Overview

We develop, finance and manage Indian-owned and non-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. We also have entered into a joint venture aimed at developing and operating a casino project in the South Central Zone of Kansas. An overview of our Indian-owned projects 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 of Oklahoma, a federally recognized Indian Tribe, and the Iowa Tribe of Oklahoma, a federally-chartered corporation (collectively, 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 and a food and beverage outlet.

• 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. The Bureau of Indian Affairs (the "BIA") has granted approval on the purchase of a 60-acre allotment, but the remaining transactions for the final 14 acres still require BIA approval. However, due to continued delays in approval of the additional 14 acres, the Iowa Tribe is proceeding with design plans for the construction of the project on the approved 60 acres. Lakes submitted its management contract with the Iowa Tribe for the Ioway Casino Resort to the National Indian Gaming Commission (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. In addition, uncertainty exists surrounding the development of this project due to changes in the economic environment and credit markets.

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. We have received various regulatory approvals to develop a 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 September 27, 2009.

In August 2009, we announced that we entered into a joint venture with the Chisholm Creek Casino Resort, LLC ("Chisholm Creek") relating to an application to the Kansas Lottery to develop and operate a casino project in south central Kansas. Phase one of the proposed casino is planned to feature 1,300 to 1,500 slot machines, 30 table games, and other amenities, which may include a number of restaurants and a hotel to be developed by a third party developer. Additional phases of development could include expanded gaming positions, an entertainment center, and other amenities. On August 27, 2009, the Kansas Lottery Commission approved the management contract for Chisholm Creek. The management contract has been forwarded to the Lottery Review Board for its ultimate decision regarding whether it will permit Chisholm Creek to operate the Chisholm Creek Casino Resort, expected to occur during the fourth quarter of 2009.

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 and nine months ended September 27, 2009.

Three months ended September 27, 2009 compared to the three months ended September 28, 2008

Revenues. Total revenues for the third quarter of 2009 were $6.6 million, compared to prior-year period revenues of $8.4 million. This decrease was primarily due to a one-time addition to revenue of approximately $1.8 million in the third quarter of 2008 which was the result of an approved compact amendment between the Pokagon Band and the State of Michigan that reduced the Four Winds Casino Resort gaming tax. The decrease was also affected by new competition that entered the Four Winds Casino Resort market during the third quarter of 2009, offset by fees from the Red Hawk Casino, which opened in December 2008.

Selling, general and administrative expenses. Selling, general and administrative expenses were $3.5 million in the third quarter of 2009 compared to $4.2 million for the third quarter of 2008. For the third quarter of 2009, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $1.8 million, including share-based compensation, travel expenses of $0.5 million, professional fees of $1.0 million, and costs associated with the application for a gaming site in the State of Kansas of $0.2 million. For the third quarter of 2008, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.5 million, including share-based compensation, travel expenses of $0.8 million, and professional fees of $0.5 million.

Ohio initiative costs. Development costs associated with the 2008 Ohio casino resort initiative were $4.7 million during the third quarter of 2008.

Impairment losses. Impairment losses were $0.6 million in the third quarter of 2009. There were no impairment losses during the third quarter of 2008. The 2009 impairment losses related primarily to continued uncertainty surrounding the Jamul Casino project.

Amortization of intangible assets related to Indian casino projects. Amortization of intangible assets related to Indian casino projects for the third quarter of 2009 was $2.6 million compared to $1.7 million for the third quarter of 2008. The increase of $0.9 million related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened in December 2008. Amortization for the third quarter of 2008 related primarily to the intangible assets associated with the Four Winds Casino Resort.

Net unrealized gains on notes receivable. Net unrealized gains on notes receivable relate primarily to our notes receivable from Indian tribes for casino projects that are not yet open, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the third quarter of 2009, net unrealized gains on notes receivable were $0.9 million, compared to net unrealized gains of $1.8 million in the prior year period. The net unrealized gains in the third quarter of 2009 consisted of $0.7 million related to the Jamul Casino project with the Jamul Tribe and $0.2 million related to the Iowa Tribe's Ioway Casino project due primarily to improvement in the credit markets. Net unrealized gains in the third quarter of 2008 were related primarily to the notes receivable related to the Red Hawk Casino project with the Shingle Springs Tribe associated with continued progress toward a fourth quarter 2008 opening of the Red Hawk Casino, partially offset by unrealized losses associated with a decrease in probability of opening of the Jamul Casino.

Other income (expense), net. Other income (expense), net for the third quarter of 2009 was $1.1 million compared to other expense of $0.2 million for the third quarter of 2008. The increase was due primarily to interest earned on the notes receivable from the Shingle Springs Tribe.

Income taxes (benefit). The estimated income tax benefit for the third quarter of 2009 was $0.4 million compared to an income tax provision of $2.4 million for the third quarter of 2008. Our estimated effective tax rates were (22.9%) and 374.0% for the third quarter of 2009 and the third quarter of 2008, respectively. The estimated effective tax rate differs from the federal tax rate of 35% due to state income taxes, permanent differences, release of valuation allowance, stock based compensation deductions included in net operating loss carryforwards, and provisions for interest charges on uncertain tax positions. Lakes' estimated income tax benefit in the current year period consists primarily of the release of valuation allowance against deferred taxes related to net operating loss carryforwards, partially offset by $0.2 million of interest on a Louisiana tax audit matter (Note 14 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 an adjustment of the valuation allowance against deferred tax assets related to capital losses for the portion that was not expected to be realized.

Nine months ended September 27, 2009 compared to the nine months ended September 28, 2008

Revenues. Total revenues for the nine months ended September 27, 2009 were $21.0 million, up 11% from prior-year period revenues of $18.9 million. This increase was primarily due to fees from the Red Hawk Casino, which opened in December 2008, partially offset by a decrease at the Four Winds Casino Resort due to new competition that entered the market during the third quarter of 2009.

Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 27, 2009 were $11.3 million compared to $11.7 million in the prior year period. For the first nine months of 2009, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $5.8 million, including share-based compensation, travel expenses of $2.2 million, professional fees of $2.3 million, and costs associated with the application for a gaming site in the State of Kansas of $0.5 million. For the first nine months of 2008, Lakes' selling, general and administrative expenses consisted primarily of payroll and related expenses of $6.8 million, including share-based compensation, travel expenses of $2.0 million, and professional fees of $1.6 million.

Ohio initiative costs. Development costs associated with the 2008 Ohio casino resort initiative were $10.4 million during the first nine months of 2008.

Impairment losses. Impairment losses were $2.9 million for the nine months ended September 27, 2009. There were no impairment losses during the first nine months of 2008. The 2009 impairment losses related primarily to continued uncertainty surrounding the Jamul Casino project.

Amortization of intangible assets related to Indian casino projects. Amortization of intangible assets related to Indian casino projects for the nine months ended September 27, 2009 was $7.6 million compared to $5.0 million in the prior-year period. The increase related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened in December 2008. Amortization for the first nine months of 2008 related primarily to the intangible assets associated with the Four Winds Casino Resort.

Net unrealized gains on notes receivable. Net unrealized gains on notes receivable relate primarily to our notes receivable from Indian tribes for casino projects that are not yet open, 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 nine months of 2009, net unrealized gains on notes receivable were $3.2 million, compared to net unrealized gains of $1.0 million in the prior-year period. The net unrealized gains for the nine months ended September 27, 2009 consisted of $2.8 million related to the Jamul Casino project with the Jamul Tribe and $0.4 million related to the Iowa Tribe's Ioway Casino project due primarily to improvement in the credit markets. Net unrealized gains in the prior-year period were due primarily to the notes receivable related to the Red Hawk Casino project with the Shingle Springs Tribe associated with the continued progress toward a fourth quarter 2008 opening of the Red Hawk Casino, partially offset by unrealized losses associated with a decrease in probability of opening of the Jamul Casino.

Other income (expense), net. Other income (expense), net for the nine months ended September 27, 2009 was $3.9 million compared to less than $0.1 million in the prior-year period. The increase was due primarily to interest earned on the notes receivable from the Shingle Springs Tribe.

Income taxes (benefit). The estimated income tax benefit was less than $0.1 million compared to an income tax provision of $3.5 million for the nine months ended September 27, 2009 and September 28, 2008, respectively. Our estimated effective tax rates were (0.6%) and 46.6% for the nine months ended September 27, 2009 and the corresponding 2008 period, respectively. The estimated effective tax rate differs from the federal tax rate of 35% due to state income taxes, permanent differences, release of valuation allowance, stock based compensation deductions included in net operating loss carryforwards, and provisions for interest charges on uncertain tax positions. Lakes' estimated income tax benefit in the current year period consists primarily of release of valuation allowance against deferred taxes related to net operating loss carryforwards, partially offset by $0.5 million of interest on a Louisiana tax audit matter (Note 14 to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q), which were offset by an additional paid-in capital adjustment of $0.8 million. 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 was not expected to be realized.

Liquidity and Capital Resources

As of September 27, 2009, we had $7.0 million in cash and equivalents and $24.3 million of investments in securities recorded at estimated fair value
(including nontransferable rights to sell our auction rate securities ("ARS")
back to UBS Financial Services, Inc. ("UBS") ("Rights") of approximately $2.5 million) which is partially offset by advances on an existing line of credit with UBS of $16.3 million described below. We currently believe that our cash and equivalents balance, our cash flows from operations and our existing financing sources discussed below may not be sufficient to meet our recorded obligations and operating expenses during the next 12 months. Lakes is involved in an ongoing litigation matter with the Louisiana Department of Revenue (Note 14 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q) and if Lakes is not successful in this matter and is required to pay up to an $8.6 million assessment plus interest during the next 12 months, it may be necessary for Lakes to obtain additional financing. Lakes currently expects to be able to obtain funds in order to fulfill its potential future liquidity needs. However, we cannot assure you that such financing will be available at all, or at acceptable terms, or that such financing will not be dilutive to our stockholders.

Our operating results and performance depend significantly on future economic conditions and their effects on consumer spending in the casinos we manage. Declines in consumer spending cause our revenue generated from the management of Indian casinos to be adversely affected. The recent decline in general economic conditions in the United States negatively impacted the local economic conditions near the casinos Lakes manages and negatively affects Lakes management fees and the availability of credit to finance Lakes development projects.

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. Accordingly, the exclusion of WPTE from our consolidated financial statements does not have an effect on Lakes' cash position.

All of our investments in securities are ARS, held by UBS and are classified as trading securities as of September 27, 2009. The types of ARS 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 equivalents.

In November 2008, we accepted an offer from UBS granting 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 September 27, 2009, approximately $16.3 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 September 27, 2009, Lakes has drawn $2 million under the Loan Agreement.

Our initial capital requirement of 16.67% ownership in Kansas Gaming Partners, LLC is $25 million. As of September 27, 2009, we have contributed approximately $8.4 million based upon amounts required as of that date. Lakes plans to raise additional equity or debt capital or a combination thereof as needed to satisfy this obligation. Any equity financing would be dilutive to our shareholders, and any debt financing may involve restrictive covenants.

Per our recent agreements related to potential Ohio casinos (Note 16 to the unaudited consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q) Lakes may choose to invest additional funds in those casinos. As a result, Lakes may need to obtain additional financing.

During the first nine months 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 trend 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 because 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. 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 the 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.

The following table summarizes our contractual obligations as of September 27, 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)                        7.7              1.0               1.8              2.7              2.2
Pokagon Band(4)                                 5.6              1.5               4.1                -                -
Iowa Tribe - Ioway Casino project(5)              -                -                 -                -                -
Lakes Kansas(6)                                   -                -                 -                -                -
Non-revolving line of credit(7)                 2.0                -               2.0                -                -
Lakes operating leases(8)                       4.3              0.5               0.9              0.9              2.0

                                             $ 19.6      $       3.0      $        8.8      $       3.6      $       4.2

(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 September 27, 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) Effective June 2009, we became obligated to pay Mr. Jerry A. Argovitz $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr Argovitz's election under an existing agreement related to this project. Also as a result of this election Mr. Argovitz will not be entitled to obtain a 15% equity interest in our entity that holds the rights to the management fees we earn from the Red Hawk Casino operations (Note 10 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

During September 2009, it became probable that we will be required to pay Mr. Kean $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which . . .