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 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, 72 table games, a 12-table poker room, a 165-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 electronic gaming devices, 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 are 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 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"). This project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. 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 and we currently expect to continue our involvement with 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 Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 29, 2009.

Three months ended March 29, 2009 compared to the three months ended March 30, 2008

Revenues. Total revenues were $7.3 million for the first quarter of 2009 compared to $4.6 million for the first quarter of 2008. Lakes' revenue increase of $2.7 million was primarily due to improved results from the Four Winds Casino Resort during the first quarter of 2009, as well as a full quarter contribution of management fees from the Red Hawk Casino, which opened to the public on December 17, 2008. The first quarter of 2009 and 2008 also included full quarter contributions from the Cimarron Casino.

Selling, general and administrative expenses. Selling, general and administrative expenses were $4.0 million in the first quarter of 2009 compared to $3.9 million for the first quarter of 2008. For the first quarter of 2009, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.2 million, including share-based compensation, travel expenses of $0.9 million, and professional fees of $0.6 million. For the first quarter of 2008, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.2 million, including share-based compensation, travel expenses of $0.6 million, and professional fees of $0.6 million.

Ohio initiative costs. Development costs associated with the Ohio casino resort initiative, which was terminated after the November 2008 election, were $1.6 million during the first quarter of 2008.

Impairment losses. Impairment losses were $0.6 million in the first quarter of 2009. There were no impairment losses during the first quarter of 2008. Due to continued uncertainty surrounding the Jamul Casino project associated with delays in progress as well as ongoing issues in the credit markets and general economic uncertainties, we recognized an impairment during the first quarter of 2009.

Amortization of intangible assets related to Indian casino projects. Amortization of intangible assets related to Indian casino projects for the first quarter of 2009 was $2.5 million compared to $1.7 million for the first quarter of 2008. The increase of $0.8 million related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened to the public on December 17, 2008. Amortization for the first quarter of 2008 related primarily to the intangible assets associated with the Four Winds Casino Resort.

Net unrealized losses on notes receivable. Net unrealized losses on notes receivable relate primarily to our notes receivable from Indian tribes, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the first quarter of 2009, we reported net unrealized losses on notes receivable of $0.2 million, compared to net unrealized losses of $2.0 million in the prior-year period. Net unrealized losses in the first quarter of 2009 were related to the Jamul Casino project with the Jamul Tribe and Iowa Tribe's Ioway Casino project due primarily to ongoing issues in the credit markets and general economic uncertainties. Net unrealized losses in the first quarter of 2008 were due primarily to a decrease in projected interest rates related to the notes receivable related to the Red Hawk Casino project with the Shingle Springs Tribe and the notes receivable related to the Jamul Casino project with the Jamul Tribe.

Other income (expense), net. Other income (expense), net for the first quarter of 2009 was $1.5 million compared to $0.2 million for the first quarter of 2008. Other income (expense), net in the first quarter of 2009 is primarily associated with interest earned on the notes receivable from the Shingle Springs Tribe.

Income Taxes. The income tax provision was $0.4 million and $0.7 million for the three months ended March 29, 2009 and March 30, 2008, respectively. Our effective tax rates were 27% and 15% for the first quarter of 2009 and the corresponding 2008 period, respectively. Lakes' income tax provision in the current year period consists primarily of current income tax, and approximately $0.2 million of interest on a Louisiana tax audit matter (Note 12 to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). In the prior year period, the income tax provision was primarily related to a valuation allowance

against deferred tax assets related to capital losses for the portion that were not expected to be realized, and approximately $0.3 million of interest on a Louisiana tax audit matter.

Liquidity and Capital Resources

As of March 29, 2009, we had $9.9 million in cash and cash equivalents and $23.5 million of long-term investments in securities recorded at estimated fair value. We currently believe that our cash and cash equivalents balance, our cash flows from operations and the financing sources discussed below will be sufficient to meet our working capital requirements during the next 12 months. However, our operating results and performance depend significantly on the current economic conditions and their impact on consumer spending in the casinos we manage. Declines in consumer spending may cause our revenue generated from the management of Indian casinos to be adversely impacted. Current economic conditions and issues in the credit markets may impact our ability to finance projects under development.

On October 1, 2008, Lakes' Board of Directors declared a noncash dividend consisting of all of the shares of WPTE then owned by Lakes. The date of distribution was November 21, 2008. WPTE cash and investments have not been used in our business. The exclusion of WPTE from our consolidated financial statements does not have an impact on Lakes' cash position.

All of our investments in securities are ARS, held by UBS and are classified as trading securities as of March 29, 2009. As a result of liquidity issues surrounding our ARS, our ARS are classified as long-term investments in securities. The types of ARS investments that we own are backed by student loans, the majority of which are guaranteed under the Federal Family Education Loan Program ("FFELP"). None of our investments in ARS qualify, or have ever been classified in our consolidated financial statements, as cash or cash equivalents.

In November 2008, we accepted an offer from UBS granting us nontransferable rights (the "Rights") to sell our ARS held by UBS at par value to UBS at any time during the period of June 30, 2010, through July 2, 2012. We expect to sell our ARS under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. UBS's obligation under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

During 2008, we entered into a credit agreement with UBS (the "Credit Line") which is due and payable on demand with interest at 30-day LIBOR plus one percent. As of March 29, 2009, approximately $18.0 million was outstanding under the Credit Line.

Also during 2008, we closed on a two-year interest only $8.0 million non-revolving line of credit loan agreement (the "Loan Agreement") with First State Bank. Amounts borrowed under the Loan Agreement bear interest at 8.95%. As of March 29, 2009, Lakes has drawn $2 million under the Loan Agreement.

During the first quarter of 2009, Lakes has recognized significant revenues from the management of Indian casino properties, and going forward Lakes expects this trend to continue as Lakes is managing the Cimarron Casino, the Four Winds Casino Resort and the Red Hawk Casino. However, because of the relatively short operating history of the casinos we manage, and the uncertainty in the economic environment, no assurance can be given that this will occur. Lakes' agreements with tribal partners require that we provide certain financing for project development in the form of loans, which has been a major use of cash over the past three years, in addition to on-going corporate costs and costs incurred during 2008 for the Ohio casino resort initiative. These loans to our tribal partners are interest bearing; however, the loans and related interest are not due until the casino is built and has established profitable operations. In the event that the casinos are not built, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust.

Our cash forecast requirements do not include construction-related costs that will be incurred when pending and future development projects begin construction. The construction of our pending casino projects will depend on the ability of the tribes and/or Lakes to obtain additional financing for the projects, which based on the general economic environment, is subject to considerable uncertainty. If such financing cannot be obtained on acceptable terms, it may not be possible to complete these projects, which could have a material adverse effect on our future results of operations, cash flows and financial condition. In order to assist the tribes, we may be required to

guarantee the tribes' debt financing or otherwise provide support for the tribes' obligations. Guarantees by us, if any, will increase our potential exposure to losses and other adverse consequences in the event of a default by any of these tribes.

If our casino development projects with the Iowa Tribe and the Jamul Tribe are not constructed or if constructed, do not achieve profitable operations in the highly competitive market for gaming activities, it is likely that we would incur substantial or complete losses on our related notes receivable and intangible assets associated with those projects. In addition, we may lack the funds to compete for and develop future gaming or other business opportunities and our business could be adversely affected to the extent that we may be forced to cease our operations entirely.

We have received various regulatory approvals to develop our own casino near Vicksburg, Mississippi. However, uncertainty exists surrounding the development of this project due primarily to changes in the economic environment and credit markets. As a result, the assets associated with the Vicksburg project are recorded at their estimated fair value of $5.4 million as of March 29, 2009.

The following table summarizes the remaining contractual obligations as of March 29, 2009 (in millions):

                                                                         Payment due by period
                                                            Less than                                          More than
Contractual obligations                        Total         1 year          1-3 years        3-5 years         5 years
                                                                              (Unaudited)

Remaining casino development commitment(1)
Jamul Tribe(2)                                 $    -      $         -      $         -      $         -      $         -
Shingle Springs Tribe(3)                            -                -                -                -                -
Pokagon Band(4)                                   6.7              1.8              3.7              1.2                -
Iowa Tribe - Ioway Casino project(5)                -                -                -                -                -
Non-revolving line of credit(6)                   2.0                -              2.0                -                -
Lakes operating lease(7)                          4.5              0.4              0.9              0.9              2.3

                                               $ 13.2      $       2.2      $       6.6      $       2.1      $       2.3

(1) We may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects (see (2) and (5) below). Any guarantees by us or similar off-balance sheet liabilities will increase our potential exposure in the event of a default by any of these tribes. No such guarantees or similar off-balance sheet liabilities existed at March 29, 2009.

(2) Effective March 30, 2006, we entered into a development financing and services agreement with the Jamul Tribe. As part of the agreement, we will use our best efforts to obtain financing of up to $350 million from which advances will be made to the Jamul Tribe to pay for the design and construction of a casino project. The current plan is for a smaller scale gaming facility that will become a solely class II electronic gaming device facility which will not require a compact with the State of California. The agreement between Lakes and the Jamul Tribe is being modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State of California or the NIGC.

(3) We may be required to pay Mr. Kean and Mr. Argovitz under their respective agreements with Lakes resulting from the opening of the Red Hawk Casino on December 17, 2008. See also the discussion below included under the caption "Description of each Indian casino project and evaluation of critical milestones - Shingle Springs Tribe".

(4) We are obligated to pay approximately $11 million to an unrelated third party as part of an agreement associated with us obtaining the management contract with the Pokagon Band, payable in quarterly installments over five years. We are also obligated to pay approximately $3 million over 24 months to a separate, unrelated third party on behalf of the Pokagon Band in accordance with the management contract. (Note 8 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

(5) We have agreed to make advances to the Iowa Tribe subject to a project budget to be agreed upon by us and the Iowa Tribe and certain other conditions. The development loan will be for preliminary development costs under

the Ioway project budget. We have also agreed to use reasonable efforts to assist the Iowa Tribe in obtaining permanent financing for any projects developed under the Iowa consulting agreement.

(6) During 2008, Lakes closed on a two-year interest only $8.0 million non-revolving line of credit (the "Loan Agreement") with First State Bank. Amounts borrowed under the Loan Agreement bear interest at 8.95%. See Note 7 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

(7) Lakes leases an airplane under a non-cancelable operating lease that expires on March 1, 2018 and has certain other operating leases.

Critical Accounting Policies and Estimates

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, share-based compensation, income taxes, and long-term assets related to Indian casino projects. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition. Revenue from the management, development, and financing of, and consulting with, Indian-owned casino gaming facilities is recognized as it is earned pursuant to each respective agreement. See further discussion below under the caption "Long-term assets related to Indian casino projects."

Share-based compensation expense. We use the Black-Scholes option pricing method to establish fair value of options. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award. We determine the estimated fair value per share of restricted stock units as the closing stock price on the date of grant, as reported by the Nasdaq Global Market.

Income taxes. We account for income taxes under the provisions of SFAS 109, Accounting for Income Taxes. The determination of our income tax-related account balances requires the exercise of significant judgment by management. Accordingly, in estimating the annual effective income tax rate for interim financial reporting purposes, we assess the likelihood that deferred tax assets will be recovered from future taxable income and establish an appropriate valuation allowance when management believes recovery it is not more likely than not.

We also account for income tax uncertainties under the provisions of Financial Accounting Standards Board ("FASB") Interpretation 48, Accounting for Uncertainty in Income Taxes and record estimated penalties and interest related to income tax matters, including uncertain tax positions, as a component of income tax expense.

Long-term assets related to Indian casino projects:

Notes receivable. We have formal procedures governing our evaluation of opportunities for potential Indian-owned casino development projects that we follow before entering into agreements to provide financial support for the development of these projects. We determine whether there is probable future economic benefit prior to recording any asset related to the Indian casino project. We initially evaluate the following factors involving critical milestones that affect the probability of developing and operating a casino:

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

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

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

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

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

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

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

• The structure and stability of the tribal government;

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

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

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

We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in Emerging Issues Task Force 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available from the operations. However, in the event our development activity is terminated prior to completion, we generally retain the right to collect in the event of completion by another developer. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects (at least prior to commencement of operations), the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset, and the two assets are accounted for separately.

Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current estimated fair value at each balance sheet date using then current assumptions including typical market discount rates, and expected repayment terms as may be affected by estimated future interest rates and opening dates, with the latter affected by changes in project-specific circumstances such as ongoing litigation, the status of regulatory approval and other factors previously noted. The notes receivable are not adjusted to a fair value estimate that exceeds the face value of the note plus accrued interest, if any. Due to uncertainties surrounding the projects, no interest income is recognized during the development period, but changes in estimated fair value of the notes receivable still held as of the balance sheet date are recorded as unrealized gains or losses in our unaudited consolidated statement of earnings (loss) and comprehensive earnings (loss).

Upon opening of the casino, any difference between the then estimated fair value of the notes receivables and the amount contractually due under the notes is amortized into income using the effective interest method over the remaining term of the note. Such notes would then be evaluated for impairment pursuant to SFAS 114 Accounting by Creditors for Impairment of a Loan ("SFAS 114").

Intangible assets related to Indian casino projects. Intangible assets related to the acquisition of the management, development, consulting or financing contracts are accounted for using the guidance in SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142") and FASB Staff Position 142-3, Determination of the Useful Life of Intangible Assets ("FSP 142-3"). Pursuant to SFAS 142, the assets are periodically evaluated for impairment based on the estimated cash . . .