##### 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
    March 29, 2009oro

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

41-1913991(I.R.S. Employer
    Identification No.)130 Cheshire Lane, Suite 101
    Minnetonka, Minnesota(Address of principal
    executive offices)

55305(Zip
    Code)   (952) 449-9092
 (Registrants telephone
    number, including area code)
  þ o
  Regulation S-T o o
  12b-2
  Large accelerated
    filer o

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

Smaller reporting
    company o   Rule 12b-2 o þ




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##### 



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


FINANCIAL STATEMENTSConsolidated Balance Sheets as of March 29,
    2009 (unaudited) and December 28, 2008


3Unaudited Consolidated Statements of Earnings
    (Loss) and Comprehensive Earnings (Loss) for the three months
    ended March 29, 2009 and March 30, 2008


4Unaudited Consolidated Statements of Cash Flows
    for the three months ended March 29, 2009 and
    March 30, 2008


5Notes to Unaudited Consolidated Financial
    Statements


6ITEM 2.


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


17ITEM 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


34ITEM 4.


CONTROLS AND PROCEDURES


35PART II. OTHER INFORMATIONITEM 1.


LEGAL PROCEEDINGS


36ITEM 1A.


RISK FACTORS


36ITEM 6.


EXHIBITS


36EX-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 SUBSIDIARIES
  Consolidated
    Balance Sheets
  March 29,2009


December 28,(Unaudited)


2008(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
9,866


$
6,170Accounts receivable


3,588



2,407Current portion of notes receivable from Indian tribes


7,070



9,151Deferred tax asset


557



Other current assets


742



1,232Total current assets


21,823



18,960Property and equipment, net


10,913



10,985Long-term assets related to Indian casino projects:Notes receivable, net of current portion


56,032



54,705Intangible assets, net of accumulated amortization of
    $12.1 million and $9.7 million


45,163



47,586Land held for development


1,810



1,810Other


4,677



4,781Total long-term assets related to Indian casino projects


107,682



108,882Other assets:Investments in securities, including put rights


26,599



26,544Other


62



73Total other assets


26,661



26,617Total assets

$
167,079


$
165,444LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Line of credit

$
18,018


$
18,152Current portion of contract acquisition costs payable, net of
    $1.0 and $1.1 million discount


1,844



2,089Accounts payable


659



531Income taxes payable


16,913



16,241Accrued payroll and related costs


2,052



1,745Other accrued expenses


1,008



1,383Total current liabilities


40,494



40,141Long-term liabilities:Non-revolving line of credit


2,000



2,000Contract acquisition costs payable, net of current portion and
    $1.2 million and $1.4 million discount


4,893



5,253Long-term liabilities


6,893



7,253Total liabilities


47,387



47,394Commitments and contingenciesShareholders equity:Common stock, $.01 par value; authorized
    200,000 shares; 26,328 and 26,237 common shares issued and
    outstanding at March 29, 2009 and December 28, 2008


263



262Additional paid-in capital


201,698



201,082Accumulated deficit


(82,269
)


(83,294
)Total shareholders equity


119,692



118,050Total liabilities and shareholders equity

$
167,079


$
165,444    3




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIESConsolidated Statements of Earnings (Loss) and Comprehensive
    Earnings (Loss)
  Three months endedMarch 29,


March 30,2009


2008(In thousands,except per share data)(Unaudited)Revenues:Management fees

$
7,266


$
4,580License fees


12



20Total revenues


7,278



4,600Costs and expenses:Selling, general and administrative


4,042



3,864Ohio initiative costs






1,646Impairment losses


569



Amortization of intangible assets related to Indian casino
    projects


2,479



1,681Depreciation


73



88Total costs and expenses


7,163



7,279Net unrealized losses on notes receivable


(163
)


(1,983
)Loss from operations


(48
)


(4,662
)Other income (expense):Interest income


1,862



481Interest expense


(395
)


(365
)Other


(8
)


52Total other income (expense), net


1,459



168Earnings (loss) before income taxes and discontinued
    operations


1,411



(4,494
)Income taxes


386



688Earnings (loss) before discontinued operations


1,025



(5,182
)Discontinued operations, net of tax






(1,723
)Net earnings (loss) applicable to common shareholders

$
1,025


$
(6,905
)Other comprehensive loss:Unrealized loss on securities, net of tax






(2,397
)Other comprehensive earnings (loss)

$
1,025


$
(9,302
)Earnings (loss) applicable to common shareholders per
    share  basic  continuing operations

$
0.04


$
(0.21
)Earnings (loss) applicable to common shareholders per
    share  basic  discontinued operations

$



$
(0.07
)Earnings (loss) applicable to common shareholders per
    share  basic

$
0.04


$
(0.28
)Earnings (loss) applicable to common shareholders per
    share  diluted  continuing operations

$
0.04


$
(0.21
)Earnings (loss) applicable to common shareholders per
    share  diluted  discontinued operations

$



$
(0.07
)Earnings (loss) applicable to common shareholders per
    share  diluted

$
0.04


$
(0.28
)Weighted-average common shares outstanding 
    basic


26,325



24,604Dilutive effect of common stock equivalents


61



Weighted-average common shares outstanding 
    diluted


26,386



24,604    4




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
 Consolidated
    Statements of Cash Flows  Three months endedMarch 29,


March 30,2009


2008(In thousands)(Unaudited)OPERATING ACTIVITIES:Net earnings (loss)

$
1,025


$
(6,905
)Loss from discontinued operations






(1,723
)Earnings (loss) from continuing operations


1,025



(5,182
)Adjustments to reconcile net earnings (loss) from continuing
    operations to net cash provided by (used in) operating
    activities:Depreciation


73



88Amortization of debt issuance costs


8



Accretion of contra note receivable


(714
)


Mark to market, trading


(1,288
)


Put rights loss


1,234



Amortization of intangible assets related to Indian casino
    projects


2,479



1,681Share-based compensation


83



147Impairment losses


569



Net unrealized losses on notes receivable


163



1,983Deferred income taxes


(557
)


380Changes in operating assets and liabilities:Accounts receivable


(1,180
)


(2,446
)Other current assets


493



(546
)Income taxes payable


672



(800
)Accounts payable


235



155Accrued expenses


(66
)


601Contract acquisition costs payable


(604
)


(301
)Net cash provided by (used in) continuing operations


2,625



(4,240
)Net cash used in discontinued operations






(2,690
)Net cash provided by (used in) operating activities


2,625



(6,930
)INVESTING ACTIVITIES:Purchase of securities






(2,700
)Sale / redemption of securities






6,500Collections on notes receivable






276Increases in long-term assets related to Indian casino projects


(796
)


(2,153
)Advances on notes receivable


(4
)


(1,117
)Purchase of property and equipment


(3
)


(49
)Proceeds from repayment of note receivable


1,476



Increase in other long-term assets






29Net cash provided by continuing operations


673



786Net cash provided by discontinued operations






3,865Net cash provided by investing activities


673



4,651FINANCING ACTIVITIES:Repayment of line of credit


(135
)


Cash proceeds from issuance of common and preferred stock


533



1,675Net cash provided by financing activities


398



1,675Net increase (decrease) in cash and cash
    equivalents  continuing operations


3,696



(1,779
)Cash and cash equivalents  beginning of
    period  continuing operations


6,170



5,396Cash and cash equivalents  end of
    period  continuing operations

$
9,866


$
3,617    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-K
      2.
    Discontinued
    operations      Revenues

$
4,962Net loss before income taxes

$
(1,723
)Income taxes


Discontinued operations

$
(1,723
)   3.
    Investments
    in securities   6




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
    Accounting for Derivative Instruments and Hedging
    Activities The
    Fair Value Option for Financial Assets and Financial Liabilities
  Accounting for Certain Investments in Debt and
    Equity Securities
  Gross


EstimatedUnrealized


FairCost


Losses


Value(Note 4)March 29, 2009 (unaudited)Maturity considered greater than one yearAuction rate securities (trading securities)

$
26,775


$
(3,243
)

$
23,532December 28, 2008Maturity considered greater than one yearAuction rate securities (trading securities)

$
26,775


$
(4,532
)

$
22,243     4.
    Fair
    Value Measurement  Fair Value Measurements FAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active FAS 157-3) , FAS 157-3
   7




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
      March 29,


December 28,2009


2008(Unaudited)Auction rate securities (ARS)(*)

$
23,532


$
22,243Put Rights(*)(***)


3,067



4,301Notes receivable from Indian Tribes(**)


10,711



10,703$
37,310


$
37,247     (*)
    
    See Note 3.(**)
    
    See Note 5.(***)
    
    The Company has elected the fair value option as offered by
    SFAS 159, only for its Rights. Therefore, material
    financial assets and liabilities not carried at fair value are
    still reported at carrying values.      
    ARS  Credit ratings of the ARS and collateral
    securities, default rates, other market and liquidity
    circumstances.
    Put 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.    NotesReceivablefromARS


Rights


Indian Tribes


TotalBeginning balance  December 28, 2008

$
22,243


$
4,301


$
10,703


$
37,247Total realized and unrealized gains (losses):Gains (losses) included in earnings(*)


1,289



(1,234
)






55Unrealized gains on notes receivable










(163
)


(163
)Advances, net of allocation to intangible, other










171



171Ending balance  March 29, 2009 (unaudited)

$
23,532


$
3,067


$
10,711


$
37,310     (*)
    
    See Note 3. 8




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
   5.
    Long-term
    assets related to Indian casino projects  notes
    receivable      ShingleSprings


JamulTribe


Tribe


Other


TotalBalance, December 30, 2007

$
53,592


$
21,406


$
3,797


$
78,795Advances, net


1,880



3,452



260



5,592Allocation of advances to intangible assets


(426
)


(2,116
)


(78
)


(2,620
)Consulting contracts










(75
)


(75
)Current portion of notes receivable


(9,151
)










(9,151
)Changes in estimated fair value(*), (**)


(1,893
)


(15,626
)


(317
)


(17,836
)Balance, December 28, 2008


44,002



7,116



3,587



54,705Advances






659



137



796Repayments


(1,476
)










(1,476
)Accretion of contra note receivable(**)


714











714Allocation of advances to intangible assets






(569
)


(56
)


(625
)Changes in estimated fair value(*)






(4
)


(159
)


(163
)Changes in current portion of notes receivable


2,081











2,081Balance, March 29, 2009 (unaudited)

$
45,321


$
7,202


$
3,509


$
56,032     (*)
    
    The changes in estimated fair value of notes receivable related
    to Indian casino projects under development are recorded as
    unrealized gains (losses) within the consolidated financial
    statements.(**)
    
    The Company 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 (See critical accounting policy
    summary in Part I, Item 2 of this Quarterly Report on
    Form 10-Q),
    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 began being amortized into
    income using the effective interest method. This difference will
    fully amortize over the remaining term of the note. These notes
    are no longer adjusted to estimated fair value on a quarterly
    basis, but rather they are evaluated for impairment pursuant to
    SFAS 114, Accounting by Creditors for Impairment of a
    Loan. 9




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
   Shingle Springs Tribe.
  As of December 17, 2008Face value of note (principal and interest)

$74,372($49,512 principal and $24,860 interest)Projected interest rate during the loan repayment term

6.41%Discount rate

18.50%Repayment terms of note

84 monthsProbability rate of casino opening

100%   Jamul Tribe.
  As of March 29, 2009

As of December 28, 2008(Unaudited)Face value of note (principal and interest)

$50,492

$49,171($34,226 principal and $16,266 interest)

($33,567 principal and $15,604 interest)Estimated months until casino opens (weighted average of three
    scenarios)

64 months

64 monthsProjected interest rate until casino opens

6.66%

6.45%Projected interest rate during the loan repayment term

9.05%

8.32%Discount rate(*)

24.50%

23.50%Repayment terms of note

120 months

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

50%

50%     (*)
    
    During the first quarter of 2009, Lakes increased the discount
    rate to 24.50% for this project, as continued issues in the
    credit markets and general economic uncertainties resulted in a
    higher required yield on the notes. The Jamul Casino project has
    been delayed due to various political and regulatory issues.
    Significant risk exists related to this project moving forward
    to completion, and Lakes has recorded significant impairment
    charges against its 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 and Lakes currently
    expects to continue its involvement with this project. 10




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
   Iowa Tribe.
  As of March 29, 2009

As of December 28, 2008(Unaudited)Face value of note (principal and interest)

$5,873
    ($4,871 principal and $1,002 interest)

$5,660
    ($4,734 principal and $926 interest)Estimated months until casino opens

24 months

20 monthsProjected interest rate until casino opens

5.77%

5.93%Projected interest rate during the loan repayment term

6.84%

6.24%Discount rate(*)

19.50%

18.50%Repayment terms of note

24 months

24 monthsProbability rate of casino opening

85%

85%     (*)
    
    During the first quarter of 2009, Lakes increased the discount
    rate to 19.50% for this project, as continued issues in the
    credit markets and general economic uncertainties resulted in a
    higher required yield on the notes.  6.
    Other
    long-term assets related to Indian casino projects  Intangible assets.
    ShinglePokagon


Springs


JamulBand


Tribe


Tribe


Other


TotalBalance, December 30, 2007

$
30,775


$
21,923


$
11,972


$
1,240


$
65,910Allocation of advances






426



2,116



78



2,620Amortization


(6,715
)


(133
)






(8
)


(6,856
)Impairment losses










(14,088
)






(14,088
)Balance, December 28, 2008


24,060



22,216







1,310



47,586Allocation of advances










569



56



625Amortization


(1,678
)


(798
)






(3
)


(2,479
)Impairment losses(*)










(569
)






(569
)Balance, March 29, 2009 (unaudited)

$
22,382


$
21,418


$



$
1,363


$
45,163     (*)
    
    Due to continued uncertainty surrounding the Jamul Casino
    project, Lakes recognized an impairment of $0.6 million
    related to the intangible assets associated with this project
    during the first quarter of 2009.  Land held for development.
 11




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
      Other. Form 10-Q,
  7.
    Debt  Credit Line. 30-day
  Non-revolving line of credit.
  8.
    Contract
    acquisition costs payable      9.
    Share-based
    compensation    Stock options.
 12




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
      Three Months EndedMarch 29,

March 30,Key valuation assumptions:

2009

2008Expected dividend yield






Risk-free interest rate


2.52
%


3.66
%Expected term (in years)


7.69 years



8.18 yearsExpected volatility


79.82
%


48.77
%Forfeiture rate






Weighted-average grant-date fair value per share

$
2.46


$
3.35   
    Expected dividend yield  As the Company does not pay
    dividends, the dividend rate variable in the Black-Scholes model
    is zero.
    Risk free interest rate  The risk free interest rate
    assumption is based on the U.S. Treasury yield curve in
    effect at the time of grant and with maturities consistent with
    the expected term of options.
    Expected term (in years)  The expected term of
    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 March 29,
    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.
    Forfeiture rate  As share-based compensation expense
    recognized is based on awards ultimately expected to vest,
    expense for grants beginning upon adoption of Statement of
    Financial Accounting Standards (SFAS) No. 123R,
    Share-Based Payment-Revised 2004(SFAS 123R) will be reduced for estimated
    forfeitures. SFAS 123R requires forfeitures to be estimated
    at the time of grant and revised, if necessary, in subsequent
    periods if actual forfeitures differ from those estimates. The
    Company has reviewed the historical forfeitures which are
    minimal, and as such will amortize the grants to the end of the
    vesting period and will adjust for forfeitures at the end of the
    term. 13




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
     Number of common sharesWeighted-avg.Options





Available


exerciseoutstanding


Exercisable


for grant


price2009Balance at December 28, 2008


2,862,964



2,498,864



343,150


$
6.60Authorized














Granted(*)


337,000







(337,000
)


3.25Forfeited/cancelled/expired


(109,423
)






109,423



4.29Exercised


(91,041
)










3.80Balance at March 29, 2009


2,999,500



2,455,700



115,573


$
6.242008Balance at December 30, 2007


4,345,650



3,842,200



584,750


$
6.08Authorized














Granted


196,000







(196,000
)


5.73Forfeited/cancelled/expired














Exercised


(400,000
)










4.19Balance at March 30, 2008


4,141,650



3,798,200



388,750


$
6.25     (*)
    
    Includes 140,000 of restricted stock units granted during the
    first quarter of 2009.    Options outstanding at March 29, 2009Weighted-








Options exercisable at March 29, 2009Average





Aggregate








AggregateNumber


Remaining


Weighted-average


intrinsic


Number


Weighted-average


intrinsicRange of exercise prices

outstanding


contractual life


exercise price


value


exercisable


exercise price


valueRestricted stock units


140,000$  (3.25  3.63)


744,600



3.9 years


$
3.30


$




547,600


$
3.32


$
(3.64  5.45)


300,300



3.4 years



4.32







221,925



4.34



(5.46  7.26)


174,750



7.3 years



6.50







89,625



6.57



(7.27  9.08)


1,353,000



4.5 years



7.54







1,352,625



7.54



(9.09  10.90)


109,250



3.8 years



10.04







89,525



10.14



(10.91  12.71)


18,000



6.8 years



11.52







9,600



11.56



(12.72  14.53)


89,600



5.8 years



13.04







85,800



13.05



(14.54  16.34)


30,000



6.0 years



16.01







19,000



15.96



(16.35  16.84)


40,000



4.4 years



16.84







40,000



16.84



2,999,500



4.7 years


$
6.24


$




2,455,700


$
6.80


$
    14




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
      Restricted stock units.
  Weighted-averageRestricted


grant-stock units


date fair valueNon-vested shares at December 28, 2008





$
Granted


140,000



3.25Vested






Forfeited






Non-vested shares at March 29, 2009


140,000


$
3.25     10.
    Earnings
    (Loss) per share    11.
    Income
    Taxes      12.
    Contingencies  Louisiana Department of Revenue litigation tax
    matter.
 15




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##### Table of Contents



LAKES
    ENTERTAINMENT, INC. AND SUBSIDIARIES
  Notes to
    Unaudited Consolidated Financial
    Statements  (Continued)
    Red Hawk Casino. Form 10-Q
  Miscellaneous legal matters.
  13.
    Subsequent
    Events   16




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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 in New Buffalo
    Township, Michigan near Interstate 94. We began managing the
    Four Winds Casino Resort when it opened to the public on
    August 2, 2007. The Four Winds Casino Resort is located
    near the first Interstate 94 exit in southwestern Michigan and
    approximately 75 miles east of Chicago. The facility
    features approximately 3,000 slot machines, 72 table games, a
    12-table poker room, a 165-room hotel, five restaurants, three
    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 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 2,100 electronic gaming
    devices, 75 table games, six restaurants, six bars, retail
    space, a parking garage, a child care facility and arcade. To
    provide direct freeway access to the Red Hawk Casino, an
    affiliate of the Shingle Springs Tribe constructed a dedicated
    inter-change on U.S. Highway 50.
    We are managing the Cimarron Casino for the Iowa Tribe in
    Perkins, Oklahoma, under a seven-year management contract, which
    commenced in 2006. The Cimarron Casino features approximately
    375 electronic gaming machines.
    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 significantly
    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 and we currently
    expect to continue our involvement with this project.
    We have a consulting agreement and management contract with the
    Iowa Tribe in connection with developing, equipping and managing
    a casino resort which is planned to be built near Route 66 and
    approximately 25 miles northeast of Oklahoma City, Oklahoma
    (the Ioway Casino Resort). 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. In January 2009, the BIA granted approval on
    the purchase of a
    60-acre
    allotment. The remaining transactions for the final
    14 acres still require BIA approval. Lakes submitted its
    management contract with the Iowa Tribe for the Ioway Casino
    Resort to the NIGC for review in 2005. The NIGC has stated that
    it is waiting for the BIA to approve all land leases before it
    will issue an opinion on the management contract.     17




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##### Table of Contents



Results
    of Operations
  Form 10-Q
  Three
    months ended March 29, 2009 compared to the three months
    ended March 30, 2008
  Revenues.
  Selling, general and administrative
    expenses.
  Ohio initiative costs.
  Impairment losses.
  Amortization of intangible assets related to Indian casino
    projects.
  Net unrealized losses on notes receivable.
  Other income (expense), net.
  Income Taxes. Form 10-Q).
 18




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##### Table of Contents



Liquidity
    and Capital Resources
          30-day
      and/or
 19




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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 years(Unaudited)Remaining casino development commitment(1)Jamul Tribe(2)

$



$



$



$



$
Shingle Springs Tribe(3)


















Pokagon Band(4)


6.7



1.8



3.7



1.2



Iowa Tribe  Ioway Casino project(5)


















Non-revolving line of credit(6)


2.0







2.0







Lakes operating lease(7)


4.5



0.4



0.9



0.9



2.3$
13.2


$
2.2


$
6.6


$
2.1


$
2.3     (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) 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 March 29,
    2009.(2)
    
    Effective March 30, 2006, we entered into a development
    financing and services agreement with the Jamul Tribe. As part
    of the agreement, we will use our best efforts to obtain
    financing of up to $350 million from which advances will be
    made to the Jamul Tribe to pay for the design and construction
    of a casino project. The current plan is for a smaller scale
    gaming facility that will become a solely class II
    electronic gaming device facility which will not require a
    compact with the State of California. The agreement between
    Lakes and the Jamul Tribe is being modified to reflect the new
    economics of the revised casino plan but is not currently
    believed to require approval by the State of California or the
    NIGC.(3)
    
    We may be required to pay Mr. Kean and Mr. Argovitz
    under their respective agreements with Lakes resulting from the
    opening of the Red Hawk Casino on December 17, 2008. See
    also the discussion below included under the caption
    Description of each Indian casino project and evaluation
    of critical milestones  Shingle Springs Tribe.(4)
    
    We are obligated to pay approximately $11 million to an
    unrelated third party as part of an agreement associated with us
    obtaining the management contract with the Pokagon Band, payable
    in quarterly installments over five years. We are also obligated
    to pay approximately $3 million over 24 months to a
    separate, unrelated third party on behalf of the Pokagon Band in
    accordance with the management contract. (Note 8 to the
    unaudited consolidated financial statements in Part I,
    Item 1 of this Quarterly Report on
    Form 10-Q).(5)
    
    We have agreed to make advances to the Iowa Tribe subject to a
    project budget to be agreed upon by us and the Iowa Tribe and
    certain other conditions. The development loan will be for
    preliminary development costs under 20




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##### Table of Contents



the Ioway project budget. We have also agreed to use reasonable
    efforts to assist the Iowa Tribe in obtaining permanent
    financing for any projects developed under the Iowa consulting
    agreement.(6)
    
    During 2008, Lakes closed on a two-year interest only
    $8.0 million non-revolving line of credit (the Loan
    Agreement) with First State Bank. Amounts borrowed under
    the Loan Agreement bear interest at 8.95%. See Note 7 to
    the unaudited consolidated financial statements in Part I,
    Item 1 of this Quarterly Report on
    Form 10-Q).(7)
    
    Lakes leases an airplane under a non-cancelable operating lease
    that expires on March 1, 2018 and has certain other
    operating leases.  Critical
    Accounting Policies and Estimates
      Revenue recognition.
  Share-based compensation expense.
  Income taxes. Accounting for
    Income Taxes.
  Accounting for
    Uncertainty in 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? 21




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##### Table of Contents




    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.  96-12, Recognition of Interest Income and Balance Sheet
    Classification of Structured Notes
    Accounting by Creditors for Impairment of a
    Loan (SFAS 114).
  Intangible assets related to Indian casino
    projects. Goodwill and Other Intangible Assets 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3).
 22




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##### Table of Contents



FSP 142-3,
  Land held for development.
  Other.
      March 29, 2009ShinglePokagon


Springs


Jamul


IowaBand


Tribe


Tribe


Tribe


Other


Total(Unaudited)Notes receivable(*)

$



$
45,321


$
7,202


$
3,509


$



$
56,032Intangible assets related to Indian casino projects


22,382



21,418







1,363







45,163Land held for development










960



850







1,810Other


60



767



761



370



2,719



4,677$
22,442


$
67,506


$
8,923


$
6,092


$
2,719


$
107,682   December 28, 2008ShinglePokagon


Springs


Jamul


IowaBand


Tribe


Tribe


Tribe


Other


TotalNotes receivable(*)

$



$
44,002


$
7,116


$
3,587


$



$
54,705Intangible assets related to Indian casino projects


24,060



22,216







1,310







47,586Land held for development










960



850







1,810Other


60



767



847



388



2,719



4,781$
24,120


$
66,985


$
8,923


$
6,135


$
2,719


$
108,882     (*)
    
    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
    SFAS 114. Approximately $7.1 million and
    $9.2 million of the notes receivable from the Shingle
    Springs Tribe are due within the next 23




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##### Table of Contents



fiscal year and have been classified as a current asset in the
    unaudited consolidated balance sheet as of March 29, 2009
    and December 28, 2008, respectively.      Jamul
    Tribe:
  As of March 29, 2009

As of December 28, 2008(Unaudited)Face value of note (principal and interest)

$50,492

$49,171($34,226 principal and $16,266 interest)

($33,567 principal and $15,604 interest)Estimated months until casino opens (weighted-average of three
    scenarios)

64 months

64 monthsProjected interest rate until casino opens

6.66%

6.45%Projected interest rate during the loan repayment term

9.05%

8.32%Discount rate(*)

24.50%

23.50%Repayment terms of note

120 months

120 monthsProbability rate of casino opening (weighting off our scenarios)

50%

50%     (*)
    
    During the first quarter of 2009, Lakes increased the discount
    rate to 24.50% for this project, as continued issues in the
    credit markets and general economic uncertainties resulted in a
    higher required yield on the notes. See also the discussion
    below included under the caption Description of each
    Indian casino project and evaluation of critical
    milestones  Jamul Tribe. 24




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##### Table of Contents



Iowa
    Tribe:
  As of March 29, 2009

As of December 28, 2008(Unaudited)Face value of note (principal and interest)

$5,873

$5,660($4,871 principal and $1,002 interest)

($4,734 principal and $926 interest)Estimated months until casino opens

24 months

20 monthsProjected interest rate until casino opens

5.77%

5.93%Projected interest rate during the loan repayment term

6.84%

6.24%Discount rate(*)

19.50%

18.50%Repayment terms of note

24 months

24 monthsProbability rate of casino opening

85%

85%     (*)
    
    During the first quarter of 2009, Lakes increased the discount
    rate to 19.50% for this project, as continued issues in the
    credit markets and general economic uncertainties resulted in a
    higher required yield on the notes. See also the discussion
    below included under the caption Description of each
    Indian casino project and evaluation of critical
    milestones  Iowa Tribe.    Estimated fair


Sensitivity analysisvalue notes


5% less


One year





5% increased


One yearreceivable


probable


delay


Both


probability


sooner


Both(In thousands)Jamul Tribe

$
7,202


$
6,514


$
6,228


$
5,638


$
7,890


$
8,336


$
9,137Iowa Tribe


3,509



3,307



3,115



2,932



3,721



3,964



4,197$
10,711


$
9,821


$
9,343


$
8,570


$
11,611


$
12,300


$
13,335       As of March 29, 2009Jamul


IowaAdvances Principal Balance

Tribe


Tribe


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

$
33,276


$
3,769


$
37,045Note receivable, land(b)


950



1,102



2,052$
34,226


$
4,871


$
39,097   25




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##### Table of Contents



As of December 28, 2008Jamul


IowaAdvances Principal Balance

Tribe


Tribe


TotalNote receivable, pre-construction(a)

$
32,617


$
3,746


$
36,363Note receivable, land(b)


950



988



1,938$
33,567


$
4,734


$
38,301     (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.    March 29,


December 28,Jamul Tribe

2009


2008(Unaudited)Monthly stipend

$
5,842


$
5,687Construction


2,213



2,102Legal


4,672



4,598Environmental


2,292



2,292Design


14,608



14,324Gaming license


952



917Lobbyist


2,697



2,697$
33,276


$
32,617   March 29,


December 28,Iowa Tribe

2009


2008(Unaudited)Construction

$
253


$
253Legal


256



252Design


3,235



3,216Gaming license


25



25$
3,769


$
3,746   Evaluation
    of impairment related to our long-term assets related to Indian
    casino projects, excluding the notes receivable, which are
    valued at fair value:
     26




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##### Table of Contents



Jamul
    Tribe
    March 28,

December 28,2009

2008(Unaudited)No. of Class II electronic gaming devices


1,000



1,000No. of Table games


20



20No. of Poker tables


5



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

$
172


$
172Win/Table game/day  1st year

$
471


$
471Win/Poker table/day  1st year

$
312


$
312     Iowa
    Tribe
  March 28,

December 28,2009

2008(Unaudited)No. of Class II electronic gaming devices


1,000



1,200No. of Table games


25



20No. of Poker tables






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

$
160


$
232Win/Table game/day  1st year

$
450


$
1,171Win/Poker table/day  1st year

$



$
529   Description
    of each Indian casino project and evaluation of critical
    milestones:
  Pokagon
    Band
  Business arrangement.
 27




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##### Table of Contents



Shingle
    Springs Tribe
  Business arrangement.
      Jamul
    Tribe
     28




---



##### Table of Contents



Business arrangement. six-acre
       29




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##### Table of Contents



Our evaluation of the critical milestones.
  Critical milestone


March 29, 2009


December 28, 2008


December 30, 2007Federal recognition of the tribe


Yes


Yes


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


Yes


Yes


YesUsable land placed in trust by Federal government


Not necessary, as the land is reservation land.


Not necessary, as land is reservation land.


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


N/A


N/A


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


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


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


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.


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.


No, see discussion above regarding the federal complaint filed
    by the Jamul Tribe against CalTrans.


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.


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


Yes. The current plan is for the gaming facility to be a solely
    class II electronic gaming device facility. The agreement
    between Lakes and the Jamul Tribe will also be modified to
    reflect the new economics of the revised casino plan but 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.


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
 30




---



##### Table of Contents



Iowa
    Tribe
  Business arrangement.
    Ioway Casino Resort.
    Cimarron Casino.
  Arrangement with Consultant.
 31




---



##### Table of Contents



Our evaluation of the Ioway Casino Resort.
  Critical milestone


March 29, 2009


December 28, 2008


December 30, 2007Federal recognition of the tribe


Yes


Yes


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


Yes, the Iowa Tribe has members that own a 74-acre allotment on
    US Route 66 midway between the access points to Warwick and
    Chandler, Oklahoma from I44. The Iowa Tribe has obtained the
    rights to purchase and/or lease substantially all of this parcel
    from the allottees. Approval from the BIA was obtained in
    January 2009 for 60 acres of the 74-acre allotment. The
    remaining 14 acres still require BIA approval. An
    additional 100 acres of fee land has been optioned to
    provide the necessary site area for the beginning of the project
    before the casino resort development can begin.


Yes, the Iowa Tribe has members that own a 74-acre allotment on
    US Route 66 midway between the access points to Warwick and
    Chandler, Oklahoma from I44. The Iowa Tribe has obtained the
    rights to purchase and/or lease substantially all of this parcel
    from the allottees. Approval from the BIA was obtained in
    January 2009 for 60 acres of the 74-acre allotment. The
    remaining 14 acres still require BIA approval. An
    additional 100 acres of fee land has been optioned to
    provide the necessary site area for the beginning of the project
    before the casino resort development can begin.


Yes, the Iowa Tribe has members that own a 74-acre allotment on
    US Route 66 midway between the access points to Warwick and
    Chandler, Oklahoma from I44. The Iowa Tribe has obtained the
    rights to purchase and/or lease substantially all of this parcel
    from the allottees. An additional 100 acres of fee land has
    been optioned to provide the necessary site area for the
    beginning of the project before the casino resort development
    can begin.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. An EA
    was prepared and on September 12, 2007, the NIGC issued their
    notice of approval of a Finding Of No Significant Impact
    (FONSI) for the EA. The 30 day public comment
    period for the FONSI ended on November 2, 2007 without any
    comment from the public. The expiration of the comment period
    now allows the NIGC to approve the management contract. The NIGC
    has stated that it is waiting for the BIA to approve all land
    leases before it will issue an opinion on the management
    contract. There have been no comments on the consulting
    agreement from the NIGC and is therefore considered operative.


No, submitted to the NIGC for review on April 22, 2005. An EA
    was prepared and on September 12, 2007, the NIGC issued their
    notice of approval of a Finding Of No Significant Impact
    (FONSI) for the EA. The 30 day public comment
    period for the FONSI ended on November 2, 2007 without any
    comment from the public. The expiration of the comment period
    now allows the NIGC to approve the management contract. The NIGC
    has stated that it is waiting for the BIA to approve all land
    leases before it will issue an opinion on the management
    contract. There have been no comments on the consulting
    agreement from the NIGC and is therefore considered operative.


No, submitted to the NIGC for review on April 22, 2005. An EA
    was prepared and on September 12, 2007, the NIGC issued their
    notice of approval of a Finding Of No Significant Impact
    (FONSI) for the EA. The 30 day public comment
    period for the FONSI ended on November 2, 2007 without any
    comment from the public. The expiration of the comment period
    now allows the NIGC to approve the management contract. The NIGC
    has stated that it is waiting for the BIA to approve all land
    leases before it will issue an opinion on the management
    contract. There have been no comments on the consulting
    agreement from the NIGC and is therefore considered operative.Resolution of all litigation and legal obstacles


None at this time.


None at this time.


None at this time.Financing for construction


No, however, preliminary discussions with lending institutions
    have occurred.


No, however, preliminary discussions with lending institutions
    have occurred.


No, however, 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.  32




---



##### Table of Contents



Our evaluation and conclusion regarding the above critical
    milestones and progress.
  60-acre
  Recently
    issued accounting pronouncements
  157-4, Determining Fair Value When the Volume and Level of Activity
    for the Asset or Liability Have Significantly Decreased and
    Identifying Transactions That Are Not Orderly (FSP 157-4), FSP 157-4
  107-1 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1), FSP 107-1 FAS 115-2 FAS 124-2, Recognition and Presentation of Other-Than-Temporary
    Impairments FAS 115-2 FAS 124-2), FAS 115-2 FAS 124-2
  Seasonality
    Regulation
    and taxes
     33




---



##### Table of Contents



Off-balance
    sheet arrangements
    Private
    Securities Litigation Reform Act
  Form 10-Q
    Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      30-day
   34




---



##### Table of Contents



and/or
    ITEM 4.
    CONTROLS
    AND PROCEDURES  Rules 13a-15(e)
   35




---



##### Table of Contents



Part II.
    Other Information  ITEM 1.
    LEGAL
    PROCEEDINGS    ITEM 1A.
    RISK
    FACTORS  Form 10-K,
  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  36




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##### Table of Contents



SIGNATURES
  Form 10-Q
  LAKES ENTERTAINMENT, INC. Registrant
  /s/  LYLE
    BERMAN       /s/  TIMOTHY
    J. COPE       37