<PAGE>   1
                                                                   EXHIBIT 10.78


                               SECURITY AGREEMENT


         THIS AGREEMENT is made as of the 29th day of July, 1999, by and between
         Lakes Shingle Springs, Inc., a Minnesota corporation (the "Secured
         Party"), located at 130 Cheshire Lane, Minnetonka, Minnesota 55305 and
         LAKES KAR-Shingle Springs, L.L.C., a Delaware limited liability company
         (the "Debtor") located at 130 Cheshire Lane, Minnetonka, Minnesota
         55305.

                              W I T N E S S E T H:

         WHEREAS, Lakes Gaming, Inc and Kean Argovitz Resorts- Shingle Springs,
LLC have entered into a Letter Agreement, a copy of which is attached hereto as
Exhibit 1 (the "Letter Agreement"), which sets forth terms under which those
parties agreed to form Debtor for the purpose of developing and operating a
gaming facility and related facilities ( the "Enterprise") for the Shingle
Springs Band of Miwok Indians (the "Tribe");

         WHEREAS, under Section 5 and Section 6 of the Letter Agreement Lakes
Gaming, Inc. agreed that upon Debtor's formation it would make certain advances
to Debtor identified in the Letter Agreement as the "Development Loan" and
"Equity Advance";

         WHEREAS, Lakes Shingle Springs, Inc. has agreed to assume all of Lakes
Gaming Inc.'s rights and obligations under the Letter Agreement and Lakes Gaming
Inc. Guarantys all duties and obligations of Lakes Shingle Springs, Inc. and
enters into that certain Guaranty Agreement of even date herewith;

         WHEREAS, Debtor desires to receive the Development Loan and Equity
Advance from Lakes Shingle Springs, Inc. pursuant to the terms of the Letter
Agreement;

         WHEREAS, Debtor understands that it is a condition precedent to Lakes
Shingle Springs, Inc. making the Development Loan and Equity Advance to Debtor
that Debtor agree to secure repayment of the Development Loan and Equity Advance
by granting to Lakes Shingle Springs, Inc. a security interest in all of
Debtor's assets as hereinafter provided;

         NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:

         1.       Definitions. When used herein, the following terms shall have
                  the following meanings:

                  (a) "Accounts" means any and all rights to payment now owned
or possessed or hereafter acquired by the Debtor for goods sold or leased or for
services rendered, whether or

<PAGE>   2

not they have been earned by performance and all other property of the Debtor
now or hereafter classified as accounts under the California UCC.

                  (b) "California UCC" means the Uniform Commercial Code as
adopted in the State of California.

                  (c) "Chattel Paper" means a writing or writings which evidence
both a monetary obligation and a security interest in or a lease of specific
goods as well as all other property of the Debtor now or hereafter classified as
chattel paper under the California UCC. When a transaction is evidenced both by
such a security agreement or a lease and by an instrument or series of
instruments, the group of writings taken together constitutes Chattel Paper.

                  (d) "Collateral" means all assets of the Debtor including
Accounts, Inventory, Equipment, Chattel Paper, Instruments, and General
Intangibles of the Debtor, whether now owned or possessed or hereafter acquired
by the Debtor, all additions and accessories thereto, cash and cash equivalents
and all proceeds, including insurance proceeds, from the sale or other
disposition of such assets. Without limitation of the foregoing, Collateral
includes all rights to payment under the Interim Promissory Note (the "Interim
Promissory Note") and the Security and Reimbursement Agreement executed, or to
be executed, pursuant to the Development Agreement dated June 11, 1999 between
Kean Argovitz Resorts-Shingle Springs, L.L.C. and the Shingle Springs Band of
Miwok Indians (the "Tribe").

                  (e) "Equipment" means all goods, machinery, furniture,
furnishings, fixtures, tools, supplies, motor vehicles and all other property
used or useful in the business of the Debtor, now or hereafter owned or
possessed or hereafter acquired by the Debtor, together with all additions,
accessions and replacements thereto and all other property of the Debtor now or
hereafter classified as equipment under the California UCC.

                  (f) "Event of Default" has the meaning given to that term in
Section 5.

                  (g) "General Intangibles" means any personal property
(including, without limitation, things in action, contracts, patent rights,
trade secrets, copyrights, licenses, know how and all trade names and
trademarks) other than Inventory, Equipment, Accounts, Chattel Paper,
Instruments and money.

                  (h) "Instrument" means a negotiable instrument or any other
writing which evidences a right to the payment of money and is not itself a
security agreement or lease and is of a type which is in the ordinary course of
business transferred by delivery with any necessary endorsement or assignment.

                  (i) "Inventory" means all raw materials, work in process,
finished products, materials used or consumed in the Debtor's business and all
property of every kind and description (including, without limitation, software
and computer programs of every kind)

<PAGE>   3

intended for sale, lease or license or to be furnished under contracts of
service in the Debtor's business, now owned or possessed or at any time
hereafter acquired by the Debtor, including such property repossessed by or
returned to the Debtor, and all other property of the Debtor now or hereafter
classified as inventory under the California UCC.

                  (j) "Loan Documents" means this Agreement, one or more
Promissory Notes executed by and between Secured Party and Debtor evidencing any
advance of funds under the Development Loan or Equity Advance, UCC Financing
Statements and the other agreements or documents executed by Debtor hereunder or
thereunder.

                  (k) "Obligations" means

                           (1) Any and all indebtedness or liabilities, of
                  whatever kind, nature and description, now existing or
                  hereafter arising, of the Debtor to the Secured Party, whether
                  direct or indirect, absolute or contingent, joint or several,
                  arising out of or relating to the Development Loan or the
                  Equity Advance, the Note or any evidence of indebtedness
                  relating to the Equity Advance, and any other indebtedness or
                  liabilities of the Debtor to the Secured Party; and

                           (2) Any and all liabilities of the Debtor to the
                  Secured Party incurred under this Agreement.

                  (l) "Permitted Encumbrances" means

                           (1) Liens imposed by law, which were incurred in the
                  ordinary course of business, and (x) which do not in the
                  aggregate materially detract from the value of the property or
                  assets to which such liens attach or materially impair the use
                  thereof in the operation of the business of the Debtor or (y)
                  which are being contested in good faith by appropriate
                  proceedings which have the effect of preventing the forfeiture
                  or sale of the property or assets subject to any such lien;
                  and

                           (2) Liens created pursuant to this Agreement.

                  (m) "Person" means any individual, partnership, joint venture,
firm, corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.

                  (n) "Subsidiary" means a corporation in which the Debtor owns,
directly or indirectly through one or more subsidiaries, a majority of shares
ordinarily, in the absence of contingencies, having the right to elect at least
a majority of the members of the board of directors.

                  (o) "UCC" means the Uniform Commercial Code as adopted in the
relevant

<PAGE>   4

jurisdiction and any other applicable commercial code in such jurisdiction.

         Unless otherwise defined herein, all other capitalized terms contained
in this Agreement shall have the meanings provided by the Letter Agreement and
the California UCC.

         2. Security Interest. To secure the performance by the Debtor of its
Obligations, the Debtor hereby grants to the Secured Party a first priority
security interest in and to the Collateral.

         3. Debtor's Representations and Warranties. The Debtor hereby
represents and warrants, which representations and warranties will survive the
execution and delivery of this Agreement, to the Secured Party as follows:

                  (a) Ownership of Collateral. Except for Permitted
Encumbrances, the Debtor is the owner of all of the Collateral free and clear of
any lien, security interest, encumbrance or other right, title or interest of
any Person.

                  (b) Necessary Filings. All filings, registrations and
recordings necessary or appropriate to create, preserve, protect and perfect the
security interests granted by the Debtor to the Secured Party pursuant to this
Agreement have been accomplished and the security interests granted to the
Secured Party pursuant to this Agreement in and to the Collateral constitute
perfected security interests therein which are, subject to the Permitted
Encumbrances, superior and prior to the rights of all other persons therein.

                  (c) Financing Statements. There is no financing statement (or
similar statement or instrument of registration under the law of any
jurisdiction) now on file (other than those filed in connection with this
Agreement or the Permitted Encumbrances) or registered in any public office
covering or purporting to cover any interest of any kind in the Collateral.

                  (d) Binding Agreement. Debtor has the corporate power to
execute, deliver and perform its obligations under the Loan Documents. Debtor
has duly executed and delivered this Agreement and the Note, and this Agreement
and the Notes each constitutes its legal, valid and binding obligation
enforceable against Debtor in accordance with their respective terms.

                  (e) No Conflicts. Neither the execution, delivery or
performance by Debtor of this Agreement or any of the other Loan Documents, nor
compliance by it with the terms and provisions hereof or thereof, (i) will
contravene any provision of any law, statute, rule or regulation or any order,
writ, injunction or decree of any court or governmental instrumentality or (ii)
will conflict or be inconsistent with or result in any breach of any of the
terms, covenants, conditions or provisions of, or constitute a default under, or
result in the creation or imposition of (or the obligation to create or impose)
any lien upon any of its property or assets pursuant to the terms of any
indenture, mortgage, deed of trust, credit agreement, security agreement or any
other agreement, contract or instrument to which it is a party or by which it or
any of its property or assets is bound or to which it may be subject.

<PAGE>   5

                  (f) No Consents. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the date of this Agreement), or
exemption by, any governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in connection with (i)
Debtor's execution, delivery and performance of the Loan Documents or (ii) the
legality, validity, binding effect or enforceability of the Loan Documents.

         4. Debtor's Covenants. The Debtor covenants and agrees that until all
Obligations have been paid in full:

                  (a) Sale and Use of Collateral. The Debtor will not sell,
offer to sell, assign, lease, rent, or otherwise transfer or dispose of any
Collateral.

                  (b) Liens. Except as permitted under the terms of this
Agreement, the Debtor will not (i) create, incur, assume or permit to exist any
lien, security interest or encumbrance on any existing or future item of
Collateral, other than Permitted Encumbrances and interests in favor of the
Secured Party as contemplated hereunder, or (ii) enter into or assume any
agreement containing a negative pledge which would require a sharing of an
interest in the Collateral or which prohibits or limits the grant of any such
interest.

                  (c) Financing Statements. The Debtor will not execute or
authorize to be filed (except in connection with this Agreement or the Permitted
Encumbrances) or registered in any public office any financing statement (or
similar statement or instrument of registration under the law of any
jurisdiction) covering or purporting to cover any interest of any kind in the
Collateral.

                  (d) Defense of Collateral. The Debtor will defend the
Collateral and proceeds thereof against all claims and demands of all Persons
other than the Secured Party at any time claiming any interest therein and will
save and hold the Secured Parries harmless from all such claims and demands.

                  (e) Execution of Other Documents. The Debtor will, at its own
expense, make, execute, endorse, acknowledge, file and deliver to the Secured
Party from time to time such financing statements, lists, descriptions and
designations of its Collateral, conveyances, transfer endorsements, powers of
attorney, certificates, reports and other assurances or instruments and take
such further steps relating to the Collateral and other property or rights
covered by the security interests hereby granted, which the Secured Party may
reasonably request, in a form satisfactory to the Secured Party to create,
preserve, protect and perfect the security interests and the priority thereof
granted by the Debtor to the Secured Party in and to the Collateral. The Debtor
will pay any applicable filing fees and related expenses. The Debtor authorizes
the Secured Party at any time and from time to time to file any financing
statements related to the Collateral without the signature of the Debtor and to
file a copy of this Agreement as a financing statement.

         5. Events of Default. The Debtor shall be in default under this
Agreement and an

<PAGE>   6

event of default (an "Event of Default") shall exist hereunder upon the
occurrence of any of the following events or conditions:

                  (a) The Debtor shall be in default in the payment or
performance of any Obligations.

                  (b) The Debtor shall be in default pursuant to the terms of
any Note(s) executed in connection with either the Development Loan or the
Equity Advance.

                  (c) The Debtor shall breach any warranty, representation,
covenant or agreement made herein.

                  (d) The occurrence of any liquidation, dissolution,
termination of existence, insolvency (failure to pay its debts as they mature or
the failure to maintain its assets value in excess of its liabilities), business
failure, appointment of a trustee, custodian or receiver of any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any bankruptcy or insolvency proceeding by or against the Debtor or any action
taken by the Debtor for the purpose of effecting any of the foregoing.

                  (e) One or more judgments or decrees are entered against the
Debtor involving in the aggregate for the Debtor a liability, not paid or fully
covered by insurance (other than the insurance policy' reasonable deductible),
of $10,000 or more, and all such judgments or decrees have not been vacated,
discharged, stayed or bonded pending appeal within 60 days after the entry
thereof.

                  (f) A notice of lien, levy or assessment, other than a
Permitted Encumbrances is filed of record with respect to all or any part of the
Collateral by any party, including the United States or any department, agency
or instrumentally thereof or by any state, county, municipal or other
governmental agency.

                  (g) There is an event of default under the Interim Promissory
Note executed by the Tribe.

         6. Remedies. (a) Generally. Upon the occurrence of any such Event of
Default and the expiration of any applicable cure period, any and all
Obligations secured hereby shall, at the option of the Secured Party, become
immediately due and payable without notice, presentation, demand for payment or
protest, all of which are expressly waived by the Debtor, and the Secured Party,
at its option, shall have, in addition to any other rights and remedies which
the Secured Party may have hereunder, any and all of the rights and remedies of
a secured creditor under the California UCC and the UCC in the state where the
Collateral is located. Without limiting the generality of the foregoing, the
Secured Party shall have the following rights, remedies and obligations:

                           (1) The Secured Party shall be entitled to take
         possession of, hold,

<PAGE>   7

         maintain, preserve and prepare the Collateral for sale until it is
         disposed of, or may propose to retain the Collateral, subject to the
         Debtor's right of redemption in satisfaction of the Debtor's
         obligations as provided in the California UCC and the UCC.

                           (2) The Secured Party may require the Debtor to
         assemble the Collateral and make it available to the Secured Party for
         possession at a place or places to be designated by the Secured Party.

                           (3) Unless the Collateral is perishable or threatens
         to decline speedily in value or is of a type customarily sold on a
         recognized market, the Secured Party will give the Debtor at least five
         business days notice of the time and place of any public sale thereof
         or of the time after which any private sale or other intended
         disposition thereof is to be made. The requirements of reasonable
         notice shall be met if such notice is mailed, postage prepaid, to the
         Debtor at its address specified in accordance with Section 14 at least
         five business days before the time of the sale or disposition.

                           (4) Any and all expenses of the Secured Party
         incurred in the taking, holding, preparing for sale and selling of the
         Collateral, including the Secured Party's reasonable attorneys fees and
         legal expenses, shall become additional Obligations of the Debtor,
         payable on demand and secured by the Collateral.

                           (5) The Secured Party may buy at any public sale and,
         if the Collateral is of a type customarily sold on a recognized market
         or is of a type which is subject to widely distributed, standard price
         quotations, the Secured Party may buy at private sale. The net proceeds
         realized upon any such disposition of the Collateral, after deduction
         for the expenses of retaking, holding, preparing for sale or lease,
         selling, leasing and the like, and the reasonable attorneys fees and
         legal expenses incurred by the Secured Party in connection therewith,
         shall be applied in satisfaction of the Obligations. The Secured Party
         will account to the Debtor for any surplus realized on such disposition
         and the Debtor shall remain liable for any deficiency.

                           (6) The remedies of the Secured Party hereunder are
         cumulative and the exercise of any one or more of the remedies provided
         for herein or under the California UCC or any other UCC shall not be
         construed as a waiver of any of the other remedies of the Secured
         Party, so long as any part of the Debtor's obligations secured hereby
         shall remain unsatisfied.

                  (b) Maintenance of Collateral Accounts. At the request of the
Secured Party upon the occurrence of an Event of Default, the Debtor agrees to
deliver to the Secured Party, or, at the Secured Party's option, to deposit in
one or more special collateral accounts maintained for the Secured Party by any
bank reasonably satisfactory to the Secured Party, all collections on General
Intangibles, Chattel Paper and other rights to payment constituting Collateral,
and all other cash proceeds of Collateral, immediately upon receipt thereof, in
the form received, except for the Debtor's endorsement when necessary. Amounts
deposited in a collateral account shall

<PAGE>   8

not bear interest and shall not be subject to withdrawal by the Debtor, except
after full payment and discharge of all Obligations.

         7. Indemnities.

                  (a) General Indemnity. The Debtor agrees to indemnity, pay and
hold the Secured Party and its officers, directors, employees. agents, and
affiliates (collectively, the "Indemnitees") harmless from and against any and
all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or
nature whatever (including, without limitation. the fees and disbursements of
counsel for such Indemnitees in connection with any investigative,
administrative or judicial proceeding commenced or threatened, whether or not
such Indemnitees are designated parties thereto) that may be imposed on,
incurred by, or asserted against the Indemnitees, in any manner relating to or
arising out of the Agreement (the "Indemnified Liabilities"); provided, however,
that the Debtor shall have no obligation to an Indemnitee hereunder with respect
to Indemnified Liabilities arising from the negligence or willful misconduct of
that Indemnitee.

                  (b) Liens. Without limiting the generality of the foregoing,
the Debtor agrees to pay or reimburse the Secured Party for any and all fees,
costs and expenses of any kind or nature whatsoever (including, without
limitation, fees and disbursements of counsel) incurred in connection with the
creation, preservation or protection of the Secured Party's liens on, and
security interest in, the Collateral, including, without limitation, all fees
and taxes in connection with the recording or filing of instruments and
documents in public offices, payment or discharge of any taxes (excluding income
or similar taxes) or liens upon or in respect of the Collateral, premiums for
insurance with respect to the Collateral and all other fees, costs and expenses
in connection with protecting, maintaining or preserving the Collateral and the
Secured Party's interest therein, whether through judicial proceedings or
otherwise, or in defending or prosecuting any actions, suits or proceedings
arising out of or relating to the Collateral.

                  (c) Unenforceability. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in this Section may be unenforceable
because it is vocative of any law or public policy, the debtor shall contribute
the maximum portion that it is permitted to pay and satisfy under applicable law
to the payment and satisfaction of all Indemnified Liabilities incurred by the
Indemnitees or any of them.

                  (d) Indemnity Obligation Secured by Collateral. Any amounts
paid by any Indemnitee hereunder as to which such Indemnitee has the right to
reimbursement shall constitute Obligations secured by the Collateral.

                  (c) Survival. The provisions of this Section shall survive the
termination of this Agreement and the discharge of the Debtor's other
obligations hereunder.

         8. Waiver. No delay an the part of the Secured Party in the exercise of
any right, power or remedy shall operate as a waiver thereof, nor shall any
single or partial exercise by the Secured Party of any right, power or remedy
preclude the further exercise thereof, or the exercise

<PAGE>   9

of any other right, power or remedy.

         9. Benefit. This Agreement shall be binding upon, and inure to the
benefit of, the Debtor and the Secured Party and their respective successors and
assigns; provided, however, that the Debtor may not assign its rights or
obligations hereunder or in connection herewith or any interest herein
(voluntarily, by operation of law or otherwise) without the prior written
consent of the Secured Party. The Secured Party may assign their rights and
obligations under this Agreement to the same extent as they may assign their
rights and obligations under the Note, in which event, upon notice thereof by
the Secured Party to the Debtor, the assignee shall have, to the extent of such
assignment (unless otherwise provided therein), the same rights and benefits as
it would have if it were a secured party hereunder and shall be deemed a secured
party for all purposes of this Agreement. Except as provided in this Section,
this Agreement shall not be construed so as to confer any right or benefit upon
any Person other than the parties to this Agreement and their respective
successors and assigns.

         10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, and for all purposes shall
be construed in accordance with the laws of said state, without regard to
principles of conflicts of law, except for the perfection and enforcement of
security interests and liens in other jurisdictions, which shall be governed by
the laws of those jurisdictions.

         11. Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be ineffective or
invalid, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions or this Agreement.

         12. Headings. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

         13. Amendment. This Agreement embodies the entire agreement and
undertaking between the Secured Party and the Debtor and supersedes all prior
agreements and understandings between the Secured Party and the Debtor relating
to the subject matter hereof. The terms of this Agreement may not he modified or
amended except by an agreement in writing signed by the parties hereto or their
assignees.

         14. Notices. All notices, requests and other communications to any
party hereto shall be in writing (including telegram, telecopier, telex or
similar writing) and shall be given to such party, addressed to it at its
address or telecopier or telex number as set forth on the signature page hereof
or such other address or telecopier or telex number as such party may hereafter
specify for the purpose of notice to the other party. Each such notice, request
or communication shall be effective (a) if given by telex or telecopy, when such
telex or telecopy is transmitted to the telex or telecopy number specified
above, (b) if given by mail, three business days after such

<PAGE>   10

communication is deposited in the United States mails with first class postage
prepaid, addressed as aforesaid, or (c) if given by any other means, when
delivered at the address specified herein.

         15. Effectiveness/Counterparts. This Agreement shall be effective upon
its signing by the Debtor and may be signed in counterparts by the Debtor and
the Secured Party, the counterparts together constituting the Agreement. Copies
of this Agreement may be filed by the Secured Party in the appropriate officers
in each jurisdiction where the Collateral is located to perfect the Secured
Party's security interest.

         16. Submission to Jurisdiction. Debtor hereby irrevocably submits to
the non-exclusive jurisdiction of any California state or federal court sitting
in California over any action or proceeding arising out of or relating to this
Agreement, the Note or any other Loan Document, and hereby irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in such California state or federal court. Debtor hereby irrevocably
waives, to the fullest extent permitted by law, any objection it may now or
hereafter have to the laying of venue in any such action or proceeding in any
such court as well as any right it may now or hereafter have, to remove any such
action or proceeding, once commenced, to another court on the grounds of forum
non convenient or otherwise.

         IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the date first written above.

Secured Party:                            LAKES SHINGLE SPRINGS, INC.

                                          130 Cheshire Lane
                                          Minnetonka, Minnesota
                                          Telephone No. (612) 449-7030
                                          Telecopy No. (612)  449-7064

                                          By: /s/ Timothy Cope
                                             ----------------------------
                                          Its: Executive Vice President
                                              ---------------------------

Debtor:                                   LAKES KAR-Shingle Springs, L.L.C.

                                          130 Cheshire Lane
                                          Minnetonka, Minnesota
                                          Telephone No. (612) 449-7030
                                          Telecopy No. (612) 449-7064

                                          By: /s/ Kevin M. Kean
                                             ----------------------------
                                          Its:   President
                                              ---------------------------