##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended July 1, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File No. 0-24993
 LAKES ENTERTAINMENT, INC.
 (Exact name of registrant as specified in its charter)
 Minnesota
    
    41-1913991(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)130 Cheshire Lane, Suite 101
    
    55305Minnetonka, Minnesota
    
    (Zip Code)(Address of principal executive offices)
 (952) 449-9092  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




---



##### 



LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
 Page ofForm 10-QPART I. FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets as of July 1, 2007 (unaudited) and December 31, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss) for the three months and six months ended July 1, 2007 and July 2, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2007 and July 2, 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    38ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    39PART II. OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    39ITEM 1A.
    
    RISK FACTORS
    
    
    39ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    41ITEM 6.
    
    EXHIBITS
    
    
    41Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906
  2




---



##### Table of Contents



LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (In thousands)
 July 1, 2007
    
    
    December 31, 2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    18,629
    
    
    $
    9,759(balances include $1.5 million and $8.4 million of WPT Enterprises, Inc. cash)Restricted cash
    
    
    
    
    
    
    12,738Investments in marketable securities
    
    
    56,612
    
    
    
    59,863(balances include $33.0 million and $31.3 million of WPT Enterprises, Inc. short-term investments)Accounts receivable
    
    
    3,350
    
    
    
    2,963Other current assets
    
    
    1,984
    
    
    
    2,706Total current assets
    
    
    80,575
    
    
    
    88,029Property and equipment, net
    
    
    16,877
    
    
    
    17,460Long-term assets related to Indian casino projects:Notes receivable from Indian tribes
    
    
    78,566
    
    
    
    164,308Land held for development
    
    
    8,121
    
    
    
    16,790Intangible assets
    
    
    57,349
    
    
    
    54,279Other
    
    
    5,244
    
    
    
    8,450Total long-term assets related to Indian casino projects
    
    
    149,280
    
    
    
    243,827Other assets:Restricted cash
    
    
    347
    
    
    
    453Investments
    
    
    2,923
    
    
    
    2,923Deferred tax asset
    
    
    6,354
    
    
    
    6,248Debt issuance costs
    
    
    
    
    
    
    1,972Other long-term assets
    
    
    201
    
    
    
    264Total other assets
    
    
    9,825
    
    
    
    11,860Total Assets
    
    $
    256,557
    
    
    $
    361,176Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    2,392
    
    
    $
    5,345Income taxes payable
    
    
    16,301
    
    
    
    14,593Accrued payroll and related costs
    
    
    2,003
    
    
    
    2,480Deferred revenue
    
    
    2,557
    
    
    
    4,740Accrued interest
    
    
    
    
    
    
    312Other accrued expenses
    
    
    1,635
    
    
    
    1,879Total current liabilities
    
    
    24,888
    
    
    
    29,349Long-term debt, other, net of unamortized discount of $0.9 million at December
31, 2006
    
    
    
    
    
    
    104,471Total liabilities
    
    
    24,888
    
    
    
    133,820Commitments and contingenciesMinority interest in subsidiary
    
    
    15,207
    
    
    
    16,764Shareholders equity:Series A preferred stock, $.01 par value; authorized 7,500 shares; 4,458 issued
and outstanding at July 1,
2007 and December 31,
2006, respectively
    
    
    45
    
    
    
    45Common stock, $.01 par value; authorized 200,000 shares;
24,356 and 22,949 issued
and outstanding
at July 1, 2007, and
December 31, 2006,
respectively
    
    
    244
    
    
    
    229Additional paid-in capital
    
    
    188,824
    
    
    
    176,419Retained earnings
    
    
    27,398
    
    
    
    34,357Accumulated other comprehensive loss
    
    
    (49
    )
    
    
    (458
    )Total shareholders equity
    
    
    216,462
    
    
    
    210,592Total liabilities and shareholders equity
    
    $
    256,557
    
    
    $
    361,176
 See notes to unaudited condensed consolidated financial statements
 3




---



##### Table of Contents



LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
 (In thousands, except per share data)
 (Unaudited)
 Three months ended
    
    
    Six months endedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Revenues:License fee income
    
    $
    6,072
    
    
    $
    8,750
    
    
    $
    9,839
    
    
    $
    13,426Host fees, sponsorship, online gaming and other
    
    
    1,671
    
    
    
    2,305
    
    
    
    2,425
    
    
    
    4,094Management, consulting and development fees
    
    
    386
    
    
    
    165
    
    
    
    835
    
    
    
    330Total revenues
    
    
    8,129
    
    
    
    11,220
    
    
    
    13,099
    
    
    
    17,850Costs and expenses:Selling, general and administrative
    
    
    9,966
    
    
    
    8,833
    
    
    
    19,721
    
    
    
    18,015Production costs
    
    
    3,087
    
    
    
    4,176
    
    
    
    5,239
    
    
    
    6,596Loss on abandonment of online gaming assets
    
    
    2,270
    
    
    
    
    
    
    
    2,270
    
    
    
    Net impairment losses
    
    
    
    
    
    
    
    
    
    
    331
    
    
    
    Depreciation and amortization
    
    
    191
    
    
    
    139
    
    
    
    386
    
    
    
    272Total costs and expenses
    
    
    15,514
    
    
    
    13,148
    
    
    
    27,947
    
    
    
    24,883Net realized and unrealized gains on notes receivable
    
    
    8,939
    
    
    
    17,647
    
    
    
    9,104
    
    
    
    33,123Earnings (loss) from operations
    
    
    1,554
    
    
    
    15,719
    
    
    
    (5,744
    )
    
    
    26,090Other income (expense):Interest income
    
    
    5,495
    
    
    
    657
    
    
    
    6,633
    
    
    
    1,090Interest expense, related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Interest expense, other
    
    
    
    
    
    
    (1,303
    )
    
    
    (2,588
    )
    
    
    (1,834
    )Amortization of debt issuance costs
    
    
    
    
    
    
    (176
    )
    
    
    (95
    )
    
    
    (312
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (6,821
    )
    
    
    (3,830
    )
    
    
    (6,821
    )Gain on sale of investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,675Other
    
    
    22
    
    
    
    (10
    )
    
    
    28
    
    
    
    76Total other income (expense), net
    
    
    5,517
    
    
    
    (7,653
    )
    
    
    148
    
    
    
    (2,263
    )Earnings (loss) before income taxes and minority interest in
net (earnings) loss of subsidiary
    
    
    7,071
    
    
    
    8,066
    
    
    
    (5,596
    )
    
    
    23,827Income taxes
    
    
    348
    
    
    
    3,837
    
    
    
    656
    
    
    
    6,547Earnings (loss) before minority interest in
net (earnings) loss of subsidiary
    
    
    6,723
    
    
    
    4,229
    
    
    
    (6,252
    )
    
    
    17,280Minority interest in net (earnings) loss of subsidiary
    
    
    1,295
    
    
    
    (981
    )
    
    
    2,176
    
    
    
    (2,348
    )Net earnings (loss)
    
    
    8,018
    
    
    
    3,248
    
    
    
    (4,076
    )
    
    
    14,932Stock warrant inducement discount
    
    
    1,444
    
    
    
    
    
    
    
    1,444
    
    
    
    Net earnings (loss) available to common shareholders
    
    
    6,574
    
    
    
    3,248
    
    
    
    (5,520
    )
    
    
    14,932Other comprehensive earnings (loss):Unrealized loss on marketable securities, net of tax
    
    
    (23
    )
    
    
    (855
    )
    
    
    
    
    
    
    (426
    )Change in estimated fair value of derivative
    
    
    
    
    
    
    (161
    )
    
    
    409
    
    
    
    (161
    )Comprehensive earnings (loss)
    
    $
    6,551
    
    
    $
    2,232
    
    
    
    ($5,111
    )
    
    $
    14,345Earnings (loss) available to common shareholders per share   basic
    
    $
    0.28
    
    
    $
    0.14
    
    
    
    ($0.24
    )
    
    $
    0.66Earnings (loss) available to common shareholders per share   diluted
    
    $
    0.25
    
    
    $
    0.13
    
    
    
    ($0.24
    )
    
    $
    0.61Weighted-average common shares outstanding  basic
    
    
    23,829
    
    
    
    22,875
    
    
    
    23,427
    
    
    
    22,642Dilutive effect of common stock equivalents
    
    
    2,077
    
    
    
    2,041
    
    
    
    
    
    
    
    1,862Weighted-average common shares outstanding  diluted
    
    
    25,906
    
    
    
    24,916
    
    
    
    23,427
    
    
    
    24,504
 See notes to unaudited condensed consolidated financial statements
 4




---



##### Table of Contents



LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six Months EndedJuly 1, 2007
    
    
    July 2, 2006OPERATING ACTIVITIES:Net earnings (loss)
    
    
    ($4,076
    )
    
    $
    14,932Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:Depreciation and amortization
    
    
    553
    
    
    
    431Amortization of debt issuance costs
    
    
    95
    
    
    
    688Amortization of debt discount
    
    
    33
    
    
    
    17Share-based compensation
    
    
    2,443
    
    
    
    3,689Loss on extinguishment of debt
    
    
    2,783
    
    
    
    6,821Loss on abandonment of online gaming assets
    
    
    2,270
    
    
    
    Net realized and unrealized gains on notes receivable
    
    
    (10,165
    )
    
    
    (33,123
    )Gain on sale of investment
    
    
    
    
    
    
    (5,675
    )Minority interest in net earnings (loss) of subsidiary
    
    
    (2,176
    )
    
    
    2,348Deferred income taxes
    
    
    (105
    )
    
    
    3,769Net impairment losses
    
    
    331
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (405
    )
    
    
    1,022Other current assets
    
    
    427
    
    
    
    617Income taxes payable
    
    
    270
    
    
    
    2,642Accounts payable
    
    
    347
    
    
    
    (1,094
    )Deferred revenue
    
    
    (2,182
    )
    
    
    (1,799
    )Accrued expenses
    
    
    (1,035
    )
    
    
    723Net cash used in operating activities
    
    
    (10,592
    )
    
    
    (3,992
    )INVESTING ACTIVITIES:Purchase of marketable securities
    
    
    (59,997
    )
    
    
    (39,346
    )Sale / maturity of marketable securities
    
    
    63,257
    
    
    
    21,722Proceeds from sale of land held for development
    
    
    8,758
    
    
    
    Collections on notes receivable
    
    
    3,690
    
    
    
    2,865Increases in long-term assets related to Indian casino projects
    
    
    (13,495
    )
    
    
    (31,880
    )Proceeds from sale of investment
    
    
    
    
    
    
    5,686Purchase of property and equipment
    
    
    (1,867
    )
    
    
    (2,886
    )Increase in other long-term assets
    
    
    
    
    
    
    (445
    )Net cash provided by (used in) investing activities
    
    
    346
    
    
    
    (44,284
    )FINANCING ACTIVITIES:Decrease in restricted cash
    
    
    12,844
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (5,004
    )Restricted cash proceeds from long-term debt
    
    
    
    
    
    
    19,090Restricted cash proceeds from long-term debt available as of quarter end
    
    
    
    
    
    
    (19,090
    )Unrestricted cash proceeds from long-term debt
    
    
    
    
    
    
    109,860Repayment of long-term debt
    
    
    (105,000
    )
    
    
    (35,000
    )Repayment of long-term debt, related party
    
    
    
    
    
    
    Cash proceeds from issuance of common and preferred stock
    
    
    9,158
    
    
    
    3,277Increase in WPTE restricted cash
    
    
    
    
    
    
    (197
    )Shareholder trading settlement
    
    
    
    
    
    
    2,805Cash proceeds from sale of participation notes
    
    
    102,114
    
    
    
    Net cash provided by financing activities
    
    
    19,116
    
    
    
    75,741Net increase (decrease) in cash and cash equivalents
    
    
    8,870
    
    
    
    27,465Cash and cash equivalents  beginning of period
    
    
    9,759
    
    
    
    9,912Cash and cash equivalents  end of period
    
    $
    18,629
    
    
    $
    37,377
 See notes to unaudited condensed consolidated financial statements
 5




---



##### Table of Contents



LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Basis of Presentation
    2. Long-Term Assets Related to Indian Casino Projects
  July 1, 2007 (unaudited)ShinglePokagon
    
    
    Springs
    
    
    JamulBand
    
    
    Tribe
    
    
    Tribe
    
    
    Other
    
    
    TotalNotes receivable, at estimated fair value
    
    $
    
    
    
    $
    50,417
    
    
    $
    24,809
    
    
    $
    3,340
    
    
    $
    78,566Intangible assets related to Indian casino projects (*)
    
    
    23,573
    
    
    
    21,674
    
    
    
    11,116
    
    
    
    986
    
    
    
    57,349Land held for development
    
    
    
    
    
    
    
    
    
    
    6,751
    
    
    
    1,370
    
    
    
    8,121Other
    
    
    60
    
    
    
    767
    
    
    
    1,154
    
    
    
    3,263
    
    
    
    5,244$
    23,633
    
    
    $
    72,858
    
    
    $
    43,830
    
    
    $
    8,959
    
    
    $
    149,280
 December 31, 2006ShinglePokagon
    
    
    Springs
    
    
    JamulBand
    
    
    Tribe
    
    
    Tribe
    
    
    Other
    
    
    TotalNotes receivable, at estimated fair value
    
    $
    100,544
    
    
    $
    40,912
    
    
    $
    20,754
    
    
    $
    2,098
    
    
    $
    164,308Intangible assets related to Indian casino projects (*)
    
    
    23,573
    
    
    
    20,387
    
    
    
    9,760
    
    
    
    559
    
    
    
    54,279Land held for development
    
    
    
    
    
    
    8,739
    
    
    
    6,710
    
    
    
    1,341
    
    
    
    16,790Other
    
    
    60
    
    
    
    2,041
    
    
    
    2,207
    
    
    
    4,142
    
    
    
    8,450$
    124,177
    
    
    $
    72,079
    
    
    $
    39,431
    
    
    $
    8,140
    
    
    $
    243,827
 
 (*)
    
    Intangible assets consist primarily of contractual rights to develop, finance and/or manage
Indian-owned casino properties. Amortization of intangible assets begins once the related project
becomes operational, and is calculated using the straight line method over the term of the
underlying contract. Amortization related to projects currently operating is not material for any
periods presented in the accompanying unaudited condensed consolidated financial statements. Pokagon Band.
 6




---



##### Table of Contents



Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
  Shingle Springs Tribe.
  As of July 1, 2007
    
    As of December 31, 2006Face value of note (principal and interest)
    
    $63,125
    
    $55,942($46,368 principal and $16,757 interest)
    
    ($42,310 principal and $13,632 interest)Estimated months until casino opens (weighted-average
of three scenarios)
    
    18 months
    
    28 monthsProjected interest rate until casino opens
    
    10.41%
    
    9.98%Projected interest rate during the loan repayment term
    
    10.26%
    
    9.76%Discount rate
    
    15%
    
    15%Repayment terms of note*
    
    84 months
    
    Projected repayment terms of note**
    
    
    
    24 monthsProbability rate of casino opening (weighting of four
scenarios)
    
    95%
    
    85%
 
 *
    
    Note is payable in even monthly installments over the course of the management agreement subsequent to the casino
opening.**
    
    Note was previously payable in varying monthly installments based on contract terms subsequent to the casino opening.   Jamul Tribe.
  As of July 1, 2007
    
    As of December 31, 2006Face value of note (principal and interest)
    
    $38,527
    
    $32,952($28,230 principal and $10,297 interest)
    
    ($24,509 principal and $8,443 interest)Estimated months until casino opens (weighted-average
of three scenarios)
    
    29 months
    
    29 monthsProjected interest rate until casino opens
    
    10.41%
    
    9.98%Projected interest rate during the loan repayment term
    
    10.38%
    
    9.76%Discount rate
    
    15.75%
    
    15.75%Projected repayment terms of note
    
    120 months
    
    120 monthsProbability rate of casino opening (weighting of four
scenarios)
    
    85%
    
    85%
 7




---



##### Table of Contents



3. Long-Term Debt
  4. Stock Warrant
   5. Share-based Compensation
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Total cost of share-based payment plans
    
    $
    1,203
    
    
    $
    1,424
    
    
    $
    2,435
    
    
    $
    3,676
  8




---



##### Table of Contents



Lakes stock option plans:
 Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,Key valuation assumptions:
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Expected volatility
    
    
    54.95
    %
    
    
    55.55
    %
    
    
    54.95
    %
    
    
    55.55
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    4.89
    %
    
    
    5.10
    %
    
    
    4.89
    %
    
    
    5.10
    %Expected term (in years)
    
    8.2 years
    
    8.2 years
    
    8.2 years
    
    8.2 years
 
    
    Expected volatility  The volatility assumption is based on the historical weekly price
data of Lakes stock over a two-year period. Management evaluated whether there were factors
during that period which were unusual and which would distort the volatility figure if used
to estimate future volatility and concluded that there were no such factors.
    
    Forfeiture rate  As share-based compensation expense recognized is based on awards
ultimately expected to vest, expense for grants beginning upon adoption of SFAS 123(R) will
be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The Company has reviewed the historical forfeitures which are
minimal, and as such will amortize the grants to the end of the vesting period and will
adjust for forfeitures at the end of the term.
    
    Expected term  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 July 1, 2007. Management believes historical data is reasonably
representative of future exercise behavior.
    
    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.
  9




---



##### Table of Contents



The following table summarizes Lakes stock option activity during the three months and six
months ended July 1, 2007 and July 2, 2006:
 Number of Common SharesWeighted-Avg.Options
    
    
    
    
    
    
    Available
    
    
    ExerciseOutstanding
    
    
    Exercisable
    
    
    for Grant
    
    
    Price2007Balance at December 31, 2006
    
    
    4,716,400
    
    
    
    3,712,350
    
    
    
    35,500
    
    
    $
    6.15Authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/cancelled/expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (112,500
    )
    
    
    
    
    
    
    
    
    
    
    5.82Balance at April 1, 2007
    
    
    4,603,900
    
    
    
    4,025,750
    
    
    
    35,500
    
    
    $
    6.15Authorized
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    Granted
    
    
    2,500
    
    
    
    
    
    
    
    (2,500
    )
    
    
    11.84Forfeited/cancelled/expired
    
    
    (44,500
    )
    
    
    
    
    
    
    44,500
    
    
    
    9.79Exercised
    
    
    (74,500
    )
    
    
    
    
    
    
    
    
    
    
    5.83Balance at July 1, 2007
    
    
    4,487,400
    
    
    
    3,954,500
    
    
    
    577,500
    
    
    $
    6.132006Balance at January 1, 2006
    
    
    5,307,626
    
    
    
    4,153,476
    
    
    
    94,500
    
    
    $
    6.03Authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    30,000
    
    
    
    
    
    
    
    (30,000
    )
    
    
    9.77Forfeited/cancelled/expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (550,000
    )
    
    
    
    
    
    
    
    
    
    
    5.65Balance at April 2, 2006
    
    
    4,787,626
    
    
    
    3,711,626
    
    
    
    64,500
    
    
    $
    6.10Authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    5,000
    
    
    
    
    
    
    
    (5,000
    )
    
    
    12.10Forfeited/cancelled/expired
    
    
    (5,000
    )
    
    
    
    
    
    
    5,000
    
    
    
    8.15Exercised
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    4.75Balance at July 2, 2006
    
    
    4,762,626
    
    
    
    3,718,126
    
    
    
    64,500
    
    
    $
    6.11
 The following table summarizes significant ranges of Lakes outstanding and exercisable
options as of July 1, 2007:
 Options Outstanding at July 1, 2007Weighted-
    
    
    
    
    
    
    
    
    
    
    Options Exercisable at July 1, 2007Average
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    
    
    
    
    AggregateNumber
    
    
    Remaining
    
    
    Weighted-Average
    
    
    Intrinsic
    
    
    Number
    
    
    Weighted-
    
    
    IntrinsicRange of Exercise Prices
    
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Value
    
    
    Exercisable
    
    
    Average Price
    
    
    Value$
    (3.25  3.63
    )
    
    
    286,200
    
    
    3.9 years
    
    $
    3.45
    
    
    $
    2,390,622
    
    
    
    286,200
    
    
    $
    3.45
    
    
    $
    2,390,622(3.64  5.45
    )
    
    
    2,374,700
    
    
    1.7 years
    
    
    4.22
    
    
    
    18,027,678
    
    
    
    2,374,700
    
    
    
    4.22
    
    
    
    18,027,678(5.46  7.26
    )
    
    
    60,000
    
    
    6.5 years
    
    
    7.18
    
    
    
    278,100
    
    
    
    45,000
    
    
    
    7.18
    
    
    
    208,575(7.27  9.08
    )
    
    
    1,438,500
    
    
    6.2 years
    
    
    8.13
    
    
    
    5,297,276
    
    
    
    1,099,000
    
    
    
    8.13
    
    
    
    4,047,068(9.09  10.90
    )
    
    
    72,000
    
    
    6.5 years
    
    
    10.36
    
    
    
    104,320
    
    
    
    27,050
    
    
    
    10.48
    
    
    
    35,936(10.91  12.71
    )
    
    
    91,000
    
    
    7.6 years
    
    
    11.47
    
    
    
    37,200
    
    
    
    41,050
    
    
    
    11.43
    
    
    
    17,647(12.72  14.53
    )
    
    
    95,000
    
    
    7.6 years
    
    
    14.00
    
    
    
    
    
    
    
    44,500
    
    
    
    14.04
    
    
    
    (14.54  16.34
    )
    
    
    5,000
    
    
    7.5 years
    
    
    16.11
    
    
    
    
    
    
    
    2,000
    
    
    
    16.11
    
    
    
    (16.35  18.16
    )
    
    
    65,000
    
    
    6.8 years
    
    
    17.91
    
    
    
    
    
    
    
    35,000
    
    
    
    17.97
    
    
    
    4,487,400
    
    
    3.7 years
    
    $
    6.13
    
    
    $
    26,135,196
    
    
    
    3,954,500
    
    
    $
    5.64
    
    
    $
    24,727,526
  10




---



##### Table of Contents



WPTE stock option plan:
 Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006Expected volatility
    
    
    72.22
    %
    
    
    78.91
    %
    
    
    73.03
    %
    
    
    81.57
    %Forfeiture rate
    
    
    12.99
    %
    
    
    4.13
    %
    
    
    12.99
    %
    
    
    4.13
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    4.84
    %
    
    
    5.06
    %
    
    
    4.65
    %
    
    
    4.68
    %Expected term (in years)
    
    6 years
    
    6.5 years
    
    6 years
    
    6.5 years
 
    
    Expected volatility  As WPTE has a relatively short operating history and no definitive
peer or peer groups, expected volatility was based on historical volatility of WPTEs stock
price since it began trading in August 2004.
    
    Forfeiture rate  As share-based compensation expense recognized is based on awards
ultimately expected to vest, expense for grants beginning upon adoption of SFAS 123(R) will
be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. WPTE used historical data to estimate employee departure
behavior in estimating future forfeitures.
    
    Expected term  Due to WPTEs limited operating history including stock option exercises
and forfeitures, WPTE calculated expected term using the Simplified Method in accordance
with Staff Accounting Bulletin 107.
    
    Risk free interest rate  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.
 The following table summarizes WPTE stock option activity during the three months and six
months ended July 1, 2007 and July 2, 2006:
 Number of Common SharesWeighted-Avg.Options
    
    
    
    
    
    
    Available
    
    
    Exerciseoutstanding
    
    
    Exercisable
    
    
    for Grant
    
    
    Price2007Balance at December 31, 2006
    
    
    2,318,166
    
    
    
    1,050,200
    
    
    
    983,501
    
    
    $
    6.76Authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    287,000
    
    
    
    
    
    
    
    (287,000
    )
    
    
    4.80Forfeited/cancelled/expired
    
    
    (90,466
    )
    
    
    
    
    
    
    90,466
    
    
    
    8.49Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at April 1, 2007
    
    
    2,514,700
    
    
    
    1,010,533
    
    
    
    786,967
    
    
    $
    6.47Authorized
    
    
    Granted
    
    
    182,000
    
    
    
    
    
    
    
    (182,000
    )
    
    
    4.53Forfeited/cancelled/expired
    
    
    (85,667
    )
    
    
    
    
    
    
    85,667
    
    
    
    5.25Exercised
    
    
    (113,660
    )
    
    
    
    
    
    
    
    
    
    
    0.0049Balance at July 1, 2007
    
    
    2,497,373
    
    
    
    912,139
    
    
    
    690,634
    
    
    $
    6.672006Balance at January 1, 2006
    
    
    2,158,000
    
    
    
    620,333
    
    
    
    283,667
    
    
    $
    7.14Authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    219,000
    
    
    
    
    
    
    
    (219,000
    )
    
    
    6.20Forfeited/cancelled/expired
    
    
    (159,333
    )
    
    
    
    
    
    
    159,333
    
    
    
    8.13Exercised
    
    
    (115,000
    )
    
    
    
    
    
    
    
    
    
    
    0.0049Balance at April 2, 2006
    
    
    2,102,667
    
    
    
    785,500
    
    
    
    224,000
    
    
    $
    7.36Authorized
    
    
    
    
    
    
    
    
    
    
    1,080,000
    
    
    
    Granted
    
    
    109,500
    
    
    
    
    
    
    
    (109,500
    )
    
    
    5.18Forfeited/cancelled/expired
    
    
    (153,501
    )
    
    
    
    
    
    
    153,501
    
    
    
    10.07Exercised
    
    
    (105,000
    )
    
    
    
    
    
    
    
    
    
    
    0.0049Balance at July 2, 2006
    
    
    1,953,666
    
    
    
    619,333
    
    
    
    1,348,001
    
    
    $
    7.42
 11




---



##### Table of Contents



The following table summarizes significant ranges of WPTE outstanding and exercisable options
as of July 1, 2007:
 Options Outstanding
    
    
    Options ExercisableWeighted-Avg.
    
    
    Weighted-
    
    
    Aggregate
    
    
    
    
    
    
    
    
    
    
    AggregateRange of
    
    Number
    
    
    Remaining
    
    
    Avg. Exercise
    
    
    Intrinsic
    
    
    Number
    
    
    Weighted-
    
    
    IntrinsicExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    

    Price
    
    
    

    Value
    
    
    Exercisable
    
    Avg. Price
    
    
    Value$0.0049
    
    
    111,340
    
    
    
    4.66
    
    
    $
    0.0049
    
    
    $
    454,835
    
    
    
    111,340
    
    
    $
    0.0049
    
    
    $
    454,835$3.93  4.80
    
    
    824,000
    
    
    
    9.58
    
    
    
    4.46
    
    
    
    4,800
    
    
    
    
    
    
    
    
    
    
    
    $5.18  9.92
    
    
    1,325,366
    
    
    
    7.48
    
    
    
    7.57
    
    
    
    
    
    
    
    739,133
    
    
    
    7.88
    
    
    
    $11.95  14.51
    
    
    220,667
    
    
    
    8.12
    
    
    
    12.19
    
    
    
    
    
    
    
    56,000
    
    
    
    12.70
    
    
    
    $15.05  19.50
    
    
    16,000
    
    
    
    8.10
    
    
    
    15.33
    
    
    
    
    
    
    
    5,666
    
    
    
    15.57
    
    
    
    2,497,373
    
    
    
    8.10
    
    
    $
    6.67
    
    
    $
    459,635
    
    
    
    912,139
    
    
    $
    7.26
    
    
    $
    454,835
  6. Earnings (Loss) Available to Common Shareholders Per Share
  7. Income Taxes
    Accounting for Uncertainty in Income Taxes
 12




---



##### Table of Contents



8. Contingencies
 IRS tax audit.
 Louisiana Department of Revenue Litigation Tax Matter.
 WPTE litigation.
 Miscellaneous legal matters.
 13




---



##### Table of Contents



9. Segment Information
 ®
 Industry SegmentsIndianCasino
    
    
    WPT
    
    
    Corporate and
    
    
    TotalProjects
    
    
    Enterprises, Inc.
    
    
    Eliminations
    
    
    ConsolidatedTotal assets as of July 1, 2007
    
    $
    148.9
    
    
    $
    44.2
    
    
    $
    63.3
    
    
    $
    256.6Total assets as of December 31, 2006
    
    $
    242.8
    
    
    $
    51.3
    
    
    $
    67.1
    
    
    $
    361.2For the three months ended July 1, 2007Revenue
    
    $
    0.4
    
    
    $
    7.7
    
    
    $
    
    
    
    $
    8.1Earnings (loss) from operations
    
    
    9.1
    
    
    
    (3.6
    )
    
    
    (3.9
    )
    
    
    1.6Depreciation and amortization expense
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2For the three months ended July 2, 2006Revenue
    
    $
    0.2
    
    
    $
    11.0
    
    
    $
    
    
    
    $
    11.2Earnings (loss) from operations
    
    
    14.3
    
    
    
    2.5
    
    
    
    (1.1
    )
    
    
    15.7Depreciation and amortization expense
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1For the six months ended July 1, 2007Revenue
    
    $
    0.8
    
    
    $
    12.2
    
    
    $
    0.1
    
    
    $
    13.1Earnings (loss) from operations
    
    
    10.0
    
    
    
    (6.5
    )
    
    
     (9.2
    )
    
    
    (5.7
    )Depreciation and amortization expense
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4For the six months ended July 2, 2006Revenue
    
    $
    0.4
    
    
    $
    17.5
    
    
    $
    
    
    
    $
    17.9Earnings (loss) from operations
    
    
    27.2
    
    
    
    1.4
    
    
    
    (2.5
    )
    
    
    26.1Depreciation and amortization expense
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
 10. Online Gaming Commitment and Related Loss on Abandonment of Online Gaming Assets
    14




---



##### Table of Contents



11. Subsequent Events
 Four Winds Casino and Resort.
  WPTE agreement with China Leisure Sports Administrative Center.
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  ®
 WPT Studios.
   15




---



##### Table of Contents



Date of
    
    Number ofAgreement or
    
    EpisodesWorld Poker
    
    Option for
    
    (including
    
    Production Period and DeliveryTour Season
    
    Season
    
    specials)
    
    of Episodes
    
    Initial Telecast of Episodes in SeasonSeason One
    
    January 2003
    
    
    15
    
    
    February 2002  June 2003
    
    March 2003  June 2003Season Two
    
    August 2003
    
    
    25
    
    
    July 2003  June 2004
    
    December 2003  September 2004Season Three
    
    May 2004
    
    
    21
    
    
    May 2004  April 2005
    
    October 2004  August 2005Season Four
    
    March 2005
    
    
    21
    
    
    May 2005  April 2006
    
    October 2005  June 2006Season Five
    
    March 2006
    
    
    22
    
    
    May 2006  April 2007
    
    August 2006  August 2007Season Six
    
    April 2007
    
    
    23
    
    
    May 2007  April 2008
    
    January 2008  August 2008 (projected)
   WPT Global Marketing.
  WPT Online.
  16




---



##### Table of Contents



Results of Operations
  Three months ended July 1, 2007 compared to the three months ended July 2, 2006
 Revenues.
  Selling, general and administrative expenses.
 Production costs.
 17




---



##### Table of Contents



Loss on abandonment of online gaming assets.
 Net realized and unrealized gains on notes receivable.
    Other income (expense).
  Income taxes.
 Minority interest.
 Six months ended July 1, 2007 compared to the six months ended July 2, 2006
 Revenues.
 18




---



##### Table of Contents



Selling, general and administrative expenses.
 Production costs.
 Loss on abandonment of online gaming assets.
 Impairment losses.
 Net realized and unrealized gains on notes receivable.
    Other income (expense).
 19




---



##### Table of Contents



Income taxes.
  Minority interest.
 Liquidity and Capital Resources
        20




---



##### Table of Contents



Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsRemaining Casino Development Commitment(1)Jamul Tribe(2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Shingle Springs Tribe(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pokagon Band(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Iowa Tribe of Oklahoma (Iowa Tribe)  Ioway Project(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lakes operating lease(6)
    
    
    0.7
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    WPTE operating leases(7)
    
    
    3.5
    
    
    
    0.8
    
    
    
    1.8
    
    
    
    0.9
    
    
    
    WPTE purchase obligations(8)
    
    
    2.9
    
    
    
    1.2
    
    
    
    1.4
    
    
    
    0.3
    
    
    
    $
    7.1
    
    
    $
    2.7
    
    
    $
    3.2
    
    
    $
    1.2
    
    
    $
    
 
 (1)
    
    We may be required to provide a guarantee of tribal debt financing or otherwise provide
support for the tribal obligations related to any of the projects (see (2), (3) and (5)
below). Any guarantees by us or similar off-balance sheet liabilities will increase our
potential exposure in the event of a default by any of these tribes. No such guarantees
or similar off-balance sheet liabilities existed at July 1, 2007.(2)
    
    Effective March 30, 2006, we entered into a development financing and services
agreement with the Jamul Tribe. As part of the agreement, we will use our best efforts
to obtain financing from which advances will be made to the Jamul Tribe of up to $350
million to pay for the design and construction of a casino project. It has been
determined that the proposed gaming facility will be reduced in size and scope. The
current plan is for the gaming facility to decrease in size and become a solely class
II electronic gaming device facility which will not require a compact. The agreement
between Lakes and the Jamul Tribe will be modified to reflect the new economics of the
revised casino plan but will not be subject to approval by the State of California or
the NIGC.(3)
    
    The development agreement between Lakes and the Shingle Springs Tribe, as amended,
provides for pre-construction advances Lakes may make to the Shingle Springs Tribe in
the form of a transition loan and land loan up to a maximum combined amount of $75.0
million, but it does not contractually require us to make such advances.(4)
    
    We will be obligated to pay an amount to an unrelated third party once the Pokagon
Casino is open and we are the manager of the casino. The amount is payable quarterly
for five years and is only payable if we are the manager and the casino is open and
operational. The payment is part of a settlement and release agreement associated with
our obtaining the management contract with the Pokagon Band. The maximum liability over
the five-year period is approximately $11 million. We will also be obligated to pay
approximately $3.3 million to a different third party on behalf of the Pokagon Band in
accordance with the management contract which is payable once the casino opens over 24
months.(5)
    
    We have agreed to make advances to the Iowa Tribe subject to a project budget to be
agreed upon by us and the Iowa Tribe and certain other conditions. The development loan
will be for preliminary development costs under the Ioway project budget. We have also
agreed to use reasonable efforts to assist the Iowa Tribe in obtaining permanent
financing for any projects developed under the Iowa consulting agreement.(6)
    
    We lease an airplane under a non-cancelable operating lease that expires on May 1, 2008.(7)
    
    WPTE operating lease obligations include rent payments for WPTE corporate offices
pursuant to two lease agreements. For the first lease, monthly lease payments began at
approximately $38,000 and escalate to approximately $45,000 over the six-year lease
term. For the second lease, monthly payments began at approximately $28,000 and
escalate up to approximately $33,000 over the five year lease term. The lease
obligations presented include rent payments for WPTEs Israel office facility in
Nahariya. The amounts set forth in the table above include monthly lease payments
through June 2011. 21




---



##### Table of Contents



(8)
    
    WPTE purchase obligations include minimum guarantees to CryptoLogic and operational
expenses associated with WPTEs online gaming division, as well as a $0.5 million
payment to the China Leisure Sports Administrative Center (CLSAC) for exclusive marketing and sponsorship opportunities.
Additionally, included in purchase obligations are open purchase orders of
approximately $0.2 million as of July 1, 2007. These liabilities are included in Other
Accrued Expenses within the Unaudited Condensed Consolidated Balance Sheets.    Critical Accounting Policies and Estimates
   Revenue recognition:
 Accounting by Producers or
Distributors of Films
 
    
    Persuasive evidence of an arrangement exists;
    
    The show/episode is complete, and in accordance with the terms of the arrangement, has
been delivered or is available for immediate and unconditional delivery;
    
    The license period has begun and the customer can begin its exploitation, exhibition or
sale;
    
    The sellers price to the buyer is fixed and determinable; and
    
    Collectibility is reasonably assured.
  22




---



##### Table of Contents



Reporting Revenue Gross as a Principal versus Net as an Agent (EITF 99-19).
    Deferred television costs:
 Share-based compensation expense:
  Income taxes: Accounting for Income Taxes
 23




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes
 Accounting for long-term assets related to Indian casino projects:
 Notes receivable.
 
    
    Has the U.S. Governments Bureau of Indian Affairs federally recognized the tribe as a
tribe?
    
    Does the tribe hold or have the right to acquire land to be used for the casino site?
    
    Has the Department of the Interior put the land into trust for purposes of being used as
a casino site?
    
    Has the tribe entered into a gaming agreement with the state in which the land is
located, if required by the state?
    
    Has the tribe obtained approval by the National Indian Gaming Commission of the
management agreement?
    
    Do other legal and political obstacles exist that could block development of the project
and, if so, what is the likelihood of the tribe successfully prevailing?
    
    An evaluation by management of the financial projections of the project given the
projects geographic location and the feasibility of the projects success given such
location;
    
    The structure and stability of the tribal government;
    
    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.
 Recognition of Interest Income and Balance Sheet Classification of
Structured Notes
 24




---



##### Table of Contents



Accounting by
Creditors for Impairment of a Loan.
 Intangible assets related to Indian casino projects. Goodwill and Other Intangible Assets
 Land held for development.
 Other.
   July 1, 2007 (unaudited)ShinglePokagon
    
    
    Springs
    
    
    JamulBand
    
    
    Tribe
    
    
    Tribe
    
    
    Other
    
    
    TotalNotes receivable, at estimated fair value
    
    $
    
    
    
    $
    50,417
    
    
    $
    24,809
    
    
    $
    3,340
    
    
    $
    78,566Intangible assets related to Indian casino projects
    
    
    23,573
    
    
    
    21,674
    
    
    
    11,116
    
    
    
    986
    
    
    
    57,349Land held for development
    
    
    
    
    
    
    
    
    
    
    6,751
    
    
    
    1,370
    
    
    
    8,121Other
    
    
    60
    
    
    
    767
    
    
    
    1,154
    
    
    
    3,263
    
    
    
    5,244$
    23,633
    
    
    $
    72,858
    
    
    $
    43,830
    
    
    $
    8,959
    
    
    $
    149,280
 25




---



##### Table of Contents



December 31, 2006ShinglePokagon
    
    
    Springs
    
    
    JamulBand
    
    
    Tribe
    
    
    Tribe
    
    
    Other
    
    
    TotalNotes receivable, at estimated fair value
    
    $
    100,544
    
    
    $
    40,912
    
    
    $
    20,754
    
    
    $
    2,098
    
    
    $
    164,308Intangible assets related to Indian casino projects
    
    
    23,573
    
    
    
    20,387
    
    
    
    9,760
    
    
    
    559
    
    
    
    54,279Land held for development
    
    
    
    
    
    
    8,739
    
    
    
    6,710
    
    
    
    1,341
    
    
    
    16,790Other
    
    
    60
    
    
    
    2,041
    
    
    
    2,207
    
    
    
    4,142
    
    
    
    8,450$
    124,177
    
    
    $
    72,079
    
    
    $
    39,431
    
    
    $
    8,140
    
    
    $
    243,827
   Shingle Springs Tribe:
 As of July 1, 2007 (unaudited)
    
    As of December 31, 2006Face value of note (principal and interest)
    
    $63,125 ($46,368 principal and $16,757 interest)
    
    $55,942 ($42,310 principal and $13,632 interest)Estimated months until casino opens (weighted-average of three scenarios)
    
    18 months
    
    28 monthsProjected interest rate until casino opens
    
    10.41%
    
    9.98%Projected interest rate during the loan repayment term
    
    10.26%
    
    9.76%Discount rate
    
    15%
    
    15%Repayment terms of note*
    
    84 months
    
    Projected repayment terms of note**
    
    
    
    24 monthsProbability rate of casino opening (weighting of four scenarios)
    
    95%
    
    85%
 
 *
    
    Note is payable in even monthly installments over the course of the management agreement subsequent to the casino
opening.**
    
    Note was previously payable in varying monthly installments based on contract terms subsequent to the casino opening.  Jamul Tribe:
 As of July 1, 2007 (unaudited)
    
    As of December 31, 2006Face value of note (principal and interest)
    
    $38,527
    
    $32,952($28,230 principal and $10,297 interest)
    
    ($24,509 principal and $8,443 interest)Estimated months until casino opens (weighted-average of three scenarios)
    
    29 months
    
    29 monthsProjected interest rate until casino opens
    
    10.41%
    
    9.98%Projected interest rate during the loan repayment term
    
    10.38%
    
    9.76%Discount rate
    
    15.75%
    
    15.75%Projected repayment terms of note
    
    120 months
    
    120 monthsProbability rate of casino opening (weighting of four scenarios)
    
    85%
    
    85%
  26




---



##### Table of Contents



July 1, 2007 (unaudited)
 Estimated Fair
    
    
    Sensitivity AnalysisValue Notes
    
    
    5% Less
    
    
    One Year
    
    
    
    
    
    
    5% Increased
    
    
    One YearReceivable
    
    
    Probable
    
    
    Delay
    
    
    Both
    
    
    Probability
    
    
    Sooner
    
    
    Both(In thousands)Shingle Springs
    
    $
    50,417
    
    
    $
    47,752
    
    
    $
    48,621
    
    
    $
    46,051
    
    
    $
    53,082
    
    
    $
    52,279
    
    
    $
    55,041Jamul
    
    $
    24,809
    
    
    $
    23,347
    
    
    $
    23,772
    
    
    $
    22,370
    
    
    $
    26,271
    
    
    $
    25,891
    
    
    $
    27,417$
    75,226
    
    
    $
    71,099
    
    
    $
    72,393
    
    
    $
    68,421
    
    
    $
    79,353
    
    
    $
    78,170
    
    
    $
    82,458
 December 31, 2006
 Estimated Fair
    
    
    Sensitivity AnalysisValue Notes
    
    
    5% Less
    
    
    One Year
    
    
    
    
    
    
    5% Increased
    
    
    One YearReceivable
    
    
    Probable
    
    
    Delay
    
    
    Both
    
    
    Probability
    
    
    Sooner
    
    
    Both(In thousands)Shingle Springs
    
    $
    40,912
    
    
    $
    38,469
    
    
    $
    39,269
    
    
    $
    36,923
    
    
    $
    43,355
    
    
    $
    42,623
    
    
    $
    45,166Jamul
    
    $
    20,754
    
    
    $
    19,548
    
    
    $
    19,815
    
    
    $
    18,664
    
    
    $
    21,960
    
    
    $
    21,738
    
    
    $
    23,002$
    61,666
    
    
    $
    58,017
    
    
    $
    59,084
    
    
    $
    55,587
    
    
    $
    65,315
    
    
    $
    64,361
    
    
    $
    68,168
   Balance at July 1, 2007 (unaudited)ShingleAdvances Principal Balance
    
    Springs
    
    Jamul
    
    Other
    
    Total(In thousands)Note receivable, pre-construction(a),(c)
    
    $
    46,368
    
    
    $
    27,280
    
    
   $
    2,796
    
    
    $
    76,444Note receivable, land(b),(c)
    
    
    
    
    
    
    950
    
    
    
    973
    
    
    
    1,923$
    46,368
    
    
    $
    28,230
    
    
    $
    3,769
    
    
    $
    78,367
 Balance at December 31, 2006ShingleAdvances Principal Balance
    
    Springs
    
    Jamul
    
    Other
    
    Total(In thousands)Note receivable, pre-construction(a),(c)
    
    $
    42,310
    
    
    $
    23,559
    
    
    $
    1,386
    
    
    $
    67,255Note receivable, land(b),(c)
    
    
    
    
    
    
    950
    
    
    
    756
    
    
    
    1,706$
    42,310
    
    
    $
    24,509
    
    
    $
    2,142
    
    
    $
    68,961
 27




---



##### 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.(c)
    
    Amounts listed under the other column represents amounts advanced under the agreements with the Iowa Tribe.  July 1,
    
    
    December 31,Shingle Springs Tribe
    
    2007
    
    
    2006(unaudited)Monthly stipend
    
    $
    8,590
    
    
    $
    7,690Construction
    
    
    1,922
    
    
    
    1,657Legal
    
    
    14,193
    
    
    
    13,790Environmental
    
    
    1,739
    
    
    
    1,680Design
    
    
    11,230
    
    
    
    9,554Gaming license
    
    
    3,726
    
    
    
    3,626Lobbyist
    
    
    4,968
    
    
    
    4,313$
    46,368
    
    
    $
    42,310
 July 1,
    
    
    December 31,Jamul Tribe
    
    2007
    
    
    2006(unaudited)Monthly stipend
    
    $
    4,760
    
    
    $
    4,451Construction
    
    
    983
    
    
    
    649Legal
    
    
    4,084
    
    
    
    3,675Environmental
    
    
    2,250
    
    
    
    1,985Design
    
    
    11,813
    
    
    
    9,578Gaming license
    
    
    710
    
    
    
    641Lobbyist
    
    
    2,680
    
    
    
    2,580$
    27,280
    
    
    $
    23,559
 Evaluation of impairment related to our long-term assets related to Indian casino projects,
excluding the notes receivable, which are valued at fair value:
   28




---



##### Table of Contents



Pokagon Band
 April 1, 2007
    
    December 31, 2006No. of Class III slot machines
    
    3,000
    
    3,000No. of Table games
    
    90
    
    90No. of Poker tables
    
    20
    
    20Win/Class III slot machine/day  1st year
    
    $282
    
    $282Win/Table game/day  1st year
    
    $1,481
    
    $1,481Win/Poker game/day  1st year
    
    $1,025
    
    $1,025Expected increase in management fee cash flows
    
    Year 2  26.5%
    
    Year 2  26.5%Year 3  4.3%
    
    Year 3  4.3%Year 4  3.8%
    
    Year 4  3.8%Year 5  4.1%
    
    Year 5  4.1%
  Jamul Tribe
  July 1,
    
    
    December 31,2007
    
    
    2006(unaudited)No. of Class II electronic gaming devices
    
    
    1,000
    
    
    
    1,000No. of Table games
    
    
    20
    
    
    
    20No. of Poker tables
    
    
    5
    
    
    
    5Win/Class II electronic gaming devices/day  1st year
    
    $
    250
    
    
    $
    250Win/Table game/day  1st year
    
    $
    900
    
    
    $
    900Win/Poker table/day  1st year
    
    $
    650
    
    
    $
    650
  Shingle Springs Tribe
 July 1, 2007
    
    December 31, 2006(unaudited)No. of Class III slot machines
    
    349
    
    349No. of Class II electronic gaming devices
    
    1,651
    
    1,651No. of Table games
    
    100
    
    100Win/Class II & III electronic gaming devices/slot    machine/day  1st year
    
    $350
    
    $350Win/Table game/day  1st year
    
    $1,275
    
    $1,275Expected increase (decrease) in management fee cash
    flows
    
    Year 2  17.6%
    
    Year 2  8.0%Year 3  10.5%
    
    Year 3  7.5%Year 4  7.9%
    
    Year 4  7.1%Year 5  8.8%
    
    Year 5  6.4%Year 6  (4.0)%
    
    Year 6  (12.3)%(management fees
were reduced in
year six)
    
    (management fees
were reduced in
year six)Year 7  5.0%
    
    Year 7  11.7%
 29




---



##### Table of Contents



Description of each Indian casino project and evaluation of critical milestones:
 Shingle Springs Tribe
 Business arrangement.
     Our evaluation of the critical milestones.
 30




---



##### Table of Contents



Critical Milestone
    
    July 1, 2007
    
    December 31, 2006
    
    January 1, 2006Federal recognition of the tribe
    
    Yes
    
    Yes
    
    YesPossession of usable land
corresponding with needs based on
Lakes project plan
    
    Yes
    
    Yes
    
    YesUsable land placed in trust by 
Federal government
    
    Not necessary, as
land is reservation
land.
    
    Not necessary, as
land is reservation
land.
    
    Not necessary, as land is
reservation land.Usable county agreement, if 
applicable
    
    Yes
    
    Yes
    
    N/AUsable state compact that allows for 
gaming consistent with that outlined 
in Lakes project plan
    
    Yes
    
    Yes
    
    YesNIGC approval of management contract
in current and desired form
    
    Yes
    
    Yes  approval
received in 2004.
    
    Yes  approval received in 2004.Resolution of all litigation and
legal obstacles
    
    No  See below.
    
    No  See below.
    
    No, Federal and state
litigation regarding approval
of highway interchange,
environmental issues and other
issues.  See below.Financing for construction
    
    Yes. On June 28,
2007 an affiliate
of the Shingle
Springs Tribe
closed on a $450
million senior note
financing to fund
the Foothill Oaks
Casino project in
Shingle Springs,
California.
    
    No, however the
Shingle Springs
Tribe has engaged
investment banks to
assist with
obtaining
financing.
    
    No, however the Shingle Springs
Tribe has engaged investment
banks to assist with obtaining
financing.Any other significant project
milestones or contingencies, the
outcome of which could have a
material affect on the probability
of project completion as planned
    
    No others known at
this time by Lakes.
    
    No others known at
this time by Lakes.
    
    No others known at this time by
Lakes.
 Our evaluation and conclusion regarding the above critical milestones and progress:
   31




---



##### Table of Contents



Jamul Tribe
 Business arrangement.
      32




---



##### Table of Contents



Lakes Evaluation of the Critical Milestones.
 Critical Milestone
    
    July 1, 2007
    
    December 31, 2006
    
    January 1, 2006Federal recognition of the tribe
    
    Yes
    
    Yes
    
    YesPossession of usable land
corresponding with needs based on
Lakes project plan
    
    Yes
    
    Yes
    
    YesUsable land placed in trust by 
Federal government
    
    Not necessary, as
land is reservation
land.
    
    Not necessary, as
land is reservation
land.
    
    Yes, six acres is
reservation land
held by the Jamul
Tribe on which the
casino will be
built. There is an
additional 82 acres
contiguous to the
reservation land
pending BIA
approval to be
placed into trust
that could be used
for additional
development of the
project. The Jamul
Tribe and Lakes
prepared an EIS and
trust application,
which has been
submitted to,
reviewed and
recommended for
approval by the
regional office of
the BIA. The
Washington, D.C.
office of the BIA
is currently
reviewing the
submission.Usable county agreement, if 
applicable
    
    N/A
    
    N/A
    
    N/AUsable state compact that allows for 
gaming consistent with that outlined 
in Lakes project plan
    
    Yes
    
    Yes
    
    YesNIGC approval of management contract
in current and desired form
    
    N/A as the Jamul
Tribe and Lakes
entered into a
development
financing and
services agreement
in March 2006,
which does not need
to be approved by
the NIGC.
    
    N/A as the Jamul
Tribe and Lakes
entered into a
development
financing and
services agreement
in March 2006,
which does not need
to be approved by
the NIGC.
    
    No, submitted for
approval by the
NIGC in 2000. We
are in
communication with
the NIGC and have
responded to
initial comments.
Approval is not
expected until the
process to place
land in trust by
the BIA is
complete.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.
    
    N/A, there has been
some local
opposition
regarding the
project, although
no formal legal
action has been
taken.Financing for construction
    
    No, however,
preliminary
discussions with
investment bankers
regarding assisting
in obtaining
financing have
taken place.
    
    No, however,
preliminary
discussions with
investment bankers
regarding assisting
in obtaining
financing have
taken place.
    
    No, however,
preliminary
discussions with
investment bankers
regarding assisting
in obtaining
financing have
taken place.
 33




---



##### Table of Contents



Critical Milestone
    
    July 1, 2007
    
    December 31, 2006
    
    January 1, 2006Any 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 Jamul
Tribe and the State
of California have
had a series of
meetings to discuss
what requirements
the State has to
either allow the
project to be built
as currently
planned or to enter
into a new compact
similar to those
approved in 2004
for other tribes in
the State. The
Jamul Tribe has
decided to move
forward with
building a casino
based solely on
class II electronic
gaming devices.
This plan will
decrease the size
and scope of the
project, but will
allow it to move
forward.
    
    Yes. The Jamul
Tribe and the State
of California have
had a series of
recent meetings to
discuss what
requirements the
State has to either
allow the project
to be built as
currently planned
or to enter into a
new compact similar
to those approved
in 2004 for other
tribes in the
State. Based on
these discussions,
the Jamul Tribe is
evaluating which of
any of these
requirements are
acceptable or in
lieu of a compact,
building a casino
based solely on
class II electronic
gaming devices.
    
    No others known at
this time by Lakes.
 Lakes evaluation and conclusion regarding the above critical milestones and progress.
  34




---



##### Table of Contents



Iowa Tribe
 Business arrangement.
  Ioway Casino.
   Cimarron Casino.
 Arrangement with Consultant.
 Lakes Evaluation of the Ioway casino project.
 35




---



##### Table of Contents



July 1, 2007
    
    December 31, 2006
    
    January 1, 2006Federal recognition of the tribe
    
    Yes
    
    Yes
    
    YesPossession of usable land
corresponding with needs based on
Lakes project plan
    
    Yes, the Iowa Tribe
has Tribal members
that own a 74-acre
allotment on US
Route 66 midway
between the access
points to Warwick
and Chandler,
Oklahoma from I44.
The Iowa Tribe has
obtained the rights
to purchase and/or
lease this parcel
from the allottees.
An additional 100
acres of fee land
has been purchased
to provide the
necessary site area
for the beginning
of the project.
    
    Yes, the Iowa Tribe
has members that
own a 74-acre
allotment on US
Route 66 midway
between the access
points to Warwick
and Chandler,
Oklahoma from I44.
The Iowa Tribe has
obtained the rights
to purchase and/or
lease this parcel
from the allottees.
An additional 100
acres of fee land
has been optioned
to provide the
necessary site area
for the beginning
of the project.
    
    Yes, the Iowa Tribe
is currently
leasing and
acquiring land from
tribal members,
which is held in
trust for the
individual tribal
members by the
United States
Government. These
transactions will
need to be approved
by the BIA.Usable land placed in trust by 
Federal government
    
    Yes, the Iowa Tribe
is currently
leasing and
acquiring land from
tribal members,
which is held in
trust for the
individual tribal
members by the
United States
Government. These
transactions will
need to be approved
by the BIA.
    
    Yes, the Iowa Tribe
is currently
leasing and
acquiring land from
tribal members,
which is held in
trust for the
individual tribal
members by the
United States
Government. These
transactions will
need to be approved
by the BIA.
    
    Yes, the Iowa Tribe
is currently
leasing and
acquiring land from
tribal members,
which is held in
trust for the
individual tribal
members by the
United States
Government. These
transactions will
need to be approved
by the BIA.Usable county agreement, if 
applicable
    
    N/A
    
    N/A
    
    N/AUsable state compact that allows for 
gaming consistent with that outlined 
in Lakes project plan
    
    Yes
    
    Yes
    
    YesNIGC approval of management contract
in current and desired form
    
    No, submitted to
the NIGC for review
on April 22, 2005.
The NIGC has
provided their
final comments to
the Iowa Tribe on
the management
contract and the
Iowa Tribe has
approved the
revisions and
returned the
contract to the
NIGC for the final
action.
There have been no
comments on the
consulting
agreement from the
NIGC and is
therefore
considered
operative.
    
    No, submitted to
the NIGC for review
on April 22, 2005.
An EA is currently
being prepared and
is necessary for
the management
contract to be
approved.
Completion of the
EA is expected by
Spring 2007. There
have been no
comments on the
consulting
agreement from the
NIGC and is
therefore
considered
operative.
    
    No, submitted to
the NIGC for review
on April 22, 2005.
An EA will be
prepared in order
for the management
contract to be
approved.Resolution of all litigation and
legal obstacles
    
    None at this time.
    
    None at this time.
    
    None at this time.Financing for construction
    
    No. Preliminary
discussions with
lending
institutions have
occurred.
    
    No. Preliminary
discussions with
lending
institutions have
occurred.
    
    No. Preliminary
discussions with
lending
institutions have
occurred.Any other significant project
milestones or contingencies, the
outcome of which could have a
material affect on the probability
of project completion as planned
    
    No others known at
this time by Lakes.
    
    No others known at
this time by Lakes.
    
    No others known at
this time by Lakes.
 Lakes evaluation and conclusion regarding the above critical milestones and progress.
 36




---



##### Table of Contents



Pawnee Nation of Oklahoma
 Business arrangement.
  Recently issued accounting pronouncements
 Fair Value Measurements The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Seasonality
  Regulation and taxes
   Off-balance sheet arrangements
  Private Securities Litigation Reform Act
  37




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    38




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 Part II.
Other Information
 
 ITEM 1. LEGAL PROCEEDINGS
 WPTE litigation.
 Miscellaneous legal matters.
 
 ITEM 1A. RISK FACTORS
  We cannot guarantee the financial results of the expansion of the World Poker Tour business,
which may negatively impact our financial results.
  39




---



##### Table of Contents




    
    On April 23, 2007, WPTE entered into an agreement with CryptoLogic pursuant to which
CryptoLogic operates and manages WPTEs branded real-money gaming website,
WorldPokerTour.com, solely in jurisdictions where online gaming is not restricted. WPTE
cannot be assured that CryptoLogics operation of the site going forward will meet
WPTEs business expectations, the failure of which would have a material adverse impact
on WPTEs online gaming business.
    
    WPTE is currently reliant on CryptoLogic for WPTEs gaming website compliance with
all applicable regulations, including the initial verification that players who wish to
wager are actually from non-restricted countries. In addition, WPTE relies on
CryptoLogic and third party vendors to assure that players cannot place improper wagers
on an on-going basis. If CryptoLogics compliance or verification is inadequate or
WPTEs third party verification tools fail, regulators in the U.S. or other
jurisdictions may impose fines or other sanctions or threaten or take other actions
that could adversely affect WPTEs reputation and the revenues WPTE derives from the
license of rights to CryptoLogic. Additionally, certain territories and foreign
networks may restrict WPTE from incorporating marketing elements related to WPTEs
online site into WPTEs international telecasts and certain laws or regulations may
restrict the type of advertising in general in those territories. If these restrictions
occur, WPTEs costs of customer acquisition may be substantially higher than
anticipated.
    
    WPTE has developed relationships with key strategic partners in many areas of WPTEs
business, including poker tournament event sponsorship, merchandise licensing,
corporate sponsorship, Internet gaming and international distribution. If WPTE was to
fail to manage its existing licensing relationships, this failure could have a material
adverse effect on WPTEs financial condition and results of operations. WPTE relies on
a limited number of contracts under which third parties provide WPTE with services
vital to WPTEs business. If WPTEs relationship with any third party was to be
interrupted, or the services provided by any third party were to be delayed or
deteriorate for any reason without being adequately replaced, WPTE business could be
materially adversely affected. If WPTE is forced to find a replacement for any
strategic partner, this could create disruption in WPTEs business and may result in
reduced revenues, increased costs or diversion of managements attention and resources.In addition, while WPTE has significant control over its licensed products and
advertising, WPTE does not have operational and financial control over third parties, and
WPTE has limited influence with respect to the manner in which they conduct their
businesses. If any strategic partner experiences a significant downturn in its business
or were otherwise unable to honor its obligations to WPTE, WPTEs business could be
materially disrupted.
    
    WPTE intends to further expand business in foreign markets, including continued
international distribution of WPTEs U.S. telecasts, creating additional poker tours in
foreign countries and distributing branded merchandise in foreign countries. WPTEs
international operations could be adversely affected by changes in political and
economic conditions, trade protection measures and the status of regulatory
requirements that may restrict the sales of WPTE products, increase costs of foreign
production or other costs that prohibit Internet gaming activities in international
jurisdictions. Also, changes in exchange rates between the U.S. dollar and other
currencies could potentially result in significant increases in WPTE costs or decreases
in earnings.
  40




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Annual Meeting of Shareholders was held on June 6, 2007.(b)
    
    At the Annual Meeting:(1)
    
    All nominees for directors as listed in the proxy statement were elected with the
following vote:
 Affirmative Votes
    
    Authority WithheldLyle Berman
    
    
    22,315,185
    
    
    
    146,085Timothy J. Cope
    
    
    21,969,874
    
    
    
    491,396Morris Goldfarb
    
    
    22,341,752
    
    
    
    119,518Neil I. Sell
    
    
    18,071,083
    
    
    
    4,390,187Ray Moberg
    
    
    22,345,734
    
    
    
    115,536Larry C. Barenbaum
    
    
    22,344,952
    
    
    
    116,318Richard White
    
    
    22,344,194
    
    
    
    117,076
 (2)
    
    The adoption of the 2007 Stock Option and Compensation Plan was approved with the
following vote:
 Affirmative Votes
    
    Negative Votes
    
    Abstentions
    
    Broker Non-Vote11,915,058
    
    4,481,003
    
    46,632
    
    6,018,577
 (3)
    
    The appointment of Piercy, Bowler, Taylor & Kern, Certified Public Accountants and
Business Advisors, a Professional Corporation, as the independent registered accounting firm
serving as auditors of the Company was ratified with the following vote:
 Affirmative Votes
    
    Negative Votes
    
    Abstentions
    
    Broker Non-Vote22,372,757
    
    38,950
    
    49,563
    
    
 
 ITEM 6. EXHIBITS
 Exhibits
    
    Description31.1
    
    Certification of CEO pursuant to Securities Exchange Act
Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of CFO pursuant to Securities Exchange Act
Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 41




---



##### Table of Contents



SIGNATURES
  LAKES ENTERTAINMENT, INC.Registrant/s/ LYLE BERMANLyle BermanChairman of the Board and
Chief Executive Officer
(Principal Executive Officer)/s/ TIMOTHY J. COPETimothy J. CopePresident and Chief Financial Officer
(Principal Financial and Accounting Officer)  42