Summary of LAKES ENTERTAINMENT INC

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

Overview

We develop, finance and manage Indian-owned casino properties. We currently have development and management or financing agreements with four separate tribes for casino operations in Michigan, California, and Oklahoma for a total of five separate casino projects as follows:

• We are currently managing the Cimarron Casino for the Iowa Tribe in Perkins, Oklahoma, under a seven-year management contract, which commenced in 2006. The Cimarron Casino features approximately 375 electronic gaming machines.

• We developed, and have a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band in New Buffalo Township, Michigan near Interstate 94. We began managing the Four Winds Casino Resort when it opened to the public on August 2, 2007. The Four Winds Casino Resort is located near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, 80 table games, a 15-table poker room, a 160-room hotel, five restaurants, three bars, a child care facility and arcade, retail space and a parking garage.

• We developed, and have a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Tribe in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. We began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,100 slot machines, 75 table games, six restaurants, six bars, retail space, a parking garage, a child care facility and arcade. To provide direct freeway access to the Red Hawk Casino, an affiliate of the Shingle Springs Tribe constructed a dedicated inter-change on U.S. Highway 50.

• We have contracts to develop and finance a casino to be built on the reservation of the Jamul Indian Village (the "Jamul Tribe") located on State Highway 94, approximately 20 miles east of San Diego, California (the "Jamul Casino"). The Jamul Casino project has been delayed due to various political and regulatory issues related to access from State Highway 94 to the proposed casino site. In addition, there is local opposition to this project that could cause further delays even if access issues are resolved. These factors, in combination with the current general economic environment and the increasingly uncertain financial and credit markets caused us to reduce the value of our assets associated with this project during the fourth quarter of 2008. Although the value of our assets related to the Jamul Casino project were significantly reduced, we currently expect to continue with the project. We acknowledge that significant risk exists related to this project.

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However, the Jamul Tribe has the two basic requirements to eventually build a successful project - federal recognition as an Indian Tribe and Indian land eligible for gaming. We have concluded that it is not currently in our best interest to terminate our involvement with the Jamul Casino project altogether. We will continue to monitor the status of this project.

• We have a consulting agreement and management contract with the Iowa Tribe in connection with developing, equipping and managing a casino resort which is planned to be built near Route 66 and approximately 25 miles northeast of Oklahoma City, Oklahoma (the "Ioway Casino Resort"). The Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. In January 2009, the BIA granted approval on the purchase of a 60-acre allotment. The remaining transactions for the final 14 acres still require BIA approval. Lakes submitted its management contract with the Iowa Tribe for the Ioway Casino Resort to the NIGC for review in 2005. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract.

We have also explored, and continue to explore, other development projects with Indian tribes. We also explore other non-Indian casino development projects and other business activities.

On October 1, 2008, Lakes' Board of Directors declared a noncash dividend consisting of all of the shares of WPTE then owned by Lakes. Lakes previously owned 12,480,000 or approximately 61% of the outstanding common stock of WPTE, a separate publicly-held media and entertainment company The record date for the dividend was October 24, 2008, which established the shareholders of record entitled to the dividend, thereby allowing the determination of the ratio of WPTE shares to be distributed per Lakes share. The date of distribution was November 21, 2008. Operations of WPTE after the date of distribution are not included in Lakes' consolidated results of operations, and historical operating results of WPTE up to that date are presented as discontinued operations.

Results of continuing operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K for the year ended December 28, 2008.

Fiscal year ended December 28, 2008 ("fiscal 2008") compared to fiscal year ended December 30, 2007 ("fiscal 2007")

Revenues. Total revenues were $24.3 million for fiscal 2008 compared to $6.7 million for fiscal 2007. Lakes' revenue increase of $17.6 million was primarily associated with casino management fees resulting from a full year of contribution of management fees from the Four Winds Casino Resort. Fiscal 2008 revenues also included a full year contribution of casino management fees from the Cimarron Casino and a partial month of casino management fees from the Red Hawk Casino, which opened to the public on December 17, 2008. Lakes' revenues during fiscal 2007 primarily related to five months of casino management fees from the Four Winds Casino Resort, which opened to the public in August 2007, along with a full year contribution of casino management fees from the Cimarron Casino.

Selling, general and administrative expenses. Selling, general and administrative expenses were $15.3 million for fiscal 2008 compared to $17.8 million for fiscal 2007. The decrease of approximately $2.5 million from fiscal 2007 was primarily due to a reduction in share-based compensation expense and professional fees . For fiscal 2008, Lakes' selling, general and administrative expenses included payroll and related expenses of $8.6 million (including share-based compensation), travel expenses of $3.0 million and professional fees of $2.2 million. For fiscal 2007, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $10.3 million including share-based compensation expense for all share-based payment awards, travel-related costs of $2.5 million and professional fees of $3.3 million.

Ohio initiative costs. Ohio initiative costs were $28.7 million for fiscal 2008. Lakes incurred these costs related to the proposed Ohio casino resort initiative in Clinton County, Ohio. On November 4, 2008, the referendum

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to amend the Ohio constitution to permit the proposed casino did not pass. Lakes does not expect to recover these costs.

Impairment losses. Impairment losses were $24.0 million in fiscal 2008 and $0.3 million in fiscal 2007. Impairment losses in fiscal 2008 related to long-term assets associated with the Jamul Casino project were $20.0 million Based on a number of factors discussed in our Business Section and on the previous page, we lowered our estimation of the probability of eventual opening of this project to 50%, we adjusted the projected opening date to 2014, and we increased the discount rate to 23.5%. As a result, we recognized an impairment of $14.1 million related to the intangible assets associated with the Jamul project during the fourth quarter of 2008. In addition we adjusted the land held for development related to this project to its estimated fair value of $1.0 million as of December 28, 2008, and recognized an impairment of $5.9 million during the fourth quarter of 2008. Lakes has received various regulatory approvals to develop a non-Indian owned casino on approximately 400 acres near Vicksburg, Mississippi. A total of $9.4 million has been invested as of December 28, 2008. Lakes is continuing to evaluate all alternatives associated with its Vicksburg project, including whether to proceed with development of this project or potentially sell it. As a result of the uncertainty surrounding the development of this project and due to changes in the economic environment and credit markets, Lakes has adjusted the assets associated with the Vicksburg project to their estimated fair value of $5.4 million as of December 28, 2008, and recognized an impairment of approximately $4.0 million during the fourth quarter of 2008.

Impairment losses in fiscal 2007 of $0.3 million related to a casino project with the Pawnee Nation, which resulted from termination of the relationship between Lakes and the Pawnee Nation.

Amortization of intangible assets related to Indian casino projects. Amortization of intangible assets related to Indian casino projects was $6.9 million for fiscal 2008 compared to $2.8 million for fiscal 2007. The increase in fiscal 2008 related primarily to a full year of amortization associated with the Four Winds Casino Resort. Amortization of intangible assets related to the Indian casino projects for fiscal 2007 related primarily to five months of amortization associated with the Four Winds Casino Resort, which began when it opened to the public on August 2, 2007.

Net realized and unrealized gains (losses) on notes receivable. Net realized and unrealized gains (losses) on notes receivable were ($17.8) million and $7.2 million for fiscal 2008 and fiscal 2007, respectively. Net realized and unrealized gains are the result of adjustment of notes receivable related to Indian casino projects to their estimated fair value based upon project status. Net unrealized losses in fiscal 2008 related primarily to our notes receivable from the Jamul Tribe and the Shingle Springs Tribe.

Based on the current status and uncertainty of the Jamul Casino's access issues described in the evaluation of critical milestones below, we believe that a near-term positive resolution of the access issues is not probable. In addition, the local opposition to this project has not been resolved and Lakes' current expectation is that issues associated with this opposition could cause further delays, even if resolution of access issues is achieved. These factors, in combination with the current general economic environment and probable difficulty of financing this project at desirable rates, have caused Lakes to lower its estimation of probability of eventual opening of this project to 50%, and adjust the projected opening date of this project to January 2014. Lakes has increased the discount rate to 23.5% for this project, due to the worsening financial markets and the wider spread over treasuries, which increased the estimate of the required yield on the notes. As a result, we recorded an unrealized loss on these notes receivable of approximately $15.6 million during fiscal 2008.

Lakes recorded an unrealized loss of $1.9 million for fiscal 2008 on notes receivable from the Shingle Springs Tribe. The unrealized loss was primarily related to the worsening financial markets, as discussed above, which increased the discount rate to 18.5% for this project in the fourth quarter of 2008. The unrealized loss recorded by Lakes of $6.6 million during the fourth quarter of 2008 more than offset the unrealized gains on the notes receivable of $4.7 million that were incurred earlier in fiscal 2008, which resulted from continued progress towards the December 17, 2008 opening of the Red Hawk Casino.

Fiscal 2007 net unrealized gains were primarily associated with our notes receivable from the Shingle Springs Tribe and were the result of the close of third party financing by an affiliate of the Shingle Springs Tribe in June of 2007, which resulted in an increased probability of opening of the casino development project with the Shingle

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Springs Tribe as well as continued progress on the construction of the Red Hawk Casino project. The result was an unrealized gain of approximately $8.9 million during fiscal 2007. Partially offsetting this gain was an unrealized loss of approximately $2.7 million related to a decrease in fair value of the notes receivable from the Jamul Tribe which resulted primarily from an increase in the discount rate due to a decrease in estimated operating results from the casino operation once open.

Other income (expense). Other income (expense) for fiscal 2008 primarily includes a $4.3 million gain associated with Lakes' Rights from the November 2008 settlement with UBS. The gain was offset by a $4.5 million loss associated with the transfer of Lakes' ARS from available-for-sale securities to trading securities. The transfer to trading securities reflects management's intent to exercise its Rights during the period June 30, 2010 to July 3, 2012.

In conjunction with the close of the Shingle Springs Tribe's $450 million senior note financing, the Shingle Springs Tribe repaid us for land we had previously purchased on its behalf and the related accrued interest. The repayment resulted in interest income of approximately $4.9 million in June of 2007. In March 2007, Lakes contracted with a group of investors for their participation in the loans made by Lakes to the Pokagon Band (and assumed by the Pokagon Gaming Authority) at an agreed upon price of 98% of the face value of the loans as of the settlement date of March 2, 2007. This participation arrangement was accounted for as a sale during 2007. Lakes' then existing $105 million credit agreement was repaid with proceeds from the Pokagon notes receivable participation transaction. This repayment resulted in a loss on extinguishment of debt of approximately $3.8 million during March of 2007. In February 2007, we registered for resale the shares underlying the warrant issued to PLKS. As a result, the related warrant liability was adjusted to its estimated fair value at that time, which resulted in a decrease to interest expense of approximately $2.3 million for fiscal 2007.

Income Taxes. The income tax provision was $9.1 million in fiscal 2008 compared to $2.4 million in fiscal 2007, both consisting of changes in the valuation allowance associated with deferred tax assets and interest on the Louisiana tax audit matter. In fiscal 2008, the provision also included $3.1 million associated with tax benefits related to stock options exercises. The effective tax rates for fiscal 2008 and fiscal 2007 were 13.2% and 45.1%, respectively.

In conjunction with Lakes' dividend of WPTE shares (Note 3), Lakes realized a taxable gain from the transaction of approximately $5 million offset by capital loss carryforwards (and utilized approximately $1.9 million of deferred tax assets) during fiscal 2008. Management has concluded that it is more likely than not that the tax benefits associated with Lakes' remaining capital loss carryforwards will not be realized in the foreseeable future. As a result, a 100% valuation allowance has been provided against the remaining deferred tax assets as of December 28, 2008. Lakes' income tax provision in fiscal 2008 and 2007 included approximately $1.0 million of interest on a Louisiana tax audit matter. In fiscal 2007 the provision was offset by the recognition of an income tax benefit of approximately $1.7 million related to the settlement of an IRS tax audit matter

Additionally, in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), we evaluated the ability to utilize deferred tax assets arising from net operating loss carryforwards, and other ordinary items and determined that a valuation allowance was appropriate at December 28, 2008 and December 30, 2007. We evaluated all evidence and determined net losses (excluding net realized and unrealized gains on notes receivable, which are not considered verifiable evidence of future taxable income) generated over the past five years outweighed the current positive evidence that we believe exists surrounding our ability to generate significant income from our long-term assets related to Indian casino projects. Therefore, we have recorded a 100% valuation allowance against these items at December 28, 2008, and December 30, 2007.

Outlook. During fiscal 2009, Lakes expects significant revenues from the management of Indian casino properties, including from the Four Winds Casino Resort, from the Cimarron Casino and from the Red Hawk Casino, which opened in December of 2008. However, due to the relatively short operating history of the casinos we currently manage, we do not plan to provide revenue guidance.

We plan for 2009 selling, general and administrative expenses to remain relatively consistent with 2008 results. In addition, we currently expect amortization of intangible assets related to Indian casino projects to increase in 2009 as a result of amortization expense associated with the Red Hawk Casino in 2009.

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Fiscal 2007 compared to fiscal year ended December 31, 2006 ("fiscal 2006")

Revenues. Total revenues were $6.7 million for fiscal 2007 compared to $0.6 million for fiscal 2006 an increase of $6.1 million. Lakes' casino management fees were $6.6 million during fiscal 2007 compared to casino management and consulting fees of $0.6 million during fiscal 2006. Lakes' casino management fees during fiscal 2007 related to fees from the management of the Four Winds Casino Resort for approximately five months and the Cimarron Casino for the full fiscal year. Lakes' casino management and consulting fees during fiscal 2006 primarily related to fees from the Cimarron Casino.

Selling, general and administrative expenses. Selling, general and administrative expenses were $17.8 million for fiscal 2007 compared to $16.9 million for fiscal 2006. The increase primarily related to additional costs associated with increased development and management activities related to Lakes' Indian casino projects. For fiscal 2007, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $10.3 million including share-based compensation expense for all share-based payment awards, travel-related costs of $2.5 million and professional fees of $3.3 million.

Amortization of intangible assets related to Indian casino projects. Amortization of intangible assets related to Indian casino projects was $2.8 million for fiscal 2007. This amortization related primarily to the intangible assets associated with the Four Winds Casino Resort, which began when it opened to the public on August 2, 2007. Amortization of intangible assets related to the Indian casino projects for fiscal 2006 was not material.

Net realized and unrealized gains on notes receivable. Net realized and unrealized gains on notes receivable were $7.2 million and $51.7 million for fiscal 2007 and fiscal 2006, respectively. Net realized and unrealized gains are the result of adjustment of notes receivable related to Tribal casino projects to their estimated fair value based upon current Tribal casino project status. Net realized and unrealized gains in fiscal 2007 related primarily to our notes receivable from the Shingle Springs Tribe, which were partially offset by unrealized losses from our notes receivable from the Jamul Tribe. The unrealized gains associated with our notes receivable from the Shingle Springs Tribe were primarily the result of the close of third party financing by an affiliate of the Shingle Springs Tribe in June of 2007, which resulted in an increased probability of opening of the casino development project with the Shingle Springs Tribe as well as continued progress on the construction of this project. The result was an unrealized gain of approximately $8.9 million during fiscal 2007. The decrease in fair value of the notes receivable from the Jamul Tribe relates primarily to an increase in the discount rate due to a decrease in estimated operating results from the casino operation once open. The result was an unrealized loss of approximately ($2.7) million during fiscal 2007.

Net unrealized gains in fiscal 2006 related primarily to our notes receivable from the Shingle Springs Tribe, Pokagon Band, Jamul Tribe and Kickapoo Tribe. Of the $51.7 million in net unrealized gains on notes receivable during fiscal 2006, approximately $36.0 million was related to the casino development project with the Pokagon Band. The unrealized gains on the Pokagon notes receivable resulted from a combination of favorable events occurring during fiscal 2006, including the NIGC's approval of the management contract between us and the Pokagon Band. Additionally, an affiliate of the Pokagon Band closed on a $305 million senior note financing in addition to a $75 million financing commitment for furniture, furnishings and equipment to fund the Four Winds Casino Resort project. Construction on this project also began during June of 2006. All of these favorable events increased the probability of opening of the project and contributed to an increase in fair value of our notes receivable from the Pokagon Band which resulted in unrealized gains on notes receivable related to this project of approximately $20.0 million through the end of the third quarter of fiscal 2006.

In addition, during March of 2007 we contracted with a group of investors for their participation in the loans we made to the Pokagon Band (and assumed by the Pokagon Gaming Authority) at an agreed upon price of 98% of the face value of the notes receivable as of the settlement date. Accordingly, as of December 31, 2006, the Pokagon notes receivable were adjusted to the negotiated participation price which resulted in unrealized gains of approximately $16.3 million during the fourth quarter of fiscal 2006. This participation arrangement was accounted for as a sale during fiscal 2007. The sale has no effect on our management contract for the Four Winds Casino Resort.

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Also contributing to net unrealized gains on notes receivable during fiscal 2006 were unrealized gains related to our casino development project with the Shingle Springs Tribe. These unrealized gains of approximately $11.6 million were primarily related to favorable events occurring during fiscal 2006 which increased the estimated probability of opening of the project. Most notably, during September of 2006, the Shingle Springs Tribe reached an agreement with El Dorado County (the "County") that will provide the County with certain funding from the planned Shingle Springs Tribe casino operations. In exchange, the County agreed to seek dismissal of all of its existing litigation against the Shingle Springs Tribe and formally support the Shingle Springs Tribe interchange and casino projects.

Based on meetings between the Jamul Tribe and the State of California, Lakes and the Jamul Tribe re-evaluated the Jamul Tribe's alternatives for its casino project. The proposed gaming facility has been reduced in size and scope. As a result, during the fourth quarter of fiscal 2006, we recorded unrealized losses on our notes receivable related to the Jamul Tribe project of approximately $6.3 million, which reduced the overall fiscal 2006 net unrealized gains on notes receivable related to this project to approximately $2.0 million.

The remainder of the net unrealized gains on notes receivable consisted of unrealized gains related to the fiscal 2006 settlement with the Kickapoo Tribe in the amount of approximately $6.2 million and net unrealized losses of approximately $4.2 million as a result of the decrease in fair value of notes receivable due to the decreased probability of opening of two casino development projects with the Pawnee Nation.

Other income (expense). Other income (expense) for fiscal 2007 was $2.0 million compared to ($15.0) million for fiscal 2006. In conjunction with the close of the Shingle Springs Tribe's $450 million senior note financing, the Shingle Springs Tribe repaid us for land we had previously purchased on its behalf and the related accrued interest. The repayment resulted in interest income of approximately $4.9 million in June of 2007. In March 2007, Lakes contracted with a group of investors for their participation in the loans made by Lakes to the Pokagon Band (and assumed by the Pokagon Gaming Authority) at an agreed upon price of 98% of the face value of the loans as of the settlement date of March 2, 2007. This participation arrangement was accounted for as a sale during 2007. Lakes' then existing $105 million credit agreement was repaid with proceeds from the Pokagon notes receivable participation transaction. This repayment resulted in a loss on extinguishment of debt of approximately $3.8 million during March of 2007. In February 2007, we registered for resale the shares underlying the warrant issued to PLKS. As a result, the related warrant liability was adjusted to its estimated fair value at that time, which resulted in a decrease to interest expense of approximately $2.3 million for fiscal 2007.

In the second quarter of 2006, we refinanced substantially all of our long-term debt. As a result, we wrote-off the unamortized portion of the debt discount related to the issuance of common stock warrants ($4.3 million) as well as unamortized closing costs ($2.5 million), resulting in a loss on extinguishment of debt of approximately $6.8 million. Interest expense was impacted as a result of an increase in the estimated fair value of our warrant liability of approximately $1.1 million during 2006.

Income Taxes. The income tax provision was $2.4 million in fiscal 2007 compared to $3.8 million in fiscal 2006. The effective tax rates for fiscal 2007 and fiscal 2006 were 45.1% and 20.2%, respectively. Lakes' income tax provision in fiscal 2007 consists primarily of a valuation allowance against deferred tax assets related to capital losses for the portion that were not expected to be realized and approximately $1.1 million of interest on a Louisiana tax audit matter (Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). These items were partially offset by the recognition of an income tax benefit of approximately $1.7 million related to the settlement of an IRS tax audit matter (Note 10 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). Lakes' fiscal 2006 income tax provision consists primarily of approximately $2.0 million related to the IRS tax audit matter, approximately $2.4 million related to the reversal of deferred tax assets related to the losses that were reversed during the period related to the Kickapoo Tribe and approximately $1.1 million of interest on a Louisiana tax audit matter. These items were partially offset by the recognition of a benefit of approximately $2.0 million related to the write-off of long-term assets related to the Chilocco and Travel Plaza casino development projects with the Pawnee Nation during fiscal 2006.

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all evidence and determined net losses (excluding net realized and unrealized . . .