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                                                                     EXHIBIT 4.2

                            LAKES ENTERTAINMENT, INC.
                         1998 DIRECTOR STOCK OPTION PLAN
                                  (as amended)

      1.    PURPOSE. The purpose of the Lakes Entertainment, Inc. 1998 Director
Stock Option Plan (the "PLAN") is to advance the interests of Lakes
Entertainment, Inc. (the "COMPANY") and its shareholders by encouraging
increased share ownership by members of the Board of Directors of the Company
(the "BOARD") who are not employees of the Company or any of its subsidiaries,
in order to promote long-term shareholder value through continuing ownership of
the Company's Common Stock.

      2.    ADMINISTRATION. The plan shall be administered by the Board. The
Board shall have all the powers vested in it by the terms of the Plan, such
powers to include authority (within the limitations described herein) to
prescribe the form of the agreement embodying awards of nonqualified stock
options made under the Plan ("OPTIONS"). The Board shall, subject to the
provisions of the Plan, grant Options under the Plan and shall have the power to
construe the Plan, to determine all questions arising thereunder and to adopt
and amend such rules and regulations for the administration of the Plan as it
may deem desirable. Any decisions of the Board in the administration of the
Plan, as described herein, shall be final and conclusive. The Board may act only
by a majority of its members in office, except that the members thereof may
authorize any one or more of their number or any other officer of the Company to
execute and deliver documents on behalf of the Board. No member of the Board
shall be liable for anything done or omitted to be done by him or by any other
member of the Board in connection with the Plan, except for his own willful
misconduct or as expressly provided by statute.

      3.    PARTICIPATION. Each member of the Board who is a non-employee
director (a "NON-EMPLOYEE DIRECTOR") as such term is defined in Rule 16b-3 of
the Securities Exchange Act of 1934, as amended, shall be eligible to receive an
Option in accordance with Paragraph 5 below.

      4.    AWARDS UNDER THE PLAN.

      (a)   Awards under the Plan shall include only Options, which are rights
to purchase common stock of the Company having a par value of $0.01 per share
(the "COMMON STOCK"). Such Options are subject to the terms, conditions and
restrictions specified in Paragraph 5 below.

      (b)   There may be issued under the Plan pursuant to the exercise of
Options an aggregate of not more than 500,000 shares of Common Stock, subject to
adjustment as provided in Paragraph 6 below. If any Option is canceled,
terminates or expires unexercised, in whole or in part, any shares of Common
Stock that would otherwise have been issuable pursuant thereto will be available
for issuance under new Options.

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      (c)   A Non-Employee Director to whom an Option is granted (and any person
succeeding to such a Non-Employee Director's rights pursuant to the Plan) shall
have no rights as a shareholder with respect to any Common Stock issuable
pursuant to any such Option until the date of the issuance of a stock
certificate to him for such shares. Except as provided in Paragraph 6 below, no
adjustment shall be made for dividends, distributions or other rights (whether
ordinary or extraordinary, and whether in cash, securities or other property)
for which the record date is prior to the date such stock certificate is issued.

      5.    NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan shall
be evidenced by an agreement in such form as the Board shall prescribe from time
to time in accordance with the Plan and shall comply with the following terms
and conditions:

      (a)   The Option exercise price shall be the "Fair Market Value" (as
herein defined) of the Common Stock subject to such Option on the date the
Option is granted. Fair Market Value shall be the closing sales price of a share
of Common Stock on the date of grant as reported on the Nasdaq National Market
(the "MARKET") or, if the Market is closed on that date, on the last preceding
date on which the Market was open for trading, but in no event will such Option
exercise price be less than the par value of the Common Stock.

      (b)   The Option shall not be transferable by the optionee otherwise than
by will or the laws of descent and distribution, and shall be exercisable during
his lifetime only by him.

      (c)   Options shall not be exercisable:

            (i)   before the expiration of one year from the date they are
      granted and after the expiration of ten years from the date they are
      granted, and may be exercised during such period as follows: twenty (20%)
      of the total number of shares covered by the Option shall become
      exercisable each year beginning with the first anniversary of the date
      they are granted, provided, however, that the Board of Directors can
      approve an accelerated vesting schedule based upon the length of time that
      a Non-Employee Director has served in such capacity prior to the adoption
      of this Plan. Notwithstanding anything to the contrary herein, an Option
      shall automatically become immediately exercisable in full (i) in the
      event of the death of a Non-Employee Director; (ii) upon the removal of
      the Non-Employee Director from the Board without cause; (iii) in the event
      the Non-Employee Director is not re-nominated or re-elected as a Director;
      (iv) in the event of a "change in control" of the Company, as defined in
      any existing agreements between the Company and its senior officers; or
      (v) in the event the Non-Employee Director voluntarily resigns from the
      Board, if a majority of the Board (excluding the Non-Employee Director)
      agrees to accelerate the vesting of the Option and determines in good
      faith that such acceleration is in the best interest of the Company;

            (ii)  unless payment in full is made for the shares of Common Stock
      being acquired thereunder at the time of exercise. Such payment shall be
      made in United States dollars by cash or check, or in lieu thereof, by
      tendering to the Company Common Stock owned by the person exercising the
      Option and having a Fair Market Value equal to the

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      cash exercise price applicable to such Option, or by a combination of
      United States dollars and Common Stock as aforesaid; and

            (iii) unless the person exercising the Option has been at all times
      during the period beginning with the date of grant of the Option and
      ending on the date of such exercise, a Non-Employee Director of the
      Company, except that

                  (A)   if such person shall cease to be such a Non-Employee
            Director for reasons other than death, while holding an Option that
            has not expired and has not been fully exercised, such person may,
            at any time within three years of the date he ceased to be a
            Non-Employee Director (but in no event after the Option has expired
            under the provisions of subparagraph 5(c)(i) above), exercise the
            Option with respect to any Common Stock as to which he could have
            exercised on the date he ceased to be such a Non-Employee Director;
            or

                  (B)   if any person to whom an Option has been granted shall
            die holding an Option that has not expired and has not been fully
            exercised, his executors, administrators, heirs or distributees, as
            the case may be, may, at any time within one year after the date of
            such death (but in no event after the Option has expired under the
            provisions of subparagraph 5(c)(i) above), exercise the Option with
            respect to any shares subject to the Option.

      (d)   Each Non-Employee Director shall receive an Option to purchase
25,000 shares of Common Stock upon becoming a director of the Company, which
number of shares shall be subject to adjustment as provided in paragraph 6
below.

      (e)   In addition to the initial option grants provided for in paragraph
5(d) above, non-employee directors and former non-employee directors may be
granted, at the discretion of the Board, additional options to purchase Common
Stock of Company. Such options shall contain such terms and provisions as the
Board determines at the time of the grant.

      6.    DILUTION AND OTHER ADJUSTMENT. In the event of any change in the
outstanding Common Stock of the Company by reason of any stock split, stock
dividend, split-up, split-off, spin-off, recapitalization, merger,
consolidation, rights offering, reorganization, combination or exchange of
shares, a sale by the Company of all or part of its assets, any distribution to
shareholders other than a normal cash dividend, or other extraordinary or
unusual event, the number or kind of shares that may be issued under the Plan
pursuant to subparagraph 4(b) above, the number of shares subject to Options
granted to Non-Employee Directors pursuant to subparagraph 5(d) above and the
number or kind of shares subject to, and the Option price per share under, all
outstanding Options shall be automatically adjusted so that the proportionate
interest of the participant shall be maintained as before the occurrence of such
event; such adjustment in outstanding Options shall be made without change in
the total Option exercise price applicable to the unexercised portion of such
Options and with a corresponding adjustment in the Option exercise price per
share, and such adjustment shall be conclusive and binding for all purposes of
the Plan.

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      7.    MISCELLANEOUS PROVISIONS.

      (a)   Except as expressly provided for in the Plan, no Non-Employee
Director or other person shall have any claim or right to be granted an Option
under the Plan. Neither the Plan nor any action taken hereunder shall be
construed as giving any Non-Employee Director any right to be retained in the
service of the Company.

      (b)   A participant's rights and interest under the Plan may not be
assigned or transferred, hypothecated or encumbered in whole or in part either
directly or by operation of law or otherwise (except in the event of a
participant's death, by will or the laws of descent and distribution),
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner, and no such right or
interest of any participant in the Plan shall be subject to any obligation or
liability of such participant.

      (c)   Common Stock shall not be issued hereunder unless counsel for the
Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign securities, securities exchange and
other applicable laws and requirements.

      (d)   It shall be a condition to the obligation of the Company to issue
Common Stock upon exercise of an Option, that the participant (or any
beneficiary or person entitled to act under subparagraph 5(c)(iii)(B) above) pay
to the Company, upon its demand, such amount as may be requested by the Company
for the purpose of satisfying any liability to withhold federal, state, local or
foreign income or other taxes. If the amount requested is not paid, the Company
may refuse to issue such Common Stock.

      (e)   The expenses of the Plan shall be borne by the Company.

      (f)   By accepting any Option or other benefit under the Plan, each
participant and each person claiming under or through him shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent to, any
action taken under the Plan by the Company or the Board.

      (g)   The appropriate officers of the Company shall cause to be filed any
reports, returns or other information regarding Options hereunder or any Common
Stock issued pursuant hereto as may be required by Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, or any other applicable statute,
rule or regulation.

      8.    AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any time and
from time to time by the Board as the Board shall deem advisable; provided,
however, that no amendment shall become effective without shareholder approval
if such shareholder approval is required by law, rule or regulation, and in no
event shall the Plan be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act or the rules thereunder. No amendment of
the Plan shall materially and adversely affect any right of any participant with
respect to any Option theretofore granted without such participant's written
consent.

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      9.    TERMINATION. This Plan shall terminate upon the earlier of the
following dates or events to occur upon the adoption of a resolution of the
Board terminating the Plan or ten years from the date the Plan is initially
approved and adopted by the shareholders of the Company. No termination of the
Plan shall materially and adversely affect any of the rights or obligations of
any person, without his consent, under any Option theretofore granted under the
Plan.

      10.   EFFECTIVE DATE OF PLAN. The Plan will become effective as of the
effective date of the "Grand Distribution" as such term is defined with
reference to the Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Park Place Entertainment Corporation, Gaming Acquisition
Corporation, Lakes Gaming, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998 and Distribution Agreement by and between Grand Casinos, Inc. and Lakes
Gaming, Inc.

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