LAKES ENTERTAINMENT INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

OR

[ ] 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 of (I.R.S., Employer
incorporation or organization) Identification No.)

130 CHESHIRE LANE, SUITE 101, MINNETONKA, MINNESOTA 55305
(Address of principal executive offices)

(952) 449-9092
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

As of March 19, 2003, 10,638,320 shares of the Registrant's Common Stock
were outstanding. Based upon the last sale price of the Common Stock as reported
on the NASDAQ National Market on June 28, 2002 (the last business day of our
most recently completed second quarter), the aggregate market value of the
Common Stock held by non-affiliates of the Registrant as of such date was
$55,016,855. For purposes of these computations, affiliates of the Registrant
are deemed only to be the Registrant's executive officers and directors.

DOCUMENTS INCORPORATED BY REFERENCE

Part III. Portions of the Registrant's definitive Proxy Statement in
connection with the Annual Meeting of Shareholders to be held on June 2, 2003
are incorporated by reference into Items 10 through 13, inclusive.
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PART I

ITEM 1. BUSINESS

The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Lakes Entertainment, Inc., a Minnesota corporation, could
differ materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
in "Risk Factors."

GENERAL

Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the
"Company") develops, constructs and manages casinos and related hotel and
entertainment facilities in emerging and established gaming jurisdictions. Lakes
is the successor to the Indian gaming business of Grand Casinos, Inc. (Grand
Casinos"). Lakes has entered into the following contracts for the development,
management and/or financing of new casino operations, all of which are subject
to various regulatory approvals before construction can begin:

- Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan with the Pokagon
Band of Potawatomi Indians.

- Lakes holds contracts through its subsidiaries to develop and manage two
casinos to be owned by Indian tribes in California, one near San Diego
with the Jamul Indian Village, and the other near Sacramento with the
Shingle Spring Band of Miwok Indians.

- Lakes and another company have formed a partnership with a contract to
finance the construction of an Indian-owned casino 60 miles north of San
Francisco, California for the Cloverdale Rancheria of Pomo Indians. The
Cloverdale Rancheria has notified the partnership that it wishes to
terminate the relationship with the two parties. The partnership has
advised the Rancheria that the partnership believes the contract is
enforceable. The Rancheria acknowledges that the partnership has loaned
the Rancheria money and that the Rancheria will endeavor to repay the
money in a timely manner.

- Lakes has also signed contracts with the Nipmuc Nation of Massachusetts
for development and management of a potential future gaming resort in the
eastern United States; however, this tribe has received a negative
finding regarding federal recognition from the Bureau of Indian Affairs
(BIA). The tribe has submitted additional information for
reconsideration.

Lakes owns options to purchase various new table games and is actively
marketing these new games to the casino industry in an attempt to have a casino
accept the games for use in their operations.

In addition, Lakes has formed a joint venture with another company to
develop approximately 2000 acres owned by the joint venture in Eastern San Diego
County. It is possible the land will be sold in lieu of development by the joint
venture.

Lakes has also formed a joint venture with a producer to launch the World
Poker Tour and establish poker as the next significant televised mainstream
sport. The joint venture recently signed an agreement with the Travel Channel
for broadcast of the World Poker Tour. Lakes also currently intends to buy or
create other new long-term business opportunities to complement its Indian
casino management business.

HISTORY

Lakes was established as a public corporation on December 31, 1998, via a
distribution (the "Distribution") of its common stock, par value $.01 per share
(the "Common Stock") to the shareholders of Grand Casinos. Pursuant to the terms
of a Distribution Agreement entered into between Grand Casinos and Lakes and
dated as of December 31, 1998 (the "Distribution Agreement"), Grand Casinos
shareholders received 0.25 of one share of Lakes Common Stock for each share
held in Grand Casinos.

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Immediately following the Distribution, Grand Casinos merged with a
subsidiary of Park Place Entertainment Corporation, a Delaware corporation
("Park Place"), pursuant to which Grand Casinos became a wholly owned subsidiary
of Park Place (the "Merger"), Grand Casinos shareholders received one share of
Park Place common stock in the Merger for each share they held in Grand Casinos.
The merger and distribution received all necessary shareholder and regulatory
approvals and was completed on December 31, 1998. Grand Casinos obtained a
ruling from the Internal Revenue Service (IRS) that the Distribution qualified
as a tax-free transaction, solely with respect to Grand Casinos shareholders
except to the extent that Grand Casinos shareholders received cash in lieu of
fractional shares.

Lakes operates the Indian casino management business and holds other assets
previously owned by Grand Casinos. Before the spin-off, Grand Casinos had
management contracts for Grand Casino Hinckley and Grand Casino Mille Lacs, both
Indian-owned casinos located in Minnesota. These management contracts both
expired in 1998. After Lakes' inception, Lakes managed two Indian-owned casinos
in Louisiana previously managed by Grand Casinos. Lakes' historical revenues
since its inception have been derived almost exclusively from management fees
for these casinos. Lakes managed the largest casino resort in Louisiana, Grand
Casino Coushatta, until the management contract expired on January 16, 2002. For
a portion of fiscal 2000 and prior, Lakes also had a management contract for
Grand Casino Avoyelles, which was terminated through an early buyout of the
contract effective March 31, 2000.

Lakes also held several parcels of commercial property in Las Vegas at the
time of the spin-off from Grand Casinos. In December 2001, Lakes entered into a
contract for sale for a large portion of this property.

BUSINESS STRATEGY

Lakes' vision is to create a company with predictable long-term profitable
growth that will be highly valued by its investors. The Company is implementing
three business strategies to accomplish its vision. The first of the three
strategies is to grow the Company's assets. The more assets the Company has, the
greater its potential for diversification and growth. The Company plans to
increase its asset base through the growth of its Indian Casino management
business. As the successor to Grand Casinos' Indian gaming business, Lakes
enjoys a reputation as a successful casino management company for Native
American owned casinos with available capital and experienced management.

Lakes develops, constructs and manages Indian-owned casino properties that
offer the opportunity for long-term development of related entertainment
facilities, including hotels, theaters, recreational vehicle parks and other
complementary amenities designed to enhance the customers' total entertainment
experience and to differentiate facilities managed by Lakes from its
competitors. Lakes provides experienced corporate and casino management and
develops and implements a wide scale of marketing programs. In conjunction with
this part of Lakes' business strategy, Lakes has entered into development,
management and/or financing agreements relating to one casino project in
Michigan, three casino projects in California, and one casino project on the
east coast, with development of each subject to regulatory approvals. Lakes has
also explored, and will continue to explore, numerous other possible development
projects. See "Casino Projects and Agreements" below.

Consistent with its past experience in managing the Louisiana casinos,
Lakes is dedicated to developing superior facilities and providing guest service
that exceeds expectations. Facilities managed by Lakes will be staffed with
well-trained local casino employees and will offer a casual environment designed
to appeal to the family-oriented, middle income customer. Lakes strives to offer
its casino customers creative gaming selections in a pleasant, festive, smoke
and climate-controlled setting. Lakes' managed casinos also will offer
reasonably priced, high-quality food.

The second business strategy has been to remove a number of uncertainties
surrounding Lakes since the spin-off in 1998. Consistent with this part of the
Lakes strategy, in 2000 Lakes entered into settlement agreements regarding
several significant shareholder litigation matters, for which Lakes is required
to indemnify Grand Casinos. Lakes paid a total of $18 million into escrow in
2000, and this amount was distributed to the shareholder groups during 2001.
Lakes' indemnification obligations continue with respect to certain other
litigation matters, however, the Company believes the indemnification
obligations will not have a

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material effect on its future results of operations, and $7.5 million paid into
an escrow account for the benefit of Grand Casinos is included as restricted
cash on the accompanying balance sheet as of December 29, 2002. See Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations".

Lakes has also addressed uncertainties relating to a portion of the land
owned or controlled by the Company in Las Vegas. On December 28, 2001, the
Company entered into a contract for sale for a portion of this site and certain
property rights to two partnerships which are not affiliated with Lakes. The
total initial sale price was approximately $30.9 million, including a $1.0
million down payment received in January 2002 and two promissory notes for the
balance. A $0.5 million payment on the notes receivable was received during
2002. That transaction was closed subject to certain administrative post-closing
conditions which were satisfied as of September 27, 2002. Due to deteriorating
economic conditions, the terms of the transaction were restructured, including a
reduction in the combined purchase price. As a result, during 2002 Lakes
recorded a $3.0 million impairment charge for these properties. During March of
2003, Lakes and Metroflag agreed to additional revisions to the terms of the
Polo Plaza and Travelodge property transactions. Upon repayment of the
promissory notes, this transaction will provide resources that are currently
planned to be used in Lakes' primary business, which is Indian gaming. See Item
2 -- "Properties".

Lakes continues to own the Shark Club property, which is an approximate 3.5
acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. During August 2002, Lakes formed the Chateaux, LLC, a joint venture with
Diamond Resorts, LLC, a Nevada limited liability company and time-share
developer for the purpose of developing the Shark Club parcel as an upscale
time-share project. Lakes owns a 49% voting interest in the Chateaux, LLC. The
terms of this joint venture agreement require that Diamond and Lakes each make a
working capital contribution of $250,000.

Subject to Diamond obtaining a financing commitment for a construction loan
sufficient to fund at least the first phase of the building improvements
contemplated by the time-share project, the joint venture agreement will require
Lakes to contribute the relevant portion of the Shark Club parcel, which was
originally valued at $16 million. During December of 2002, the Shark Club parcel
was adjusted to its revised estimated market value of $15 million, resulting in
an impairment charge of approximately $1.0 million, which is reflected in
impairment losses in the accompanying consolidated statement of loss. Diamond
has agreed to perform sales, marketing, administrative and managerial services
for the project. The terms of the joint venture agreement provide for the
repayment to Lakes of its contribution of property in cash based on the joint
venture's cash flow and time-share unit sales. It is contemplated that Lakes
will be required to make no other material contributions of cash or property to
the project. It is possible that Lakes may sell the Shark Club property or its
interest in the joint venture prior to or during construction in order to
monetize this investment.

The other uncertainty facing Lakes relates to the proposed casino
developments. At one of the California locations, the tribe needs to resolve
land issues related to its casino site. At the second California location,
access to the proposed casino site is subject to certain regulatory approvals
which have been obtained. However, there is currently a pending legal challenge
to these approvals. At a third California location, the agreement with the tribe
is currently in dispute. The tribe has notified Lakes through the partnership
that holds the agreement with the tribe that the tribe wishes to terminate the
agreement. The partnership has advised the tribe that the partnership believes
the contract is enforceable. The tribe acknowledges that the partnership has
loaned the tribe money and that the tribe will endeavor to repay the money in a
timely manner. At the Michigan location, the Secretary of the Interior has
accepted the land into trust, however, during the 30-day public comment period,
a group called "Taxpayers of Michigan Against Casinos" filed a complaint to stop
the U.S. Department of Interior from placing it into trust. The Department of
Justice is defending this lawsuit on behalf of the Secretary of Interior. At the
east coast location, the tribe is attempting to obtain federal recognition, but
there is no assurance that federal recognition will be obtained. Additionally,
the National Indian Gaming Commission ("NIGC") needs to approve Lakes'
management contracts for each location. Lakes is actively working with the
tribes to bring these issues to a successful conclusion.

Diversification is important to Lakes' long-term success and is the third
of the business strategies. Lakes currently intends to buy or create new
long-term business opportunities through the use of cash, stock or debt

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to complement its Indian casino management business. Substantial long-term
growth and low multiple values to generate high returns are just a few of the
attributes in companies or start-ups that Lakes is looking for in new
opportunities to help enhance shareholder value. As part of the Company's effort
to diversify, in March of 2002, Lakes formed a joint venture with an experienced
producer of televised poker tournaments. The purpose of the joint venture is to
launch the World Poker Tour and establish poker as the next significant
televised mainstream sport. See "World Poker Tour Joint Venture" below.

CASINO PROJECTS AND AGREEMENTS

Development and Management of Michigan Casino. On June 22, 1999, the
Company announced that it had been selected by the Pokagon Band of Potawatomi
Indians (the "Band") to serve as the exclusive developer and manager of a
proposed casino gaming resort facility to be owned by the Band in the state of
Michigan. In connection with its selection, Lakes and the Band have executed a
development and management agreement governing their relationship during the
development, construction and management of the casino. Various regulatory
approvals are needed prior to commencement of development activities. The United
States Department of the Interior issued a Finding of No Significant Impact
(FONSI) in January 2001 and filed a legal notice of its intent to place into
trust 675 acres near New Buffalo, Michigan on behalf of the Pokagon Band. Under
Federal law, a 30-day waiting period was required for public comments to be made
before the land in trust process could be finalized. During the 30-day period, a
lawsuit was filed against the federal government in the District Court in the
District of Columbia by a Michigan-based group called "Taxpayers of Michigan
Against Casinos", to stop the U.S. Department of Interior from placing into
trust the land for the casino site. The Department of Justice is defending the
suit on behalf of the Secretary of Interior. While the outcome of the suit
cannot be predicted at this time, Lakes' management believes that this hurdle
will be successfully overcome and the casino development will be approved.
Casino construction is not planned to start until land is accepted into trust
status by the Secretary of the Interior and the agreements are approved by the
Chairman of NIGC.

Contract to Develop and Manage Casino Near San Diego, California. In
February 2000, a subsidiary of Lakes formed a joint venture with Kean Argovitz
Resorts -- Jamul, LLC ("KAR -- Jamul") that holds a contract to develop and
manage a casino resort facility with the Jamul Indian Village on land owned by
the tribe near San Diego, California. The contract is subject to approval by
NIGC and placement of the land where the gaming facility is to be located into
trust with the BIA. In 2000, California voters approved an amendment to the
State Constitution which allows for Nevada-style gaming on Indian land and
ratifies the Tribal Compact. Development of the casino resort will begin once
various regulatory approvals are received.

On January 30, 2003, the Lakes subsidiary purchased KAR -- Jamul's interest
in the joint venture for nominal consideration, at which time the joint venture
entity became an indirect wholly owned subsidiary of Lakes. At the same time,
subsidiaries of Lakes entered into separate agreements with Kevin M. Kean and
Jerry A. Argovitz, the individual owners of KAR -- Jamul. See "Agreements With
Owners of KAR Entities" below.

Contract to Develop and Manage Casino Near Sacramento, California. In June
1999, a subsidiary of Lakes formed a joint venture with Kean Argovitz
Resorts -- Shingle Springs, LLC ("KAR -- Shingle Springs") that holds a contract
to develop and manage a casino resort facility with the Shingle Springs Band of
Miwok Indians on land owned by the tribe near Sacramento, California. The
contract is subject to approval by NIGC. In 2000, California voters approved an
amendment to the State Constitution which allows for Nevada-style gaming on
Indian land and ratifies the Tribal Compact. Development of the casino resort
will begin once various regulatory approvals are received. Regulatory approval
of the new interchange construction for access to tribal land of the Shingle
Springs Band of Miwok Indians was received during 2002. The neighboring county
and another group have commenced litigation against the California regulatory
agencies, attempting to block the approval of the interchange.

On January 30, 2003, the Lakes subsidiary purchased KAR -- Shingle Springs'
interest in the joint venture for nominal consideration, at which time the joint
venture entity became an indirect wholly owned subsidiary of Lakes. At the same
time, subsidiaries of Lakes entered into separate agreements with Kevin M.

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Kean and Jerry A. Argovitz, the individual owners of KAR -- Shingle Springs. See
"Agreements With Owners of KAR Entities" below.

Agreements With Owners of KAR Entities. The joint venture entities that
hold the management contracts for the San Diego and Sacramento area casino
resorts were previously jointly owned with KAR -- Jamul and KAR -- Shingle
Springs (together, the "KAR Entities"). On January 30, 2003, subsidiaries of
Lakes purchased the respective joint venture interests of the KAR Entities for
nominal consideration, at which time the joint venture entities became indirect
wholly owned subsidiaries of Lakes. At the time of the purchase, Lakes or its
subsidiaries had notes receivable from the KAR Entities and a long-term
receivable from Kevin M. Kean that, as of December 29, 2002, were in the amounts
of $1.8 million and $1.9 million, respectively. In connection with the purchase
transactions, Lakes and certain of its subsidiaries entered into separate
agreements with Kevin M. Kean and Jerry A. Argovitz, the two individual owners
of the KAR Entities. Under these agreements, Lakes and its subsidiaries have
forgiven the notes receivable from the KAR Entities, subject to the agreements
of Messrs. Kean and/or Argovitz to assume the obligations under the notes in
certain circumstances.

Under the agreements with Kevin M. Kean, Mr. Kean may elect to serve as a
consultant to Lakes' subsidiaries during the term of each subsidiary's casino
management contract if he is found suitable by relevant gaming regulatory
authorities. In such event, Mr. Kean will be entitled to receive annual
consulting fees equal to 20% of the management fees from the San Diego area
casino operations and 15% of the management fees from the Sacramento area casino
operations, less certain costs of these operations. If Mr. Kean is found
suitable by relevant gaming regulatory authorities and elects to serve as a
consultant, he will be obligated to repay 50% of the notes receivable from the
KAR Entities. If Mr. Kean is not found suitable by relevant gaming regulatory
authorities or otherwise elects not to serve as a consultant, he will be
entitled to receive annual payments of $1 million from each of the San Diego and
Sacramento area casino projects during the term of the respective casino
management contracts (but not during any renewal term of such management
contracts). Regardless of whether Mr. Kean serves as a consultant, a Lakes
subsidiary has agreed to loan up to $1.25 million to Mr. Kean, $1 million of
which must be used to fund certain obligations of Mr. Kean related to a separate
joint venture formed to acquire land in the San Diego area. Mr. Kean has agreed
that 50% of the consulting fees or other payments payable to him under the
agreements with Lakes and its subsidiaries shall be applied toward repayment of
his indebtedness to Lakes. In the event of a default under the agreements, 100%
of the fees and payments will be applied toward repayment of his indebtedness to
Lakes.

Under the agreements with Jerry A. Argovitz, if Mr. Argovitz is found
suitable by relevant gaming regulatory authorities, he will be entitled to
purchase for nominal consideration a 20% equity interest in the Lakes subsidiary
holding a management contract with the San Diego area casino and a 15% equity
interest in the Lakes subsidiary holding a management contract with the
Sacramento area casino. Upon such purchase, Mr. Argovitz will become obligated
to repay 50% of the notes receivable from the KAR Entities. If he is not found
suitable or does not elect to purchase equity interests in the Lakes
subsidiaries, Mr. Argovitz may elect to receive annual payments of $1 million
from each of the San Diego and Sacramento area casino projects from the date of
election through the term of the respective casino management contracts (but not
during any renewal term of such management contracts).

Joint Venture for Further California Casinos, Including Financing of
Cloverdale, California Casino. On August 10, 2000, the Company announced that
it had agreed to form a joint venture for the purpose of developing gaming
facilities on Indian owned land in California. Under the agreement, Lakes formed
a joint venture limited liability company with MRD Gaming, a limited liability
company. The partnership between Lakes and MRD holds the contract to finance
casino facilities with the Cloverdale Rancheria of Pomo Indians. The planned
site for the potential new casino development is located on Highway 101 in
Cloverdale, California, approximately 60 miles north of San Francisco. The
Cloverdale Rancheria has notified the partnership that the Rancheria wishes to
terminate the relationship between the two parties. The partnership has advised
the Rancheria that the partnership believes the contract is enforceable. The
Rancheria acknowledges that the partnership has loaned the Rancheria money and
that the Rancheria will endeavor to repay the money in a timely manner.

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Agreement for Possible Casino Development with Massachusetts Tribe. On
July 9, 2001, the Company announced that it had signed development and
management agreements with the Nipmuc Nation of Massachusetts for a potential
future casino resort in the eastern United States. The Nipmuc Nation's petition
for federal recognition received a proposed positive finding from the BIA in
January 2001. However, in September 2001, that proposed positive finding was
reversed by the BIA when it issued a negative finding relating to the Nipmuc
Nation's request for federal recognition. The Nipmuc Nation has submitted
additional information for reconsideration. In addition, community groups will
have an opportunity to submit comments and documentation. If approval is
received, the Nipmuc Nation would need to put land in trust and enter into a
gaming agreement with the state where the land is located before proceeding with
any such enterprise.

MARKETING

Lakes' marketing strategy at its managed operations is to attract and
retain the repeat customer. Management believes that Lakes' emphasis on
providing superior guest service along with first-class facilities, coupled with
targeted marketing programs, contributes to attracting the repeat customer.

Lakes' operations strategy seeks to combine retail, gaming and
entertainment marketing techniques. Lakes profiles the casino customers
utilizing available demographic data, regularly conducted customer surveys and
other sources. Based upon this data, Lakes uses a variety of initial special
promotions to attract the first-time customer and, thereafter, seeks to leverage
initial customer satisfaction through a mix of marketing programs dedicated to
developing a repeat customer. A variety of other events, facilities and
entertainment options provide the patron with a total entertainment experience.
Lakes markets these programs through a variety of direct and media marketing
techniques utilizing a significant customer database at each location. Lakes
emphasizes guest service as part of its operating strategy. High standards are
set for well-trained and friendly employees so that customers can enjoy
themselves in a fun-filled and entertaining atmosphere.

COMPETITION

The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos managed and to be managed by
Lakes compete with all of these forms of gaming, and will compete with any new
forms of gaming that may be legalized in additional jurisdictions, as well as
with other types of entertainment. Lakes also competes with other gaming
companies for opportunities to acquire legal gaming sites in emerging gaming
jurisdictions and for the opportunity to manage casinos on Indian land. Some of
the competitors of Lakes have more personnel and greater financial and other
resources than Lakes. Further expansion of gaming could also significantly
affect Lakes' business.

WORLD POKER TOUR JOINT VENTURE

In March 2002, Lakes formed World Poker Tour, LLC, ("WPT"), a joint venture
with Steven Lipscomb, an experienced producer of televised poker tournaments.
Lakes owns approximately a 78% equity interest in WPT. WPT has established a
global series of thirteen poker tournaments in locations in various countries,
to be filmed and broadcast on television. In March 2003, WPT announced that it
has signed an agreement with the Travel Channel, L.L.C. (TRV), granting TRV the
right to broadcast the first season of the World Poker Tour series. Under the
agreement, TRV has the exclusive right, license, and privilege to exhibit,
market, distribute, transmit, perform and otherwise exploit each of the first
thirteen two-hour programs produced by WPT for an unlimited number of times over
the next three years within the United States. WPT will receive a series of
fixed license payments from TRV, subject in each case to satisfaction of
production milestones and other conditions.

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REGULATION

GAMING REGULATION

The ownership, management, and operation of gaming facilities are subject
to extensive federal, state, provincial, tribal and/or local laws, regulations
and ordinances, which are administered by the relevant regulatory agency or
agencies in each jurisdiction (the "Regulatory Authorities"). These laws,
regulations and ordinances vary from jurisdiction to jurisdiction, but generally
concern the responsibility, financial stability and character of the owners and
managers of gaming operations as well as persons financially interested or
involved in gaming operations. Certain basic provisions that are currently
applicable to Lakes in its management, development and financing activities are
described below.

Neither Lakes nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with Lakes or any of its subsidiaries,
including officers, directors, employees, and security holders of Lakes or its
subsidiaries. In the event a Regulatory Authority were to find a security holder
to be unsuitable, Lakes may be sanctioned, and may lose its licenses and
approvals if Lakes recognizes any rights in such unsuitable person in connection
with such securities. Lakes may be required to repurchase its securities at fair
market value from security holders that the Regulatory Authorities deem
unsuitable. Lakes' Articles of Incorporation authorize Lakes to redeem
securities held by persons whose status as a security holder, in the opinion of
the Lakes' Board, jeopardizes gaming licenses or approvals of Lakes or its
subsidiaries. Once obtained, licenses, permits, and approvals must be
periodically renewed and generally are not transferable. The Regulatory
Authorities may at any time revoke, suspend, condition, limit, or restrict a
license for any cause they deem reasonable.

Fines for violations may be levied against the holder of a license, and in
certain jurisdictions, gaming operation revenues can be forfeited to the State
under certain circumstances. No assurance can be given that any licenses,
permits, or approvals will be obtained by Lakes or its subsidiaries, or if
obtained, will be renewed or not revoked in the future. In addition, the
rejection or termination of a license, permit, or approval of Lakes or any of
its employees or security holders in any jurisdiction may have adverse
consequences in other jurisdictions. Certain jurisdictions require gaming
operators licensed therein to seek approval from the state before conducting
gaming in other jurisdictions. Lakes and its subsidiaries may be required to
submit detailed financial and operating reports to Regulatory Authorities.

The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on Lakes.

Certain specific provisions to which Lakes is currently subject are
described below.

INDIAN GAMING

The terms and conditions of management contracts for the operation of
Indian-owned casinos, and of all gaming on Indian land in the United States, are
subject to the Indian Gaming Regulatory Act ("IGRA"), which is administered by
NIGC, and also are subject to the provisions of statutes relating to contracts
with Indian tribes, which are administered by the Secretary of the Interior (the
"Secretary") and the BIA. The regulations and guidelines under which NIGC will
administer IGRA are evolving. The IGRA and those regulations and guidelines are
subject to interpretation by the Secretary and NIGC and may be subject to
judicial and legislative clarification or amendment.

Lakes may need to provide the BIA or NIGC with background information on
each of its directors and each shareholder who holds five percent or more of
Lakes' stock ("5% Shareholders"), including a complete financial statement, a
description of such person's gaming experience, and a list of jurisdictions in
which such person holds gaming licenses. Background investigations of key
employees also may be required. Lakes'

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Articles of Incorporation contain provisions requiring directors and 5%
Shareholders to provide such information.

IGRA currently requires NIGC to approve management contracts and certain
collateral agreements for Indian-owned casinos. Prior to NIGC assuming its
management contract approval responsibility, management contracts and other
agreements were approved by the BIA. The NIGC may review any of Lakes'
management contracts and collateral agreements for compliance with IGRA at any
time in the future. The NIGC will not approve a management contract if a
director or a 5% Shareholder of the management company (i) is an elected member
of the Indian tribal government that owns the facility purchasing or leasing the
games; (ii) has been or is convicted of a felony gaming offense; (iii) has
knowingly and willfully provided materially false information to the NIGC or the
tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto.

In addition, the NIGC will not approve a management contract if the
management company or any of its agents have attempted to unduly influence any
decision or process of tribal government relating to gaming, or if the
management company has materially breached the terms of the management contract
or the tribe's gaming ordinance, or a trustee, exercising due diligence, would
not approve such management contract.

A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs; and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of profits; provided that the NIGC
may approve up to a seven year term and a management fee not to exceed 40% of
profits if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify the larger profit
allocation and longer term.

IGRA established three separate classes of tribal gaming -- Class I, Class
II, and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punch boards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.

IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the state in which the casino is
located that specifically authorizes the types of commercial gaming the tribe
may offer (a "tribal-state compact"). IGRA requires states to negotiate in good
faith with tribes that seek tribal-state compacts, and grants Indian tribes the
right to seek a federal court order to compel such negotiations. Many states
have refused to enter into such negotiations. Tribes in several states have
sought federal court orders to compel such negotiations under IGRA; however, the
Supreme Court of the United States held in 1996 that the Eleventh Amendment to
the United States Constitution immunizes states from suit by Indian tribes in
federal court without the states' consent.

Because Indian tribes are currently unable to compel states to negotiate
tribal-state compacts, Lakes may not be able to develop and manage casinos in
states that refuse to enter into, or renew, tribal-state compacts.

In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the law of the state in which the casino is
located permits gaming by non-Indian entities, which may change over time. Any
such changes in state law may have a material adverse effect on the casinos
managed by Lakes.

Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value in consideration of services for said Indians relative to their
lands unless

8

such contract or agreement be executed and approved" by the Secretary or his or
her designee. An agreement or contract for services relative to Indian lands
that fails to conform with the requirements of Section 81 will be void and
unenforceable. Any money or other thing of value paid to any person by any
Indian or tribe for or on his or their behalf, on account of such services, in
excess of any amount approved by the Secretary or his or her authorized
representative will be subject to forfeiture.

The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit all merchandise offered for sale to the Indians or
found in his possession, and shall moreover be liable to a penalty of $500. . ."
No such licenses have been issued to Lakes to date. The applicability of ITLA to
Indian gaming management contracts is unclear. Lakes believes that ITLA is not
applicable to its management contracts, under which Lakes provides services
rather than goods to Indian tribes. Lakes further believes that ITLA has been
superseded by IGRA.

Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Because of their sovereign status, Indian tribes possess immunity
from lawsuits to which the tribes have not otherwise consented or otherwise
waived their sovereign immunity defense. Therefore, no contractual obligations
undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has
expressly waived its sovereign immunity as to such obligations. Courts strictly
construe such waivers. Lakes has obtained immunity waivers from each of the
tribes to enforce the terms of its management agreements, however, the scope of
those waivers has never been tested in court, and may be subject to dispute.
Additionally, persons engaged in gaming activities, including Lakes, are subject
to the provisions of tribal ordinances and regulations on gaming. These
ordinances are subject to review by NIGC under certain standards established by
IGRA.

NON-GAMING REGULATIONS

The Company and its subsidiaries are subject to certain federal, state and
local, safety and health laws, regulations and ordinances that apply to
non-gaming businesses generally, such as the Clean Air Act, Clean Water Act,
Occupational Safety and Health Act, Resource Conservation Recovery Act and the
Comprehensive Environmental Response, Compensation and Liability Act. The
Company believes that it is currently in material compliance with such
regulations. The coverage and attendant compliance costs associated with such
laws, regulations and ordinances may result in future additional cost to the
Company's operations.

EMPLOYEES

At March 19, 2003, Lakes had approximately 30 employees. Lakes believes its
relations with employees are positive.

RISK FACTORS

In addition to factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.

THE CONSTRUCTION, OPERATION AND MANAGEMENT OF INDIAN CASINOS AND RESORTS REQUIRE
THE SATISFACTION OF VARIOUS CONDITIONS, MANY OF WHICH ARE BEYOND LAKES' CONTROL
AND THE FAILURE OF WHICH TO BE SATISFIED MAY SIGNIFICANTLY DELAY THE COMPLETION
OF LAKES' CURRENT INDIAN CASINO DEVELOPMENT PROJECTS OR PREVENT THE COMPLETION
OF SUCH PROJECTS ALTOGETHER.

Although Lakes and certain members of its management team have experience
developing, operating, and managing casinos owned by Indian tribes and located
on Indian land, neither the Company nor any of these individuals has developed
or operated a casino in either the State of California, the State of Michigan,
or on the east coast. In addition, the gaming industry in each of the locations
where Lakes plans to develop and

9

operate casinos has a limited operating history and faces several legal and
procedural challenges that will need to be resolved prior to the commencement of
Lakes' development activities and the opening and operation of the respective
casinos.

The opening of each of the proposed Lakes' facilities in the State of
California, the State of Michigan, and on the east coast, will be contingent
upon, among other things, the completion of construction, hiring and training of
sufficient personnel and receipt of all regulatory licenses, permits,
allocations and authorizations. The scope of the approvals required to construct
and open these facilities will be extensive, and the failure to obtain such
approvals could prevent or delay the completion of construction or opening of
all or part of such facilities or otherwise affect the design and features of
the proposed casinos.

No assurances can be given that once a schedule for such construction and
development activities is established, such development activities will begin or
will be completed on time, or any other time, or that the budget for these
projects will not be exceeded.

In addition, the regulatory approvals necessary for the construction and
operation of casinos are often challenged in litigation brought by government
entities, citizens groups and other organizations and individuals. Such
litigation can significantly delay the construction and opening of casinos.
Several of the Company's casino projects are the subject of litigation, and
there is no assurance that the litigation can be successfully defended or that
the Company's casino projects will not be delayed significantly.

Major construction projects entail significant risks, including shortages
of materials or skilled labor, unforeseen engineering, environmental and/or
geological problems, work stoppages, weather interference, unanticipated cost
increases and non-availability of construction equipment. Construction,
equipment or delays or difficulties in obtaining any of the requisite licenses,
permits, allocations and authorizations from regulatory authorities could
increase the total cost, delay or prevent the construction or opening of any of
these planned casino developments or otherwise affect their design. In addition,
once developed, no assurances can be given that the Company will be able to
manage these casinos on a profitable basis or to attract a sufficient number of
guests, gaming customers and other visitors to make the various operations
profitable independently.

Although Lakes generally provides only preliminary construction financing
for its managed casinos, with each project Lakes is subject to the risk that its
investment may be lost if the project cannot obtain adequate financing to
complete development and open the casino successfully. In some cases, Lakes may
be forced to provide more financing than it originally planned in order to
complete development, increasing the risk to Lakes in the event of a default by
the casino.

BECAUSE LAKES CURRENTLY GENERATES NO REVENUE FROM CASINO MANAGEMENT CONTRACTS
WITH WHICH TO OFFSET THE INVESTMENT COSTS ASSOCIATED WITH ITS CASINO DEVELOPMENT
PROJECTS, DELAYS IN THE COMPLETION OF THESE DEVELOPMENT PROJECTS OR THE
NON-COMPLETION OF ANY SUCH PROJECT COULD MATERIALLY AND ADVERSELY AFFECT LAKES'
POTENTIAL FOR PROFITABILITY.

Since the expiration of its management contract for Grand Casino Coushatta
(the last remaining Lakes' managed Indian-owned casino) on January 16, 2002,
Lakes has generated no revenue from its casino management activities. Given the
absence of current casino management-related operating revenue with which to
offset the potentially significant investment costs associated with its current
or future casino development projects, delays in the completion of Lakes'
current development projects, or the failure of such projects to be completed at
all, may cause Lakes' operating results to fluctuate significantly and may
adversely affect Lakes' profitability. In addition, because Lakes' future growth
in revenues and its ability to generate profits will depend to a large extent on
Lakes' ability to increase the number of its managed casinos or develop new
business opportunities, the delays in the completion or the non-completion of
Lakes' current development projects may adversely affect Lakes' ability to
realize future growth in revenues and future profits.

10

PURSUANT TO THEIR TERMS, LAKES' CONTRACTS TO MANAGE CASINOS BEING DEVELOPED BY
LAKES ON INDIAN LAND CAN BE TERMINATED BY THE TRIBES UNDER CERTAIN
CIRCUMSTANCES, WHICH TERMINATION MAY HAVE A MATERIAL ADVERSE EFFECT ON THE
RESULTS OF LAKES' OPERATIONS.

The terms of Lakes' current management contracts provide that such
contracts may be terminated under circumstances, including without limitation,
upon the failure to obtain NIGC approval for the project, the loss of requisite
gaming licenses, or an exercise by a tribe of its buy-out option. Without the
realization of new business opportunities or new management contracts,
management contract terminations could have a material adverse effect on Lakes'
results of operations and financial conditions.

IF LAKES IS REQUIRED TO MAKE SIGNIFICANT ADDITIONAL PAYMENTS IN SATISFACTION OF
THE INDEMNIFICATION OBLIGATIONS LAKES INHERITED FROM GRAND CASINOS UPON LAKES'
FORMATION, THOSE PAYMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON LAKES' ASSET
POSITION.

Under the documents relating to Lakes' spin-off from Grand Casinos and
Grand Casinos' acquisition by Park Place, Lakes agreed to indemnify Grand
Casinos and affiliates of Grand Casinos for (i) liabilities of Grand Casinos
retained by Lakes in the spin-off, (ii) Grand Casinos' ongoing indemnification
obligations to current and former directors and officers of Grand Casinos and
(iii) contingent liabilities related to Stratosphere Corporation
("Stratosphere"). Lakes has previously entered into a settlement agreement
dispensing with both the Stratosphere shareholders' litigation and the Grand
Casinos, Inc. shareholders' litigation, pursuant to which Lakes paid a total of
$18.0 million to the Grand Casinos, Inc. shareholders and the Stratosphere
shareholders for full and final settlement of all federal and state related
actions. As described under Item 3 ("Legal Proceedings"), there are currently a
number of other litigation matters for which Lakes has indemnification
obligations to Grand Casinos. Until Lakes has reached a final resolution with
respect to these matters, there can be no assurance that Lakes' indemnification
obligations will not have a material adverse effect on Lakes.

IF LAKES' CURRENT CASINO DEVELOPMENT PROJECTS ARE NOT COMPLETED OR, UPON
COMPLETION, FAIL TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE MARKET FOR
GAMING ACTIVITIES, LAKES MAY LACK THE FUNDS TO COMPETE FOR AND DEVELOP FUTURE
GAMING OR OTHER BUSINESS OPPORTUNITIES AND THE RESULTS OF LAKES' OPERATIONS MAY
SUFFER ACCORDINGLY.

The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored lotteries and video poker in restaurants, bars and
hotels; pari-mutuel betting on horse racing, dog racing and jai alai; sports
bookmaking; and card rooms. The Indian-owned casinos managed by Lakes compete,
and will in the future compete, with all these forms of gaming, and will compete
with any new forms of gaming that may be legalized in additional jurisdictions,
as well as with other types of entertainment.

Lakes also competes with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Many of Lakes' competitors
have more personnel and most have greater financial and other resources than
Lakes. Such competition in the gaming industry could adversely affect Lakes'
ability to attract customers and thus, adversely affect its operating results.
In addition, further expansion of gaming into new jurisdictions could also
adversely affect Lakes' business by diverting customers from its managed casinos
to competitors in such jurisdictions.

CHANGES IN THE LAWS, REGULATIONS, AND ORDINANCES (INCLUDING TRIBAL AND/OR LOCAL
LAWS) TO WHICH THE GAMING INDUSTRY IS SUBJECT, OR THE INABILITY OF LAKES, ITS
KEY PERSONNEL, SIGNIFICANT SHAREHOLDERS, OR JOINT VENTURE PARTNERS TO OBTAIN OR
RETAIN REQUIRED GAMING REGULATORY LICENSES, COULD PREVENT THE COMPLETION OF
LAKES' CURRENT CASINO DEVELOPMENT PROJECTS OR PREVENT LAKES FROM PURSUING FUTURE
DEVELOPMENT PROJECTS.

The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulations and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from

11

jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations, and often require such parties to obtain certain licenses, permits
and approvals.

The rapidly-changing political and regulatory environment governing the
gaming industry (including gaming operations which are conducted on Indian land)
makes it impossible for Lakes to accurately predict the effects that an adoption
of or changes in the gaming laws, regulations and ordinances will have on Lakes.
However, the failure of Lakes, or any of Lakes' key personnel, significant
shareholders or joint venture partners, to obtain or retain required gaming
regulatory licenses could prevent Lakes from expanding into new markets,
prohibit Lakes from generating revenues in certain jurisdictions, and subject
Lakes to sanctions and fines.

The political and regulatory environment in which Lakes is and will be
operating, including with respect to gaming activities on Indian land, is
discussed in greater detail in this Form 10-K under the caption "Regulation".

IF THE NIGC ELECTS TO MODIFY THE TERMS OF LAKES' MANAGEMENT CONTRACTS WITH
INDIAN TRIBES OR VOID SUCH CONTRACTS ALTOGETHER, LAKES' REVENUES FROM MANAGEMENT
CONTRACTS MAY BE REDUCED OR DISCONTINUED.

The NIGC has the power to require modifications to Indian management
contracts under certain circumstances or to void such contracts or ancillary
agreements including loan agreements if the management company fails to obtain
requisite approvals or to comply with applicable laws and regulations. NIGC has
the right to review each contract and has the authority to reduce the term of a
management contract or the management fee or otherwise require modification of
the contract, which could have an adverse effect on Lakes. Currently, the
management contracts (i) have not been reviewed or approved by NIGC and (ii)
NIGC could call them for review at any time, in which case NIGC may not approve
the contracts at all or may require modification prior to granting approval.

IF INDIAN TRIBES TO WHICH LAKES HAS LOANED MONEY DEFAULT ON THEIR REPAYMENT
OBLIGATIONS OR WRONGFULLY TERMINATE THEIR MANAGEMENT CONTRACTS WITH LAKES, LAKES
WILL BE FORCED TO RELY ON REVENUES, IF ANY, FROM CASINO OPERATIONS AS RECOURSE
FOR COLLECTION OF INDEBTEDNESS OR MONEY DAMAGES AND, THEREFORE, LAKES MAY BE
UNABLE TO COLLECT THE AMOUNTS DUE.

Lakes has made, and will make, substantial loans to tribes for the
construction, development, equipment and operations of casinos managed by Lakes.
Lakes' only recourse for collection of indebtedness from a tribe or money
damages for breach or wrongful termination of a management contract is from
revenues, if any, from casino operations. Lakes has subordinated, and may in the
future subordinate, the repayment of these loans to a tribe and other
distributions due from a tribe (including management fees) in favor of other
obligations of the tribe to other parties related to the casino operations.
Accordingly, in the event of a default by a tribe under such obligations, Lakes'
loans and other claims against the tribe will not be repaid until such default
has been cured or the tribe's senior casino-related creditors have been repaid
in full.

A DETERIORATION OF THE COMPANY'S RELATIONSHIP WITH AN INDIAN TRIBE COULD CAUSE
DELAYS IN THE COMPLETION OF A CASINO DEVELOPMENT PROJECT WITH THAT TRIBE OR EVEN
FORCE THE COMPANY TO ABANDON A CASINO DEVELOPMENT PROJECT ALTOGETHER.

Good personal and professional relationships with Indian tribes and their
officials are critical to Lakes' proposed and future Indian-related gaming
operations and activities, including Lakes' ability to obtain, develop and
effectuate management and other agreements. As sovereign nations, Indian tribes
establish their own governmental systems under which tribal officials or bodies
representing a tribe may be replaced by appointment or election or become
subject to policy changes. Replacements of tribe officials or administrations,
or changes in policies to which a tribe is subject, may deteriorate the
Company's relationship with a tribe and lead to delays in the completion of a
development project with that tribe or prevent the project's completion
altogether, either of which will have an adverse effect on the results of the
Company's operations.

12

IF FUNDS FROM LAKES' OPERATIONS ARE INSUFFICIENT TO SUPPORT ITS CASH
REQUIREMENTS AND LAKES IS UNABLE TO OBTAIN ADDITIONAL FINANCING IN ORDER TO
SATISFY THESE REQUIREMENTS, EITHER ON TERMS ACCEPTABLE TO LAKES OR AT ALL, LAKES
MAY BE FORCED TO DELAY, SCALE BACK OR ELIMINATE SOME OF ITS EXPANSION AND
DEVELOPMENT GOALS, OR CEASE ITS OPERATIONS ENTIRELY. THE CONSTRUCTION OF ITS
CASINO PROJECTS MAY ALSO DEPEND ON THE ABILITY OF VARIOUS INDIAN TRIBES TO RAISE
CAPITAL.

Lakes anticipates that its reserves of cash, interest expected to be earned
on those reserves, and its anticipated revenues will be sufficient to finance
its operations. However, it is likely additional financing for Lakes will be
required to complete one or more of its casino projects as soon as regulatory
approvals are received and construction can begin. There can be no assurance
that Lakes will not seek or require additional capital at some point in the
future through either public or private financings. Such financings may not be
available when needed on terms acceptable to Lakes or at all. Moreover, any
additional equity financings may be dilutive to Lakes' shareholders, and any
debt financing may involve additional restrictive covenants. An inability to
raise such funds when needed might require Lakes to delay, scale back or
eliminate some of its expansion and development goals, or might require Lakes to
cease its operations entirely. Lakes' financial condition and resources are
discussed in greater detail in Item 7. ("Management's Discussion and Analysis of
Financial Condition and Results of Operations of Lakes -- Capital Resources,
Capital Spending and Liquidity").

In addition, the construction of the Company's Indian casino projects may
depend on the ability of the tribes to obtain financing for the projects. If
such financing cannot be obtained on acceptable terms, it may not be possible to
complete these projects. In order to assist the tribes, Lakes may be required to
guarantee the tribes' debt financing or otherwise provide support for the
tribes' obligations. Any guarantees by Lakes or similar off-balance sheet
liabilities will increase Lakes' potential exposure in the event of a default by
any of these tribes.

A LARGE PORTION OF LAKES' ASSETS ARE REPRESENTED BY NOTES RECEIVABLE FROM INDIAN
TRIBES AND OTHER PARTIES WITH VARYING DEGREES OF COLLECTION RISK, AND WITH
REPAYMENT OFTEN DEPENDENT ON THE OPERATING PERFORMANCE OF EACH GAMING PROPERTY.
IMPAIRMENT OF ONE OR MORE OF THESE LOANS COULD HAVE A SIGNIFICANT ADVERSE IMPACT
ON LAKES' FINANCIAL RESULTS.

At December 29, 2002, Lakes had $71.0 million in notes receivable, which
represented approximately 40% of its total assets. See Note 3 to the
Consolidated Financial Statements included in Item 8. Most of the notes
receivable are advances made to Indian tribes for financing related to gaming
properties being developed, managed or financed by Lakes. Other notes receivable
relate to other business ventures in which Lakes has participated. All of the
notes are subject to varying degrees of collection risk and there is no
established market for any of the notes. For the notes representing indebtedness
of Indian tribes, the repayment terms are specific to each tribe and are largely
dependent upon the operating performance of each gaming property. Repayments of
such notes receivable are required to be made only if distributable profits are
available from the operation of the related casinos. Repayments are also the
subject of certain distribution priorities specified in the management
contracts. In addition, repayment to Lakes of the notes receivable and the
manager's fees under Lakes' management contracts are subordinated to certain
other financial obligations of the respective tribes.

It is possible that one or more of the loans to Indian tribes will not be
collectible, in whole or in part. Management periodically evaluates the
recoverability of its notes receivable based on the current and projected
operating results of the underlying facility or entity and historical collection
experience. No impairment losses on such notes receivable have been recognized
through December 29, 2002. If there are significant losses in the future
relating to impairment of value of the notes, this could have a material adverse
effect on Lakes' results of operations and financial condition. As Lakes' casino
projects begin construction or Lakes enters into new business arrangements,
Lakes expects to make additional advances to Indian tribes and other parties in
the future, which will be subject to the risks described above.

13

ENTRY INTO NEW BUSINESSES MAY RESULT IN FUTURE LOSSES.

Lakes has announced that part of its strategy involves diversifying into
other businesses. Such businesses involve business risks separate from the risks
involved in casino development and these investments may result in future losses
to Lakes. These risks include but are not limited to negative cash flow, initial
high development costs of new products and/or services without corresponding
sales pending receipt of corporate and regulatory approvals, market introduction
and acceptance of new products and/or services, and obtaining regulatory
approvals required to conduct the new businesses. There is no assurance that
diversification activities will successfully add to Lakes' future revenues and
income.

LAKES IS HEAVILY DEPENDENT ON THE ONGOING SERVICES OF ITS CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, LYLE BERMAN, THE LOSS OF WHOM WOULD HAVE A DETRIMENTAL EFFECT
ON THE PURSUIT OF LAKES' BUSINESS OBJECTIVE AND, CONSEQUENTLY, ITS PROFITABILITY
AND THE PRICE OF ITS STOCK.

Lakes' success will depend largely on the efforts and abilities of its
senior corporate management, particularly Lyle Berman, its Chairman and Chief
Executive Officer. The loss of the services of Mr. Berman or other members of
senior corporate management could have a material adverse effect on Lakes. Lakes
does not have an employment agreement with Mr. Berman.

UNTIL LAKES HAS SATISFIED ITS INDEMNIFICATION OBLIGATIONS RELATED TO GRAND
CASINOS, LAKES IS PROHIBITED FROM DECLARING DIVIDENDS ON ITS COMMON STOCK AND,
CONSEQUENTLY, THE ONLY RETURN ON INVESTMENT FOR LAKES' SHAREHOLDERS, IF ANY,
WILL OCCUR UPON THE SALE OF LAKES' STOCK.

So long as Lakes is required to indemnify Grand Casinos for certain
specified liabilities, including (i) contingent liabilities assumed by Lakes
under the Distribution Agreement, (ii) ongoing director and officer
indemnification obligations and (iii) contingent liabilities related to
Stratosphere, Lakes has agreed that it will not declare or pay any dividends,
make any distribution on account of Lakes' equity interests, or otherwise
purchase, redeem, defease or retire for value any equity interest in Lakes,
without the written consent of Park Place, which consent can be given or
withheld at Park Place's sole and absolute discretion. Lakes believes it has
satisfied all potential obligations beyond the amounts provided for in the
Company's financial statements. Lakes is seeking release of the restricted cash
that was deposited into trust.

ITEM 2. PROPERTIES

CORPORATE OFFICE FACILITY

Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned
to Lakes, and Lakes assumed a lease agreement dated February 1, 1996 covering
corporate office space of approximately 65,000 square feet in Minnetonka,
Minnesota, with a lease term of fifteen years. The lease commenced on October
14, 1996 and the annual base rent was $768,300 plus building operating costs.
During 2001, also pursuant to the terms of the Distribution Agreement, Lakes
entered into a capital lease arrangement for the corporate office space.
Accordingly, Lakes recorded a capital leased asset and liability in the amount
of approximately $5.8 million. These amounts are included on the accompanying
consolidated balance sheet as of December 30, 2001. On January 2, 2002, as per
the terms of the agreement with Grand Casinos, Lakes purchased the building for
$6.4 million which is included as part of property and equipment on the
accompanying consolidated balance sheet as of December 29, 2002. Lakes occupies
approximately 22,000 square feet of the building and has leased the remaining
space to outside tenants.

LAS VEGAS LAND

The Company owned, or held purchase options for, approximately sixteen
acres of land surrounding the corner of Harmon Avenue and Las Vegas Boulevard in
Las Vegas, Nevada. On December 28, 2001, the Company entered into a contract for
sale of the Polo Plaza shopping center property to Metroflag Polo, LLC. In
conjunction with this transaction, Lakes also entered into a contract for sale
to Metroflag BP, LLC, of the rights to the adjacent Travelodge property
consisting of a long-term land lease and a motel operation. This transaction was
accounted for under the deposit method of accounting under the requirements of
Statement of

14

Financial Accounting Standards No. 66, Accounting for Sales of Real Estate,
rather than as a sale. The price for this combined transaction, which closed on
December 28, 2001, was approximately $30.9 million. Terms of the transaction
include a $1.0 million down payment, which was received in January 2002, a
contractual commitment to pay Lakes $23.3 million payable by December 29, 2002,
and a second contractual commitment to pay Lakes $7.5 million on June 30, 2004.
A $0.5 million payment on the notes receivable was received during 2002.

During 2002, Lakes and Metroflag restructured the terms of the Polo Plaza
and Travelodge property transactions due to deteriorating economic conditions.
The parties reduced the purchase price for the Polo Plaza property from $23.8
million to $21.8 million. On the payment date, which was scheduled to be no
later than January 31, 2003, $16.8 million of the purchase price was to be
payable to Lakes in cash and $4.0 million was to be payable through the issuance
to Lakes of a preferred membership interest in Metroflag. Effective June 30,
2002, Lakes recorded a $3.0 million impairment charge for these properties
relating to the adjustment in the purchase price and a negotiated potential
discount on the return of Lakes' preferred interest. This real estate is
reported at its adjusted carrying value in Land Held Under Contract for Sale.
Lakes' collateral is the property and lease rights described above which would
revert back to Lakes in the event of default by Metroflag.

During March of 2003, Lakes and Metroflag agreed to additional revisions to
the terms of the Polo Plaza and Travelodge property transactions. The parties
have increased the price of the Polo Plaza property from $21.8 million to $25.8
million. On the payment date, which the parties have agreed in principle shall
be extended to no later than May 15, 2003, $16.8 million of the purchase price
is payable to Lakes in cash, $4.0 million is payable through the issuance to
Lakes of a preferred membership interest in Metroflag and $4.0 million is
payable through the issuance to Lakes of a subordinated membership interest in
Metroflag. On or before April 30, 2004, Metroflag Polo may elect to distribute
to Lakes $3.0 million plus interest in cash as full return of Lakes' preferred
interest. If paid after April 30, 2004, and in no event later than December 24,
2006, the entire $4.0 million plus interest will be payable. The subordinated
interest must be repurchased for $4.0 million at the time of repayment of an
outstanding $3.5 million contractual commitment in connection with the
Travelodge property, which is scheduled on or before December 28, 2004. If the
Travelodge commitment is not repaid by December 28, 2004, ownership of the
Travelodge lease rights would revert back to Lakes. If at any time the Polo
Plaza property is sold and the Travelodge commitment has not been repaid,
Metroflag is required to repurchase the subordinated interest for the lesser of
$4.0 million or any portion of the net cash proceeds from such sale or
refinancing that exceeds $60.0 million.

The parties have decreased the sale price of the Travelodge property from
$7.5 million to $3.5 million. The contractual commitment to pay Lakes has also
been decreased from $7.5 million to $3.5 million and is now payable no later
than December 28, 2004.

Lakes continues to own the Shark Club property, which is an approximate 3.5
acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. During August 2002, Lakes formed the Chateaux, LLC, a joint venture with
Diamond Resorts, LLC, a Nevada limited liability company and time-share
developer for the purpose of developing the Shark Club parcel as an upscale
time-share project. Lakes owns a 49% voting interest in the Chateaux, LLC. The
terms of this joint venture agreement require that Diamond and Lakes each make a
working capital contribution of $250,000.

Subject to Diamond obtaining a financing commitment for a construction loan
sufficient to fund at least the first phase of the building improvements
contemplated by the time-share project, the joint venture agreement will require
Lakes to contribute the relevant portion of the Shark Club parcel, which was
originally valued at $16 million. During December of 2002, the Shark Club parcel
was adjusted to its revised estimated market value of $15 million, resulting in
an impairment charge of approximately $1.0 million, which is reflected in
impairment losses in the accompanying consolidated statement of loss. Diamond
has agreed to perform sales, marketing, administrative and managerial services
for the project. The terms of the joint venture agreement provide for the
repayment to Lakes of its contribution of property in cash based on the joint
venture's cash flow and time-share unit sales. It is contemplated that Lakes
will be required to make no other

15

material contributions of cash or property to the project. It is possible that
Lakes may sell the Shark Club property or its interest in the joint venture
prior to or during construction in order to monetize this investment.

ITEM 3. LEGAL PROCEEDINGS

The following summaries describe certain known legal proceedings to which
Grand Casinos is a party which Lakes has assumed, or with respect to which Lakes
may have agreed to indemnify Grand Casinos, in connection with the Distribution.

SLOT MACHINE LITIGATION

In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand Casinos) alleged to operate casinos or be slot
machine manufacturers were named as defendants. The plaintiff sought to have the
action certified as a class action.

A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.

Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.

In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.

In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the
Schreier action were similar to those made by the plaintiffs in the Poulos and
Ahearn actions, except that Schreier claimed to represent a more precisely
defined class of plaintiffs than Poulos or Ahearn.

In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.

In March 1997, various defendants (including Grand Casinos) filed motions
to dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.

In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand Casinos has filed its answer to
the new complaint.

The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand Casinos and certain of the defendants have opposed the
motion. The Court has not ruled on the motion.

STANDBY EQUITY COMMITMENT LITIGATION

In 1997, the trustee under an indenture pursuant to which Stratosphere
Corporation issued certain first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant. The complaint alleged that Grand Casinos failed to perform under
the Standby Equity Commitment entered into between Stratosphere and Grand
Casinos in connection with Stratosphere's issuance of such first mortgage notes
in March 1995. The complaint sought an order compelling specific

16

performance of what the Trustee claimed were Grand Casinos' obligations under
the Standby Equity Commitment. An LLC was subsequently substituted for the
trustee in the proceeding. Following trial, on April 4, 2001, the Court entered
judgment in favor of Grand Casinos and issued its findings of fact and
conclusions of law. The plaintiff filed an appeal with the Ninth Circuit Court
of Appeals on May 4, 2001, Case No. 01-15947. On August 13, 2002, the Ninth
Circuit affirmed the prior ruling in favor of Grand. In November 2002, the
Company announced that the appeal period for this litigation had expired.

STRATOSPHERE PREFERENCE ACTION

In April 1998, Stratosphere served on Grand Casinos and Grand Media &
Electronics Distributing, Inc., a wholly owned subsidiary of Grand Casinos
("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
recovery of certain amounts paid by Stratosphere to (i) Grand Media for
electronic equipment purchased by Stratosphere from Grand Media, and (ii) Grand
as management fees and for costs and expenses under a management agreement
between Stratosphere and Grand.

Stratosphere claimed in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law. In May 1998, Grand
Casinos responded to Stratosphere's complaint denying that Stratosphere is
entitled to recover the amounts described in the complaint. Discovery was
completed on December 31, 2001 and the case proceeded to trial before the United
States Bankruptcy Court for the District of Nevada on June 20, 2002.

On December 31, 2002, the Bankruptcy Court issued its final judgment
holding that: (i) payments to Grand Media for electronic equipment totaling
approximately $3.3 million are not recoverable by Stratosphere as avoidable
preferences, and (ii) payment to Grand for management services in the
approximate amount of $2.3 million is recoverable by Stratosphere and an
avoidable preference. Under this judgment, Lakes would be obligated to indemnify
Grand for the $2.3 million recovery. As of December 29, 2002 and December 30,
2001, $7.5 million related to security to support Lakes' indemnification
obligations to Grand is included as restricted cash in the accompanying
condensed consolidated balance sheets.

All post-trial issues have been resolved, and the parties will have an
opportunity to appeal for a period of ten days following entry of final
judgment.

OTHER LITIGATION

The Company has recorded a reserve assessment related to various of the
above items. The reserve is reflected as a litigation and claims accrual on the
accompanying consolidated balance sheets.

Grand Casinos and Lakes are involved in various other inquiries,
administrative proceedings, and litigation relating to contracts and other
matters arising in the normal course of business. While any proceeding or
litigation has an element of uncertainty, management currently believes that the
final outcome of these matters is not likely to have a material adverse effect
upon the Company's consolidated financial position or results of operations.
Consequently, the Company has not recorded any reserve assessments related to
these matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Lakes became a publicly held company effective December 31, 1998. The
Common Stock began trading on the Nasdaq National Market under the symbol LACO
on January 4, 1999.

17

The high and low sales prices per share of the Company's Common Stock for
each full quarterly period within the two most recent fiscal years are indicated
below, as reported on the Nasdaq National Market:

On March 19, 2003, the last reported sale price for the Common Stock was
$5.58 per share. As of March 19, 2003, the Company had approximately 989
shareholders of record.

The Company has never paid any cash dividends with respect to its Common
Stock and the current policy of the Board of Directors is to retain any earnings
to provide for the growth of the Company. So long as Lakes is required to
indemnify Grand, as a subsidiary of Park Place, for certain specified
liabilities, Lakes has agreed that it will not declare or pay any dividends,
make any distribution on account of Lakes' equity interests or otherwise
purchase, redeem, defease or retire for value any equity interest in Lakes
without the written consent of Park Place which consent can be given or withheld
in Park Place's sole and absolute discretion. Subject to the foregoing dividend
restrictions, the payment of cash dividends in the future, if any, will be at
the discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements, the Company's overall financial condition
and any other factors deemed relevant by the Board of Directors. See "Risk
Factors -- Operating Covenants -- Dividend Restrictions."

ITEM 6. SELECTED FINANCIAL DATA

The Selected Financial Data presented below should be read in conjunction
with the Financial Statements and notes thereto included elsewhere in this Form
10-K, and in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.

18

- ---------------

(1) 2002 includes $1.5 million in revenues from the management contract for
Grand Casino Coushatta that concluded on January 16, 2002. 2001 includes
$34.6 million in revenues from the management contract for Grand Casino
Coushatta that concluded January 16, 2002. 2000 includes $19.8 million in
revenues from the management contract for Grand Casino Avoyelles that
concluded during 2000, including $16.0 million relating to the early buyout
of the agreement. 1998 results include $36.8 million in revenues from the
management contracts for Grand Casino Mille Lacs and Grand Casino Hinckley
that concluded during 1998.

(2) Includes non-recurring, non-cash charges totaling $4 million related to the
impairment of certain land held under contract for sale and held for
development in Las Vegas, Nevada. Also includes a non-recurring, non-cash
charge of $4 million relating to the impairment of a note receivable from
Living Benefits Financial Services.

(3) Includes non-recurring, non-cash charges totaling $29.2 million related to
the impairment and write-down of certain land held for development in Las
Vegas, Nevada.

(4) Includes a non-recurring, non-cash $18.0 million provision for the Grand
Casinos/Stratosphere litigation settlement and a $5.5 million charge for the
write-off of unconsolidated affiliates.

(5) EBITDA is earnings before interest, taxes, depreciation and amortization,
which can be computed by adding depreciation and amortization to operating
income. For 2002, this amount is a loss, therefore, EBITDA is not shown for
2002. EBITDA excludes the $29.2 million charge related to the impairment and
write-down of certain land held for development in Las Vegas, Nevada in 2001
and the $18.0 million provision for the Grand Casinos/Stratosphere
litigation settlement and the $5.5 million write-off of unconsolidated
affiliates in 2000. EBITDA is presented supplementally because management
believes it allows for a more complete analysis of results of operations.
This information should not be considered as an alternative to any measure
of performance as promulgated under accounting principles generally accepted
in the United States (such as operating income or income from continuing
operations) nor should it be considered as an indicator of the overall
financial performance of Lakes. The calculations of EBITDA may be different
from the calculations used by other companies and, therefore, comparability
may be limited. Historical depreciation and amortization for Lakes for the
fiscal years ended December 29, 2002, December 30, 2001, December 31, 2000,
January 2, 2000, and January 3, 1999 totaled $0.5 million, $1.0 million,
$3.0 million, $2.0 million, and $2.0 million, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the
"Company") was established as a public corporation on December 31, 1998, via a
distribution (the "Distribution") of its Common Stock, to the shareholders of
Grand Casinos, Inc. ("Grand Casinos").

As a result of the Distribution, Lakes operates the Indian casino
management business and holds various other assets previously owned by Grand
Casinos. Lakes' main business is the development, construction and management of
casinos and related hotel and entertainment facilities in emerging and
established gaming jurisdictions. Lakes has entered into the following contracts
for the development, management and/or financing of new casino operations, all
of which are subject to various regulatory approvals before construction can
begin: (1) Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan. (2) Lakes has entered
into contracts to develop and manage two casinos to be owned by Indian tribes in
California, one near San Diego with the Jamul Indian Village and the other near
Sacramento with the Shingle Springs Band of Miwok Indians. (3) Lakes and another
company have formed a partnership with a contract to finance the construction of
an Indian-owned casino 60 miles north of San Francisco, California. The
Cloverdale Rancheria has notified the partnership that the Rancheria wishes to
terminate the relationship between the two parties. The partnership has advised
the Rancheria that the partnership believes the contract is enforceable. The
Rancheria acknowledges that the partnership has loaned the Rancheria money and
that the Rancheria will endeavor to repay the money in a timely manner. (4)
Lakes has also signed contracts with a Massachusetts Indian tribe for
development and management of a potential

19

future gaming resort in the eastern United States; however, this tribe has
received a negative finding regarding federal recognition from the Bureau of
Indian Affairs (BIA). The tribe has submitted additional information for
reconsideration.

In addition, Lakes owns options to purchase various new casino games and is
actively marketing these new games to the casino industry in an attempt to have
a casino accept the games for use in their operations. Lakes has also formed a
joint venture with another company to develop approximately 2,000 acres owned by
the joint venture in eastern San Diego County in California. It is possible the
land will be sold in lieu of a development by the joint venture. Lakes has also
formed a joint venture with a producer to launch the World Poker Tour and
establish poker as the next significant televised mainstream sport. The joint
venture recently signed a three-year agreement with the Travel Channel for
broadcast of the World Poker Tour series. See Item 1 -- "Business".

Lakes' historical revenues have been derived almost exclusively from
management fees. Through January 16, 2002, Lakes managed a land-based,
Indian-owned casino, Grand Casino Coushatta, in Kinder, Louisiana ("Grand Casino
Coushatta"). Pursuant to the Coushatta management contract, Lakes received a fee
based on the net distributable profits (as defined in the contracts) generated
by Grand Casino Coushatta. The management contract expired January 16, 2002, and
was not renewed. This non-renewal has resulted in the loss of revenues to the
Company derived from such contract, which has had a material adverse effect on
the Company's results of operations.

The Company also managed a second land-based, Indian-owned casino in
Marksville, Louisiana ("Grand Casino Avoyelles"). On March 31, 2000, the Company
reached an agreement with the tribe for the early buyout of the management
contract for Grand Casino Avoyelles, which was scheduled to expire on June 3,
2001. The early buyout of the contract was provided for in the original
seven-year management agreement and, under the agreement, Lakes was compensated
for the management fees the company would have received had it managed Grand
Casino Avoyelles through the original contract expiration date of June 3, 2001,
discounted to their present value. Lakes was also repaid all amounts owing to it
under its loan agreements with the Tribe.

Lakes' limited operating history may not be indicative of Lakes' future
performance. In addition, a comparison of results from year to year may not be
meaningful due to the opening of new facilities during each year and the buy-out
and/or cessation of other casino management contracts. Lakes' growth strategy
contemplates the expansion of existing operations, the pursuit of opportunities
to develop and manage additional gaming facilities and the pursuit of new
business opportunities. The successful implementation of this growth strategy is
contingent upon the satisfaction of various conditions, including obtaining
governmental approvals, the impact of increased competition, and the occurrence
of certain events, many of which are beyond the control of Lakes.

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies, which Lakes believes are the most
critical to aid in fully understanding and evaluating its reported financial
results, include the following: revenue recognition and realizability of notes
receivable.

Revenue recognition: Revenue from the management of Indian-owned casino
gaming facilities is recognized when earned according to the terms of the
management contracts. Currently all of the Indian-owned casino projects that
Lakes is involved with are in development stages and are not yet open.
Therefore, until a project is opened and operating, Lakes will not recognize
revenue related to Indian casino management. Interest income on notes receivable
for Indian tribes related to casino development projects is deferred because
realizability of the interest is contingent upon the completion and generation
of cash flow from the operation of the casino. Interest deferred during the
development period is recognized over the remaining life of the note using the
effective interest method.

Impairment of long-term assets: The Company's notes receivable from Indian
Tribes are generally for the development of gaming properties to be managed by
the Company. The repayment terms are specific to

20

each tribe and are largely dependent upon the operating performance of each
gaming property. Repayments of the notes receivable are required to be made only
if distributable profits are available from the operation of the related
casinos. Repayments are also the subject of certain distribution priorities
specified in the management contracts. In addition, repayment of the notes
receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.
Through December 29, 2002, no amounts have been withheld under these provisions.
Management periodically evaluates the recoverability of such notes receivable
based on the current and projected operating results of the underlying facility
and historical collection experience. The Company currently holds land held for
development and land held under contract for sale. The Company periodically
evaluates whether events and circumstances have occurred that may affect the
recoverability of the net book value of these assets. If such events or
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company estimates the future cash flows expected to result from
the use of the asset. If the sum of the expected future undiscounted cash flows
does not exceed the carrying value of the asset, the Company will recognize an
impairment loss. During 2002, the Company recognized an impairment loss of $3.0
million on land held under contract for sale and an impairment loss of $1.0
million on land held for development.

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto for the years ended
December 29, 2002, December 30, 2001, and December 31, 2000.

RESULTS OF OPERATIONS

Revenues are calculated in accordance with accounting principles generally
accepted in the United States of America and are presented in a manner
consistent with industry practice. Net distributable profits are computed by the
Indian casinos using a modified cash basis of accounting in accordance with the
management contracts to calculate management fees. Under this modified cash
basis of accounting prescribed by the management contracts, the write-off of
capital equipment and leased assets for the casino operations is accelerated,
which thereby impacts the timing of net distributable profits.

FISCAL YEAR ENDED DECEMBER 29, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
2001

Revenues. Total revenues were $1.5 million for the fiscal year ended
December 29, 2002, compared to $34.9 million for the same period in the prior
year. Revenues for the current year were derived from fees related to the
management of Grand Casino Coushatta. Revenues for the year decreased by $33.4
million from 2001, principally because 2001 revenues included management fees
for the management of Grand Casino Coushatta for the entire year. Since this
management contract expired on January 16, 2002, current year revenues include
management fees for only 17 days. Due to the expiration of this management
agreement with the Coushatta Tribe of Louisiana, the Company's revenues and
earnings have not included contributions from the Coushatta operation since
January 16, 2002, which has had a material adverse effect on the Company's
results of operations. The Company currently has no other management contracts
from which it will derive revenues in 2003.

Costs and Expenses. Total costs and expenses decreased $17.6 million, to
$18.4 million for the year ended December 29, 2002, from $36.0 million for the
prior year. There was a decrease of $17.4 million in impairment losses from 2002
compared to 2001. The year ended December 30, 2001 included $25.4 million of
such charges including the $22.0 million write-down of the Polo Plaza and
Travelodge properties in Las Vegas and the $3.4 million write-down of the Shark
Club property in Las Vegas. The year ended December 29, 2002 included $8.0
million of such charges including the write-down of the $4.0 million note
receivable from Living Benefits Financial Services, the $3.0 million write-down
of the Polo Plaza and Travelodge properties in Las Vegas and the $1.0 million
write-down of the Shark Club property. The use of the Shark Club property is
discussed below under "Financial Condition". Selling, general and administrative
expenses increased from $9.2 million for 2001 to $9.9 million for 2002,
principally due to an increase in costs associated with planned casino
developments. Depreciation and amortization expenses decreased $0.8 million, to
$0.5 million for the year ending December 29, 2002 from $1.3 million for the
prior year, due to the conclusion of the Coushatta management contract in
January of 2002.

21

Taxes. Benefit for income taxes was $4.5 million for the year ended
December 29, 2002, compared to $2.0 million for the prior year. The effective
tax rates for 2002 and 2001 were 27.9% and 41.0%, respectively. The decrease in
the effective rate was due to the provision of additional valuation allowances
for tax benefits associated with the impairment of capital assets.

Other. Loss on land held for development was $3.7 million for the year
ended December 30, 2001. This amount includes losses relating to the lapsed
option on the Cable property adjacent to the Polo Plaza property in Las Vegas,
Nevada.

The Company has $71.0 million in notes receivable at December 29, 2002,
principally from Indian tribes related to casino development projects. Interest
income is deferred during development of the casinos because realizability of
the interest is contingent upon the completion and positive cash flow from
operation of the casino. In each of fiscal 2002 and 2001, $4.0 million in
interest on such notes was deferred.

In June 2001, Lakes entered into an agreement with New Horizon Kids Quest
(NHKQ), pursuant to which NHKQ would acquire Lakes' interest in NHKQ. As a
result, Lakes incurred a one-time write-down charge, included as write-down of
unconsolidated affiliates, of $0.7 million before tax, during 2001. Interest
income decreased $0.6 million to $1.4 million for the fiscal year ended December
29, 2002 from $2.0 million for the prior year, primarily due to the payoff of
notes receivable related to Grand Casino Coushatta in January 2002, as well as,
a decline in cash balances and in market interest rates. Equity in loss of
unconsolidated affiliates was $0.5 million for the years ended December 29, 2002
and December 30, 2001.

Earnings (Loss) per Common Share and Net Earnings (Loss). For the fiscal
year ended December 29, 2002 basic and diluted losses per common share were
$1.08. This compares to basic and diluted losses per common share of $0.27 for
the fiscal year ended December 30, 2001. Losses increased from $2.9 million for
the fiscal year ended December 30, 2001, to $11.5 million for the fiscal year
ended December 29, 2002.

Outlook. It is currently contemplated that there will be no operating
revenues for 2003 from existing casino development projects. Revenue from the
World Poker Tour is expected, however, this revenue is not expected to exceed
production costs during 2003. Although none of the existing casino development
projects are expected to produce revenue in 2003, Lakes continues to evaluate
potential new revenue-generating business opportunities. Lakes continues to
closely monitor its operating expenses. The Company's cash position coupled with
payments to be received on the sale of the Polo Plaza property, are considered
adequate to cover expected 2003 operating expenses.

FISCAL YEAR ENDED DECEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

Revenues. Total revenues were $34.9 million for the fiscal year ended
December 30, 2001, compared to $59.0 million for the same period in the prior
year. Revenues for the current year were less than the same period last year
primarily due to the early buyout of the Company's management contract for Grand
Casino Avoyelles by the Tunica-Biloxi Tribe of Louisiana at the end of the first
quarter 2000, pursuant to the terms of the contract.

Revenues from Grand Casino Avoyelles contributed $19.8 million for the
twelve months ended December 31, 2000, including approximately $16.0 million in
management fee income recognized due to the buyout of the management contract.
The decrease in revenues relates also to a decline in management fees of $4.2
million from Grand Casino Coushatta due to construction interruption on the main
roads leading to the casino, along with intensive marketing campaigns
implemented by casinos in the competitive Lake Charles market and adverse
weather conditions in the area.

The management contract for Grand Casino Coushatta expired January 16, 2002
and will not be renewed. This expiration will result in the loss of revenues to
the Company derived from such contract, which will have a material adverse
effect on the Company's results of operations. As of this filing, no revenues
are being derived from casinos.

Costs and Expenses. Total costs and expenses increased $24.1 million, to
$36.0 million for the year ended December 30, 2001, from $11.9 million for the
prior year. Impairment losses were $25.4 million for the

22

year ended December 30, 2001. There were no impairment losses in the prior year.
The increase primarily reflects the $22.0 million write-down of the Polo Plaza
and Travelodge properties in Las Vegas and the $3.4 million write-down of the
Shark Club property in Las Vegas to $16.0 million during 2001. The use of the
Shark Club property is discussed below under "Capital Resources, Capital
Spending and Liquidity". Selling, general and administrative expenses increased
from $9.0 million for the year ended December 31, 2000 to $9.2 million for the
year ended December 30, 2001. This increase is primarily due to an increase in
costs associated with planned casino developments. Depreciation and amortization
expenses decreased $1.6 million, to $1.3 million for the year ending December
30, 2001 from $2.9 million for the prior year, due to the early buyout of the
Avoyelles management contract in 2000.

Taxes. Benefit for income taxes was $2.0 million for the year ended
December 30, 2001, compared to a provision for income taxes of $12.1 million for
the prior year. The effective tax rates for 2001 and 2000 were 41.0% and 45.0%,
respectively.

Other. Loss on land held for development was $3.7 million for the year
ended December 30, 2001. This amount includes losses relating to the lapsed
option on the Cable property adjacent to the Polo Plaza property in Las Vegas,
Nevada. In the year ended December 31, 2000, there was a provision for
litigation loss of $18.0 million. This amount relates to a settlement agreement
reached in June 2000 regarding both the Stratosphere shareholders' litigation
and the Grand Casinos, Inc. shareholders' litigation. The settlement agreement
required Lakes to pay a total of $18.0 million, which has been reflected as a
non-operating expense. This amount was paid into escrow and related accounts in
July 2000 for full and final settlement for all federal and state related
actions. Such amounts were included as restricted cash on the accompanying
consolidated balance sheet as of December 31, 2000. The settlement agreement
received final approval by the respective courts, and distributions have been
made in accordance with the settlement agreement.

In June 2001, Lakes entered into an agreement with New Horizon Kids Quest
(NHKQ), pursuant to which NHKQ would acquire Lakes' interest in NHKQ. As a
result, Lakes incurred a one-time write-down charge, included as write-down of
unconsolidated affiliates, of $0.7 million before tax, during 2001. For the 2000
year, the $5.5 million charge for the write-down of unconsolidated affiliates
reflects the carrying value at December 31, 2000 for certain assets held as
investments including securities in Fanball.com, Inc., Interactive Learning
Group, Inc. and Trak 21 Development, LLC. Interest income decreased $3.9 million
to $2.0 million for the fiscal year ended December 30, 2001 from $5.9 million
for the prior year, primarily due to the payoff of notes receivable related to
Grand Casino Avoyelles in 2000, as well as, a decline in market interest rates.
Equity in loss of unconsolidated affiliates was $0.5 million and $2.9 million
for the years ended December 30, 2001 and December 31, 2000, respectively, the
current year decrease is the result of the write-off of investments in
Fanball.com, Interactive Learning Group and Trak 21 at the end of 2000.

Earnings (Loss) per Common Share and Net Earnings (Loss). For the fiscal
year ended December 30, 2001 basic and diluted losses per common share were
$0.27. This compares to basic and diluted earnings per common share of $1.36 for
the fiscal year ended December 31, 2000. Earnings decreased from $14.5 million
for the fiscal year ended December 31, 2000 to a loss of $2.9 million for the
fiscal year ended December 30, 2001.

FINANCIAL CONDITION

At December 29, 2002 Lakes had $8.3 million in restricted cash and $14.1
million in unrestricted cash and cash equivalents. For the years ended December
29, 2002, December 30, 2001 and December 31, 2000, net cash provided by
operating activities totaled $1.2 million, $30.7 million and $35.0 million,
respectively. For the same periods, net cash provided by (used in) investing
activities totaled ($22.7) million, $2.0 million and ($49.0) million,
respectively. Included in these investing activities for the years ended
December 29, 2002, December 30, 2001 and December 31, 2000 are proceeds
primarily from repayment of notes receivable from Indian-owned casinos of $0.1
million, $16.7 million and $18.0 million, respectively. Advances on notes
receivable were $18.7 million, $21.8 million and $33.6 million for the years
ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.
Also, during these periods, payments for land held for development amounted to
$4.0 million, $22.5 million and $7.6 million, respectively.

23

Lakes plans to use its cash for continuing operations, loans to current
joint venture and tribal partners to develop existing and anticipated Indian
casino operations, the pursuit of additional business opportunities, and
settlement of pending litigation matters. The amount and timing of Lakes' cash
outlays for casino development loans will depend on the timing of the regulatory
approval process and the availability of external financing. When approvals are
received, additional financing will be needed to complete the projects. It is
currently planned that this third-party financing will be obtained by each
individual tribe. However, there can be no assurance that if third-party
financing is not available, Lakes will not be required to finance these projects
directly. If Lakes must provide this financing, Lakes expects to obtain debt or
equity financing which it would loan to the respective tribes as necessary. In
the alternative, Lakes may be required to guarantee the tribes' debt financing
or otherwise provide support for the tribes' obligations. Any guarantees by
Lakes or similar off-balance sheet liabilities will increase Lakes' potential
exposure in the event of a default by any of these tribes.

At December 29, 2002, Lakes had approximately $71.0 million in notes
receivable from Indian tribes and other parties. Most of these amounts are
advances made to the tribes for the development of gaming properties managed by
Lakes. See Note 3 to the Consolidated Financial Statements included in Item 8.
Notes receivable from the Coushatta Tribe of Louisiana were $0.1 million at
December 30, 2001. The outstanding balance was repaid at the conclusion of the
management agreement on January 16, 2002. In addition, Lakes was previously the
guarantor of a loan agreement entered into by the Coushatta Tribe in the amount
of $25.0 million, with a balance of $6.8 million outstanding at December 30,
2001. Lakes was released from the guaranty agreement on January 16, 2002.

The joint venture entities that hold the management contracts for the San
Diego and Sacramento area casino resorts were previously jointly owned with two
LLC's owned by Kevin M. Kean and Jerry A. Argovitz, (the "KAR Entities"). On
January 30, 2003, subsidiaries of Lakes purchased the respective joint venture
interests of the KAR Entities for nominal consideration, at which time the joint
venture entities became indirect wholly owned subsidiaries of Lakes. At the time
of the purchase, Lakes or its subsidiaries had notes receivable from the KAR
Entities and a long-term receivable from Kevin M. Kean that, as of December 29,
2002, were in the amounts of $1.8 million and $1.9 million, respectively. In
connection with the purchase transactions, Lakes and certain of its subsidiaries
entered into separate agreements with Kevin M. Kean and Jerry A. Argovitz, the
two individual owners of the KAR Entities. Under these agreements, Lakes and its
subsidiaries have forgiven the notes receivable from the KAR Entities, subject
to the agreements of Messrs. Kean and/or Argovitz to assume the obligations
under the notes in certain circumstances.

Under the agreements with Kevin M. Kean, Mr. Kean may elect to serve as a
consultant to Lakes' subsidiaries during the term of each subsidiary's casino
management contract if he is found suitable by relevant gaming regulatory
authorities. In such event, Mr. Kean will be entitled to receive annual
consulting fees equal to 20% of the management fees from the San Diego area
casino operations and 15% of the management fees from the Sacramento area casino
operations, less certain costs of these operations. If Mr. Kean is found
suitable by relevant gaming regulatory authorities and elects to serve as a
consultant, he will be obligated to repay 50% of the notes receivable from the
KAR Entities. If Mr. Kean is not found suitable by relevant gaming regulatory
authorities or otherwise elects not to serve as a consultant, he will be
entitled to receive annual payments of $1 million from each of the San Diego and
Sacramento area casino projects during the term of the respective casino
management contracts (but not during any renewal term of such management
contracts). Regardless of whether Mr. Kean serves as a consultant, a Lakes
subsidiary has agreed to loan up to $1.25 million to Mr. Kean, $1 million of
which must be used to fund certain obligations of Mr. Kean related to a separate
joint venture formed to acquire land in the San Diego area. Mr. Kean's personal
indebtedness to Lakes remained outstanding. Mr. Kean has agreed that 50% of the
consulting fees or other payments payable to him under the agreements with Lakes
and its subsidiaries shall be applied toward repayment of his indebtedness to
Lakes. In the event of a default under the agreements, 100% of the fees and
payments will be applied toward repayment of his indebtedness to Lakes.

Under the agreements with Jerry A. Argovitz, if Mr. Argovitz is found
suitable by relevant gaming regulatory authorities, he will be entitled to
purchase for nominal consideration a 20% equity interest in the Lakes subsidiary
holding a management contract with the San Diego area casino and a 15% equity
interest in

24

the Lakes subsidiary holding a management contract with the Sacramento area
casino. Upon such purchase, Mr. Argovitz will become obligated to repay 50% of
the notes receivable from the KAR Entities. If he is not found suitable or does
not elect to purchase equity interests in the Lakes subsidiaries, Mr. Argovitz
may elect to receive annual payments of $1 million from each of the San Diego
and Sacramento area casino projects from the date of election through the term
of the respective casino management contracts (but not during any renewal term
of such management contracts).

As part of a joint venture which will televise poker tournaments, the
Company invested $0.1 million for an approximately 78% ownership position in the
joint venture during 2002. The Company is also required to loan up to $3.2
million to the joint venture as needed. As of December 29, 2002, the Company had
made net loans totaling $1.9 million to the joint venture.

On December 28, 2001, the Company transferred title and ownership
obligations of the Polo Plaza shopping center property to Metroflag Polo, LLC.
In conjunction with this transaction, Lakes transferred to Metroflag BP, LLC,
rights to and obligations of the adjacent Travelodge property consisting of a
long-term land lease and a motel operation. This transaction was accounted for
under the deposit method of accounting under the requirements of Statement of
Financial Accounting Standards No. 66, Accounting for Sales of Real Estate
rather than as a sale. Therefore, the fair value of the property is included as
land held under contract for sale on the accompanying balance sheet as of
December 29, 2002 and December 30, 2001. The total price for this combined
transaction was approximately $30.9 million. Terms of the transaction include a
$1.0 million down payment, which was received in January 2002, a contractual
commitment to pay to Lakes $23.3 million and a second contractual commitment to
pay Lakes $7.5 million. During 2002, Lakes and Metroflag restructured the terms
of the Polo Plaza and Travelodge property transactions due to deteriorating
economic conditions. The parties reduced the purchase price for the Polo Plaza
property from $23.8 million to $21.8 million. On the payment date, which was
scheduled to be no later than January 31, 2003, $16.8 million of the purchase
price was to be payable to Lakes in cash and $4.0 million was to be payable
through the issuance to Lakes of a preferred membership interest in Metroflag.
During 2002, Lakes recorded a $3.0 million impairment charge for these
properties relating to the adjustment in the purchase price and a negotiated
potential discount on the return of Lakes' preferred interest. Lakes' collateral
for the two contractual commitments is the property and lease rights described
above which would revert back to Lakes in the event of default by Metroflag.

During March of 2003, Lakes and Metroflag agreed to additional revisions to
the terms of the Polo Plaza and Travelodge property transactions. The parties
have increased the price of the Polo Plaza property from $21.8 million to $25.8
million. On the payment date, which the parties have agreed in principle shall
be extended to no later than May 15, 2003, $16.8 million of the purchase price
is payable to Lakes in cash, $4.0 million is payable through the issuance to
Lakes of a preferred membership interest in Metroflag and $4.0 million is
payable through the issuance to Lakes of a subordinated membership interest in
Metroflag. On or before April 30, 2004, Metroflag Polo may elect to distribute
to Lakes $3.0 million plus interest in cash as full return of Lakes' preferred
interest. If paid after April 30, 2004 and in no event later than December 24,
2006, the entire $4.0 million plus interest will be payable. The subordinated
interest must be repurchased for $4.0 million at the time of repayment of an
outstanding $3.5 million contractual commitment in connection with the
Travelodge property, which is scheduled on or before December 28, 2004. If the
Travelodge commitment is not repaid by December 28, 2004, ownership of the
Travelodge lease rights would revert back to Lakes. If at any time the Polo
Plaza property is sold and the Travelodge commitment has not been repaid,
Metroflag is required to repurchase the subordinated interest for the lesser of
$4.0 million or any portion of the net cash proceeds from such sale or
refinancing that exceeds $60.0 million.

The parties have decreased the sale price of the Travelodge property from
$7.5 million to $3.5 million. The contractual commitment to pay Lakes has also
been decreased from $7.5 million to $3.5 million and is now payable no later
than December 28, 2004.

Lakes continues to own the Shark Club property, which is an approximate 3.5
acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. During August 2002, Lakes formed a joint venture with Diamond Resorts,
LLC, a Nevada limited liability company and time-share developer for the

25

purpose of developing the Shark Club parcel as an upscale time-share project.
The terms of this joint venture agreement require that Diamond and Lakes each
make a working capital contribution of $250,000. Subject to Diamond obtaining a
financing commitment for a construction loan sufficient to fund at least the
first phase of the building improvements contemplated by the time-share project,
the joint venture agreement will re