UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~________________~~

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~July 1,~~September 30, 2012
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-1913991
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)
130 Cheshire Lane, Suite 101	55305
Minnetonka, Minnesota	(Zip Code)
(Address of principal executive offices)

(952) 449-9092

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of ~~August 6,~~November 5, 2012, there were 26,440,936 shares of Common Stock, $0.01 par value per share, outstanding.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

		Page of Form ~~10-Q~~10-Q
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of ~~July 1,~~September 30, 2012 (unaudited) and January 1, 2012	3
	Unaudited Consolidated Statements of ~~Earnings~~Operations for the three and ~~six~~nine months ended ~~July 1,~~September 30, 2012 and ~~July 3,~~October 2, 2011	4
	Unaudited Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~July 1,~~September 30, 2012 and ~~July 3,~~October 2, 2011	5
	Notes to Unaudited Consolidated Financial Statements	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14 17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21 25
ITEM 4.	CONTROLS AND PROCEDURES	21 25
	PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	22 26
ITEM 1A.	RISK FACTORS	22 26
ITEM 6.	EXHIBITS	23 26

Financial Information

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)
July 1, 2012 January 1, 2012
Assets
Current assets:
Cash and cash equivalents $ 35,211 $ 38,557
Accounts receivable 24 117
Current portion of notes receivable from Indian casino projects - 1,076
Deposits 2,100 2,250
Income taxes receivable 5,487 3,472
Other 1,169 1,013
Total current assets 43,991 46,485
Property and equipment 8,224 8,170
Accumulated depreciation (3,212 ) (3,107 )
Property and equipment, net 5,012 5,063

Long-term assets related to Indian casino projects:
Notes and interest receivable, net of current portion and allowance 36,052 34,160
Intangible assets, net of accumulated amortization of $1.6 and $11.7 million 3,656 4,184
Land held for development - 960
Management fees receivable and other 5,509 7,315
Total long-term assets related to Indian casino projects 45,217 46,619
Other assets:
Investment in unconsolidated investee 20,161 15,706
Land held for development 1,130 170
Land held for sale 1,729 1,729
Other 201 228
Total other assets 23,221 17,833
Total assets $ 117,441 $ 116,000

Liabilities and shareholders' equity
Current liabilities:
Current portion of contract acquisition costs payable, net of $0.8 and $0.9 million discount $ 1,155 $ 1,055
Accounts payable 266 354
Accrued payroll and related 431 534
Other accrued expenses 613 400
Total current liabilities 2,465 2,343

Long-term contract acquisition costs payable, net of current portion and $1.0 and $1.4 million discount 3,964 4,568

Total liabilities 6,429 6,911

Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares; 26,441 and 26,406 common shares issued and outstanding
264 264
Additional paid-in capital 203,780 203,747
Deficit (93,032 ) (95,272 )
Total Lakes Entertainment, Inc. shareholders' equity 111,012 108,739
Noncontrolling interest - 350
Total equity 111,012 109,089
Total liabilities and shareholders' equity $ 117,441 $ 116,000

	(Unaudited) September 30, 2012			January 1, 2012
Assets
Current assets:
Cash and cash equivalents	$	28,793		$	38,557
Current portion of notes receivable from Indian casino projects		-			1,076
Deposits		-			2,250
Income taxes receivable		5,466			3,472
Other		1,851			1,130
Total current assets		36,110			46,485
Property and equipment		14,992			8,170
Accumulated depreciation		(3,376	)		(3,107	)
Property and equipment, net		11,616			5,063

Long-term assets related to Indian casino projects:
Notes and interest receivable, net of current portion and allowance		37,103			34,160
Intangible assets, net of accumulated amortization of $1.9 and $11.7 million		3,391			4,184
Land held for development		-			960
Management fees receivable and other		4,764			7,315
Total long-term assets related to Indian casino projects		45,258			46,619
Other assets:
Investment in unconsolidated investee		20,161			15,706
License fee		2,100			-
Land held for development		1,130			170
Land held for sale		405			1,729
Other		756			228
Total other assets		24,552			17,833
Total assets	$	117,536		$	116,000

Liabilities and shareholders' equity
Current liabilities:
Current portion of contract acquisition costs payable, net of $0.8 and $0.9 million discount	$	1,209		$	1,055
Accounts payable		660			354
Accrued payroll and related		748			534
Other accrued expenses		1,164			400
Total current liabilities		3,781			2,343

Long-term contract acquisition costs payable, net of current portion and $0.8 and $1.4 million discount		3,640			4,568

Total liabilities		7,421			6,911

Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares; 26,441 and 26,406 common shares issued and outstanding		264			264
Additional paid-in capital		203,874			203,747
Deficit		(94,023	)		(95,272	)
Total Lakes Entertainment, Inc. shareholders' equity		110,115			108,739
Noncontrolling interest		-			350
Total equity		110,115			109,089
Total liabilities and shareholders' equity	$	117,536		$	116,000

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Revenues:
Management fees	$	1,885		$	222		$	6,331		$	34,142
Room		763			-			763			-
Food and beverage		618			-			618			-
Other operating		358			-			358			-
License fees and other		15			28			51			158
Total revenues		3,639			250			8,121			34,300

Costs and expenses:
Room		146			-			146			-
Food and beverage		471			-			471			-
Other operating		216			-			216			-
Selling, general and administrative		2,846			2,537			7,054			7,479
Loss on convertible note receivable		-			4,000			-			4,000
Impairments and other losses		1,986			1,102			4,314			2,611
Amortization of intangible assets related to operating casinos		264			264			792			11,424
Depreciation and amortization		229			128			335			240
Total costs and expenses		6,158			8,031			13,328			25,754

Net unrealized losses on notes receivable		-			(2,709	)		-			(2,091	)

Earnings (loss) from operations		(2,519	)		(10,490	)		(5,207	)		6,455

Other income (expense):
Interest income		1,614			1,439			4,775			4,420
Interest expense		(228	)		(273	)		(722	)		(915	)
Other		55			119			113			359
Total other income, net		1,441			1,285			4,166			3,864

Earnings (loss) before income taxes		(1,078	)		(9,205	)		(1,041	)		10,319
Income tax benefit		(87	)		(9,149	)		(2,229	)		(490	)
Net earnings (loss) including noncontrolling interest		(991	)		(56	)		1,188			10,809
Net loss attributable to noncontrolling interests		-			18			61			18

Net earnings (loss) attributable to Lakes Entertainment, Inc.	$	(991	)	$	(38	)	$	1,249		$	10,827

Weighted-average common shares outstanding
Basic		26,441			26,406			26,438			26,402
Dilutive effect of restricted stock units		-			-			-			25
Diluted		26,441			26,406			26,438			26,427
Earnings (loss) per share
Basic	$	(0.04	)	$	0.00		$	0.05		$	0.41
Diluted	$	(0.04	)	$	0.00		$	0.05		$	0.41

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of ~~Earnings~~Cash Flows

(In ~~thousands, except per share data)~~thousands)

Three Months Ended Six Months Ended
July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011
Revenues:
Management fees $ 2,503 $ 28,085 $ 4,446 $ 33,920
License fees and other 16 72 36 130
Total revenues 2,519 28,157 4,482 34,050

Costs and expenses:
Selling, general and administrative 1,905 2,286 4,208 4,942
Impairments and other losses 1,399 635 2,328 1,509
Amortization of intangible assets related to operating casinos 265 9,217 528 11,160
Depreciation 51 55 106 112
Total costs and expenses 3,620 12,193 7,170 17,723

Net unrealized gains (losses) on notes receivable - (124 ) - 618

Earnings (loss) from operations (1,101 ) 15,840 (2,688 ) 16,945

Other income (expense):
Interest income 1,578 1,513 3,161 2,981
Interest expense (242 ) (321 ) (494 ) (642 )
Other 44 120 58 240
Total other income, net 1,380 1,312 2,725 2,579

Earnings before income taxes 279 17,152 37 19,524
Income taxes (benefit) (145 ) 7,667 (2,142 ) 8,659
Net earnings including noncontrolling interest 424 9,485 2,179 10,865
Net loss attributable to noncontrolling interests 1 - 61 -

Net earnings attributable to Lakes Entertainment, Inc. $ 425 $ 9,485 $ 2,240 $ 10,865

Weighted-average common shares outstanding
Basic 26,441 26,406 26,436 26,404
Dilutive effect of restricted stock units - 25 - 25
Diluted 26,441 26,431 26,436 26,429
Gain (loss) per share
Basic $ 0.02 $ 0.36 $ 0.08 $ 0.41
Diluted $ 0.02 $ 0.36 $ 0.08 $ 0.41

	Nine Months Ended
	September 30, 2012			October 2, 2011
OPERATING ACTIVITIES:
Net earnings including noncontrolling interest	$	1,188		$	10,809
Adjustments to reconcile net earnings including noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization		335			240
Amortization of debt issuance costs and imputed interest on contract acquisition costs		722			915
Accretion of interest and additions to long-term interest receivable		(2,944	)		(2,203	)
Amortization of intangible assets related to operating casinos		792			11,424
Share-based compensation		296			467
Net unrealized losses on notes receivable		-			2,091
Loss on convertible note receivable		-			4,000
Impairments and other losses		4,314			2,611
Changes in operating assets and liabilities:
Accounts receivable		(306	)		142
Management fees receivable		2,361			-
Deposits		150			(2,100	)
Deferred income taxes		-			(338	)
Other current assets		(152	)		(72	)
Income taxes payable / receivable		(1,994	)		(9,075	)
Accounts payable and accrued expenses		1,364			(158	)
Net cash provided by operating activities		6,126			18,753

INVESTING ACTIVITIES:
Acquisition of the Rocky Gap Resort		(6,834	)		-
Payments to acquire investment in unconsolidated investee		(4,455	)		(12,214	)
Changes in management fees receivable and other		190			264
Purchase of property and equipment		(1,872	)		(236	)
Advance on convertible note receivable		-			(4,000	)
Advances on notes receivable		(2,069	)		(5,445	)
Collection on notes receivable		1,076			3,971
Changes in other assets		25			(4	)
Net cash used in investing activities		(13,939	)		(17,664	)

FINANCING ACTIVITIES:
Purchase of non-controlling interest		(590	)		-
Noncontrolling interest member contributions		139			205
Contract acquisition costs payable		(1,500	)		(2,231	)
Net cash used in financing activities		(1,951	)		(2,026	)

Net decrease in cash and cash equivalents		(9,764	)		(937	)

Cash and cash equivalents - beginning of period		38,557			45,233

Cash and cash equivalents - end of period	$	28,793		$	44,296

SUPPLEMENTAL CASH FLOW INFORMATION:
Noncash investing activities:
Capital expenditures in accounts payable and accrued expenses	$	405		$	-

See notes to consolidated financial statements.

~~LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES~~

~~Unaudited Consolidated Statements of Cash Flows~~

~~(In thousands)~~

Six Months Ended
July 1, 2012 July 3, 2011
OPERATING ACTIVITIES:
Net earnings including noncontrolling interest $ 2,179 $ 10,865
Adjustments to reconcile net earnings including noncontrolling interest to net cash provided by operating activities:

Depreciation 106 112
Amortization of debt issuance costs and imputed interest on contract acquisition costs 494 642
Accretion of interest and additions to long-term interest receivable (1,893 ) (1,464 )
Amortization of intangible assets related to operating casinos 528 11,160
Share-based compensation 202 360
Net unrealized gains on notes receivable - (618 )
Impairments and other losses 2,328 1,509
Changes in operating assets and liabilities:
  Accounts receivable 93 152
  Management fees receivable 1,692 204
  Deposits 150 -
  Other current assets (57 ) (326 )
  Income taxes receivable (2,015 ) (277 )
  Accounts payable and accrued expenses 326 (306 )
Net cash provided by operating activities 4,133 22,013

INVESTING ACTIVITIES:
Payments to acquire investment in unconsolidated investee (4,456 ) (4,862 )
Change in management fees receivable and other 114 198
Purchase of property and equipment (615 ) (7 )
Advances on notes receivable (2,069 ) (3,616 )
Collection on notes receivable 1,076 3,165
Change in other assets (78 ) (7 )
Net cash used in investing activities (6,028 ) (5,129 )

FINANCING ACTIVITIES:
Purchase of non-controlling interest (590 ) -
Noncontrolling interest member contributions 139 -
Contract acquisition costs payable (1,000 ) (1,731 )
Net cash used in financing activities (1,451 ) (1,731 )

Net increase (decrease) in cash and cash equivalents (3,346 ) 15,153

Cash and cash equivalents - beginning of period 38,557 45,233

Cash and cash equivalents - end of period $ 35,211 $ 60,386

~~See notes to consolidated financial statements.~~

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

The unaudited consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation, and ~~Subsidiaries~~subsidiaries (individually and collectively “Lakes” or the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed and/or omitted. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-K, for the year ended January 1, 2012, previously filed with the SEC, from which the balance sheet information as of that date is derived. In the opinion of management, all adjustments considered necessary for a fair presentation have been included (consisting of normal recurring adjustments). The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

All material intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated investees, which are less than 20% owned and the Company does not have the ability to significantly influence the operating or financial decisions of the entity, are accounted for under the cost method. See note 7, Investment in Unconsolidated Investee.

2. New Accounting Standards

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) (“ASU 2011-04”). ASU 2011-04 includes updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. Lakes adopted ASU 2011-04 on January 2, 2012, which did not have a material impact on its consolidated financial statements.

3. Termination of Jamul Development Agreement

Lakes initially entered into an agreement with the Jamul Indian Village (the “Jamul Tribe”) during 1999 to develop and manage a casino on behalf of the Jamul Tribe on the Jamul Tribe’s existing reservation approximately 20 miles east of San Diego, California (the “Jamul Casino Project”). Due to Lakes’ corporate strategic objectives, Lakes determined that it would not continue to move forward with the Jamul Casino Project and terminated the agreement with the Jamul Tribe in March 2012.

~~Pursuant to the agreement with the Jamul Tribe, Lakes was required to make advances of approximately $1.3 million subsequent to the date of the termination of the agreement.~~ As of ~~July 1, 2012, all of the required advances had been made to the Jamul Tribe. As of July 1,~~September 30, 2012, Lakes had advanced approximately ~~$59.2~~$59.4 million including accrued interest to the Jamul Tribe related to casino development efforts. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Jamul Tribe, and such casino’s furnishings and equipment.

As a result of the termination of Lakes’ agreement with the Jamul Tribe, Lakes estimated the fair value of the notes receivable from the Jamul Tribe to be zero as of ~~July 1,~~September 30, 2012 and January 1, 2012.

4. Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort

Background

In September 2011, Lakes entered into a joint venture with Addy Entertainment, LLC (“Addy”) to form Evitts Resort, LLC (“Evitts”). In April 2012, a video lottery operation license (“License”) for the Rocky Gap Lodge & Golf Resort in Allegany County, Maryland (the ~~“Resort”~~“Rocky Gap Resort”) was awarded to Evitts by the State of Maryland Video Lottery Facility Location Commission (the “Commission”). In May 2012, Lakes paid Addy $0.6 million for its ownership interest in Evitts, giving Lakes full ownership of Evitts. Total assets related to Evitts were approximately $2.1 million and $2.3 million as of July 1, 2012 and January 1, 2012, respectively, which consisted primarily of a $2.1 million license fee deposit paid by Evitts to the Commission during the third quarter of 2011. Included in impairments and other losses during the three months ended July 1, 2012 were $0.6 million related to costs associated with development plans for the Resort which were subsequently revised.

Acquisition of the Rocky Gap Resort and Application of the Acquisition Method of Accounting

On August 3, 2012, ~~Evitts~~Lakes acquired the assets of the Rocky Gap Resort pursuant to an asset purchase agreement (the “Purchase Agreement”) for $6.8 ~~million.~~million paid with cash on hand. As provided in the Purchase Agreement, Lakes acquired substantially all of the assets used in the Rocky Gap Resort’s business, which is primarily the operation of a AAA Four Diamond ~~Award~~®Award® winning resort and includes a 215-room hotel, convention center, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland. This acquisition is consistent with Lakes’ strategy of developing, operating, and owning or managing casino resort properties. In connection with the closing of the acquisition of the Resort, Evitts entered into a 40 year operating ground lease with the Maryland Department of Natural Resources for approximately 268 acres in the Rocky Gap State Park on which the Resort is situated.

The Company plans to renovate the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, a bar and a food outlet. The total cost of the project is currently expected to be ~~between $25 million and $30~~approximately $30.0 million. Lakes currently plans to fund the entire cost of the project with ~~Company~~ cash on hand, but may obtain third-party financing for a portion of the project costs.

The financial position of the Rocky Gap Resort is included in the Company’s consolidated balance sheet as of September 30, 2012 and its results of operations for the period from August 3, 2012 through September 30, 2012 are included in the Company’s consolidated statements of operations and cash flows for the three and nine months ended September 30, 2012. From the date of the acquisition of the Rocky Gap Resort on August 3, 2012 through September 30, 2012, Lakes recorded $1.7 million in revenue and no net earnings from the Rocky Gap Resort’s operations. The operating results of the Rocky Gap Resort are included in the Company’s consolidated statements of operations in the non-Indian casino projects segment. Room revenue is recognized at the time of occupancy and food and beverage and retail revenue is recognized at the time of sale.

Total assets related to Evitts were approximately $10.6 million as of September 30, 2012 which consisted primarily of property, equipment and intangible assets related to the acquisition of the Rocky Gap Resort and a $2.1 million license fee deposit paid by Evitts to the Commission during the third quarter of 2011. Total assets related to Evitts were approximately $2.3 million as of January 1, 2012 which consisted primarily of the license fee deposit. Included in impairments and other losses during the three and nine months ended September 30, 2012 were $0.7 million and $1.2 million, respectively, related to costs associated with development plans for the Rocky Gap Resort which were subsequently revised.

The acquisition ~~will be~~has been accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of the Rocky Gap Resort acquired in connection with the acquisition, based on their estimated fair values. The ~~Company has not included all~~allocation of the ~~required disclosures~~purchase price to the assets acquired and liabilities assumed is as follows (in thousands):

	Amount
Building	$	2,788
Site improvements		2,091
Furniture and equipment		1,294
Intangible assets		627
Inventories		126
Other assets		136
Current liabilities assumed		(228	)
Total purchase price	$	6,834

The amounts assigned to intangible assets by category are summarized in the table below (in thousands):

	Useful Life (years)		Amount Assigned
Advance bookings		1.4	$	179
Memberships		25		448
Total intangible assets			$	627

Advance bookings – Advance bookings are reservations that represent future cash flows the Company will enjoy when the guest visits the Rocky Gap Resort. These reservations have been “pre-sold” as of the acquisition date of August 3, 2012 and would not require future sales or marketing expenses to be incurred.

Memberships – Memberships provide access to the golf course and related amenities in exchange for the payment of dues. The portion of the Rocky Gap Resort’s income attributed to the possession of such membership contracts forms the basis of the intangible value.

Amortization expense related to the ~~third quarter~~advance bookings and memberships intangible assets for the period from August 3, 2012 through September 30, 2012 was approximately $0.1 million.

See note 14, Financial Instruments and Fair Value Measurements, for further discussion regarding the valuation of the acquired tangible and intangible assets.

Operating Ground Lease

In connection with the closing of the acquisition of the ~~assets~~Rocky Gap Resort, Evitts entered into a 40 year operating ground lease (the “Lease Agreement”) with the Maryland Department of Natural Resources (the “Maryland DNR”) for approximately 268 acres in the Rocky Gap State Park on which the Rocky Gap Resort is situated. The Lease Agreement contains an option to renew for 20 years after the initial 40-year term. Payments are due under the Lease Agreement according to the following terms:

From August 3, 2012 and until the casino opens for public play, rent in the form of surcharges is due and payable annually. These surcharges are billed to and collected from guests and are $3.00 per room, per night and $1.00 per round of golf (“Surcharge Revenue”), with a minimum annual payment of approximately $0.2 million.

From the date that the casino opens for public play through year nine of the Lease Agreement, rent in the amount of approximately $0.4 million is due annually, in addition to 0.9% of any gross operator share of gaming revenue (as defined in the Lease Agreement) in excess of approximately $0.3 million, and any Surcharge Revenue in excess of approximately $0.2 million.

From the beginning of year ten through the remaining term of the Lease Agreement, all Surcharge Revenue is due and payable, with a minimum annual payment of approximately $0.2 million, plus the greater of 0.9% of any gross operator share of gaming revenue or approximately $0.3 million, representing a minimum annual rent payment of approximately $0.5 million.

Unaudited Pro Forma Condensed Consolidated Financial Information

The following unaudited pro forma condensed consolidated financial results of operations for the three and nine months ended September 30, 2012 and October 2, 2011 are presented as if the acquisition had been completed at the beginning of each period presented:

	Three Months Ended				Nine Months Ended
	September 30, 2012		October 2, 2011		September 30, 2012			October 2, 2011
	(In thousands, except per-share data)
Pro forma total gross revenues	$	4,637	$	3,468	$	12,245		$	40,976
Pro forma net earnings (loss) attributable to Lakes Entertainment, Inc.		89		244		(1,041	)		10,433

Pro forma earnings (loss) per share:
Basic		0.00		0.01		(0.04	)		0.40
Diluted		0.00		0.01		(0.04	)		0.39

Weighted average common shares outstanding:
Basic		26,441		26,406		26,438			26,402
Diluted		26,441		26,406		26,438			26,427

These unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the ~~Resort as it was not practical to do so given~~results of operations that actually would have resulted had the ~~timing~~acquisition occurred on the first day of each fiscal period presented, or of future results of the ~~transaction~~consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the ~~filing date~~integration of ~~this Quarterly Report on Form 10-Q. As a result,~~ the ~~required disclosures will be included~~acquisition. The following adjustments have been made to the pro forma net earnings (loss) attributable to Lakes and pro forma earnings (loss) per share in the ~~footnotes filed with the Company’s Form 10-Q for the period ending September 30, 2012.~~table above:

Management and service fees paid by the Rocky Gap Resort to the previous management company have been excluded as the Rocky Gap Resort would not have incurred these costs if owned by Lakes.

Ground rent expense incurred by the Rocky Gap Resort has been adjusted to reflect the terms of the Lease Agreement that Lakes and the Maryland DNR entered into upon the acquisition of the Rocky Gap Resort.

Interest expense incurred by the Rocky Gap Resort has been excluded as Lakes did not assume the debt of the Rocky Gap Resort upon the acquisition of the property.

5. Long-Term Assets Related to Indian Casino Projects — Notes and Interest Receivable

The majority of the long-term assets related to Indian casino projects is in the form of notes and interest receivable due from the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”) pursuant to the Company’s development, financing, consulting and management agreement with the Shingle Springs Tribe for the Red Hawk Casino. The repayment terms of the notes are dependent upon the operating performance of the Red Hawk Casino. Repayment of the notes is required only if distributable profits are available from the operation of the Red Hawk Casino. In addition, repayment of the notes and the management fees are subordinated to certain other financial obligations of the Red Hawk Casino. The order of priority of payments from the Red Hawk Casino’s cash flows has been as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe; repayment of various debt with interest accrued thereon (including the Company’s pre-construction advances); management fees due to Lakes; other obligations, if any; and the remaining funds, if any, distributed to the Shingle Springs Tribe.

At January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired. Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment as of ~~July 1,~~September 30, 2012 and concluded that the notes receivable continue to be impaired. This determination was based on the continued ~~significant~~ economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. As a result of these factors, Lakes determined it was probable that substantial amounts due would not be repaid within the contract term. In order to assist the Red Hawk Casino in increasing cash levels, allowed payments of principal on the preconstruction advances made by Lakes, if any, are being deferred from March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. The notes and interest receivable carrying amounts at ~~July 1,~~September 30, 2012 and January 1, 2012 represent the present value of expected future cash flows.

While Lakes has concluded that it is probable that substantial amounts due from the Shingle Springs Tribe will not be repaid within the contract term, the Shingle Springs Tribe will remain legally obligated to repay any remaining amounts due to Lakes subsequent to the conclusion of the contract.

The management contract with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month for the duration of the contract, which expires in December 2015. Lakes is obligated to advance funds for these minimum guaranteed monthly payments when the casino operating results are not sufficient, and is repaid the advances in subsequent periods when operating results are sufficient. As of ~~July 1,~~September 30, 2012, no amount was outstanding under this obligation. Lakes collected payments of $1.1 million under this obligation during the ~~six~~nine months ended ~~July 1,~~September 30, 2012.

Information with respect to the notes and interest receivable from the Shingle Springs Tribe at ~~July 1,~~September 30, 2012 and January 1, 2012 is summarized in the following table (in thousands):

	September 30, 2012			January 1, 2012
Pre-construction advances	$	66,720		$	66,720
Minimum guarantee payment advances		—			1,076
Interest receivable		2,273			1,217
Unearned discount		(12,610	)		(13,659	)
Allowance for impaired notes receivable		(19,280	)		(20,118	)
Total notes and interest receivable, net of allowance		37,103			35,236
Less current portion of notes receivable		—			(1,076	)
Long-term notes and interest receivable, net of current portion and allowance	$	37,103		$	34,160

July 1, 2012 January 1, 2012
Pre-construction advances $ 66,720 $ 66,720
Minimum guarantee payment advances                                                                                     — 1,076
Interest receivable                                                                                     1,881 1,217
Unearned discount                                                                                     (12,969 ) (13,659 )
Allowance for impaired notes receivable                                                                                     (19,580 ) (20,118 )
  Total notes and interest receivable, net of allowance 36,052 35,236
     Less current portion of notes receivable — (1,076 )
Long-term notes and interest receivable, net of current portion and allowance $ 36,052 $ 34,160

Information with respect to the activity in the allowance for impaired notes receivable is summarized in the following table (in thousands):

2012
Allowance for impaired notes balance, January 1, 2012	$	20,118		$	20,118
Impairment charge on notes receivable		—			—
Recoveries		—			—
Charge-offs		—			—
Accretion included in interest income		(538	)		(838	)
Allowance for impaired notes balance, July 1, 2012	$	19,580
Allowance for impaired notes balance, September 30, 2012				$	19,280

2011
Allowance for impaired notes balance, January 2, 2011	$	20,975		$	20,975
Impairment charge on notes receivable		—			—
Recoveries		—			—
Charge-offs		—			—
Accretion included in interest income		(434	)		(629	)
Allowance for impaired notes balance, July 3, 2011	$	20,541
Allowance for impaired notes balance, October 2, 2011				$	20,346

6. Intangible and Other Assets Related to Indian Casino Projects

Intangible Assets

Intangible assets consist of costs associated with the acquisition of the development, financing and management contracts with the Shingle Springs Tribe for the Red Hawk Casino and are periodically evaluated for impairment. The intangible assets related to the Shingle Springs Tribe are being amortized through the end of the management contract, which expires in December 2015.

Information with respect to the intangible assets related to the Shingle Springs Tribe is summarized as follows (in thousands):

	Shingle Springs Tribe			Shingle Springs Tribe
Balances, January 1, 2012	$	4,184		$	4,184
Amortization		(528	)		(793	)
Impairment losses		—			—
Balances, July 1, 2012	$	3,656
Balances, September 30, 2012				$	3,391

Management Fees Receivable and Other

Management fees receivable and other include financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe of ~~$4.5~~$3.8 million and $6.0 million as of ~~July 1,~~September 30, 2012 and January 1, 2012, respectively. As defined in the management agreement with the Shingle Springs Tribe, payment of management fees, if any, are deferred when operating results are not sufficient and are paid in subsequent periods when operating results are sufficient. In addition, management fees receivable and other include amounts due from Mr. Kevin M. Kean (see note 10, Contract Acquisition Costs Payable). Financial instruments related to Mr. Kean have a carrying value of ~~$1.0~~$0.9 million and $1.3 million, net of current portion of $0.5 million as of ~~July 1,~~September 30, 2012 and January 1, 2012, respectively.

7. Investment in Unconsolidated Investee

The Company's cost method investment is evaluated, on at least a quarterly basis, for potential other-than-temporary impairment, or when an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. Lakes monitors this investment for impairment by considering all information available to the Company including the economic environment, market conditions, and operational performance and other specific factors relating to the business underlying the investment.

The fair value of the cost method investment is considered impracticable to estimate. The impracticability in developing such an estimate is due primarily to insufficient information necessary to prepare a valuation model to determine fair value. Lakes is not aware of any events or changes in circumstances that could have had a significant adverse effect on the fair value of this investment. As of ~~July 1,~~September 30, 2012 and January 1, 2012, no impairment was identified.

Lakes has the right, but not the obligation, to make additional investments up to 10% of equity required by Rock Ohio Ventures to develop its properties in Ohio in return for a corresponding equity interest in Rock Ohio Ventures (see note 15, Commitments and Contingencies).

10. Contract Acquisition Costs Payable

11. Share-Based Compensation

Three Months Ended

Six Months Ended

July 1,
2012

July 3,
2011

July 1,
2012

July 3,
2011

(In thousands)
Total cost of share-based payment plans
$ 94 $ 183 $ 202 $ 360

	Three Months Ended				Nine Months Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011

Total cost of share-based payment plans	$	94	$	107	$	296	$	467

The following table summarizes Lakes’ stock option activity during the ~~six~~nine months ended ~~July 1,~~September 30, 2012 and ~~July 3,~~October 2, 2011:

Balance at January 1, 2012

Forfeited/cancelled/expired

Balance at July 1, 2012

Balance at September 30, 2012

Balance at January 2, 2011

Forfeited/cancelled/expired

Balance at July 3, 2011 (*)

Balance at October 2, 2011 (*)

____________

(*) Options outstanding do not include 38,337 of outstanding restricted stock units.

As of ~~July 1,~~September 30, 2012, the options outstanding had a weighted average remaining contractual life of ~~7.3~~7.0 years, weighted average exercise price of $2.92 and aggregate intrinsic value of ~~$0.5~~$0.1 million. The options exercisable have a weighted average exercise price of $3.22, a weighted average remaining contractual life of ~~6.9~~6.7 years and aggregate intrinsic value of ~~$0.2~~less than $0.1 million as of ~~July 1,~~September 30, 2012.

There were no options exercised during the three and ~~six~~nine months ended ~~July 1,~~September 30, 2012 and ~~July 3,~~October 2, 2011. Lakes’ unrecognized share-based compensation expense related to stock options was approximately ~~$0.5~~$0.4 million as of ~~July 1,~~September 30, 2012, which is expected to be recognized over a weighted-average period of ~~1.5~~1.3 years.

Lakes issues new shares of common stock upon the exercise of options.

Restricted Stock Units

Grant-Date Fair Value

Balance at January 1, 2012

Balance at July 1, 2012

Balance at September 30, 2012

Balance at January 2, 2011

Balance at July 3, 2011

Balance at October 2, 2011

12. Earnings (Loss) per Share

14. Financial Instruments and Fair Value Measurements

●

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

●

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

●

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Balances Measured at Fair Value on a Nonrecurring Basis

Land held for development

	January 1, 2012
	Balance		Level 1		Level 2		Level 3
Assets
Land held for development	$	1,130		—		—	$	1,130
Land held for sale		1,729		—		—		1,729

Land held for development and land held for sale – Land held for development and land held for sale are measured ~~on a nonrecurring basis~~ using unobservable (Level 3) inputs that utilize the market approach technique and reflect management’s estimates about the assumptions that market participants would use in pricing the asset. Significant inputs include recent transactions of comparable properties as well as consideration of its highest and best use. See note 8, Land, for further discussion regarding the valuation of the land held for development and land held for sale.

Property and equipment related to the acquisition of the Rocky Gap Resort – Property and equipment acquired in connection with the Company’s acquisition of the Rocky Gap Resort during the third quarter of 2012 were measured using unobservable (Level 3) inputs. The fair value of the building, site improvements, and furniture, fixtures and equipment were calculated using the cost approach. The cost approach computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. The cost estimates for these assets were based on the guidelines provided by Marshall Valuation Services and Hotel Cost Estimating Guide 2012 published by HVS. See note 4, Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort, for further discussion regarding the acquisition of the Rocky Gap Resort’s property and equipment.

Intangible assets related to the acquisition of the Rocky Gap Resort – The identified intangible assets acquired in connection with the Company’s acquisition of the Rocky Gap Resort during the third quarter of 2012 were measured using unobservable (Level 3) inputs. The fair value of the advance bookings was calculated using the excess earnings approach which is an application of the income approach and computes the present value of cash flows attributable to the associated future income stream. Significant inputs include advance revenue, related operating expense, sales and marketing expense avoided and a discount rate. The fair value of the memberships was calculated using the income approach with significant inputs including estimated attrition rate, revenue growth rate, and discount rate. See note 4, Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort, for further discussion regarding the acquisition of the Rocky Gap Resort’s intangible assets.

Balances Disclosed at Fair Value

The following table includes the estimated fair value of certain of the Company’s financial instruments (in thousands):

	July 1, 2012					September 30, 2012
	Carrying Value, net of Current Portion		Estimated Fair Value		Fair Value Hierarchy	Carrying Value, net of Current Portion		Estimated Fair Value		Fair Value Hierarchy
Assets
Shingle Springs notes and interest receivable	$	36,052	$	30,875	Level 3	$	37,103	$	35,783	Level 3
Other assets related to Indian casino projects		5,509		4,569	Level 3		4,763		4,006	Level 3

Fair Value Hierarchy

Shingle Springs notes receivable

Shingle Springs notes and interest receivable

Other assets related to Indian casino projects

Shingle Springs notes and interest receivable - Management estimates the fair value of the notes and interest receivable from the Shingle Springs Tribe as of ~~July 1,~~September 30, 2012 to be approximately ~~$30.9~~$35.8 million using a discount rate of ~~23%~~20% and a remaining estimated term of ~~103~~100 months. Management estimated the fair value of the notes and interest receivable from the Shingle Springs Tribe as of January 1, 2012, to be approximately $18.5 million using a discount rate of 33% and a remaining estimated term of 109 months.

Other assets related to Indian casino projects - These assets include financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe and amounts due from Mr. Kevin M. Kean (see note 6, Intangible and Other Assets Related to Indian Casino Projects). The Company estimates the fair value of other assets related to the Shingle Springs Tribe and Mr. Kean to be ~~$4.6~~$4.0 million as of ~~July 1,~~September 30, 2012 using a discount rate of 19.5%. Management estimated the fair value of these financial instruments related to the Shingle Springs Tribe and Mr. Kean to be $5.9 million as of January 1, 2012 using a discount rate of 19.5%.

Investment in unconsolidated investee - The fair value of the Company’s investment in unconsolidated investee was not estimated as of ~~July 1,~~September 30, 2012 or January 1, 2012, as there were no events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and Lakes’ management determined that it was not practicable to estimate the fair value of the investment (see note 7, Investment in Unconsolidated Investee).

Contract acquisition costs payable - The carrying amount of the liability approximates its estimated fair value of ~~$5.1~~$4.8 million and $5.6 million as of ~~July 1,~~September 30, 2012 and January 1, 2012, respectively (see note 10, Contract Acquisition Costs Payable).

15. Commitments and Contingencies

Rock Ohio Ventures, LLC

Lakes has a 10% ownership in Rock Ohio Ventures and as of ~~July 1,~~September 30, 2012, Lakes has contributed approximately $20.2 million as required (see note 7, Investment in Unconsolidated Investee). Lakes may contribute additional capital up to $4.9 million as needed to maintain its equity position in Rock Ohio Ventures. If Lakes chooses not to fund any additional amounts, it will maintain an ownership position in Rock Ohio Ventures in a pro rata amount of what its $2.8 million initial payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million is required to be repurchased at an amount equal to the price paid.

Operating Lease with the Maryland Department of Natural Resources Related to the Rocky Gap Resort

As discussed in note 4, Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort, Evitts entered into a 40 year operating ground lease with the Maryland Department of Natural Resources for approximately 268 acres in the Rocky Gap State Park on which the Rocky Gap Resort is situated. Future minimum lease payments under this operating ground lease at September 30, 2012 are as follows (in thousands):

		2013				2014				2015				2016				2017				Thereafter
Minimum lease payment		$	425			$	425			$	425			$	425			$	425			$	14,450

Quest Media Group, LLC Litigation

Litigation Settlement

Lakes entered into a Settlement and Mutual Releases Agreement (the “Settlement Agreement”) in October 2012 related to the lawsuit entitled WPT Enterprises, Inc., et al vs. Deloitte & Touche, LLP. The Settlement Agreement provided for payment to Lakes of $2.2 million, which was received on November 1, 2012. This payment will be recorded as other income in the Company’s consolidated statement of operations for the fourth quarter of 2012.

Miscellaneous Legal Matters

16. Segment Information

Impairments and other losses

Earnings (loss) from operations

Depreciation expense

Impairments and other losses

Earnings (loss) from operations

Depreciation expense

Investment in unconsolidated investees

	Indian Casino Projects			Non-Indian Casino Projects			Corporate & Eliminations			Consolidated

Three months ended September 30, 2012
Revenue	$	1.9		$	1.7		$	—		$	3.6
Impairments and other losses		—			0.7			1.3			2.0
Earnings (loss) from operations		1.5			(0.9	)		(3.1	)		(2.5	)
Depreciation and amortization expense		—			0.2			—			0.2
Amortization of intangible assets related to operating casinos		0.3			—			—			0.3

Three months ended October 2, 2011
Revenue	$	0.2		$	—		$	0.1		$	0.3
Impairments and other losses		0.8			0.3			—			1.1
Loss from operations		(3.9	)		(4.6	)		(2.0	)		(10.5	)
Depreciation expense		—			—			0.1			0.1
Amortization of intangible assets related to operating casinos		0.3			—			—			0.3

Nine months ended September 30, 2012
Revenue	$	6.3		$	1.7		$	0.1		$	8.1
Impairments and other losses		1.8			1.2			1.3			4.3
Earnings (loss) from operations		3.4			(1.8	)		(6.8	)		(5.2	)
Depreciation and amortization expense		—			0.2			0.1			0.3
Amortization of intangible assets related to operating casinos		0.8			—			—			0.8

Nine months ended October 2, 2011
Revenue	$	34.1		$	—		$	0.2		$	34.3
Impairments and other losses		2.3			0.3			—			2.6
Earnings (loss) from operations		17.9			(4.6	)		(6.8	)		6.5
Depreciation expense		—			—			0.2			0.2
Amortization of intangible assets related to operating casinos		11.4			—			—			11.4

As of September 30, 2012
Total assets	$	45.5		$	30.7		$	41.3		$	117.5
Investment in unconsolidated investees		—			20.2			—			20.2

As of January 1, 2012
Total assets	$	48.0		$	18.2		$	49.8		$	116.0
Investment in unconsolidated investees		—			15.7			—			15.7

17. Subsequent Events

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On August 3, 2012, we acquired the assets of the Rocky Gap Lodge & Golf Resort in Allegany County, Maryland (the “Rocky Gap Resort”) pursuant to an asset purchase agreement (the “Purchase Agreement”) for $6.8 million paid with cash on hand. As provided in the Purchase Agreement, we acquired substantially all of the assets used in the Rocky Gap Resort’s business, which is primarily the operation of a AAA Four Diamond Award® winning resort which includes a 215-room hotel, convention center, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland. In connection with the closing of the acquisition of the Rocky Gap Resort, we entered into a 40 year operating ground lease with the Maryland Department of Natural Resources for approximately 268 acres in the Rocky Gap State Park on which the Rocky Gap Resort is situated. We are currently operating the existing hotel, golf course and related amenities. We plan to renovate the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, bar and a food outlet. The total cost of the project is currently expected to be approximately $30.0 million. We currently plan to fund the entire cost of the project with cash on hand, but may obtain third-party financing for a portion of the project costs.

Lakes has an investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) ~~for~~that owns the Horseshoe Casino Cleveland in Cleveland, Ohio, ~~and~~ the casino development project in Cincinnati, Ohio, and the Thistledown Racetrack in North Randall, Ohio. As of ~~July 1,~~September 30, 2012, we have contributed approximately $20.2 million to Rock Ohio Ventures. Lakes currently maintains a 10% interest in Rock Ohio Ventures’ 80% ownership in its casino properties in Ohio. We currently plan to contribute additional capital as needed to maintain our equity position in Rock Ohio Ventures. If we choose not to fund any additional amounts, we will maintain an ownership position in Rock Ohio Ventures in a pro rata amount of what our $2.8 million initial payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million is required to be repurchased at an amount equal to the price paid.

The Horseshoe Casino Cleveland opened on May 13, 2012. The casino features approximately 2,100 slot machines, 63 table games, a 30-table poker room and multiple food and beverage outlets. The Cincinnati casino is expected to open in the spring of 2013 and is planned to feature approximately 2,000 slot machines, 116 table games (including poker), food and beverage outlets, and a parking structure with approximately 2,500 parking spaces.

~~In September 2011, we entered into~~ The Thistledown Racetrack was contributed to a ~~joint venture with Addy Entertainment, LLC (“Addy”)~~subsidiary of Rock Ohio Ventures in August 2012. Rock Ohio Ventures plans to ~~form Evitts Resort, LLC (“Evitts”). In April 2012,~~develop a video lottery ~~operation license for~~terminal facility at the Rocky Gap Lodge & Golf Resort in Allegany County, Maryland (the “Resort”) was awarded to Evitts by the State of Maryland Video Lottery Facility Location Commission. In May 2012, we paid Addy $0.6 million for its ownership interest in Evitts, giving us full ownership of Evitts. Total assets related to Evitts were approximately $2.1 million and $2.3 million as of July 1, 2012 and January 1, 2012, respectively, which consisted primarily of a $2.1 million license fee deposit paid by Evitts to the Commission during the third quarter of 2011.

On August 3, 2012, we acquired the assets of the Resort pursuant to an asset purchase agreement (the “Purchase Agreement”) for $6.8 million. As provided in the Purchase Agreement, we acquired substantially all of the assets used in the Resort’s business, which is primarily the operation of a AAA Four Diamond Award®Thistledown Racetrack. winning resort which includes a 215-room hotel, convention center, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland. In connection with the closing of the acquisition of the Resort, we entered into a 40 year operating ground lease with the Maryland Department of Natural Resources for approximately 268 acres in the Rocky Gap State Park on which the Resort is situated. We plan to renovate the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, bar and a food outlet. The total cost of the project is currently expected to be between $25 million and $30 million. We currently plan to fund the entire cost of the project with Company cash, but may obtain third-party financing for a portion of the project costs.

Results of Operations

Three months ended ~~July 1,~~September 30, 2012 compared to the three months ended ~~July 3,~~October 2, 2011

Property Operating Expenses

Selling, General and Administrative Expenses

Loss on Convertible Note Receivable

Impairments and Other Losses

Amortization of Intangible Assets Related to Indian Casino Projects

Net Unrealized Losses on Notes Receivable

Nine months ended September 30, 2012 compared to the nine months ended October 2, 2011

Property Operating Expenses

Property operating expenses were $0.8 million for the nine months ended September 30, 2012 which primarily relate to rooms, food and beverage and golf operations of the Rocky Gap Resort. As the Rocky Gap Resort was acquired during the third quarter of 2012, there were no such expenses for the nine months ended October 2, 2011.

Selling, General and Administrative Expenses

~~Impairments and Other Losses~~

~~Amortization of Intangible Assets Related to Indian Casino Projects~~

~~Net Unrealized Gains (Losses) on Notes Receivable~~

~~Other Income, net~~

~~Six months ended July 1, 2012 compared to the six months ended July 3, 2011~~

~~Selling, General and Administrative Expenses~~

Loss on Convertible Note Receivable

Loss on convertible note receivable was $4.0 million for the nine months ended October 2, 2011. There was no loss on convertible note receivable for the nine months ended September 30, 2012. The prior year period loss was associated with Lakes’ initial $4.0 million investment in Dania Entertainment Center, LLC via a convertible promissory note, which was written down to zero as of October 2, 2011.

Impairments and Other Losses

Amortization of Intangible Assets Related to Indian Casino Projects

Net Unrealized ~~Gains (Losses)~~Losses on Notes Receivable

The income tax benefit for the ~~six~~nine months ended ~~July 1,~~September 30, 2012 was ~~$2.1~~$2.2 million compared to ~~an income tax provision of $8.7~~$0.5 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2011. Lakes’ income tax benefit in the current year period is primarily due to its ability to carry back estimated 2012 taxable loss to a prior year and receive a refund of taxes previously paid. In the prior period, the income tax provision ~~consisted~~is primarily ~~of current income tax provision of $7.8 million~~due to 2011 timing differences and ~~additional~~related valuation ~~allowance of $0.8 million.~~allowances. Our effective tax rates were ~~(2,186)~~(227)% and ~~44%~~(5)% for the ~~six~~nine months ended ~~July 1,~~September 30, 2012 and ~~July 3,~~October 2, 2011, respectively. For the ~~six~~nine months ended ~~July 1,~~September 30, 2012, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes and discrete items recognized. For the ~~six~~nine months ended ~~July 3,~~October 2, 2011, the effective tax rate differs from the federal tax rate of 35% due to state income taxes and ~~additional~~changes in valuation allowance ~~recorded~~ due to ~~projected~~ 2011 timing differences.

Liquidity and Capital Resources

In September 2011, we entered into a joint venture with Addy to form Evitts. In May 2012, we paid Addy $0.6 million for its ownership interest in Evitts, giving Lakes full ownership of Evitts. Total assets related to Evitts were approximately $2.1 million and $2.3 million as of July 1, 2012 and January 1, 2012, respectively, which consisted primarily of a $2.1 million license fee deposit paid by Evitts to the Commission during the third quarter of 2011. On August 3, 2012, we acquired the assets of the Rocky Gap Resort pursuant to the Purchase Agreement for $6.8 ~~million.~~million paid with cash on hand. In connection with the closing of the acquisition of the Rocky Gap Resort, we entered into a 40 year operating ground lease with the Maryland Department of Natural Resources for approximately 268 acres in the Rocky Gap State Park on which the Rocky Gap Resort is situated. We are currently operating the existing hotel, golf course and related amenities. We plan to renovate the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, bar and a food outlet. The total cost of the project is currently expected to be ~~between $25 million and $30~~approximately $30.0 million. We currently plan to fund the entire cost of the project with ~~Company~~ cash on hand, but may obtain third-party financing for a portion of the project costs.

We entered into a Settlement and Mutual Releases Agreement (the “Settlement Agreement”) in October 2012 related to the lawsuit entitled WPT Enterprises, Inc., et al vs. Deloitte & Touche, LLP. The Settlement Agreement provided for payment to Lakes of $2.2 million, which was received on November 1, 2012.

Critical Accounting Policies and Estimates

See note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended January 1, 2012, previously filed with the SEC, for our critical accounting policies in addition to the policies discussed below that involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Application of the Acquisition Method of Accounting

Lakes has applied the acquisition method of accounting to this business combination, which requires the following:

Identifying the acquirer,

Determining the acquisition date,

Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and

Recognizing and measuring goodwill or a gain from a bargain purchase

We measured the fair value of identifiable assets and liabilities in accordance with required valuation recognition and measurement provisions; the application of such provisions resulted in recording the fair value of the assets acquired of $7.0 million and the fair value of the liabilities assumed of $0.2 million in our consolidated balance sheet as of August 3, 2012. In total, the assets of the Rocky Gap Resort acquired represent approximately 6% of our consolidated total assets as of September 30, 2012.

We have reported the operating results of the Rocky Gap Resort in our consolidated statements of operations and cash flows for the period from August 3, 2012 through September 30, 2012. During this period, Lakes recorded $1.7 million in revenue and no net earnings from the Rocky Gap Resort’s operations.

Revenue Recognition for the Rocky Gap Resort

Long-Term Assets Related to Indian Casino Projects

July 1, 2012 (Unaudited)

Intangible assets related to Indian casino projects

Management fees receivable and other (*)

	January 1, 2012
	Shingle Springs Tribe		Jamul Tribe		Other		Total
Notes and interest receivable, net of current portion, discount and allowance for impaired notes receivable	$	34,160	$	—	$	—	$	34,160
Intangible assets related to Indian casino projects		4,184		—		—		4,184
Land held for development		—		960		—		960
Management fees receivable and other (*)		6,037		—		1,278		7,315
	$	44,381	$	960	$	1,278	$	46,619

(*)

Primarily includes deferred management fees and interest due from the Shingle Springs Tribe for the management of the Red Hawk Casino of ~~$4.5~~$3.9 million and $6.0 million as of ~~July 1,~~September 30, 2012 and January 1, 2012, respectively, and notes receivable from related parties of ~~$1.0~~$0.9 million and $1.3 million, net of current portion, as of ~~July 1,~~September 30, 2012 and January 1, 2012, respectively.

Has the U.S. Government’s Bureau of Indian Affairs federally recognized the tribe as a tribe?

Does the tribe hold or have the right to acquire land to be used for the casino site?

Has the Department of the Interior put the land into trust for purposes of being used as a casino site?

Has the tribe entered into a gaming agreement with the state in which the land is located, if required by the state?

Has the tribe obtained approval by the National Indian Gaming Commission of the management agreement?

Do other legal and political obstacles exist that could block development of the project and, if so, what is the likelihood of the tribe successfully prevailing?

An evaluation by management of the financial projections of the project given the project’s geographic location and the feasibility of the project’s success given such location;

The structure and stability of the tribal government;

The scope of the proposed project, including the physical scope of the contemplated facility and the expected financial scope of the related development;

An evaluation of the proposed project’s ability to be built as contemplated and the likelihood that financing will be available; and

The nature of the business opportunity to us, including whether the project would be a financing, development and/or management opportunity.

We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in ASC 320, Investments – Debt and Equity Securities. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available from the operations. However, in the event our development activity is terminated prior to completion, we generally retain the right to collect in the event of completion by another developer. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects (at least prior to commencement of operations), the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset, and the two assets are accounted for separately.

Notes receivable for open casinos are periodically evaluated for impairment pursuant to ASC 310, Receivables (“ASC 310”). Lakes considers a note receivable to be impaired when, based on current information and events, it is determined that Lakes will not be able to collect all amounts due according to the terms of the note receivable agreement. Subsequent to the initial impairment evaluation, we continue to monitor the note receivable for any changes in expected cash flows and recognize those changes in accordance with ASC 310.

Shingle Springs Tribe

Lakes concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes were impaired as of January 2, 2011. Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment as of ~~July 1,~~September 30, 2012 and concluded that the notes receivable continue to be impaired. This determination was based on the continued ~~significant~~ economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. The outstanding amounts on the notes and interest receivable from the Shingle Springs Tribe was ~~$68.6~~$69.0 million as of ~~July 1,~~September 30, 2012, which is comprised of $66.7 million related to pre-construction advances and ~~$1.9~~$2.3 million related to interest receivable. The carrying amount of long-term notes and interest receivable, which is net of unearned discount of ~~$13.0~~$12.6 million and allowance for impairment of ~~$19.5~~$19.3 million, was ~~$36.1~~$37.1 million as of ~~July 1,~~September 30, 2012. The carrying amounts represent the present value of expected future cash flows.

We initially entered into an agreement with the Jamul Tribe during 1999 to develop and manage the Jamul Casino Project. Due to Lakes’ corporate strategic objectives, Lakes determined that it would not continue to move forward with the Jamul Casino Project and terminated the agreement with the Jamul Tribe in March 2012. As a result of the termination of Lakes’ agreement with the Jamul Tribe, Lakes estimated the fair value of the notes receivable from the Jamul Tribe to be zero as of ~~July 1,~~September 30, 2012 and January 1, 2012. Pursuant to the agreement with the Jamul Tribe, Lakes was required to make advances of approximately $1.3 million subsequent to the date of the termination of the agreement. As of ~~July 1,~~September 30, 2012, all of the required advances had been made to the Jamul Tribe. As of ~~July 1,~~September 30, 2012, Lakes had advanced approximately ~~$59.2~~$59.4 million including accrued interest to the Jamul Tribe related to casino development efforts. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Jamul Tribe, and the casino’s furnishings and ~~equipment~~equipment.

Intangible Assets Related to Indian Casino Projects

Intangible assets related to the acquisition of the management, development, consulting or financing contracts are accounted for using the guidance in ASC 350, Intangibles - Goodwill and Other (“ASC 350”). In accordance with ASC 350, we amortize the intangible assets related to the acquisition of the management, development, consulting or financing contracts under the straight-line method over the term of the respective contracts which commence when the related casinos open. In addition to the intangible asset associated with the cash advances to tribes described above, these assets include actual costs incurred to acquire our interest in the projects from third parties.

Management Fees Receivable and Other

Other assets primarily consist of deferred management fees and related interest due from the Shingle Springs Tribe and amounts due from related parties that are directly related to the development and opening of Lakes’ Indian casino project. See note 6, Intangible and Other Assets Related to Indian Casino Projects, to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended January 1, 2012, previously filed with the SEC, for further discussion.

Description of Indian Casino Project and Evaluation of Critical Milestones

Shingle Springs Tribe – Red Hawk Casino

On December 17, 2008, the Red Hawk Casino opened to the public. We earn a management fee equal to 30% of Net Revenue of the operations annually for the first five years. During years six and seven, Lakes will earn a fee equal to 25% of the first $90 million of Net Revenue per year, 15% of the next $60 million of Net Revenue per year and 5% of Net Revenue over $150 million per year. Payment of our management fee is subordinated to the repayment of $450 million senior note financing of an affiliate of the Shingle Springs Tribe, the repayment of ~~$23.0~~$19.2 million furniture, furnishings and equipment financing as of ~~July 1,~~September 30, 2012 and a minimum priority payment to the Shingle Springs Tribe. Generally, the order of priority of payments from the Red Hawk Casino’s cash flows is as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe; repayment of various debt with interest accrued thereon (including our pre-construction advances); management fees due to Lakes; other obligations, if any; and the remaining funds, if any, distributed to the Shingle Springs Tribe. The management contract includes provisions that allow the Shingle Springs Tribe to buy out the management contract after four years from the opening date. The buy-out amount is calculated by multiplying the previous 12 months of management fees earned by the remaining number of years under the contract, discounted back to the present value at the time the buy-out occurs. If the Shingle Springs Tribe elects to buy out the contract, all outstanding amounts owed to Lakes immediately become due and payable. The NIGC approved the management contract in July 2004, which was subsequently amended in April 2007.

We acquired our initial interest in the development and management contracts for the Shingle Springs Casino from KAR — Shingle Springs in 1999 and formed a joint venture, in which the contracts were held, between us and KAR — Shingle Springs. On January 30, 2003, we purchased the remaining KAR — Shingle Springs’ partnership interest in the joint venture. In connection with the purchase transaction, we entered into separate agreements with the two individual owners of KAR — Shingle Springs (Kevin M. Kean and Jerry A. Argovitz).

During 2009, Lakes became obligated to pay Mr. Argovitz $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Argovitz’s election under an existing agreement related to this project. Also as a result of this election, Mr. Argovitz will not be entitled to obtain a 15% equity interest in the Lakes’ entity that holds the rights to the management fees earned by Lakes from the Red Hawk Casino operations.

During 2009, Lakes became obligated to pay to Mr. Kean $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Kean’s election under an existing agreement related to this project. Also as a result of this election, Mr. Kean will not be entitled to receive consulting fees equal to 15% of the management fees earned by Lakes from the Red Hawk Casino operations.

See note 10, Contract Acquisition Costs Payable, to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Recently Issued Accounting Pronouncements

For information related to recently adopted pronouncements see note 2, New Accounting Standards, to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Regulation and Taxes

Off-Balance Sheet Arrangements

Private Securities Litigation Reform Act

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

Part II.

Other Information

ITEM 1. LEGAL PROCEEDINGS

Quest Media Group, LLC Litigation

On May 17, 2012, Lakes received service of a breach of contract lawsuit filed in the Franklin County Court of Common Pleas, Franklin County, Ohio by Quest Media Group, LLC (“Quest”) with respect to an agreement (the “Agreement”) entered into between Lakes Ohio Development, LLC (a wholly owned subsidiary of Lakes) and Quest on March 9, 2010. The Agreement relates to Quest assisting Lakes Ohio Development in partnering with Rock Ohio Ventures, LLC and Penn Ventures, LLC with respect to funding the proposed citizen-initiated referendum in November 2009 to amend the Ohio constitution to permit one casino each in Cleveland, Cincinnati, Toledo and Columbus, Ohio. The lawsuit alleges, among other things, that Lakes breached the Agreement by selling Lakes Ohio Development’s interest in Penn Ventures, LLC to Penn, failing to pay the proper fee to Quest as a result of such sale, and incorrectly calculating the costs that are to be offset against Quest’s fee. The lawsuit seeks unspecified compensatory damages in excess of $25,000, punitive damages, declaratory and injunctive relief. The lawsuit names as defendants Lakes Entertainment, Inc., Lakes Ohio Development, LLC and Lyle Berman, Chairman and CEO of Lakes. Lakes removed the case to federal court and answered the pleadings. The case is still in the early stages of ~~litigation.~~discovery. Lakes believes the suit to be without merit and intends to vigorously defend itself in this lawsuit.

Miscellaneous Legal Matters

Our shareholders may be required to provide information that is requested by gaming authorities and we have the right, under certain circumstances, to redeem a shareholder’s securities.

Our Articles of Incorporation require our shareholders to provide information that is requested by authorities that regulate our current or proposed gaming operations. Our Articles of Incorporation also permit us to redeem the securities held by persons whose status as a security holder, in the opinion of the Lakes’ Board of Directors, jeopardizes existing gaming licenses or approvals of Lakes or its subsidiaries. The price paid for these securities is, in general, the average closing price for the 30 trading days prior to giving notice of redemption.

We may be forced to use our cash or incur debt to fund redemption of our securities.

In the event a shareholder’s background or status jeopardizes our current or proposed gaming licensure, we may be required to redeem such shareholder’s securities in order to continue gaming operations or obtain a gaming license. This redemption may divert our cash resources from other productive uses and require us to obtain additional financing which, if in the form of equity financing, will be dilutive to our shareholders. Further, any debt financing may involve additional restrictive covenants and further leveraging of our finite assets. The inability to obtain additional financing to redeem a disqualified shareholder’s securities may result in the loss of a current or potential gaming license.

Exhibits		Description

31.1		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 2002

31.2		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 2002

32.1		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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition ~~Linkbase Document~~

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	LAKES ENTERTAINMENT, INC.
	Registrant

	/s/ LYLE BERMAN
	Lyle Berman
	Chairman of the Board and
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ ~~LYLE BERMAN~~
	~~Lyle Berman~~ ~~Chairman of the Board and~~ ~~Chief Executive Officer~~ ~~(Principal Executive Officer)~~

	~~/s/~~ TIMOTHY J. COPE
	Timothy J. Cope
	President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Dated: November 7, 2012

~~Dated: August 9, 2012~~27

	Number of Common Shares									Number of Common Shares
	Options Outstanding			Exercisable		Available for Grant		Weighted-Average Exercise Price		Options Outstanding			Exercisable		Available for Grant			Weighted-Average Exercise Price
2012
Balance at January 1, 2012		1,644,639			1,155,347		874,627	$	2.92		1,644,639			1,155,347		874,627		$	2.92
Forfeited/cancelled/expired		(116,600	)		—		1,000		2.88		(116,600	)				1,000			2.88
Balance at July 1, 2012		1,528,039			1,081,249		875,627		2.92
Balance at September 30, 2012											1,528,039			1,121,818		875,627			2.92

2011
Balance at January 2, 2011		2,031,084			904,076		699,215	$	2.99		2,031,084			904,076		699,215		$	2.99
Restricted stock unit activity, net		—			—		1,667		3.25		—					1,667			3.25
Forfeited/cancelled/expired		(313,946	)		—		155,996		3.19		(362,946	)				168,996			3.18
Balance at July 3, 2011 (*)		1,717,138			683,620		856,878		2.95
Granted											4,000					(4,000	)		2.29
Balance at October 2, 2011 (*)											1,672,138			991,670		865,878			2.95

Non-Vested Shares:	Restricted Stock Units			Weighted-Average Grant-Date Fair Value		Restricted Stock Units			Weighted-Average Grant- Date Fair Value

2012
Balance at January 1, 2012		38,337		$	3.25		38,337		$	3.25
Vested		(38,337	)		3.25		(38,337	)		3.25
Balance at July 1, 2012		—			—
Balance at September 30, 2012							—			—

2011
Balance at January 2, 2011		79,996		$	3.25		79,996		$	3.25
Vested		(39,992	)		3.25		(39,992	)		3.25
Forfeited		(1,667	)		3.25		(1,667	)		3.25
Balance at July 3, 2011		38,337			3.25
Balance at October 2, 2011							38,337			3.25

	(Unaudited)
	July 1, 2012			January 1, 2012
Assets
Current assets:
Cash and cash equivalents	$	35,211		$	38,557
Accounts receivable		24			117
Current portion of notes receivable from Indian casino projects		-			1,076
Deposits		2,100			2,250
Income taxes receivable		5,487			3,472
Other		1,169			1,013
Total current assets		43,991			46,485
Property and equipment		8,224			8,170
Accumulated depreciation		(3,212	)		(3,107	)
Property and equipment, net		5,012			5,063

Long-term assets related to Indian casino projects:
Notes and interest receivable, net of current portion and allowance		36,052			34,160
Intangible assets, net of accumulated amortization of $1.6 and $11.7 million		3,656			4,184
Land held for development		-			960
Management fees receivable and other		5,509			7,315
Total long-term assets related to Indian casino projects		45,217			46,619
Other assets:
Investment in unconsolidated investee		20,161			15,706
Land held for development		1,130			170
Land held for sale		1,729			1,729
Other		201			228
Total other assets		23,221			17,833
Total assets	$	117,441		$	116,000

Liabilities and shareholders' equity
Current liabilities:
Current portion of contract acquisition costs payable, net of $0.8 and $0.9 million discount	$	1,155		$	1,055
Accounts payable		266			354
Accrued payroll and related		431			534
Other accrued expenses		613			400
Total current liabilities		2,465			2,343

Long-term contract acquisition costs payable, net of current portion and $1.0 and $1.4 million discount		3,964			4,568

Total liabilities		6,429			6,911

Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares; 26,441 and 26,406 common shares issued and outstanding		264			264
Additional paid-in capital		203,780			203,747
Deficit		(93,032	)		(95,272	)
Total Lakes Entertainment, Inc. shareholders' equity		111,012			108,739
Noncontrolling interest		-			350
Total equity		111,012			109,089
Total liabilities and shareholders' equity	$	117,441		$	116,000

	Three Months Ended						Six Months Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Revenues:
Management fees	$	2,503		$	28,085		$	4,446		$	33,920
License fees and other		16			72			36			130
Total revenues		2,519			28,157			4,482			34,050

Costs and expenses:
Selling, general and administrative		1,905			2,286			4,208			4,942
Impairments and other losses		1,399			635			2,328			1,509
Amortization of intangible assets related to operating casinos		265			9,217			528			11,160
Depreciation		51			55			106			112
Total costs and expenses		3,620			12,193			7,170			17,723

Net unrealized gains (losses) on notes receivable		-			(124	)		-			618

Earnings (loss) from operations		(1,101	)		15,840			(2,688	)		16,945

Other income (expense):
Interest income		1,578			1,513			3,161			2,981
Interest expense		(242	)		(321	)		(494	)		(642	)
Other		44			120			58			240
Total other income, net		1,380			1,312			2,725			2,579

Earnings before income taxes		279			17,152			37			19,524
Income taxes (benefit)		(145	)		7,667			(2,142	)		8,659
Net earnings including noncontrolling interest		424			9,485			2,179			10,865
Net loss attributable to noncontrolling interests		1			-			61			-

Net earnings attributable to Lakes Entertainment, Inc.	$	425		$	9,485		$	2,240		$	10,865

Weighted-average common shares outstanding
Basic		26,441			26,406			26,436			26,404
Dilutive effect of restricted stock units		-			25			-			25
Diluted		26,441			26,431			26,436			26,429
Gain (loss) per share
Basic	$	0.02		$	0.36		$	0.08		$	0.41
Diluted	$	0.02		$	0.36		$	0.08		$	0.41

	Three Months Ended				Six Months Ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
	(In thousands)
Total cost of share-based payment plans	$	94	$	183	$	202	$	360

	July 1, 2012 and January 1, 2012								September 30, 2012
	Balance		Level 1		Level 2		Level 3		Balance		Level 1		Level 2		Level 3
Assets
Land held for development	$	1,130		—		—	$	1,130	$	1,130		—		—	$	1,130
Land held for sale		1,729		—		—		1,729		405		—		—		405
Property and equipment related to the acquisition of the Rocky Gap Resort										6,173		—		—		6,173
Intangible assets related to the acquisition of the Rocky Gap Resort										627		—		—		627

	Indian		Non-Indian
	Casino		Casino			Corporate &
	Projects		Projects			Eliminations			Consolidated

Three months ended July 1, 2012
Revenue	$	2.5	$	—		$	—		$	2.5
Impairments and other losses		0.8		0.6			—			1.4
Earnings (loss) from operations		1.3		(0.6	)		(1.8	)		(1.1	)
Depreciation expense		—		—			0.1			0.1
Amortization of intangible assets related to operating casinos		0.3		—			—			0.3

Three months ended July 3, 2011
Revenue	$	28.1	$	—		$	0.1		$	28.2
Impairments and other losses		0.6		—			—			0.6
Earnings (loss) from operations		18.1		—			(2.3	)		15.8
Depreciation expense		—		—			0.1			0.1
Amortization of intangible assets related to operating casinos		9.2		—			—			9.2

Six months ended July 1, 2012
Revenue	$	4.4	$	—		$	0.1		$	4.5
Impairments and other losses		1.7		0.6			—			2.3
Earnings (loss) from operations		2.0		(1.0	)		(3.7	)		(2.7	)
Depreciation expense		—		—			0.1			0.1
Amortization of intangible assets related to operating casinos		0.5		—			—			0.5

Six months ended July 3, 2011
Revenue	$	33.9	$	—		$	0.1		$	34.0
Impairments and other losses		1.5		—			—			1.5
Earnings (loss) from operations		21.8		—			(4.9	)		16.9
Depreciation expense		—		—			0.1			0.1
Amortization of intangible assets related to operating casinos		11.2		—			—			11.2

As of July 1, 2012
Total assets	$	45.3	$	22.3		$	49.8		$	117.4
Investment in unconsolidated investees		—		20.2			—			20.2

As of January 1, 2012
Total assets	$	48.0	$	18.2		$	49.8		$	116.0
Investment in unconsolidated investees		—		15.7			—			15.7

	July 1, 2012 (Unaudited)						September 30, 2012 (Unaudited)
	Shingle Springs Tribe		Other		Total		Shingle Springs Tribe		Other		Total
Notes and interest receivable, net of current portion, discount and allowance for impaired notes receivable	$	36,052	$	—	$	36,052	$	37,103	$	—	$	37,103
Intangible assets related to Indian casino projects		3,656		—		3,656		3,391		—		3,391
Management fees receivable and other (*)		4,481		1,028		5,509		3,861		903		4,764
	$	44,189	$	1,028	$	45,217	$	44,355	$	903	$	45,258