


(1,321
)Equity in loss of unconsolidated investees






(17
)


(64
)


(17
)Other


(508
)


(4
)


(20
)


(20
)Total other income (expense), net


23,828



1,139



27,114



3,926Earnings before income taxes (benefit)


26,032



1,862



25,826



6,097Income taxes (benefit)


10,976



(426
)


11,548



(36
)Net earnings

$
15,056


$
2,288


$
14,278


$
6,133Weighted-average common shares outstandingBasic


26,369



26,328



26,369



26,327Diluted


26,426



26,443



26,425



26,411Earnings per share applicable to common
    shareholders  basic & diluted

$
0.57


$
0.09


$
0.54


$
0.23    4




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Consolidated Statements of Cash
    Flows
  Nine Months EndedOctober 3, 2010


September 27, 2009(In thousands)(Unaudited)OPERATING ACTIVITIES:Net earnings

$
14,278


$
6,133Adjustments to reconcile net earnings to net cash provided by
    operating activities:Depreciation


196



211Amortization of debt issuance costs and contract acquisition
    costs


1,516



23Accretion of discount on notes receivable


(2,752
)


(2,009
)Mark to market, trading securities


(8
)


(195
)Amortization of intangible assets related to operating casinos


8,355



7,630Tax benefit from stock option exercises


(406
)


Gain on divestiture of cost method investment


(23,100
)


Equity in loss of unconsolidated investee


64



17Share-based compensation


394



321Impairment losses


4,002



2,877Net unrealized gains on notes receivable


(762
)


(3,247
)Deferred income taxes






(4,149
)Changes in operating assets and liabilities:Accounts receivable


(2,503
)


188Other current assets


123



698Income taxes payable


9,799



1,875Accounts payable


(9
)


130Accrued expenses


3



(1,165
)Net cash provided by operating activities


9,190



9,338INVESTING ACTIVITIES:Sales / redemptions of investment securities


24,325



2,400Proceeds from divestiture of investment in unconsolidated
    investees


33,333



Payments to acquire investment in unconsolidated investee


(223
)


(8,422
)Increases in long-term assets related to Indian casino projects,
    net


(714
)


(3,260
)Purchase of property and equipment


(27
)


(13
)Advances on notes receivable


(3,993
)


(504
)Collection on notes receivable


5,847



4,106Increase in other long-term assets


(6
)


(254
)Net cash provided by (used in) investing activities


58,542



(5,947
)FINANCING ACTIVITIES:Repayments of lines of credit


(23,340
)


(2,530
)Proceeds from line of credit


4,994



716Cash proceeds from issuance of common stock






346Tax benefit from stock option exercises


406



753Contract acquisition costs payable


(6,638
)


(1,884
)Net cash used in financing activities


(24,578
)


(2,599
)Net increase in cash and cash equivalents


43,154



792Cash and cash equivalents  beginning of period


3,751



6,170Cash and cash equivalents  end of period

$
46,905


$
6,962    5




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes
    to Unaudited Consolidated Financial Statements
  1.
    Basis of
    presentation  and/or
  Form 10-Q Form 10-K,
    2.
    New
    accounting standards  2010-6, Improving Disclosures About Fair Value Measurements 2010-6 2010-6
  3.
    Investment
    securities, including rights      4.
    Financial
    instruments and fair value measurements  Financial instruments.
   6




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##### Table of Contents



Fair value measurements.
  
    ARS  Credit ratings of the ARS and collateral
    securities, default rates, other market and liquidity
    circumstances.
    Rights  Credit worthiness of UBS including its credit
    swap rate.
    Notes receivable from Indian Tribes  Probability of
    the casino opening based on the status of critical project
    milestones and the expected opening date, estimated pre- and
    post-opening interest rates, contractual interest rate and other
    terms, yield rates on US Treasury Bills and other financial
    instruments, the risk/return indicators of equity investments in
    general, specific risks associated with operating the casino and
    similar projects, and scenario weighting alternatives.    October 3,


January 3,2010


2010Auction rate securities (Note 3)

$



$
21,836Rights (Note 3)






2,481Notes receivable from Indian Tribes (Note 5)


10,141



13,254$
10,141


$
37,571     NotesReceivablefromARS


Rights


Indian Tribes


TotalBalance, January 3, 2010

$
21,836


$
2,481


$
13,254


$
37,571Total realized and unrealized gains (losses):Gains (losses) included in earnings as interest income


189



(189
)






Net unrealized gains on notes receivable










1,770



1,770Sales (at par)


(2,300
)










(2,300
)Redemptions (at par)


(100
)










(100
)Advances, net of allocation to intangible, other










168



168Balance, April 4, 2010 (unaudited)


19,625



2,292



15,192



37,109Total realized and unrealized gains (losses):Gains (losses) included in earnings as interest income


2,300



(2,292
)






8Net unrealized losses on notes receivable










(1,458
)


(1,458
)Sales (at par)


(21,925
)










(21,925
)Iowa Tribe notes receivable transfer to notes receivable that
    are not carried at fair value










(4,360
)


(4,360
)Advances, net of allocation to intangible, other










171



171Balance, July 4, 2010 (unaudited)










9,545



9,545Net unrealized gains on notes receivable










450



450Advances, net of allocation to intangible, other










146



146Balance, October 3, 2010 (unaudited)

$



$



$
10,141


$
10,141  7




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##### Table of Contents



5.
    Long-term
    assets related to Indian casino projects  notes
    receivable   8




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##### Table of Contents



ShingleSprings


Iowa


JamulTribe(*)


Tribe(**)


Tribe


TotalBalance, January 3, 2010

$
52,771


$
3,493


$
9,761


$
66,025Advances, net


500







756



1,256Repayments


(1,910
)










(1,910
)Accretion of note receivable discount


1,161



4







1,165Allocation of advances to intangible assets










(592
)


(592
)Unrealized gains






863



907



1,770Balance, April 4, 2010 (unaudited)


52,522



4,360



10,832



67,714Advances, net


81







878



959Repayments


(1,053
)


(1,233
)






(2,286
)Accretion of note receivable discount


808



31







839Allocation of advances to intangible assets










(707
)


(707
)Unrealized losses










(1,458
)


(1,458
)Balance, July 4, 2010 (unaudited)


52,358



3,158



9,545



65,061Advances, net


1,000







778



1,778Repayments


(795
)


(856
)






(1,651
)Accretion of note receivable discount


708



40







748Allocation of advances to intangible assets










(632
)


(632
)Unrealized gains










450



450Balance, October 3, 2010


53,271



2,342



10,141



65,754Less current portion of notes receivable


(5,522
)


(2,342
)






(7,864
)Long-term notes receivable, October 3, 2010 (unaudited)

$
47,749


$



$
10,141


$
57,890     (*)
    
    The Companys management estimated the fair value of the
    notes receivable from the Shingle Springs Tribe in conjunction
    with the opening of the Red Hawk Casino on December 17,
    2008. Pursuant to Lakes accounting policy, upon opening of
    the casino, the difference between the then estimated fair value
    of the notes receivable and the amount contractually due under
    the notes is being amortized into interest income using the
    effective interest method over the remaining term of the note.
    These notes are no longer adjusted to estimated fair value, but
    rather they are evaluated periodically for impairment pursuant
    to ASC 310.(**)
    
    In conjunction with the Termination Agreement with the Iowa
    Tribe entered into in May 2010 and pursuant to Lakes
    accounting policy, the notes receivable from the Iowa Tribe are
    no longer adjusted to estimated fair value on a quarterly basis,
    but rather they are evaluated for impairment pursuant to
    ASC 310.  Shingle Springs Tribe.
 9




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##### Table of Contents



Jamul Tribe.
  As of October 3, 2010

As of January 3, 2010(Unaudited)Face value of note (principal and interest)

$59,593

$54,911$(38,919 principal and $20,674 interest)

$(36,507 principal and $18,404 interest)Estimated months until casino opens (weighted average of three
    scenarios)

66 months

66 monthsProjected interest rate until casino opens

6.42%

8.00%Projected interest rate during the loan repayment term

9.29%

10.40%Discount rate

20.50%

21.00%Repayment terms of note

120 months

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

50%

50%   Iowa Tribe.
        As of January 3, 2010Face value of note (principal and interest)

$6,218$(4,970 principal and $1,248 interest)Estimated months until casino opens

36 monthsProjected interest rate until casino opens

7.03%Projected interest rate during the loan repayment term

9.59%Discount rate

16.00%Repayment terms of note

24 monthsProbability rate of casino opening

75%  10




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##### Table of Contents



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


Springs


Jamul


IowaBand


Tribe


Tribe(*)


Tribe(**)


TotalBalances, January 3, 2010

$
17,346


$
26,328


$



$
1,390


$
45,064Allocation of advances










592







592Amortization


(1,678
)


(1,105
)






(2
)


(2,785
)Impairment losses










(592
)


(1,388
)


(1,980
)Balances, April 4, 2010 (unaudited)


15,668



25,223











40,891Allocation of advances










707







707Amortization


(1,679
)


(1,106
)










(2,785
)Impairment losses










(707
)






(707
)Balances, July 4, 2010 (unaudited)


13,989



24,117











38,106Allocation of advances










632







632Amortization


(1,679
)


(1,106
)










(2,785
)Impairment losses










(632
)






(632
)Balances, October 3, 2010 (unaudited)

$
12,310


$
23,011


$



$



$
35,321     (*)
    
    Due to the continued uncertainty surrounding the Jamul Casino
    project, Lakes recognized an impairment of $0.6 million and
    $1.9 million related to the intangible assets associated
    with this project during the three and nine months ended
    October 3, 2010, respectively.(**)
    
    Due to the Iowa Tribe of Oklahomas decision not to move
    forward with Lakes for the development and management of the
    Ioway Casino Resort, Lakes recognized an impairment of
    $1.4 million related to the intangible assets associated
    with the Ioway Casino Resort during the three months ended
    April 4, 2010. There have been no subsequent impairment
    losses related to the Ioway Casino resort.  Land held for development.
    Other.
 11




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##### Table of Contents



7.
    Investment
    in unconsolidated investees  Equity method investment.
  Cost method investments.
    8.
    Debt  Line of credit payable.
  Non-revolving line of credit payable.
 12




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##### Table of Contents



9.
    Contract
    acquisition costs payable        10.
    Share-based
    compensation    Three Months Ended

Nine Months EndedOctober 3,

September 27,

October 3,

September 27,2010

2009

2010

2009(In thousands)Total cost of share-based payment plans

$
106


$
70


$
394


$
321   Stock options.
    
    Expected dividend yield  As the Company does not pay
    dividends, the dividend rate variable in the Black-Scholes model
    is zero.
    Risk free interest rate  The risk free interest rate
    assumption is based on the U.S. Treasury yield curve in
    effect at the time of grant and with maturities consistent with
    the expected term of options. 13




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##### Table of Contents




    Expected term (in years)  The expected term of
    employee stock options represents the weighted-average period
    that the stock options are expected to remain outstanding. It is
    based upon an analysis of the historical behavior of option
    holders during the period from September 1995 to
    September 27, 2009. Management believes historical data is
    reasonably representative of future exercise behavior.
    Expected volatility  The volatility assumption is
    based on the historical weekly price data of Lakes stock
    over a two-year period. Management evaluated whether there were
    factors during that period which were unusual and which would
    distort the volatility figure if used to estimate future
    volatility and concluded that there were no such factors.
    Estimated forfeiture rate  Share-based compensation
    expense recognized is based on awards ultimately expected to
    vest. ASC 718, Compensation  Stock
    Compensation,requires forfeitures to be estimated at the
    time of grant and revised quarterly, if necessary, in subsequent
    periods if actual forfeitures differ from those estimates.
    Management has reviewed the historical forfeitures which have
    been minimal, and as such will amortize the grants to the end of
    the vesting period subject to any revisions to its estimated
    forfeiture rates prior to vesting.    Number of Common SharesWeighted-AverageOptions





Available


ExerciseOutstanding


Exercisable


for Grant


Price2010Balance at January 3, 2010


1,704,187



442,350



1,121,413


$
3.93Restricted stock unit activity, net










3,333



3.25Forfeited/cancelled/expired


(98,955
)






6,355



11.58Balance at April 4, 2010


1,605,232



462,656



1,131,101



3.46Forfeited/cancelled/expired


(4,150
)






4,150



3.27Balance at July 4, 2010


1,601,082



462,656



1,135,251



3.46Forfeited/cancelled/expired


(20,516
)






8,316



5.33Balance at October 3, 2010(*)


1,580,566



891,743



1,143,567



3.442009Balance at December 28, 2008


2,862,964



2,498,864



343,150


$
6.60Granted


197,000







(197,000
)


3.25Restricted stock unit activity, net










(140,000
)


3.25Forfeited/cancelled/expired


(109,423
)






109,423



4.29Exercised


(91,041
)










3.80Balance at March 29, 2009


2,859,500



2,455,700



115,573



6.54Restricted stock unit activity, net










5,000



3.25Forfeited/cancelled/expired


(40,125
)






40,125



9.04Balance at June 28, 2009


2,819,375



2,433,575



160,698



6.51Authorized










2,000,000



Forfeited/cancelled/expired


(215,000
)






20,000



4.37Option exchange modification


(1,827,400
)










7.25Option exchange post modification


1,046,587







(1,046,587
)


3.40Balance at September 27, 2009(**)


1,823,562



543,725



1,134,111



4.23     (*)
    
    Options outstanding do not include 86,662 of outstanding
    restricted stock units.(**)
    
    Options outstanding do not include 135,000 of outstanding
    restricted stock units. 14




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##### Table of Contents



Restricted stock units.
  Weighted-averageRestricted


Grant-DateNon-vested Shares:

Stock Units


Fair Value2010Balance at January 3, 2010


135,000


$
3.25Vested


(45,005
)


3.25Forfeited


(3,333
)


3.25Balance at April 4, 2010


86,662



3.25Vested






Forfeited






Balance at July 4, 2010


86,662



3.25Vested






Forfeited






Balance at October 3, 2010


86,662



3.252009Balance at December 28, 2008





$
Granted


140,000



3.25Forfeited






Balance at March 29, 2009


140,000



3.25Vested






Forfeited


(5,000
)


3.25Balance at June 28, 2009


135,000



3.25Vested






Forfeited






Balance at September 27, 2009


135,000



3.25     11.
    Earnings
    per share   15




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##### Table of Contents



12.
    Income
    taxes      13.
    Commitments
    and contingencies  Rock Ohio Ventures, LLC.
  Quest Media Group, LLC.
  Louisiana Department of Revenue litigation tax
    matter.
 16




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##### Table of Contents



Miscellaneous legal matters.
  14.
    Segment
    information      Indian

Non-IndianCasino

Casino

Corporate &Projects

Projects

Eliminations

Consolidated(In millions)Three months ended October 3, 2010Revenue

$
8.2


$



$



$
8.2Impairment losses


0.6











0.6Earnings (loss) from operations


4.4







(2.2
)


2.2Total assets


111.4



8.5



54.8



174.7Investment in unconsolidated investees






2.4







2.4Depreciation expense










0.1



0.1Amortization of intangible assets related to operating casinos


2.8











2.8Three months ended September 27, 2009Revenue

$
6.6


$



$



$
6.6Impairment losses


0.6











0.6Earnings (loss) from operations


4.1



(0.2
)


(3.2
)


0.7Total assets


122.6



13.8



41.6



178.0Depreciation expense










0.1



0.1Amortization of intangible assets related to operating casinos


2.6











2.6   17




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##### Table of Contents



Indian

Non-IndianCasino

Casino

Corporate &Projects

Projects

Eliminations

Consolidated(In millions)Nine months ended October 3, 2010Revenue

$
19.8


$



$
0.1


$
19.9Impairment losses


4.0











4.0Equity in loss of unconsolidated investees






0.1







0.1Earnings (loss) from operations


7.5







(8.8
)


(1.3
)Total assets


111.4



8.5



54.8



174.7Investment in unconsolidated investees






2.4







2.4Depreciation expense










0.2



0.2Amortization of intangible assets related to operating casinos


8.4











8.4Nine months ended September 27, 2009Revenue

$
20.9


$



$
0.1


$
21.0Impairment losses


2.9











2.9Earnings (loss) from operations


12.9



(0.5
)


(10.2
)


2.2Total assets


122.6



13.8



41.6



178.0Depreciation expense










0.2



0.2Amortization of intangible assets related to operating casinos


7.6











7.6   15.
    Subsequent
    event   18




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##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
    
    We developed, and have a five-year contract to manage, the Four
    Winds Casino Resort for the Pokagon Band of Potawatomi Indians
    (Pokagon Band) in New Buffalo Township, Michigan
    near Interstate 94. We began managing the Four Winds Casino
    Resort when it opened to the public on August 2, 2007. The
    Four Winds Casino Resort is located near the first Interstate 94
    exit in southwestern Michigan and approximately 75 miles
    east of Chicago. The facility features approximately 2,900 slot
    machines, 65 table games including a 12-table poker room, a
    165-room hotel, five restaurants, four bars, a child care
    facility and arcade, retail space and a parking garage.
    We developed, and have a seven-year contract to manage, the Red
    Hawk Casino that was built on the Rancheria of the Shingle
    Springs Band of Miwok Indians (Shingle Springs
    Tribe) in El Dorado County, California, adjacent to
    U.S. Highway 50, approximately 30 miles east of
    Sacramento, California. We began managing the Red Hawk Casino
    when it opened to the public on December 17, 2008. The Red
    Hawk Casino features approximately 2,150 slot machines, 65 table
    games including 7 poker tables, five restaurants, six bars,
    retail space, a parking garage, a child care facility and arcade.
    We have contracts to develop and finance a casino to be built on
    the reservation of the Jamul Indian Village (the Jamul
    Tribe) located on State Highway 94, approximately
    20 miles east of San Diego, California (the
    Jamul Casino). This project has been delayed due to
    various political and regulatory issues. Significant risk exists
    related to this project moving forward to completion and we have
    recorded significant impairment charges against our investment
    in this project. However, the Jamul Tribe has the two basic
    requirements to eventually build a successful
    project  federal recognition as an Indian Tribe and
    Indian land eligible for gaming. We have concluded that it is
    not currently in our best interest to terminate our involvement
    with the Jamul Casino project altogether. We will continue to
    monitor the status of this project.      
    In October 2009, Lakes entered into an agreement with Penn
    Ventures for the purpose of funding a percentage of costs
    associated with the referendum to amend the Ohio constitution to
    authorize casino gaming in Ohio, which passed on
    November 3, 2009. On July 13, 2010, Lakes entered into
    a Termination Agreement with Penn Ventures, LLC whereby, in
    consideration of the parties terminating the Funding and Option
    Agreement entered into during October 2009, Penn Ventures, LLC
    agreed to pay Lakes $25 million. Accordingly, Lakes no
    longer has any rights, obligations or interest in the entity
    that was to be formed in collaboration with Penn Ventures for
    the development of casinos in Toledo and Columbus, Ohio. 19




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##### Table of Contents




    In October 2009, Lakes entered into a separate agreement with
    Rock Ohio Ventures also for the purpose of funding a percentage
    of costs associated with the referendum to amend the Ohio
    constitution to authorize casino gaming in Ohio. As of
    October 3, 2010, Lakes has contributed approximately
    $2.3 million to Rock Ohio Ventures related to this
    referendum effort. Lakes expects to contribute additional
    capital to Rock Ohio Ventures for the development of casinos in
    Cleveland and Cincinnati.
    During March and April 2010, Lakes entered into an agreement and
    amendment, respectively, with Quest Media Group, LLC
    (Quest), wherein Lakes agreed to pay a fee to Quest
    for assisting Lakes in partnering with Rock Ohio Ventures, LLC,
    and Penn Ventures, LLC during 2009 and with MYOHIONOW.COM, LLC
    in 2008 (collectively the Project Companies).
    Pursuant to the agreement, Lakes shall pay Quest a fee equal to
    18.5% of gross distributions from the Project Companies (less
    certain amounts set forth in the agreement), capped at
    $0.5 million for the first five years or until Lakes
    recovers prior expenditures, as set forth in the agreement. The
    April 2010 amendment increased the fee from 18.0% to 18.5% in
    exchange for a payment from Quest to Lakes of $0.5 million.
    During the three months ended October 3, 2010, Lakes made a
    payment of $0.5 million to Quest as a result of the payment
    received from the Termination Agreement with Penn Ventures, LLC.
    We have received various regulatory approvals to develop a
    casino on approximately 400 acres near Vicksburg,
    Mississippi. However, uncertainty exists surrounding the
    development of this project due primarily to changes in the
    economic environment and credit markets. As a result, the assets
    associated with the Vicksburg project are recorded at their
    estimated fair value of $4.9 million.
    In January 2010, Lakes entered into a Development Services and
    Management Agreement with Abston-McKay Ventures, LLC where Lakes
    agreed to perform certain development and management services
    for a potential casino located in Tunica, Mississippi. In
    exchange for its services, Lakes will receive a development fee,
    a monthly fee and an annual incentive based on earnings.
    In August 2009, Lakes entered into a joint venture with the
    Chisholm Creek Casino Resort, LLC (Chisholm Creek)
    relating to an application to the Kansas Lottery to develop and
    operate a casino project in south central Kansas. On
    April 9, 2010, Chisholm Creek withdrew its application for
    the potential casino due to unresolved issues related to the
    projects location and uncertainties in the competitive
    market. Chisholm Creek is a wholly-owned subsidiary of Kansas
    Gaming Partners, LLC. As of January 3, 2010, Lakes Kansas
    Casino Management, LLC, an indirect wholly-owned consolidated
    subsidiary of Lakes, had a 16.67% ownership in Kansas Gaming
    Partners, LLC. As a result of the withdrawal of the application
    Lakes also terminated its involvement with this project and as
    of October 3, 2010, has no ownership interest in Kansas
    Gaming Partners, LLC.  Results
    of Operations
  Form 10-Q
  Three
    months ended October 3, 2010 compared to the three months
    ended September 27, 2009
  Revenues.
  Selling, general and administrative
    expenses.
 20




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##### Table of Contents



Impairment losses.
  Amortization of intangible assets related to Indian casino
    projects.
  Net unrealized gains on notes receivable.
  Other income (expense), net.
  Income taxes (benefit). Form 10-Q).
  Nine
    months ended October 3, 2010 compared to the nine months
    ended September 27, 2009
  Revenues.
  Selling, general and administrative
    expenses.
  Impairment losses.
 21




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##### Table of Contents



Amortization of intangible assets related to Indian casino
    projects.
  Net unrealized gains on notes receivable.
  Other income (expense), net.
  Income taxes (benefit). Form 10-Q).
  Liquidity
    and Capital Resources
         22




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##### Table of Contents



Form 10-Q).
            and/or
 23




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##### Table of Contents



Payment Due by PeriodLess Than








More ThanContractual Obligations

Total


1 Year


1-3 Years


3-5 Years


5 YearsRemaining casino development commitment(1)Jamul Tribe(2)

$



$



$



$



$
Shingle Springs Tribe(3)


10.5



2.0



4.0



4.0



0.5Pokagon Band(4)


0.9



0.6



0.3







Quest Media Group, LLC(5)


















Operating leases(6)


4.0



0.5



0.9



0.9



1.7$
15.4


$
3.1


$
5.2


$
4.9


$
2.2     (1)
    
    We may elect to provide a guarantee of tribal debt financing or
    otherwise provide support for the tribal obligations related to
    any of the projects (see (2) below). Any guarantees by us
    or similar off-balance sheet liabilities will increase our
    potential exposure in the event of a default by any of these
    tribes. No such guarantees or similar off-balance sheet
    liabilities existed at October 3, 2010.(2)
    
    We have agreed to use our best efforts to obtain financing of up
    to $350 million from which advances will be made to the
    Jamul Tribe to pay for the design and construction of a casino
    project.(3)
    
    We are obligated to pay Mr. Jerry A. Argovitz and
    Mr. Kevin M. Kean each $1 million per year (prorated
    based on a 365 day year) during the remainder of the
    seven-year initial term of the management contract which
    commenced in December 2008 between Lakes and the Shingle Springs
    Tribe.(4)
    
    We are obligated to pay an aggregate of approximately
    $0.9 million to an unrelated third party as part of an
    agreement associated with obtaining the management contract with
    the Pokagon Band, payable in quarterly installments over two
    years.(5)
    
    We have agreed to pay a fee to Quest Media Group, LLC (Quest)
    equal to 18.5% of gross distributions from Rock Ohio Ventures,
    LLC (less certain amounts set forth in the agreement with
    Quest), capped at $0.5 million for the first five years or
    until Lakes recovers prior expenditures that are set forth in
    the agreement with Quest.(6)
    
    Lakes leases an airplane under a non-cancelable operating lease
    that expires on March 1, 2018.  Critical
    Accounting Policies and Estimates
     24




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##### Table of Contents



Revenue recognition:
  Share-based compensation expense:
  Income taxes: Income Taxes.
    Long-term
    assets related to Indian casino projects:
  Notes receivable.
  
    Has the U.S. Governments Bureau of Indian Affairs
    federally recognized the tribe as a tribe?
    Does the tribe hold or have the right to acquire land to be
    used for the casino site?
    Has the Department of the Interior put the land into trust
    for purposes of being used as a casino site?
    Has the tribe entered into a gaming agreement with the state
    in which the land is located, if required by the state?
    Has the tribe obtained approval by the National Indian Gaming
    Commission of the management agreement?
    Do other legal and political obstacles exist that could block
    development of the project and, if so, what is the likelihood of
    the tribe successfully prevailing?
    An evaluation by management of the financial projections of
    the project given the projects geographic location and the
    feasibility of the projects success given such
    location;
    The structure and stability of the tribal government;
    The scope of the proposed project, including the physical
    scope of the contemplated facility and the expected financial
    scope of the related development;
    An evaluation of the proposed projects ability to be
    built as contemplated and the likelihood that financing will be
    available; and
    The nature of the business opportunity to us, including
    whether the project would be a financing, development
    and/or
    management opportunity.  Investments  Debt and
    Equity Securities
 25




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##### Table of Contents



Receivables
    Intangible assets related to Indian casino
    projects. Intangibles  Goodwill and Other
  Land held for development.
  Other.
 26




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##### Table of Contents



Long-term asset related to Indian Casino projects
  October 3, 2010ShinglePokagon


Springs


Jamul


IowaBand


Tribe


Tribe


Tribe


Other


TotalNotes receivable, net of current portion(*)

$



$
47,749


$



$



$



$
47,749Notes receivable at fair value, net of current portion










10,141











10,141Intangible assets related to Indian casino projects


12,310



23,011















35,321Land held for development










960











960Other(**)


60



2,605



383



273



1,670



4,991$
12,370


$
73,365


$
11,484


$
273


$
1,670


$
99,162   January 3, 2010ShinglePokagon


Springs


Jamul


IowaBand


Tribe


Tribe


Tribe


Other


TotalNotes receivable, net of current portion(*)

$



$
46,100


$



$



$



$
46,100Notes receivable at fair value










9,761



3,493







13,254Intangible assets related to Indian casino projects


17,346



26,328







1,390







45,064Land held for development










960



853







1,813Other(**)


60



1,405



419



330



2,110



4,324$
17,406


$
73,833


$
11,140


$
6,066


$
2,110


$
110,555     (*)
    
    In conjunction with the opening of the Red Hawk Casino on
    December 17, 2008 and pursuant to Lakes accounting
    policy, the notes receivable from the Shingle Springs Tribe are
    no longer adjusted to estimated fair value on a quarterly basis,
    but rather they are evaluated for impairment pursuant to
    ASC 310. Approximately $5.5 million and
    $6.7 million of the notes receivable from the Shingle
    Springs Tribe are estimated to be collected within the next
    twelve fiscal months, and have been classified as a current
    asset in the unaudited consolidated balance sheets as of
    October 3, 2010 and January 3, 2010, respectively.(**)
    
    Includes notes receivable from related parties of
    $1.9 million and $2.3 million, net of current portion,
    as of October 3, 2010 and January 3, 2010,
    respectively. See Note 6 to our unaudited consolidated
    financial statements included in Item 1 of this Quarterly
    Report on
    Form 10-Q
    for further details.   27




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##### Table of Contents



Jamul
    Tribe
    As of October 3, 2010

As of January 3, 2010Face value of note (principal and interest)

$59,593
    $(38,919 principal and $20,674 interest)

$54,911
    $(36,507 principal and $18,404 interest)Estimated months until casino opens (weighted-average of three
    scenarios)

66 months

66 monthsProjected interest rate until casino opens

6.42%

8.00%Projected interest rate during the loan repayment term

9.29%

10.40%Discount rate

20.5%

21.00%Repayment terms of note

120 months

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

50%

50%     Sensitivity AnalysisAs of October 3, 2010

As of January 3, 2010Estimated fair value of notes receivable

$
10,141


$
9,7615% less probable


8,101



8,303One year delay


7,930



8,249Both 5% less probable and one year delay


6,941



7,2745% increased probability


10,336



10,482One year sooner


10,675



10,670Both 5% increased probability and one year sooner


11,938



11,887       October 3,


January 3,Advances Principal Balance

2010


2010Note receivable, pre-construction(a)

$
37,969


$
35,557Note receivable, land(b)


950



950$
38,919


$
36,507  28




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##### Table of Contents



(a)
    
    We fund certain costs incurred to develop the casino project.
    These costs relate to construction costs, legal fees in
    connection with various regulatory approvals and litigation,
    environmental costs and design consulting, and we, in order to
    obtain the development agreement and management contract, agree
    to advance a monthly amount used by the tribe for a variety of
    tribal expenses.(b)
    
    We purchased land to be used and transferred to the tribe in
    connection with the casino project.    October 3,


January 3,Jamul Tribe

2010


2010Monthly stipend

$
6,820


$
6,357Construction


2,546



2,454Legal


5,054



4,873Environmental


3,445



2,776Design


16,237



15,333Gaming license


1,170



1,067Lobbyist


2,697



2,697$
37,969


$
35,557   Iowa
    Tribe
        As of January 3, 2010Face value of note (principal and interest)

$6,218$(4,970 principal and $1,248 interest)Estimated months until casino opens

36 monthsProjected interest rate until casino opens

7.03%Projected interest rate during the loan repayment term

9.59%Discount rate

16.00%Repayment terms of note

24 monthsProbability rate of casino opening

75%  29




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##### Table of Contents



Evaluation
    of impairment related to long-term assets related to Indian
    casino projects, excluding the notes receivable.
        Jamul
    Tribe
    October 3,

January 3,2010

2010No. of Class II electronic gaming devices


1,000



1,000No. of Table games


20



20No. of Poker tables


5



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

$
172


$
172Win/Table game/day  1st year

$
471


$
471Win/Poker table/day  1st year

$
312


$
312     Iowa
    Tribe
   30




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##### Table of Contents



Description
    of each Indian casino project and evaluation of critical
    milestones:
  Pokagon
    Band
  Business arrangement.
  Shingle
    Springs
  Business arrangement.
         31




---



##### Table of Contents



Jamul
    Tribe
      Business arrangement. six-acre
     32




---



##### Table of Contents



33




---



##### Table of Contents



Our evaluation of the critical milestones.
  October 3,

January 3,Critical Milestone

2010

2010Federal recognition of the tribe

Yes

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

Yes

YesUsable land placed in trust by Federal government

Not necessary, as land is reservation land.

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

N/A

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

N/A  the Jamul Tribes current plan is to
    operate a solely class II electronic gaming device
    facility, which does not require a compact with the State.

N/A  the Jamul Tribes current plan is to
    operate a solely class II electronic gaming device
    facility, which does not require a compact with the State.NIGC approval of management contract in current and desired
    form

N/A as the Jamul Tribes current plan is to operate a
    solely class II electronic gaming device facility, which
    does not need to be approved by the NIGC.

N/A as the Jamul Tribes current plan is to operate a
    solely class II electronic gaming device facility, which
    does not need to be approved by the NIGC.Resolution of all litigation and legal obstacles

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

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

No, however, preliminary discussions with investment bankers
    regarding assisting in obtaining financing have taken place. The
    current general economic environment may limit our ability to
    obtain financing at desirable levels in the near-term.

No, however, preliminary discussions with investment bankers
    regarding assisting in obtaining financing have taken place. The
    current general economic environment may limit our ability to
    obtain financing at desirable levels in the near-term.Any other significant project milestones or contingencies,
    the outcome of which could have a material affect on the
    probability of project completion as planned

Yes. The current plan is for the gaming facility to be a solely
    class II electronic gaming device facility. The agreement
    between Lakes and the Jamul Tribe will also be modified to
    reflect the new economics of the revised casino plan but is not
    currently believed to require approval by the State or the NIGC.

Yes. The current plan is for the gaming facility to be a solely
    class II electronic gaming device facility. The agreement
    between Lakes and the Jamul Tribe will also be modified to
    reflect the new economics of the revised casino plan but is not
    currently believed to require approval by the State or the NIGC.   Our evaluation and conclusion regarding the above critical
    milestones and progress. land-in-trust
   34




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##### Table of Contents



Iowa
    Tribe
    Recently
    issued accounting pronouncements
  Form 10-Q.
  Seasonality
    Regulation
    and taxes
      Off-balance
    sheet arrangements
    Private
    Securities Litigation Reform Act
  Form 10-Q
 35




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##### Table of Contents



Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15(e)
   36




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##### Table of Contents



Part II.
    Other Information ITEM 1.
    LEGAL
    PROCEEDINGS  Form 10-Q.
    ITEM 1A.
    RISK
    FACTORS  Form 10-K,
  ITEM 5.
    OTHER
    INFORMATION  Lakes Agreement
  ITEM 6.
    EXHIBITS  Exhibits

Description10
.1

Change in Terms Agreement dated October 28, 2010 between
    Lakes Entertainment, Inc. and Centennial Bank31
.1

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

Certification of CFO pursuant to Securities Exchange Act
    Rules 13a-15(e)
    and 15d-15(e) as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200232
.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  37




---



##### Table of Contents



SIGNATURES
  Form 10-Q
  LAKES ENTERTAINMENT, INC. Registrant
  
       
       38