UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No.  )

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LAKES ENTERTAINMENT, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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TABLE OF CONTENTS

130 Cheshire Lane
Minnetonka, Minnesota 55305

LAKES ENTERTAINMENT, INC.
130 Cheshire Lane
Minnetonka, Minnesota 55305

shareholder may revoke his or her proxy in person, but a shareholder’s attendance alone at the Annual Meeting will not revoke any proxy that the shareholder has previously given. If a shareholder chooses either of the first two methods, the shareholder must take the described action prior to the start of the Annual Meeting. Once voting on a particular matter is completed at the Annual Meeting, a shareholder will not be able to revoke his or her proxy or to change his or her vote as to that matter. Unless a shareholder’s proxy is so revoked or changed, the shares of common stock represented by each proxy received by the Company will be voted at the Annual Meeting and at any adjournments or postponements thereof. If a shareholder’s shares of common stock are held in street name by a broker, bank or other financial institution, such shareholder must contact them to change his or her vote.

     All shares represented by proxies will be voted for the resolution reducing the number of members of the Board of Directors, for the election of the nominees for the Board of Directors named in this proxy statement, for the approval of the amendment to the Lakes Entertainment, Inc. 2007 Stock Option and Compensation Plan to increase the number of shares of our common stock authorized for awards from 500,000 to 2,500,000, for the amendment to the Lakes Entertainment, Inc. 2007 Stock Option and Compensation Plan to permit repricing, adjustment or amendment to the exercise price of Options or the grant price of Stock Appreciation Rights previously awarded, with shareholder approval, for the approval of a value-for-value stock option exchange program, and for the ratification of the appointment of PBTK as the Company’s independent registered public accounting firm for the 2009 fiscal year, unless a contrary choice is specified. If any nominee should withdraw or otherwise become unavailable for reasons not presently known, the proxies which would have otherwise been voted for such nominee will be voted for such substitute nominee as may be selected by the Board of Directors. A shareholder who abstains with respect to any proposal is considered to be present and entitled to vote on such proposal and is in effect casting a negative vote, but a shareholder (including a broker) who does not give authority to a proxy to vote, or withholds authority to vote, on any proposal, shall not be considered present and entitled to vote on such proposal.

      The Board of Directors unanimously recommends that you vote “ FOR ” the resolution reducing the number of members of the Board of Directors, “ FOR ” the election of all nominees for the Board of Directors named in this proxy statement, “ FOR ” the approval of the amendment to the Lakes Entertainment, Inc. 2007 Stock Option and Compensation Plan to increase the number of shares of our common stock authorized for awards from 500,000 to 2,500,000, “ FOR ” the approval of an amendment to the lakes Entertainment, Inc. 2007 Stock Option and Compensation Plan to permit repricing, adjustment or amendment to the exercise price of Option or the grant price of Stock Appreciation Rights previously awarded, with shareholder approval, “ FOR ” the approval of a value-for-value stock option exchange program, and “ FOR ” the ratification of the appointment of PBTK as our independent registered public accounting firm for the 2009 fiscal year.

     While the Board of Directors knows of no other matters to be presented at the Annual Meeting or any adjournment or postponements thereof, all proxies returned to the Company will be voted on any such matter in accordance with the judgment of the proxy holders.

PROPOSAL FOR REDUCTION OF NUMBER OF DIRECTOR POSITIONS

(Proposal One)

               Lakes’ Bylaws currently in effect provide that the Company’s Board of Directors shall have eight (8) members. Our Board of Directors currently consists of seven (7) directors. The existing vacancy on the Board of Directors results from the previous resignation or retirement of directors in previous years. Notwithstanding the existing vacancy, the Board believes it has been able to perform its administrative and strategic development responsibilities with seven directors. Therefore, the Board of Directors believes it is in the best interest of the Company to eliminate the vacancy by decreasing the number of director positions from eight to seven. In order to accomplish this, the Company’s bylaws require a resolution of the shareholders. As a result, the Board of Directors is recommending that the shareholders adopt the following resolution:

               BE IT RESOLVED, THAT the number of members of the Company’s Board of Directors is hereby reduced from eight to seven.

PROPOSAL FOR ELECTION OF DIRECTORS

(Proposal Two)

     Our Board of Directors currently consists of seven directors. All of the current directors have been nominated for election by the Board of Directors. If elected, each nominee will hold office until the next Annual Meeting of the shareholders, or until his successor is elected and shall have been qualified. All nominees have consented to be named and have indicated their intention to serve as members of the Board of Directors, if elected. Assuming an affirmative vote by shareholder on Proposal One to decrease the number of directors, the number of members constituting our Board of Directors will be seven. Proxies cannot be voted for more than seven individuals, which number represents the number of nominees named by the Board of Directors.

     The names and ages of the nominees, and their principal occupations and tenure as directors, which are set forth below, are based upon information furnished to us by each nominee.

goals established at the beginning of each fiscal year by the Committee. We believe bonus potential adequately motivates executives to attain corporate and individual goals.

     Our long-term compensation program is designed to emphasize the performance measures our named executive officers need to address in order to deliver shareholder value. Historically, the equity-based component of the compensation program has been provided by the Company’s 1998 Stock Option and Compensation Plan, referred to as the 1998 plan , but options are not granted to named executive officers or other employees of the Company under the 1998 plan each year. For example, a small number of options were granted to certain employees (other than the named executive officers) under the 1998 plan in fiscal 2006, and Scott Just was the only named executive officer granted options in fiscal 2007 in correlation with his hire date. The Company established the 2007 Stock Option and Compensation Plan, referred to as the 2007 plan , which was approved by shareholders at our 2007 annual meeting. The Company granted an aggregate of 50,000 stock options to named executive officers in 2008. The stock options granted to our executives (as well as to the Company’s other employees) typically vest pro rata over three, four or five years with an exercise price equal to the closing market price of the Company’s common stock on the date of the grant. All options expire ten years from the date of grant. Historically, stock options have been granted to new hires, whether a named executive officer or not, as of the date of hire, and additional stock options were granted to employees in fiscal years 1999, 2004, 2008 and 2009 at regularly scheduled meetings of the Committee. Most Committee meetings are scheduled a year in advance. Scheduling decisions are made without regard to anticipated earnings or other major announcements by the Company. In granting stock options to named executive officers, we recognized that while the value realizable from exercisable stock options is dependent upon the extent to which the Company’s performance is reflected in the market price of the Company’s common stock at any particular point in time, the decision as to whether this value will be realized in any particular year is determined by each individual and not by the Committee. For these reasons, when the Committee determines to grant a stock option to a named executive officer, that decision does not take into account any gains realized in any given year by a named executive officer as a result of his individual decision to exercise an option granted in a previous year.

     In addition, because a limited number of shares remain available for equity awards under the existing plans, the Board has adopted, and submitted to a vote of the Company’s shareholders at the Annual Meeting, an amendment to the 2007 Stock Option and Compensation Plan. See “Proposal to Approve the Amendment to the 2007 Stock Option and Compensation Plan” for a discussion of the 2007 Stock Option and Compensation Plan. We expect in future years to provide equity-based compensation to named executive officers in the form of restricted stock grants and possibly other forms permitted under the 2007 plan, rather than just in the form of stock option grants. In early 2009, the Committee granted restricted stock units to named executive officers in addition to stock options. We may also make awards subject to performance goals that must be satisfied or met as a condition to exercisability, vesting or receipt of all or a portion of an award. The 2007 plan provides that these goals can be based exclusively on one or more of the corporate-wide or subsidiary, division or operating unit financial measures listed in the 2007 plan, which include various financial measures and strategic business criteria. We may make equity-based awards to named executive officers under the 2007 plan from time to time at regularly scheduled meetings of the Committee in line with its past practice described above, but awards may not necessarily be made each year. We also anticipate that an initial equity-based award will be made to new hires as of the date of hire. We believe that having the ability to provide equity-based compensation is an essential element of the compensation program that motivates the named executive officers to enhance shareholder value.

Elements of Compensation

     For the fiscal year ended December 28, 2008, referred to as fiscal 2008 , the principal components of compensation for named executive officers included base salary and annual incentive bonus compensation. Our Chief Executive Officer and President also have post termination benefits, personal benefits and perquisites provided for in their employment agreements.

      Base salary.   We use base salary to recognize the experience, skills, knowledge and responsibilities required of our named executive officers in their roles. The Committee reviews each named executive officer’s salary annually and makes adjustments, as appropriate, based on the recommendations of the Chief Executive Officer and President. The Committee also considers a number of factors including market data taken from the public filings of public companies in the gaming industry, internal review of the executive’s compensation (both individually and relative to other executives), level of the executive’s responsibility, and individual performance of the executive. Consistent with fiscal 2007 base salaries, the base salaries of the named executive officers continued to be the biggest portion of the name executives’ compensation in fiscal 2008.

          The base salaries of Lyle Berman (Chief Executive Officer), Timothy J. Cope (President), and Mark Sicilia (Vice President of Food & Beverage), were established in their respective employment agreements. Neither theirs, nor Richard Bienapfl or Scott Just’s

base salaries were increased in fiscal 2008. We and the Committee believed that the base salaries of our named executive officers for fiscal 2008 were at acceptable market rates.

           Annual incentive cash bonus.   Annual incentive cash bonuses are intended to reward individual and Company performance during the year. Annual incentive cash bonuses range from 20% — 80% of the named executive officer’s base salary. The bonuses are determined on a discretionary basis by the Committee based on recommendations from the Chief Executive Officer and President and the performance of the Company and the named executive officer for the completed fiscal year. The annual incentive cash bonus awards made to named executive officers in April 2009 for performance in fiscal 2008 are reflected in the Summary Compensation Table on page 9. The Committee approved these annual incentive cash bonuses due to achievement of strategic fiscal 2008 corporate goals, including, among other things, the successful opening of the Red Hawk Casino for the Shingle Springs Band of Miwok Indians and the successful operating results of the Four Winds Casino for the Pokagon Band of Potawatomi Indians and the Cimarron Casino for the Iowa Tribe of Oklahoma. The annual incentive bonus program is reviewed annually by the Committee to determine whether it is achieving its intended purpose. We and the Committee believe it achieved its purpose in 2008.

           Long term equity incentive.   The Company traditionally uses stock options to motivate our named executive officers to increase long-term shareholder value. The Committee will consider providing other forms of equity-based compensation awards to named executive officers under the 2007 plan, which may be subject to performance goals, rather than just in the form of stock option grants. Grants of equity-based awards to named executive officers under the 2007 plan are made from time to time, as the Committee has done in early 2009, at regularly scheduled meetings of the Committee in line with our past practices. In early 2009, the Committee granted restricted stock units to named executive officers in addition to stock options. Awards may not necessarily be made each year if the Committee decides that the Company’s strategic and financial performance does not merit awards or the Committee believes that the named executive officer has received a sufficient amount of equity-based awards. It is anticipated that an initial equity-based award will continue to be made to new hires in the form of stock options as of the date of hire.

           Personal benefits and perquisites.   Lyle Berman (Chief Executive Officer) and Timothy J. Cope (President) have personal benefits and perquisites provided under their respective employment agreements. Both agreements were negotiated and executed in February 15, 2006, and amended effective February 15, 2009. The Company and the Committee believe that the benefits and perquisites are reasonable and consistent with the compensation program to better enable the Company to retain superior employees for key positions. These two officers are provided personal use of the Company’s aircraft and term life insurance coverage paid by the Company. The value of these benefits and perquisites is set forth in the Summary Compensation Table on page 9. Mark Sicilia’s employment agreement does not contain any personal benefits or perquisites. The other named executive officers receive only those personal benefits and perquisites that are provided on a non-discriminatory basis to all employees.

           Post-termination benefits.   Mr. Berman, Mr. Cope and Mr. Sicilia have post-termination benefits as provided in their respective employment agreements. See “Potential Payments Upon Termination or Change-In Control” for a discussion of those benefits. Mr. Berman, Mr. Cope and Mr. Sicilia are the only named executive officers with employment agreements, and specific post-termination benefits. We provided these benefits to Mr. Berman and Mr. Cope as they were part of the compensation package they negotiated with us for continued employment with us. We provided post-termination benefits to Mr. Sicilia as it was a condition to his initial employment with us.

Role of Executives in Establishing Compensation .   

     The Chief Executive Officer and President play an integral role in recommending compensation for the named executive officers. These officers, along with the Company’s human resources department, research the current and expected compensation trends of other publicly-held companies in the gaming industry applicable to named executive officers, evaluate performance for the completed fiscal year, establish business performance targets and objectives for the coming fiscal year and recommend salary adjustments for the named executive officers to the Committee. These executives participate in the Committee meetings to provide background information on the Company’s business and operational objectives and their evaluation of, and compensation recommendations for, the named executive officers. As required by the listing standards of The NASDAQ Stock Market LLC, the Chief Executive Officer does not participate in deliberations concerning, or vote on, the compensation arrangements for himself.

Tax and Accounting Implications

           Deductibility of Executive Compensation.   As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Company believes that compensation paid under the management

compensation programs are generally fully deductible for federal income tax purposes. However, in certain situations, the Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its executive officers. For fiscal 2008, the amount of compensation in excess of $1,000,000 for any named executive officer was deductible for federal income tax purposes.

           Accounting for Stock-Based Compensation.   Beginning on January 1, 2006, the Company began accounting for stock-based payments including its long-term equity incentive program in accordance with the requirements of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123(R), Share-Based Payment .

Compensation Committee Report

     The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy statement with management. Based on the review and discussions with management with respect to the Compensation Discussion and Analysis, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

     The foregoing report is provided by the following directors, who constitute the Compensation Committee.

COMPENSATION COMMITTEE

Morris Goldfarb
Larry C. Barenbaum

Summary Compensation Table

     The following table sets forth the cash and non-cash compensation for the last fiscal year awarded to or earned by (i) each individual that served as our Chief Executive Officer during fiscal 2008; (ii) each individual that served as our Chief Financial Officer during fiscal 2008; (iii) our three most highly compensated individuals who served as executives of the Company other than our Chief Executive Officer and Chief Financial Officer who were serving as executives at the end of fiscal 2008. The Chief Executive Officer, the Chief Financial Officer and the other executives are collectively referred to in this proxy statement as the named executive officers.

      Employment Agreements for Chief Executive Officer and President.   The Company entered into employment agreements dated as of February 15, 2006 with Lyle Berman and Timothy J. Cope, each referred to as an Executive , to employ the Executives as members of the Company’s senior management. Under the agreements, the Executives are required to perform such duties as may be designated by the Company’s Board of Directors from time to time. Each agreement had an initial term of 36 months and both agreements were amended in 2009 for an additional 36 month term, which commenced February 15, 2009. The term of each agreement automatically extends for successive one-year periods unless at least 60 days prior to the end of a term, the Company or the Executive gives notice to the other of an election to terminate the agreement at the end of the current term. In addition, the agreement may be terminated (a) upon the death or disability (as defined in the agreement) of the Executive; (b) by the Company for cause (as defined in the agreement); (c) by the Company without cause; (d) as a result of a constructive termination (as defined in the agreement); or (e) by the Executive at any time upon providing 60 days advance written notice to the Company. Under the terms of the agreements, Mr. Berman and Mr. Cope receive a base salary of $500,000 and $350,000, respectively, or such other amount as may be determined by the Company in its sole discretion, and a monthly travel and expense fee in the amount of $600. The Executives are also entitled to participate in Lakes’ discretionary incentive compensation program and to receive other benefits provided by the Company to senior executives. Each employment agreement also contains customary confidentiality provisions and a two-year post-employment non-solicitation covenant. Each employment agreement also contains an arbitration clause.

      Employment Agreement for Vice President of Food & Beverage.   The Company entered into an employment agreement dated as of March 5, 2005 with Mark Sicilia to employ him as the Vice President of Food & Beverage. The agreement had an initial term of three years and was extended for a successive one-year period. The agreement automatically renewed for an additional one-year period and will continue to automatically renew unless either the Company or Mr. Sicilia provides notice to the other of a decision to extend the term of the agreement by November 1, 2009 unless at least 90 days prior to the end of a term, the Company or Mr. Sicilia gives notice to the other of an election to terminate the agreement at the end of the current term. In addition, the agreement may be terminated (a) by the Company for cause (as defined in the agreement); (b) by the Company without cause; (c) as a result of a constructive termination (as defined in the agreement); or (e) voluntarily by Mr. Sicilia. Under the terms of the agreement, Mr. Sicilia receives a base salary of $200,000 or such higher amount as may be determined by the Company in its sole discretion and was granted a nonqualified stock option to purchase up to 75,000 shares of the Company’s common stock. Mr. Sicilia is also entitled to receive an annual bonus in an amount equal to at least 40%, and up to 60%, of base salary, subject to approval of the Compensation Committee. Mr. Sicilia is also entitled to receive other benefits provided by the Company to vice presidents. The employment agreement also contains a customary confidentiality provision and a two-year post-employment non-solicitation and non-compete provision. If Mr. Sicilia’s employment agreement is terminated by the Company without cause or due to a constructive termination, Mr. Sicilia is entitled to receive, in equal installments paid at the same interval as his regular salary payments, the following: (a) base salary

(including any accrued vacation) through his termination date, and severance benefits equal to 12 months of his base salary and an amount equal to the average bonus that he received in the Company’s fiscal year(s) prior to the fiscal year in which his employment is terminated; and (b) all medical and dental insurance benefits during the severance period. In addition, all outstanding options to purchase shares of common stock in the Company shall immediately vest and become immediately exercisable and Mr. Sicilia has two years after the date on which he ceases to be employed by the Company to exercise his right to purchase shares of stock of the Company under any such option agreements. The Company’s obligation to provide these payments and benefits is conditioned on Mr. Sicilia entering into a satisfactory general release.

     Mr. Bienapfl and Mr. Just do not have employment agreements with the Company.

Grants of Plan-Based Awards

     The following table provides information about equity awards granted to the named executives in fiscal 2008.

Outstanding Equity Awards at Fiscal Year-End

     The following table sets forth certain information relating to equity awards outstanding at the end of fiscal 2008 for each named executive officer.

     All options were granted under the Company’s 1998 Stock Option and Compensation Plan and the 2007 Stock Option and Compensation Plan. Stock options were granted to Mr. Berman and Mr. Cope in January 1999, January 2004 and March 2008. Stock options were granted to Mr. Bienapfl in January 2000, January 2004 and March 2008. Stock options were granted to Mr. Sicilia in January 2005 and March 2008. Stock options were granted to Scott Just in November 2007.

Option Exercises and Stock Vested

     The following table sets forth certain information relating to the exercise of stock options during fiscal 2008 for each named executive officer.

Potential Payments Upon Termination or Change-In-Control

     The table below describes the potential payments and benefits payable to each of the named executive officers who have employment agreements with the Company upon termination of employment due to disability, by the Company without cause, due to a constructive discharge, due to the named executive officer’s voluntary resignation, by the Company with cause, expiration of the initial or renewal term of the named executive officer’s employment agreement, and involuntary termination within two years following a change-in-control. The amounts shown in the table assume that such termination was effective as of December 28, 2008 and includes all amounts earned through that date and are estimates of the amounts that would be paid out to the named executive officers upon their termination of employment. The actual amounts to be paid out can only be determined at the time a named executive officer in fact terminates employment with the Company.

      Regular Benefits. The amounts shown in the above table do not include payments and benefits that are provided on a non-discriminatory basis to salaried employees generally upon termination of employment. These include payment of accrued, but unused vacation pay.

      Death. A termination of employment due to death does not entitle the Named executive officers to any payments or benefits that are not available to salaried employees generally.

      Disability. Each of the employment agreements for Mr. Berman and Mr. Cope provides that if the agreement is terminated due to the executive’s disability, the executive would be entitled to receive an amount equal to six months of his then base salary and the continuation of medical and dental benefits for the executive and his dependents during the six months following any such termination.

      Involuntary Termination without Cause or Constructive Discharge. If either Mr. Berman or Mr. Cope is terminated without cause or through constructive discharge, he would be entitled to:

	•		base salary (including any accrued vacation) through the termination date;
	•		severance benefits equal to the accrued and unpaid base salary for 12 months, or for the period of time remaining in the term of employment, whichever is longer;
	•		equivalent of bonus or incentive compensation (based upon the average bonus percentage rate for the two fiscal years of the Company preceding such termination) for 12 months, or for the period of time remaining in the term of the employment agreement, whichever is longer;
	•		all medical and dental insurance benefits during the severance period; and

•

all outstanding options to purchase shares of stock in the Company immediately vest and become immediately exercisable for two years after the date on which executive ceases to be employed by the Company.

     If Mr. Sicilia is terminated through disability, without cause or through constructive discharge, he would be entitled to:

	•		base salary (including any accrued vacation) through the termination date;
	•		severance benefits equal to the accrued and unpaid base salary for 12 months;
	•		the equivalent of bonus or incentive compensation (based upon the average bonus Mr. Sicilia received for the fiscal year(s) of the Company preceding such termination) for 12 months;
	•		all medical and dental insurance benefits during the severance period; and
	•		all outstanding options to purchase shares of stock in the Company immediately vest and become immediately exercisable for two years after the date on which he ceases to be employed by the Company.

     In exchange for these payments, Mr. Sicilia agreed not to compete with the Company, nor solicit the Company’s employees, for a period of two years following termination of employment with the Company.

      Involuntary Termination after Change-in-Control. If the employment of Mr. Berman or Mr. Cope is terminated without cause or due to constructive discharge within two years following a change-in-control, he would be entitled to:

	•		all compensation due and payable to, or accrued for, the benefit of the executive as of the date of termination;
	•		a lump sum payment equal to two times the executive’s annual compensation (which is defined as the executive’s (i) annual base salary plus annual bonus or incentive compensation computed at par levels, (ii) an amount equal to the annual cost to executive of obtaining annual health care coverage comparable to that currently provided by the Company, (iii) an amount equal to any normal matching contributions made by the Company on executive’s behalf in the Company’s 401(k) plan, (iv) annual automobile allowance, if any, and (v) an amount equal to the annual cost to the executive of obtaining life insurance and insurance coverage for accidental death and disability insurance comparable to that provided by the Company);
	•		all outstanding options to purchase shares of stock in the Company immediately vest and become immediately exercisable for two years after the date on which executive ceases to be employed by the Company;
	•		the Company must use its best efforts to convert any then existing life insurance and accidental death and disability insurance policies to individual policies in the name of the executive; and
	•		if payments are made to the executive, or the value of other benefits received by the executive, in connection with the change of control exceed certain limits, Section 280G of the Internal Revenue Code imposes an excise tax on the employee. The costs of this excise tax, including related tax gross-ups, will be borne by the Company.

     In exchange for these payments, Mr. Berman and Mr. Cope are subject to non-solicitation covenants covering the Company’s employees, persons or entities that are doing business with the Company, and anyone that is an active prospect to do business with the Company, for a period of two years following termination of employment with the Company.

      Stock Option Acceleration and Continuation. Upon the termination of the employment of Mr. Berman or Mr. Cope for any reason, including death, disability, expiration of the initial term, nonrenewal, termination by the Company with or without cause, termination by the executive with notice, due to a constructive discharge or within two years of a change of control, all stock options held by the executive immediately vest and become immediately exercisable by the executive or his legal representative for a period of two years following the date of termination of the executive’s employment.

      Excise Tax Gross-Up. If payments are made to Mr. Berman or Mr. Cope, or the value of other benefits received by them, in connection with the change-in-control exceed certain limits, Section 280G of the Internal Revenue Code imposes an excise tax on the employee. The costs of this excise tax, including related tax gross-ups, will be borne by the Company.

Executive Officers of Lakes Entertainment

     The table below lists the executive officers of the Company as of December 28, 2008:

CORPORATE GOVERNANCE

Board of Directors

     Our Board of Directors is currently comprised of the seven members identified under Proposal One (Proposal for Election of Directors). The following directors, which constitute a majority of the Board of Directors, are “independent directors” as such term is defined in Section 4200(a)(15) of The NASDAQ Stock Market LLC’s listing standards, referred to as Nasdaq Listing Standards : Larry C. Barenbaum, Morris Goldfarb, Ray Moberg, Neil I. Sell and Richard D. White.

     The Board of Directors has established an Audit Committee, a Corporate Governance Committee and a Compensation Committee. The Board of Directors held 11 meetings during fiscal 2008. None of our directors attended fewer than 75 percent of the aggregate of (i) the total number of meetings of the Board of Directors held during fiscal 2008, and (ii) the total number of meetings held by all committees of the Board on which such director served.

Ability of Shareholders to Communicate with the Company’s Board of Directors

     We have established several means for shareholders and others to communicate with our Board of Directors. If a shareholder has a concern regarding our financial statements, accounting practices or internal controls, the concern should be submitted in writing to the chairperson of the Audit Committee in care of our Secretary at our headquarters address. If the concern relates to our governance practices, business ethics or corporate conduct, the concern should be submitted in writing to a member of the Corporate Governance Committee in care of our Secretary at our headquarters address. If a shareholder is unsure as to which category the concern relates, the shareholder may communicate it to any one of the independent directors in care of our Secretary at our headquarters address. All such shareholder communications will be forwarded to the applicable director(s).

Director Attendance at Annual Meetings of Shareholders

     The Company does not have a formal policy regarding attendance by members of the Board of Directors at the Company’s Annual Meeting of shareholders but the Company does encourage its Board members to attend such meetings. A total of four of our directors attended the Company’s 2008 annual meeting of shareholders.

Audit Committee of the Board of Directors

          The Board of Directors has established a three-member Audit Committee that consists of Larry C. Barenbaum, Richard D. White and Ray Moberg, who is the chairperson of the audit committee. The audit committee operates under an amended and restated written charter adopted by the Board of Directors on March 6, 2006, and a copy of this charter is attached as Appendix A to this proxy statement. The primary functions of the Audit Committee are (i) to serve as an independent and objective party to monitor our financial reporting process and internal control system, (ii) to review and appraise the audit efforts of our independent auditors, and (iii) to provide an open avenue of communication among the independent auditors, financial and senior management and the Board of Directors. The charter also requires that the Audit Committee (or designated members of the Audit Committee) review and pre-approve the performance of all audit and non-audit accounting services to be performed by our independent registered public accounting firm (auditors), other than certain de minimus exceptions permitted by Section 202 of the Sarbanes-Oxley Act of 2002. The Audit Committee held nine meetings during fiscal year 2008. The Audit Committee also held executive sessions on several occasions during the year where Company management was not present.

          The Board of Directors has determined that at least one member of the Audit Committee, Mr. Moberg, is an “Audit Committee financial expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. In addition, each member of the Audit Committee is an “independent director,” as such term is defined in the Nasdaq Listing Standards. The Board of Directors has also determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.

Report of the Audit Committee

     The Audit Committee is responsible for providing independent, objective oversight of the Company’s accounting functions and internal controls. In connection with these responsibilities, the Audit Committee has reviewed audited financial statements of Lakes Entertainment, Inc. for fiscal 2008 and discussed them with management.

     The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees , as adopted and amended by the Public Company Accounting Oversight Board under Rule 3200T.

     The Audit Committee has received and reviewed the written disclosures and the letter from the independent auditors required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditors’ communications with the Audit Committee concerning independence, and has discussed the independent registered public accounting firm’s independence with the independent auditors.

     The Audit Committee, based on the review and discussions described above, recommended to the Board of Directors that the Company’s audited financial statements be included in its Annual Report on Form 10-K for fiscal 2008.

     This report of the Audit Committee does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference into such other filings.

AUDIT COMMITTEE

Larry C. Barenbaum
Ray Moberg
Richard D. White

Corporate Governance Committee of the Board of Directors

     The Board of Directors has established a two-member corporate Governance Committee that consists of Morris Goldfarb and Neil I. Sell, each of whom satisfies the independence requirements of the Nasdaq Listing Standards. The Corporate Governance Committee held two meetings during fiscal year 2008.

          The primary role of the Corporate Governance Committee is to (1) develop the overall corporate governance policies for the Company and (2) consider and make recommendations to the full Board of Directors concerning the appropriate size, function and needs of the Board, including establishing criteria for Board membership and considering, recruiting and recommending candidates (including those recommended by shareholders) to fill new Board positions. The Corporate Governance Committee (or a subcommittee thereof) recruits and considers director candidates and presents qualified candidates to the full Board for consideration. Qualified candidates will be considered without regard to race, color, religion, sex, ancestry, national origin or disability.

          The Corporate Governance Committee will consider each candidate’s general business and industry experience, his or her ability to act on behalf of shareholders, overall Board diversity, potential concerns regarding independence or conflicts of interest and other factors relevant in evaluating Board nominees. Additionally, the Board will consider whether or not the candidate would be found suitable to be issued a gaming license. This is a requirement of continued Board membership. If the Corporate Governance Committee approves a candidate for further review following an initial screening, the Corporate Governance Committee will establish an interview process for the candidate. Generally, the candidate will meet with the members of the Corporate Governance Committee, along with our Chief Executive Officer. Contemporaneously with the interview process, the Corporate Governance Committee will conduct a comprehensive conflicts-of-interest assessment of the candidate. The Corporate Governance Committee will consider reports of the interviews and the conflicts-of-interest assessment to determine whether to recommend the candidate to the full Board of Directors. The Corporate Governance Committee will also take into consideration the candidate’s personal attributes, including, without limitation, personal integrity, loyalty to us and concern for our success and welfare, willingness to apply sound and independent business judgment, awareness of a director’s vital part in good corporate citizenship and image, time available for meetings and consultation on Company matters and willingness to assume broad, fiduciary responsibility. The Corporate Governance Committee operates under a written charter adopted by the Board of Directors on April 28, 2005, and a copy of this charter is attached as Appendix B to this proxy statement.

          Recommendations for candidates to be considered for election to the Board at our annual shareholder meetings may be submitted to the Corporate Governance Committee by our shareholders. Candidates recommended by our shareholders will be considered under the same standards as candidates that are identified by the Corporate Governance Committee. In order to make such a recommendation, a shareholder must submit the recommendation in writing to the Corporate Governance Committee, in care of our Secretary at our headquarters address, at least 120 days prior to the mailing date of the previous year’s Annual Meeting proxy statement. To enable the committee to evaluate the candidate’s qualifications, shareholder recommendations must include the following information:

	•		The name and address of the nominating shareholder and of the director candidate;
	•		A representation that the nominating shareholder is a holder of record of our common stock and entitled to vote at the current year’s Annual Meeting;
	•		A description of any arrangements or understandings between the nominating shareholder and the director candidate or candidates being recommended pursuant to which the nomination or nominations are to be made by the shareholder;
	•		A resume detailing the educational, professional and other information necessary to determine if the nominee is qualified to hold a Board position;
	•		Such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had each nominee been nominated by the Board of Directors; and

•

The consent of each nominee to serve as a director if so elected.

Compensation Committee of the Board of Directors

     The Board of Directors has established a two member Compensation Committee that consists of Morris Goldfarb and Larry C. Barenbaum, each of whom satisfies the independence requirements of the Nasdaq Listing Standards. Mr. Barenbaum and Mr. Goldfarb are also “non-employee directors” as defined by Rule 16b-3 under the Securities Exchange Act of 1934 and “outside directors” as defined by Section 162(m) of the Internal Revenue Code. The Compensation Committee operates under a written amended and restated charter adopted by the Board of Directors on December 4, 2006, and a copy of this charter is attached as Appendix C to this proxy statement. The Compensation Committee reviews our remuneration policies and practices, makes recommendations to the full Board of Directors in connection with all compensation matters affecting us and administers our incentive compensation plans.

     The Compensation Committee has the authority, to the extent it deems necessary or appropriate, to retain a compensation consultant to assist in the evaluation of named executive officer compensation. The Compensation Committee also has the sole authority to approve the consultant’s fees and other retention terms. The Compensation Committee also has the authority, to the extent it deems necessary or appropriate, to retain other advisors. The Company will provide appropriate funding, as determined by the Compensation Committee, for payment of compensation to any consulting firm or other advisors hired by the Compensation Committee. The Compensation Committee engaged Towers, Perrin, Forster and Crosby, Inc., a compensation consultant, to review compensation for fiscal 2008 for both named executive officers and the board of directors. Towers, Perrin was instructed to analyze not only the overall board compensation, but also the cash and stock component. Towers, Perrin was also instructed to analyze the entire compensation package for Mr. Berman and Mr. Cope and compare such packages with similarly situated officers.

     The Compensation Committee meets as often as its members deem necessary to perform the Compensation Committee’s responsibilities but in no event less than twice annually. The chair of the Compensation Committee presides at each meeting. In consultation with the other members of the Compensation Committee, the chair sets the frequency and length of each meeting and the agenda of items to be addressed at each meeting. The chair of the Compensation Committee also ensures that the agenda for each meeting is circulated to each Compensation Committee member in advance of the meeting. In addition, the Compensation Committee makes regular reports to the Board and proposes any necessary action to the Board.

     In fiscal 2008, the Compensation Committee met on two occasions. The committee members participated in each of those meetings and, where appropriate, management was also present at the meetings. The recommendations of the Compensation Committee for named executive officer compensation for fiscal 2008 were made to the Board, which subsequently adopted the Compensation Committee’s recommendations without modifications.

     Additional information regarding the Compensation Committee’s processes and procedures for establishing and overseeing executive compensation is disclosed under the heading “ Executive Compensation—Compensation Discussion and Analysis. ”

Compensation Committee Interlocks and Insider Participation

     Morris Goldfarb and Larry C. Barenbaum served as the members of the Compensation Committee during fiscal 2008. There were no relationships among members of the Compensation Committee, members of the Board of Directors or executive officers of Lakes who served during fiscal 2008 that require disclosure under Item 407(e) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.

PROPOSAL TO APPROVE THE AMENDMENT TO THE
2007 STOCK OPTION AND COMPENSATION PLAN
TO INCREASE THE NUMBER OF SHARES AUTHORIZED
FOR ISSUANCE TO 2,500,000
(Proposal Three)

General

          On June 3, 2009, the Board of Directors approved an amendment to our 2007 Stock Option and Compensation Plan, referred to as the 2007 Plan , subject to the approval of the Company’s shareholders, to increase the number of shares of our common stock authorized for issuance under the 2007 Plan from 500,000 to 2,500,000. The Company believes that an increase in the number of shares available for grant under the 2007 Plan ensures that the Company can continue to grant stock options or other equity-based awards to attract and retain talented directors and key employees. The Company further believes that the granting of stock options or other equity-based awards to directors and key employees links the personal interests of such directors and key employees with the Company’s shareholders.

               If the shareholders approve Proposal Five relating to the value-for-value option exchange program at the Annual Meeting and it is subsequently implemented by the Company and accepted by employees holding options under the Company’s existing 1998 Stock Option and Compensation Plan, referred to as the 1998 Plan , any shares underlying options exchanged under the 1998 Plan would need to be replaced with options under the 2007 Plan because the 1998 Plan is no longer effective.

          The shareholders are being asked to approve the increase in the number of shares of common stock reserved for issuance from 500,000 to 2,500,000 under the 2007 Plan to provide the shares necessary to affect both the value-for-value option exchange program and the Company’s future needs in attracting, retaining, and incentivizing key contributors.

           Effect on Prior Plans. Shareholder approval of the amendment of the 2007 Stock Option and Compensation Plan will have no effect on the Company’s existing 1998 Stock Option and Compensation Plan, referred to as the 1998 Plan . See “ Equity Compensation Plan Information ” for additional information regarding the number of exercisable stock options issued and outstanding under the Company’s existing stock option plans.

Summary of the 2007 Stock Option and Compensation Plan

          The complete text of the 2007 Plan, as amended, is attached as Appendix D to this proxy statement. The following summary of the material terms of the 2007 Plan, as amended, is qualified in its entirety by reference to the full text of the 2007 Plan, as amended.

      Purpose. The 2007 Plan is intended to aid the Company in recruiting and retaining employees, officers, non-employee directors and other consultants capable of assuring the future success of the Company. Lakes expects that the awards of stock-based compensation under the 2007 Plan and opportunities for stock ownership in the Company will provide incentives to participants to exert their best efforts for the success of the Company and also align their interests with those of the Company’s shareholders.

      Administration. The Compensation Committee or any successor committee of the Board of Directors designated by the Board (“Committee”) will administer the 2007 Plan. Subject to the terms of the 2007 Plan, the Committee has the power to determine, among other things, eligibility, the types and sizes of awards, the price and timing of awards, the terms and conditions of awards, any applicable vesting requirements or restrictions, and the acceleration or waiver of any such vesting requirements or restrictions. The Committee also has the authority to interpret the 2007 Plan and to prescribe, interpret and revoke rules and regulations relating to the 2007 Plan. The Committee may delegate its powers and duties under the 2007 Plan to one or more Directors or executive officers of the Company, or a committee of Directors and executive officers, other than the power to grant an award to any person who is a “covered employee” within the meaning of Section 162(m) of the Internal Revenue Code or who is subject to Section 16 of the Securities Exchange Act of 1934.

      Eligibility. The Committee will determine which employees, officers, consultants and non-employee Directors of the Company or its subsidiaries are eligible to participate in the 2007 Plan based on recommendations it receives from management.

      Shares Authorized. If this Proposal Three is approved by our shareholders, a total of 2,500,000 shares of our common stock for awards may be issued under the 2007 Plan, all of which may be granted in a variety of ways described under “ Types of Awards .”

below. Shares that are subject to awards that terminate, lapse or are cancelled or forfeited will be available again for grant under the 2007 Plan.

      Certain Limitations. No participant may be granted in any calendar year an award or awards for more than 400,000 shares of our common stock in the aggregate, or, in the case of cash awards, for more than $200,000.

      Types of Awards. The 2007 Plan authorizes many different types of awards. To date, we have granted stock options and restricted stock units under the 2007 Plan. The following types of awards are permitted under the 2007 Plan:

	•		Stock Options. The grant of either non-qualified or incentive stock options to purchase shares of our common stock are permitted under the 2007 Plan. Incentive stock options are intended to qualify for favorable tax treatment under the Internal Revenue Code to participants in the 2007 Plan. The stock options will provide for the right to purchase shares of common stock at a specified price and will become exercisable after the grant date under the terms established by the Committee. In general, the per share option exercise price may not be less than 100% of the fair market value of a share of our common stock on the grant date.
	•		Stock Options for Non-Employee Directors. The 2007 Plan provides that each non-employee director at the time of his or her initial election or appointment receives a non-qualified stock option to purchase up to 25,000 shares of our common stock at an option exercise price equal to the fair market value of the shares on the grant date. Each option will have a ten-year term and will generally become exercisable in five equal annual installments commencing on the first anniversary of the grant date.
	•		Stock Appreciation Rights. Awards of stock appreciation rights (“SARs”) are permitted under the 2007 Plan. Upon exercise, SARs provide the holder with a right to receive in cash or in shares of our common stock the excess of the fair market value of one share of our common stock on the date of exercise, over the grant price of the SARs. In general, the grant price of SARs may not be less than 100% of the fair market value of a share of our common stock on the grant date.
	•		Restricted Stock and Restricted Stock Units. Awards of restricted stock and restricted stock units are permitted under the 2007 Plan, subject to any restrictions that the Committee determines to impose such as satisfaction of performance measures or a performance period, or restrictions on the right to vote or receive dividends. The minimum vesting period of such awards is one year from the grant date.
	•		Performance Awards. Performance awards, denominated in shares of our common stock, are permitted under the 2007 Plan. Performance awards must be contingent upon the attainment of one or more performance goals within a performance period designated by the Committee. Performance awards may be settled or payable in shares of our common stock or in cash. The recipient of a performance award has no rights as a shareholder with respect to the shares of our common stock subject to the award. For purposes of the 2007 Plan, performance goals must be based exclusively on one or more of the following corporate-wide or subsidiary, division or operating unit financial measures: (1) pre-tax or after-tax income (before or after allocation of corporate overhead and bonus), (2) net income (before or after taxes), (3) reduction in expenses, (4) pre-tax or after-tax operating income, (5) earnings (including earnings before taxes, earnings before interest and taxes, or earnings before interest, taxes, depreciation and amortization, (6) gross revenue, (7) working capital, (8) profit margin or gross profits, (9) Share price, (10) cash flow or cash flow per Share (before or after dividends), (11) cash flow return on investment, (12) return on capital (including return on total capital or return on invested capital), (13) return on assets or net assets, (14) market share, (15) pre-tax or after-tax earnings per Share, (16) pre-tax or after-tax operating earnings per Share, (17) total stockholder return, (18) growth measures, including revenue growth, as compared with a peer group or other benchmark, (19) economic value-added models or equivalent metrics, (20) comparisons with various stock market indices, (21) improvement in or attainment of expense levels or working capital levels, (22) operating margins, gross margins or cash margins, (23) year-end cash, (24) debt reductions, (25) stockholder equity, (26) regulatory achievements, (27) implementation, completion or attainment of measurable objectives with respect to research, development, products or projects, production volume levels, acquisitions and divestitures and recruiting and maintaining personnel, (28) customer satisfaction, (29) operating efficiency, productivity ratios, (30) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals (including accomplishing regulatory approval for projects), cost or cost savings targets, accomplishing critical milestones for projects, and goals relating to acquisitions or divestitures, or any combination thereof (in each case before or after such objective income and expense allocations or adjustments as the Committee may specify within the applicable period).

	•		Stock Awards. Awards of our common stock without restrictions is permitted under the 2007 Plan, but such grants may be subject to any terms and conditions the Committee may determine.
	•		Other Stock-Based Awards. Grants of other types of awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of our common stock, subject to the terms and conditions established by the Committee, are permitted under the 2007 Plan. Shares of our common stock, or other securities delivered pursuant to a purchase right granted by such an award, must be purchased for consideration having a value equal to at least 100% of the fair market value of such shares of our common stock or other securities on the date the purchase right is granted.
	•		Cash Awards. Grants of cash awards, subject to the terms and conditions established by the Committee, are permitted under the 2007 Plan.
	•		Dividend Equivalents. Awards of dividend equivalents, pursuant to which the recipient is entitled to receive payments in cash, shares of our common stock, other securities or other property, as determined by the Committee, based on the amount of cash dividends paid by the Company to holders of our common stock are permitted under the 2007 Plan. Dividend equivalents awards may also be subject to any terms and conditions established by the Committee.

      Transfer Restrictions. In general, awards under the 2007 Plan may not be transferred except upon death, by will or the laws of descent and distribution, or pursuant to a transfer to a family member that is expressly permitted by the Committee.

      Adjustment for Certain Corporate Changes. In the event of a stock split, stock dividend, recapitalization, reorganization, merger or similar event, which affects shares of our common stock such that an adjustment is required to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2007 Plan, then the Committee must, in such manner as it deems equitable, make appropriate adjustments to (1) the number of shares of our common stock available for awards under the 2007 Plan, and subject to outstanding awards and (2) the purchase or exercise price of outstanding awards. If the Company acquires or combines with another company with a pre-existing plan approved by shareholders and not adopted in contemplation of the acquisition or combination, the shares available for grant under the pre-existing plan may be used for awards under the 2007 Plan. Such awards can not be made after the date awards or grants could have been made under the pre-existing plan, absent the acquisition or combination, and can only be made to individuals who were not employees or Directors of the Company prior to such acquisition or combination.

      Change in Control. In the event of a change in control of the Company (as defined in the 2007 Plan), all outstanding awards become vested and exercisable in full. If the Company is a party to a merger, exchange or reorganization, outstanding awards will be subject to the terms and conditions of any agreement of merger, exchange or reorganization which may include, without limitation, accelerating the vesting or exercise date of Awards and the cancellation of outstanding Awards in exchange for payment of their cash equivalent.

      Amendment. The Board may amend the 2007 Plan at any time, except that the Board may not amend the 2007 Plan to increase materially the benefits to participants under the 2007 Plan without shareholder approval. In addition, the Board may not make any amendment that would impair an outstanding award under the 2007 Plan.

      Term. The term of the 2007 Plan expires on June 5, 2017, unless earlier terminated by the Board.

      New Plan Benefits. Other than the stock options granted to new non-employee Directors as provided in the 2007 Plan, no specific determinations have been made regarding the timing, size or terms of individual awards to be made under the 2007 Plan at this time.

Federal Income Tax Consequences

     The following is a brief overview of the U.S. federal income tax consequences generally arising with respect to awards under the 2007 Plan. This summary is not intended to be exhaustive and does not describe state, local or FICA tax consequences.

      Tax Consequences to Participants. The tax consequences to a participant depend on the type of award granted under the 2007 Plan.

	•		Stock Options.
			Non-Qualified Stock Options. A participant does not recognize income at the time a non-qualified stock option is granted. At the time of exercise of the non-qualified stock option, the participant recognizes ordinary income in an amount equal to the difference between the amount paid for the shares subject to the option (the “exercise price”) and the fair market value of the shares (assuming the shares subject to the option are unrestricted). When the participant sells the shares acquired on exercise of the option, any appreciation (or depreciation) in the value of the shares after the date of exercise is short-term or long-term capital gain (or loss) depending on how long the shares have been held.
			Incentive Stock Options. Options that qualify as incentive stock options (“ISOs”) are entitled to special tax treatment. As with non-qualified stock options, a participant does not recognize income at the time an ISO is granted. However, unlike with non-qualified stock options, if the ISO holding period requirement is satisfied, the participant does not recognize income (for purposes of regular income tax) at the time of exercise (although the participant may be required to recognize income for purposes of the alternative minimum tax). The ISO holding period requirement is satisfied if the shares acquired on exercise of the ISO are held for at least two years from the ISO grant date and one year from the ISO exercise date, whichever is longer. If this requirement is met, when the participant sells the shares acquired on the ISO exercise, any appreciation (or depreciation) in the value of the shares over the exercise price is short-term or long-term capital gain (or loss) depending on how long the shares have been held. If a participant sells the shares acquired on exercise of an ISO before satisfying the ISO holding period requirement, the participant has a “disqualifying disposition” of the shares at the time they are sold. Upon the disqualifying disposition, the participant has ordinary income equal to the lesser of: (1) the fair market value of the shares on the date of exercise of the ISO less the exercise price; and (2) the sales price of the shares less the exercise price. Any additional appreciation (or depreciation) in the value of the shares is short-term or long-term capital gain (or loss) depending on how long the shares have been held.
	•		Stock Appreciation Rights. A participant does not recognize income at the time a SAR is granted. When a SAR is exercised, the participant recognizes income equal to the amount of cash and the fair market value of any unrestricted shares received on the exercise.
	•		Restricted Stock. A participant granted shares of restricted stock does not recognize income at the time of grant unless the participant makes an election (an “8 3(b) election” ) to be taxed at such time. Instead, the participant recognizes ordinary income at the time the restrictions lapse in an amount equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for the shares. Any dividends paid to the participant with respect to the shares of restricted stock are treated as compensation income, rather than dividend income, until the restrictions lapse. When the participant sells the shares, any appreciation (or depreciation) in the value of the shares after the date the restrictions lapse is short-term or long-term capital gain (or loss) depending on how long the shares have been held since the date the restrictions lapse.
			If a participant granted shares of restricted stock properly makes an 83(b) election with respect to the shares, the participant recognizes ordinary income on the date of grant equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for the shares. The participant does not recognize any income at the time the restrictions lapse. When the participant sells the shares, any appreciation (or depreciation) in the value of the shares after the date of grant of the shares is short-term or long-term capital gain (or loss) depending on how long the shares have been held since the date of grant.
	•		Restricted Stock Units, Performance Awards, and Dividend Equivalents . A participant granted restricted stock units, performance awards or dividend equivalents does not recognize income at the time of grant. The participant generally recognizes ordinary income at the time the award is payable to him or her equal to the cash or the value of the shares received at that time. When the participant sells any shares received, any appreciation (or depreciation) in the value of the shares after they are received is short-term or long-term capital gain (or loss) depending on how long the shares have been held.
	•		Cash Awards and Stock Awards. A participant granted a cash award recognizes ordinary income at the time of grant equal to the amount of cash received. A participant granted a stock award recognizes ordinary income at the time of grant equal to the fair market value of the shares granted less the amount, if any, paid for the shares. When the participant sells

			the shares, any appreciation (or depreciation) in the value of the shares after they are received is short-term or long-term capital gain (or loss) depending on how long the shares have been held.
	•		Other Stock-Based Awards. If a participant is granted another type of stock-based award under the plan, the participant will recognize income on the award based on the nature of the award.

           Tax Consequences to the Company. To the extent that a participant recognizes ordinary income in the circumstances described above, the Company or the subsidiary for which the participant performs services will be entitled to a corresponding deduction if, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code and is not disallowed by Section 162(m) of the Internal Revenue Code.

           Awards Granted. The table below shows the number of outstanding awards granted under the 2007 Plan to the following individuals and groups since its inception.

          The closing price of a share of the Company’s common stock on June 8, 2009 was $3.26.

PROPOSAL TO APPROVE THE AMENDMENT OF THE
2007 STOCK OPTION AND COMPENSATION PLAN
TO PERMIT REPRICING OF OPTIONS WITH PRIOR SHAREHOLDER APPROVAL
(Proposal Four)

               The 2007 Plan currently specifically prohibits our Compensation Committee from repricing, adjusting or amending the exercise price of options or grant price of stock appreciation rights previously awarded to any participant, even with shareholder approval. In connection with Proposal Five below, the Board of Directors approved an amendment to our 2007 Plan, subject to the approval of the Company’s shareholders, to allow the Compensation Committee to reprice, adjust or amend the exercise price of outstanding options and grant price of outstanding stock appreciation rights, but only if the Company first obtains prior shareholder approval. Accordingly, the shareholders are being asked to approve the amendment and restatement of the 2007 Plan to enable our Compensation Committee to reprice, adjust or amend the exercise price of options or grant price of stock appreciation rights previously awarded to any participant, so long as the Company first obtains shareholder approval for the specific plan being proposed. If this proposal is approved, it will permit the Company to have authority to implement the value-for-value option exchange proposal outlined in Proposal Five below, assuming that proposal is also approved. A detailed summary of the terms of the 2007 Plan is provided under Proposal Three above. The complete text of the Amended and Restated 2007 Stock Option and Compensation Plan, which includes the amendments proposed under Proposals Three and Four, is attached as Appendix D to this proxy statement.

PROPOSAL TO APPROVE THE
VALUE-FOR-VALUE STOCK OPTION EXCHANGE PROGRAM
(Proposal Five)

Background

               Our stock price has experienced a significant decline over the last two years, due in large part to the continued weak economy, the effect of reduced discretionary income on the casino industry generally, along with other factors both within and beyond our control. This decline in many respects mirrors the decline in the stock prices of other companies in the casino and other industries. There is no sign that economic conditions will soon change or that our stock price (or the stock prices of other companies in our industry) will soon return to recent historical levels. This decline in our stock price means that many of the stock options we have granted have limited perceived value to our optionees because their exercise prices are greater than our current stock price. In other words, they are “underwater.” We do not believe that underwater options are an effective retention tool, nor do we believe that they result in the alignment of the optionees’ interests with the interests of our shareholders. We believe the best way to achieve these goals without a significant economic cost to our shareholders is to permit optionees holding underwater options to exchange them in a value-for-value exchange offer, referred to as the Option Exchange . Such an offer would permit all current holders of underwater options to elect to exchange existing underwater options for new options (having an exercise price equal to fair market value on the date of grant) that have the same calculated value, based on the commonly used Black-Scholes valuation model. The number of new options will therefore be smaller than the number of options being exchanged to offset the lower exercise price. Because our proposed Option Exchange requires the new options to contain newly extended vesting periods, the new options, when vesting is considered, will be somewhat more favorable for the Company and less favorable to the employee than a value-for-value exchange that did not change vesting from the options being exchanged.

               We have been granting stock options to our employees for more than 10 years, seeking to align employees’ economic interests with the interests of our shareholders. Our stock option program has covered nearly all employees and directors. As a result of significant declines in our stock price over the last two years for reasons outlined above, over 84% of our outstanding stock options as of June 8, 2009 have exercise prices greater than the closing price of our common stock of $3.26 on that date (e.g. they are underwater). As of June 8, 2009, optionees held stock options to purchase 2,355,925 shares of our common stock with exercise prices above the closing price of our common stock. The weighted average exercise price of these underwater options is $7.18 per share. Of these underwater options, our executive officers held options to purchase 1,100,000 shares, with a weighted average exercise price of $6.83 and our independent directors held options to purchase 301,000 shares, with a weighted average exercise price of $7.05.

Reasons for the Option Exchange Program

               The Board of Directors is requesting that our shareholders approve the Option Exchange, contingent on the approval of Proposals Three and Four above. The Board believes that the Option Exchange is in the best interest of shareholders and the Company because:

	•		New options received pursuant to the Option Exchange will provide added incentive to motivate and retain talented employees and other contributors.
	•		Under the Option Exchange, new options will contain newly extended vesting periods, thereby incentivizing key contributors to remain with the Company longer in order to receive the economic benefit of their stock options.
	•		If a significant number of optionees elect to accept the terms of the Option Exchange, it will substantially reduce our “overhang” of outstanding employee stock options.
	•		We will be afforded the opportunity to make better use of the compensation costs that we have already incurred from our outstanding stock option awards.

               We rely on highly skilled employees with gaming experience to develop and operate our business, including managing the challenges of our development pipeline. If we are not successful in retaining our current best employees and other contributors, we could experience employee turnover which is both disruptive and expensive. Ongoing growth in the gaming industry has continued to create significant demand for qualified industry executives. We continue to believe that stock options are an important component in

our total compensation and believe that a failure to address the underwater option issue in the near term may make it more difficult for us to retain our key employees.

               If we are forced to hire replacement employees, such employees will often demand stock option packages with exercise prices equal to current market price. New employees do not have the same background knowledge and expertise with our Company and our projects as our existing employees and it often requires an extended period of time for new employees to become full contributors. Finally, new employees often require recruitment fees and relocation expenses and, inevitably, there is risk associated with the success of any new hire and the potential for additional turnover. All of this leads to the conclusion that we need to focus on retaining our existing contributors because of the high costs of attracting new individuals to replace them.

               In the event that Proposals Three and Four are not both approved by shareholders along with this Proposal Five, we would be unable to affect the Option Exchange. We are also asking for shareholders to approve the Option Exchange (as well as Proposals Three and Four) in order to satisfy the terms of our stock plans and NASDAQ rules, and as a matter of good corporate governance.

Current Approach to Equity Program

               The proportion of the variable pay that an employee receives as a percentage of total compensation generally increases as the grade level and responsibility of the employee increase. As a result, individuals with higher strategic responsibilities within the organization have a higher proportion of their compensation at risk. Equity is an essential part of our total compensation structure, and when stock price growth is flat to down, our employees individually experience its impact through the structure of their total compensation and the broad-based reach of our equity program. Of our 43 employees as of June 8, 2009, 42 are currently holding stock options. Each of our five independent directors also currently holds stock options. Our stock options are granted with an exercise price equal to the market value on the date of grant. Our outstanding stock options vest over periods of three, four or five years in annual increments and after vesting can be exercised until expiration 10 years after their grant date. Our stock option grants outstanding have been made on various dates throughout the years. As a result, outstanding stock options have a number of varying exercise prices, vesting, and expiration dates. Our employee stock options cannot be sold; they are either voluntarily exercised when there is a positive spread between their exercise price and the market price of Lakes Entertainment common stock, or they expire unexercised and provide no economic value to the optionee.

               Over recent years, Lakes Entertainment has continued to move forward with casino-related opportunities. However, we have faced a changing marketplace in terms of delays associated with opening of projects as well as the more recent economic downturn which has affected discretionary incomes and the casino industry as a whole. We consider our employees an important component in our drive to enhance our competitive position and to prepare for future success. Many of our employees are specialists who are working on important projects or have skills that they have developed over the years and would be difficult to replace.

               The current worldwide economic downturn has affected our business. It is unclear when a turnaround may occur. Exercise prices for stock options outstanding as of June 8, 2009, ranged from $2.86 to $16.84, and the closing market price of our common stock was $3.26 on that date. As a result, the current situation provides a considerable challenge to maintaining employee motivation, as well as creating a serious threat to retention until a recovery commences or our business performance improves. The Option Exchange would help to address both of these concerns as well as permitting us to reinvigorate a culture based on employee stock ownership, enhance long-term stockholder value by retaining experienced and productive employees, improve morale of employees generally, and align the interests of our employees more fully with the interests of our shareholders.

Additional Benefits of Option Exchange

               Successful execution of the Option Exchange would reduce our “overhang” (equity awards outstanding but not exercised, plus equity awards available to be granted, divided by total common shares outstanding at the end of the year). Underwater stock option awards have little or no retentive value but remain in overhang until they are exercised, expire, or are cancelled. Our overhang on June 8, 2009 was 11.5% (3.0 million equity awards outstanding plus approximately fifty thousand shares available for future grant divided by 26.3 million total common shares outstanding). Under the Option Exchange, we expect that a reduction in overhang will occur, because participating employees will receive fewer new stock options than the number of stock options being surrendered. If all eligible optionees were to elect to accept the terms of the Option Exchange, and assuming a new exercise price of $3.26 per share, we anticipate that there would be approximately 995,000 fewer options outstanding and our overhang would be reduced under the calculation described above to approximately 7.7%. The exact total overhang reduction is difficult to estimate and will only be

known when the actual Option Exchange has been completed. Also, the majority of the surrendered stock options are likely to be cancelled were issued under the 1998 Plan which is no longer effective. As a result, they cannot be re-issued under the 1998 Plan.

               If we are unable to conduct a program in which underwater options with low incentive value may be exchanged for options with higher incentive value, we may be forced to pursue issuance of additional options to our employees at current market price, thereby increasing our overhang. The exchange ratios of old stock options for new stock options will be based on the fair value determined under applicable accounting rules at the time of the Option Exchange. The Option Exchange is intended to be a value-for-value exchange; in order to obtain a new in-the-money stock option, an employee will be required to surrender a higher number of underwater stock options that have value approximately equivalent to the new stock option.

               The Option Exchange will also permit us to benefit from accounting expense already allocated to equity awards, to enhance employee motivation and retention rather than incur new, additional costs to achieve the same result. Generally, when stock options are granted to employees, the Company bears an expense that reduces our net income. This expense (known as share-based compensation) is calculated at the time a stock option is granted based on the determined value of each stock option when granted. Lakes Entertainment is using a mathematical formula known as the Black-Scholes option pricing model to determine the value of each stock option. We started recognizing share-based compensation in 2006 as a result of the adoption of SFAS No. 123(R). As of March 29, 2009, there was $1.2 million in unrecognized compensation cost related to outstanding stock options to be expensed in 2009 and beyond; however, at current stock prices, these outstanding stock option awards are of limited benefit in motivating and retaining our employees. Through the Option Exchange, we believe that we can increase the significance of these stock option awards for our employees and provide a more meaningful incentive. We have designed the Option Exchange so that it is not expected to create additional share-based compensation expense; as noted above, this is known as a value-for-value exchange.

Features of Option Exchange

Offer an Approximate Value-for-Value Exchange.

               All current employees and directors holding options with an exercise price above the closing price of a share of common stock will be eligible to participate in the Option Exchange. The value of a new stock option grant received as part of the Option Exchange is not expected to exceed the value of such employee’s surrendered stock options. The exercise price of the new stock options will be set on the grant date of the Option Exchange using the closing price for that day. The exchange ratios of shares associated with surrendered eligible stock options into new stock options will be established at the time of the Option Exchange utilizing the commonly used Black-Scholes model or similar model.

Establishment of a New Vesting Period with a Term of Ten Years.

               New stock option awards will have a new term of ten years from the date of grant and a renewed vesting period that will vest in equal annual increments, depending on the date of the original grant, as follows:

	•		Two years for original grants made in 2004 and prior.
	•		Three years for original grants made in 2005.
	•		Four years for original grants made in 2006.
	•		Five years for original grants made in 2007 and after.

These vesting periods support the nature of stock as an incentive vehicle and also provide for additional years of retention over the tendered stock options.

Implementation of the Option Exchange Promptly After Shareholder Approval.

               We currently expect that the Option Exchange will begin promptly after shareholder approval of this Proposal Five (along with approval of Proposals Three and Four above), if received. The Option Exchange may be implemented in one or more separate exchange offers commenced at the discretion of our Compensation Committee, but no more than one offer to exchange may be made for any one outstanding option. The actual implementation date, and whether we actually implement this program, will be determined by our Compensation Committee. If the Option Exchange does not commence prior to December 31, 2009, we will not conduct the Option Exchange without first seeking shareholder approval. Our Compensation Committee reserves the right to amend, postpone, or under certain circumstances cancel the Option Exchange once it has commenced.

               We currently estimate that the Option Exchange could cover approximately 2.7 million outstanding stock options. The new stock options would be granted with an exercise price equal to the market value of a Lakes Entertainment share on the grant date, and would be subject to a two-year, three-year, four-year or five-year vesting schedule and ten-year term. Our objective for the Option Exchange is to preserve the integrity of the new stock option grants for retention and motivation. The ten-year term will be reflected in the exchange ratios that we calculate on a value-for-value basis. We believe that this is appropriate because using a ten-year term and renewed vesting schedules based on original grant dates better aligns our employees with our other shareholders for long-term stock price growth and provides better retention.

               All stock options surrendered as part of the Option Exchange will be cancelled upon completion of the exchange offer, and the shares underlying those options will not be available for new grants, except to the extent that the surrendered options were granted under the 2007 Stock Option Plan, which currently consists of approximately 300,000 shares of the total 2.7 million eligible. Accordingly, because the 2007 Stock Option Plan would not have sufficient shares available for the Option Exchange if all eligible options are exchanged, we have requested in Proposal Three above an amendment to the 2007 Stock Option Plan to authorize the issuance of up to 2.0 million additional shares.

               Additional information about how we expect to conduct the Option Exchange, if approved by shareholders, is set forth below. While the terms of the Option Exchange are expected to conform to the material terms described above in this proposal, we may find it necessary or appropriate to modify the terms of the Option Exchange from those described below to take into account our administrative needs, local law requirements in foreign jurisdictions, accounting rules, or Company policy decisions.

               Finally, we may decide not to implement the Option Exchange even if shareholder approval of the Option Exchange is obtained, or we may amend or terminate the Option Exchange once it is in progress. The final terms of the Option Exchange will be described in the exchange offer documents that will be filed with the SEC.

Overview of the Option Exchange Process

               Upon initiation of the Option Exchange, eligible optionees will receive a written offer setting forth the precise terms of the Option Exchange and will need to voluntarily elect to participate. All of our directors and employees who are employed on the commencement date of the exchange offer period, are still employed at the grant date, and hold eligible stock option awards may participate in the Option Exchange; we may elect to exclude employees from the program in our sole discretion. Eligible optionees will be provided at least 20 business days to elect to surrender eligible stock options in exchange for a lesser amount of new stock options. Upon completion of the Option Exchange, surrendered stock options will be cancelled and new stock options will be granted promptly. The 2007 Plan will govern any terms or conditions of new options not specifically addressed within the Option Exchange proposal.

Election to Participate

               Eligible employees will receive a tender offer document and will be able to voluntarily elect to participate in the Option Exchange. If you are both a shareholder and an employee or director holding stock options that are potentially subject to the Option Exchange, note that voting to approve the Option Exchange does not constitute an election to participate in the Option Exchange. The written exchange offer documents described above will be provided if and when the Option Exchange is initiated; you can elect to participate after that time only.

Eligible Stock Options to Be Cancelled via the Option Exchange

               As of June 8, 2009, there were 2.7 million shares estimated to be eligible for the Option Exchange held by approximately 48 current employees and directors. Eligible stock options would be expected to have exercise prices ranging from $2.86 to $16.84 per share, a weighted average exercise price of $6.44 per share, and a weighted average remaining term of 4.5 years per option.

               The precise exchange ratios of shares associated with surrendered eligible stock options into new stock options will be established at the time of the Option Exchange. These exchange ratios will be based on the fair value of the eligible awards (calculated using the Black-Scholes option pricing model). The calculation of fair value using the Black-Scholes option pricing model takes into account many variables, such as the volatility of our stock and the expected term of a stock option. Setting the exchange ratios in this manner is intended to result in the issuance of new stock options that have a fair value approximately equal to the fair value of the surrendered eligible stock options that they replace. This is designed to eliminate additional compensation expense from such new stock options, other than compensation expense that might result from changes in our stock price or other variables after the exchange ratios have been established but before the time that new stock options are granted in the Option Exchange, if any.

               Although exchange ratios cannot be determined now, we are providing an example by making certain assumptions regarding the start date of the offer, the fair value of the eligible stock options, and the fair market value of our common stock. To calculate the exchange ratios in the example, we have used the applicable inputs available as of June 8, 2009 for the Black-Scholes option pricing model.

               In the table below, the exchange ratio represents the number of existing stock options that an employee would be required to surrender in exchange for one new stock option. For example, if an employee surrendered 5,000 stock options granted in 2005 that have an exercise price of $12.82 per share, that employee (for purposes of this example only) would receive approximately 2,869 new stock options, using the exchange ratio of 1.74:1 as stipulated. The following is an example of our methodology.

Examples of Stock Option Exchange Ratios

Accounting Impact

               Effective January 1, 2006, Lakes Entertainment adopted the provisions of SFAS No. 123(R), which requires employee equity awards to be accounted for under the fair value method.

               The Option Exchange is intended to be “cost neutral” from an accounting standpoint. Thus, we will establish exchange ratios with the intent not to generate incremental share-based compensation expense. To be cost neutral, the value of the stock options surrendered as calculated immediately prior to their surrender must be at least equal to the value of the new stock options received by employees in the Option Exchange. We use the Black-Scholes option pricing model to estimate the fair value of all stock options granted to employees, and expect to use that same model in valuing the stock options that are part of the Option Exchange.

               Any unrecognized compensation expense from the surrendered stock options will be recognized prior to the end of the service period of the new stock options received in the Option Exchange. Incremental compensation cost, if any, associated with the new stock options under the Option Exchange will be recognized over the service period of the new awards. Compensation cost for stock options forfeited due to employees not meeting the applicable service requirements will not be recognized.

U.S. Tax Consequences

               The exchange of stock options pursuant to the Option Exchange should be treated as a non-taxable exchange because the new stock options will have an exercise price equal to the fair market value of our common stock on grant date. Lakes Entertainment and participating optionees should not recognize any income for U.S. federal income tax purposes upon the grant of the new stock options. All new stock options granted under the Option Exchange will be non-qualified stock options for U.S. federal income tax purposes. A more detailed summary of tax considerations will be provided to all participants in the Option Exchange documents.

We believe that our equity program has enhanced our ability to attract, motivate, and retain the employee talent critical to attaining long-term improved company performance and shareholder returns. Therefore, we consider approval of the Option Exchange to be important to our future success, as it will enable Lakes Entertainment to strengthen the motivational and retentive value of our stock option awards to our contributors.

PROPOSAL TO RATIFY THE APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Proposal Six)

     Our Board of Directors and management are committed to the quality, integrity and transparency of our financial reports. Independent registered public accounting firms play an important part in our system of financial control. In accordance with the duties set forth in its written charter, the Audit Committee of our Board of Directors has appointed Piercy Bowler Taylor & Kern, Certified Public Accountants, referred to herein as PBTK , as our independent registered public accounting firm for the 2009 fiscal year. Although it is not required to do so, the Audit Committee and the full Board of Directors wishes to submit the appointment of PBTK for shareholder ratification at the Annual Meeting. Representatives of PBTK are expected to be present at the Annual Meeting to answer your questions and to make a statement if they desire to do so.

     If the shareholders do not ratify the appointment of PBTK, the Audit Committee may reconsider its selection, but is not required to do so. Even if the shareholders ratify the appointment of PBTK at the Annual Meeting, the Audit Committee, in its sole discretion, may direct the appointment of a new independent registered public accounting firm at any time during the year without notice to, or the consent of, the shareholders, if the Audit Committee determines that such a change would be in our best interests and the best interests of our shareholders.

     The Audit Committee of the Board of Directors has reviewed the fees billed by PBTK during fiscal year 2008 and, after consideration, has determined that the receipt of these fees by PBTK is compatible with the provision of independent audit services. The Audit Committee discussed these services and fees with PBTK and our management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC, including those designed to implement the Sarbanes-Oxley Act of 2002, as well as by the American Institute of Certified Public Accountants.

Pre-Approval of Audit and Non-Audit Services

     As permitted under applicable law, our Audit Committee may pre-approve from time to time certain types of services, including tax services, to be provided by our independent registered public accounting firm. As provided in the charter of the Audit Committee, and in order to maintain control and oversight over the services provided by our independent registered public accounting firm, it is the policy of the Audit Committee to pre-approve all audit and non-audit services to be provided by the independent registered public accounting firm (other than with respect to de minimus exceptions permitted by the Sarbanes-Oxley Act of 2002), and not to engage the independent registered public accounting firm to provide any non-audit services prohibited by law or regulation. For administrative convenience, the Audit Committee may delegate pre-approval authority to Audit Committee members who are also independent members of the Board of Directors, but any decision by such a member on pre-approval must be reported to the full Audit Committee at its next regularly scheduled meeting.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

     As of the close of business on the June 8, 2009, the record date, there were 26,328,045 shares of our common stock issued and outstanding, which is the only class of capital stock entitled to vote at the Annual Meeting. Each share of our common stock is entitled to one vote on all matters put to a vote of shareholders.

     The following table sets forth, as of the Record Date, certain information regarding the beneficial ownership of our common stock by (i) all persons known by us to be the owner (or deemed to be the owner pursuant to the rules and regulations of the SEC), of record or beneficially, of more than 5% of our outstanding common stock, (ii) each of the directors and nominees for election to the Board of Directors, (iii) each Named executive officer, and (iv) all directors and executive officers as a group, in each case based upon beneficial ownership reporting of our common stock as of such date. Except as otherwise indicated, the mailing address of each shareholder is 130 Cheshire Lane, Minnetonka, Minnesota 55305, and each shareholder has sole voting and investment power with respect to the shares beneficially owned.

     The foregoing footnotes are provided for informational purposes only and each person disclaims beneficial ownership of shares owned by any member of his or her family or held in trust for any other person, including family members.

     2. The basis on which the related person is deemed to be a related person within the meaning of Regulation S-K, Item 404(a), if applicable.

     3. The material facts and terms of the proposed transaction.

     4. The material facts as to the interest of the related person in the proposed transaction.

     5. Any other information that the Audit Committee requests concerning the proposed transaction.

     The Audit Committee may require that all or any part of such information be provided to it in writing.

     The Audit Committee may approve only those transactions covered by the policy that a majority of the members of the Audit Committee in good faith determine to be (i) fair and reasonable to the Company, (ii) on terms no less favorable than could be obtained by the Company if the proposed transaction did not involve a director or the related person, as the case may be, and (iii) in the best interests of the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

     Based solely on the Section 16(a) forms furnished to us, we believe that all officers, directors and greater than ten percent shareholders met all applicable filing requirements under Section 16(a) during fiscal 2008.

By Order of the Board of Directors
LAKES ENTERTAINMENT, INC.
-s- Timothy J. Cope
Timothy J. Cope,
President, Chief Financial Officer and Treasurer

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2009 ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 6, 2009.

The Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and 2009 Annual Report to Shareholders are
available at www.lakesentertainment.com under “Proxy filings” in the “Investor Relations” section.

Appendix A

LAKES ENTERTAINMENT, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

CHARTER

I.		Purpose.
		The primary function of the Audit Committee (the “Committee”) is to assist the Board of Directors (“the “Board”) in fulfilling its oversight responsibilities by reviewing: the financial reports and other financial information provided by the Corporation to any governmental body or the public; the Corporation’s systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board have established; and the Corporation’s auditing, accounting and financial reporting processes generally. Consistent with this function, the Committee should encourage continuous improvement of, and should foster adherence to, the corporation’s policies, procedures and practices at all levels. The Committee’s primary duties and responsibilities are to:

	•		Serve as an independent and objective party to monitor the Corporation’s financial reporting process and internal control system.
	•		Review and appraise the audit performed by the Corporation’s independent accountants, who report directly to the Committee.
	•		Provide an open avenue of communication among the independent accountants, financial and senior management and the Board.

		The Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section IV of this Charter.
II.		Composition.
		The Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent directors (as defined by all applicable rules and regulations of the Securities and Exchange Commission (the “Commission”), Nasdaq and any other appropriate body), and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgement as a member of the Committee. All members of the Committee should have a working familiarity with basic finance and accounting practices, including being able to read and understand financial statements, and at least one member of the Committee shall have accounting or related financial management expertise. The Committee shall endeavor to have, as one of its members, an individual who qualifies as an “audit committee financial expert” in compliance with the criteria established by the Commission and other relevant regulations at the time the regulations require disclosure of the existence of an audit committee financial expert. The existence of such audit

		committee financial expert, including his or her name and whether or not he or she is independent, or the lack of an audit committee financial expert, shall be disclosed in the Corporation’s periodic filings as required by the Commission.
		Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Corporation or an outside consultant.
		The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board and shall serve until the next annual organizational meeting of the Board or until their successors have been duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership.
III.		Meetings.
		The Committee shall meet at least two times annually, or more frequently as circumstances dictate. As part of its job to foster open communication, the Committee should meet at least annually with management, and the independent accountants in separate executive sessions to discuss any matters that the Committee or each of these groups believe should be discussed privately.
IV.		Responsibilities and Duties.
		To fulfill its responsibilities and duties, the Committee is expected to:

	1.		Provide an open avenue of communication between the Corporation, the independent accountants and the Board.
	2.		Review the Committee’s charter at lest annually and recommend to the Board any necessary or desirable amendments as conditions may dictate.
	3.		Maintain sole authority and responsibility for hiring and firing the independent accountants, and maintain direct responsibility for the appointment, compensation, and oversight of the independent accountants’ work (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The independent accountants shall report directly to the Committee.
	4.		Assess the effectiveness of the Corporation’s internal control environment, and evaluate the need for an internal audit function; Discuss with management any significant deficiencies in internal controls that have been identified by the Chief Executive Officer or Chief Financial Officer which could adversely affect the Corporation’s ability to record, process, summarize or report financial data.

	5.		Confirm and assure the independence of the internal audit function and the independent accountant, including considering whether the independent accountant’s performance of permissible non-audit services and the compensations received for such services is compatible with the independent accountant’s independence.
	6.		Review and pre-approve the performance of all audit and non-audit accounting services to be performed by the independent accountant (other than with respect to de minimus exceptions permitted by the Sarbanes-Oxley Act of 2002), to the extent such services are permitted under applicable rules and regulation. By action of the Committee, the authority to grant pre-approval may be delegated to one or more designated members of the Committee who are independent members of the Board, with any such pre-approval to be reported to the Committee at its next regularly scheduled meeting. Approval of non-audit services shall be disclosed to investor in the Corporation’s periodic reports required by Section 13(a) of the Securities Exchange Act of 1934, as amended.
	7.		Inquire of management and the independent accountants about significant risks or exposures and assess the steps management has taken to minimize such risk to the Corporation.
	8.		Consider, in consultation with the independent accountant, the audit scope and plan of the independent accountant.
	9.		Consider and review with the independent accountant:

	(a)		The adequacy of the Corporation’s internal controls, including computerized information system controls and security.
	(b)		Any related significant findings and recommendations of the independent accountant together with management’s responses thereto.

10.

Review the following items with management and the independent accountant at the completion of the annual examination and recommend to the Board whether the financial statements should be included in the Annual Report on Form 10-K:

	(a)		The Corporation’s annual financial statements and related footnotes.
	(b)		The independent accountant’s audit of the financial statements and his or her report thereof.
	(c)		Any significant changes required in the independent accountant’s audit plan.
	(d)		Any serious difficulties or disputes with management encountered during the course of the audit.
	(e)		Other matters related to the conduct of the audit which are to be communicated to the Committee under Public Company Accounting Oversight Board AU Section 380, Communication with Audit Committees .

11.

Review with management, and if appropriate, with the independent accountants, the interim financial results that are filed with the Commission or other regulators.

	12.		Review with management legal and regulatory matters that may have a material impact on the financial statements, related company compliance policies, and programs and reports received from regulators.
	13.		Review the Corporation’s critical accounting policies and estimates, all alternative treatments of financial information within GAAP discussed between the independent accounts and management, and all other material written communications between the independent accounts and management.
	14.		Review the internal controls report prepared by management for insertion into the annual report and the independent accountant’s attestation on the assertions of management that are contained in the internal controls report.
	15.		Ensure there is a process for the confidential, anonymous submission by the Corporation’s employees of concerns regarding questionable accounting and auditing matters.
	16.		Ensure procedures are established for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, auditing, and internal accounting controls.
	17.		Review and approve (with the concurrence of a majority of the disinterested members of the Board) any related party and affiliated party transactions.
	18.		Report Committee actions to the Board with such recommendations as the Committee may deem appropriate.
	19.		The Committee shall have the power to conduct or authorize investigations into any matters within the Committee’s scope of responsibilities.
	20.		The Committee has the authority to engage and determine funding for outside legal, accounting or other advisors and to obtain advice and assistance from such outside advisors as deemed appropriate to perform its duties and responsibilities.
	21.		The Committee will perform such other functions as assigned by law, the Corporation’s charter or bylaws or the Board.

Appendix B

LAKES ENTERTAINMENT, INC.

Corporate Governance Committee of
the Board of Directors

Charter

I. Purpose .

     The primary focus of the Corporate Governance Committee (the “Committee”) is on the broad range of issues surrounding the composition and operation of Lakes Entertainment, Inc.’s (the “Company”) Board of Directors and committees thereof. The Committee provides assistance to the Board of Directors in the areas of membership selection, committee selection and rotation practices, evaluation of the overall effectiveness of the Board of Directors, and review and consideration of developments in corporate governance practices. The Committee’s goal is to assure that the composition, practices and operation of the Board of Directors contribute to value creation and effective representation of the Company’s shareholders.

II. Organization .

     The Committee shall consist of two or more directors, each of whom shall satisfy the applicable independence requirements of The Nasdaq Stock Market and any other regulatory requirements that may be applicable to the Company from time to time.

     Committee members shall be appointed by the Board of Directors on an annual basis at its annual organizational meeting; members shall serve until their successors are duly elected and qualified. Committee members may be removed for any reason or no reason at the discretion of the Board of Directors, and the Board of Directors may fill any Committee vacancy that is created by such removal or otherwise. The Committee’s chairperson shall be designated by the full Board of Directors or, if it does not do so, the Committee members shall elect a chairperson by vote of a majority of the full Committee.

     The Committee may form and delegate authority to subcommittees as the Company may deem appropriate in its sole discretion.

III. Structure and Meetings .

     The Committee shall meet as often as its members deem necessary to perform the Committee’s responsibilities but in no event less than twice annually. At the request of the Committee, meetings may be held with members of management and with independent consultants.

     The chairperson of the Committee will preside at each meeting and, in consultation with the other members of the Committee, will set the frequency and length of each meeting and the agenda of items to be addressed at each meeting. The chairperson of the Committee shall ensure

that the agenda for each meeting is circulated to each Committee member in advance of the meeting. The chairperson of the Committee shall prepare minutes of each meeting, which shall be provided to the other Committee members and the entire Board of Directors at the next regularly scheduled meeting of the Committee or the Board of Directors, as applicable. In addition, the Committee shall make regular reports to the Board of Directors and will propose any necessary action to the Board of Directors.

IV. Goals and Responsibilities .

     In furtherance of its purposes, the Committee shall:

	(i)		develop and recommend to the Board of Directors a set of corporate governance principles applicable to the Company, and review and reassess the adequacy of such guidelines annually and recommend to the Board of Directors any changes deemed appropriate;
	(ii)		evaluate the composition, organization and governance of the Board of Directors, determine future requirements and make recommendations to the Board of Directors for approval;
	(iii)		determine desired Board and committee skills and attributes;
	(iv)		review candidates for Board membership consistent with the Board of Directors’ criteria for selecting new directors, including a review of candidates for Board membership recommended by shareholders;
	(v)		annually recommend a slate of nominees to the Board of Directors to be considered for election or re-election at the Company’s annual shareholders’ meeting;
	(vi)		conduct the appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates;
	(vii)		administer the performance evaluation procedures for the Board of Directors, including conducting surveys of director observations, suggestions and preferences, and other procedures established by the Committee from time to time;
	(viii)		evaluate and consider matters relating to the qualifications and retirement of directors;
	(ix)		develop a plan for, and consult with the Board regarding, management succession;
	(x)		consider questions of possible conflicts of interest of Board members and of executive officers;

	(xi)		Identify and bring to the attention of the Board of Directors current and emerging corporate governance trends and issues that may affect the Company’ business operations, performance , public image or compliance with applicable laws; and
	(xii)		generally advise the Board of Directors on corporate governance matters.

     The Committee shall also advise the Board of Directors on (a) committee member qualifications, (b) appointments, removals and rotation of committee members, (c) committee structure and operations (including authority to delegate to subcommittees), and (d) committee reporting to the Board of Directors.

     The Committee will review and reassess at least annually the adequacy of this Charter and recommend any proposed changes to the Board of Directors for approval.

     The Committee shall perform any other activities consistent with this Charter, the Company’s Articles of Incorporation, Bylaws and governing law as the Committee or the Board of Directors deems appropriate.

V. Committee Resources .

     The Committee shall have the authority to obtain advice and seek assistance from internal or external legal, accounting or other advisors. The Committee shall have the sole authority to retain and terminate any search firm to be used to identify director candidates, including sole authority to approve such search firm’s fees and other retention terms.

Appendix C

AMENDED AND RESTATED
LAKES ENTERTAINMENT, INC.

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER

This Amended and Restated Charter of the Compensation Committee of the Board of Directors (the “ Board ”) was adopted by the Board of Lakes Entertainment, Inc. (the “ Company ”) on December 4, 2006.

I. Purpose .

The primary purpose of the Compensation Committee (the “Committee”) is to discharge the responsibilities of the Board relating to compensation of the executive officers of the Company.

II. Membership and Procedures .

The Committee shall be comprised of not less than two members, each of whom satisfy the definition of “independent” under the listing standards of The Nasdaq Stock Market LLC (“ Nasdaq ”). All Committee members shall also be “non-employee directors” as defined by Rule 16b-3 under the Securities Exchange Act of 1934 and “outside directors” as defined by Section 162(m) of the Internal Revenue Code.

Committee members will be appointed by the Board on an annual basis after nomination by the Corporate Governance Committee of the Board. Committee members shall serve until their resignation, retirement, removal by the Board or until their successors are duly appointed and qualified. Committee members may be removed by the Board in its sole discretion for any reason or no reason. The Board may fill any vacancy on the Committee. The chair of the Committee shall be designated by the full Board or, if it does not do so, the Committee members shall elect a chair by vote of a majority of the full Committee. The Committee shall have the authority to delegate any of its responsibilities to subcommittees as the Committee may deem appropriate, provided that the subcommittees are composed entirely of independent directors as provided in the foregoing paragraph.

III. Meetings .

The Committee shall meet as often as its members deem necessary to perform the Committee’s responsibilities but in no event less than twice annually. The Committee may request that any directors, officers or employees of the Company, or other persons whose advice and counsel are sought by the Committee, attend any meeting of the Committee to provide such pertinent information as the Committee requests.

The chair of the Committee will preside at each meeting and, in consultation with the other members of the Committee, will set the frequency and length of each meeting and the agenda of items to be addressed at each meeting. The chair of the Committee shall ensure that the

agenda for each meeting is circulated to each Committee member in advance of the meeting. The Committee shall prepare minutes of each meeting, which shall be provided to all Committee members and the entire Board at the next regularly scheduled meeting of the Committee or the Board, as applicable. In addition, the Committee shall make regular reports to the Board and will propose any necessary action to the Board.

IV. Key Responsibilities .

The following functions shall be the common recurring activities of the Committee in carrying out its responsibilities. These functions are set forth as a guide with the understanding that the Committee may diverge as circumstances require.

	•		Review the adequacy of the Company’s compensation plans and programs in general on an annual basis, comparing such plans and programs to those utilized by the Company’s peer group; review the appropriateness of management incentives to ensure that such incentives are aligned with the interests of the Company’s shareholders; report the results of, and recommendations resulting from, such reviews to the Board.
	•		Review periodically executive compensation at the Company, such as salary, bonus, equity-based incentives and miscellaneous benefits, and modify as necessary to optimize performance and remain competitive.
	•		Meet with the Company’s management, and if deemed appropriate, independent outside professional compensation advisors to review current trends and practices in executive compensation and disclosure requirements under various securities rules and regulations.
	•		Review and approve all compensation arrangements between the Company and its executive officers (the Company’s Chief Executive Officer may be present at the meeting deliberations on this subject, but is not allowed to vote on these matters).
	•		Review and approve the Company’s goals and objectives relevant to CEO compensation, evaluate the CEO’s performance in light of those goals and objectives, and have sole authority to determine the CEO’s compensation level based on this evaluation (the Company’s Chief Executive Officer may not be present during the deliberations or vote on these matters).
	•		Review and discuss the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K for inclusion in the Company’s annual shareholder meeting proxy statement, Annual Report on Form 10-K or information statement, as the case may be, and based on such review and discussion determine whether or not to recommend to the Company’s Board of Director that such Compensation Discussion and Analysis be included in such filing.
	•		Prepare and issue a compensation committee report for inclusion in the Company’s annual shareholder meeting proxy statement in accordance with applicable rules and regulations of the SEC and Nasdaq and any other report

			or other disclosure required to be prepared by the Committee pursuant to the rules of the SEC and Nasdaq for inclusion in the Company’s annual shareholder meeting proxy statement or other SEC filings.
	•		Administer all equity compensation plans and grant awards under these plans in a manner consistent with each plan’s intended purpose and recommend changes in such plans to the Board as needed; provided, however, the Committee may delegate to the President authority to grant awards under the Company’s equity compensation plans to persons who are not serving as executive officers of the Company or deemed to be a “named executive officer” of the Company within the meaning of SEC rules and regulations; provided further, that no such award for any one individual may exceed 10,000 shares without the prior approval of the Committee.
	•		Establish and approve cash and equity compensation for members of the Board and annually compare such compensation to companies within the Company’s peer group and to companies of comparable size.
	•		Investigate or have investigated any variance or matter of concern brought to the Committee’s attention that is within the scope of its duties.
	•		Evaluate its own performance on an annual basis and present the results of such evaluation to the Board.
	•		Review the adequacy of this Charter on an annual basis and recommend any proposed changes to the Board for approval.

V. Authority .

The Committee will have the authority, to the extent it deems necessary or appropriate, to retain a compensation consultant to assist in the evaluation of the Chief Executive Officer or executive officer compensation. The Committee shall have the sole authority to approve such consultant’s fees and other retention terms. The Committee shall also have the authority, to the extent it deems necessary or appropriate, to retain other advisors. The Company will provide appropriate funding, as determined by the Committee, for payment of compensation to any consulting firm or other advisors hired by the Committee.

Appendix D

LAKES ENTERTAINMENT, INC.
AMENDED AND RESTATED 2007 STOCK OPTION AND COMPENSATION PLAN

      Section 1. Purpose of the Plan; Effect on Prior Plans

      (a)  Purpose of the Plan . The purpose of the Plan is to aid Lakes Entertainment, Inc. (the “Company”) in recruiting and retaining employees, officers, non-employee Directors, and other Consultants capable of assuring the future success of the Company through the grant of Awards to such persons under the Plan. The Company expects that Awards of stock-based compensation and opportunities for stock ownership in the Company will provide incentives to Plan participants to exert their best efforts for the success of the Company’s business and thereby align the interests of Plan Participants with those of the Company’s stockholders.

      (b)  Effect on Prior Plans . All outstanding awards previously granted under the Company’s 1998 Stock Option and Compensation Plan, and under the Company’s 1998 Director Stock Option Plan prior to the date of stockholder approval of the Plan shall remain outstanding in accordance with their terms.

      Section 2. Definitions

     The following capitalized terms used in the Plan have the meanings set forth in this Section:

      (a)  “Affiliate” means (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

      (b)  “Award” means any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Dividend Equivalent, Performance Award, Stock Award, Other Stock-Based Award, or Cash Award granted under the Plan.

      (c)  “Award Agreement” means any written agreement, contract or other instrument or document evidencing an Award granted under the Plan. Each Award Agreement shall be subject to the applicable terms and conditions of the Plan and any other terms and conditions (not inconsistent with the Plan) determined by the Committee.

      (d)  “Board” means the Board of Directors of the Company.

      (e)  “Cash Award” means any Award granted under Section 7(d) of the Plan that is payable in cash and denominated as a “Cash Award.”

      (f)  “Change in Control” means the occurrence of any of the following:

     (i) Any person or group of persons becomes the beneficial owner of thirty percent (30%) or more of any equity security of the Company entitled to vote for the election of Directors;

     (ii) A majority of the members of the Board is replaced within a period of less than two (2) years by Directors not nominated and approved by the Board.

     (iii) The stockholders of the Company approve an agreement to merge or consolidate with or into another corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company’s assets (including a plan of liquidation).

     For purposes hereof, beneficial ownership by a person or group of persons shall be determined in accordance with Regulation 13D-G (or any similar successor regulation) promulgated by the Securities and Exchange Commission pursuant to the Exchange Act. Beneficial ownership of more than thirty percent (30%) of an equity security may be established by any reasonable method, but shall be presumed conclusively as to any person who files a Schedule 13D or 13G report with the Securities and Exchange Commission reporting such ownership.

      (g)  “Code” means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

      (h)  “Committee” means the Compensation Committee of the Board or any successor committee of the Board designated by the Board to administer the Plan. The Committee shall be comprised of not less than such number of Directors as shall be required to permit Awards granted under the Plan to qualify under Rule 16b-3, and each member of the Committee shall be a “Non-Employee Director” within the meaning of Rule 16b-3 and an “outside director” within the meaning of Section 162(m) of the Code. The Company expects to have the Plan administered in accordance with the requirements of the “qualified performance-based compensation” exception under Section 162(m) of the Code, to the extent applicable.

      (i)  “Company” means Lakes Entertainment, Inc., a Minnesota corporation.

      (j)  “Consultant” means an individual who renders services to the Company in a non-employee capacity, including a Non-employee Director.

      (k)  “Director” means a member of the Board.

      (l)  “Dividend Equivalent” means any right granted under Section 7(e) of the Plan.

      (m)  “Eligible Person” means any employee, officer or Consultant of the Company or any Affiliate whom the Committee determines to be an Eligible Person.

      (n)  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

      (o) “Fair Market Value” means, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property

determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, unless otherwise determined by the Committee, the Fair Market Value of Shares on a given date for purposes of the Plan shall be the closing sale price of the Shares on the principal United States Securities Exchange registered under the Exchange Act on which the Shares are listed (the “Exchange”) on the applicable date. If the Exchange is closed for trading on such date, then the last sale price used shall be the one on the date the Shares last traded on the Exchange.

      (p)  “Incentive Stock Option” means an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision, as set forth in part in Section 6(a)(v).

      (q)  “Non-employee Director” means a Director who is not an employee of the Company or an Affiliate.

      (r)  “Non-Qualified Stock Option” means an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option.

      (s)  “Option” means an Incentive Stock Option or a Non-Qualified Stock Option.

      (t)  “Other Stock-Based Award” means any stock-based right granted under Section 7(d) of the Plan.

      (u)  “Participant” means an Eligible Person who is designated by the Committee to be granted an Award under the Plan.

      (v)  “Performance Award” means any right granted under Section 7(b) of the Plan.

      (w) “Performance Goals” means the goals established by the Committee, which shall be satisfied or met as a condition to the exercisability, vesting or receipt of all or a portion of an Award. Such goals shall be based exclusively on one or more of the following corporate-wide or subsidiary, division or operating unit financial measures: (1) pre-tax or after-tax income (before or after allocation of corporate overhead and bonus), (2) net income (before or after taxes), (3) reduction in expenses, (4) pre-tax or after-tax operating income, (5) earnings (including earnings before taxes, earnings before interest and taxes, or earnings before interest, taxes, depreciation and amortization, (6) gross revenue, (7) working capital, (8) profit margin or gross profits, (9) Share price, (10) cash flow or cash flow per Share (before or after dividends), (11) cash flow return on investment, (12) return on capital (including return on total capital or return on invested capital), (13) return on assets or net assets, (14) market share, (15) pre-tax or after-tax earnings per Share, (16) pre-tax or after-tax operating earnings per Share, (17) total stockholder return, (18) growth measures, including revenue growth, as compared with a peer group or other benchmark, (19) economic value-added models or equivalent metrics, (20) comparisons with various stock market indices, (21) improvement in or attainment of expense levels or working capital levels, (22) operating margins, gross margins or cash margins, (23) year-end cash, (24) debt reductions, (25) stockholder equity, (26) regulatory achievements, (27) implementation, completion or attainment of measurable objectives with respect to research, development, products or

projects, production volume levels, acquisitions and divestitures and recruiting and maintaining personnel, (28) customer satisfaction, (29) operating efficiency, productivity ratios, (30) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals (including accomplishing regulatory approval for projects), cost or cost savings targets, accomplishing critical milestones for projects, and goals relating to acquisitions or divestitures, or any combination thereof (in each case before or after such objective income and expense allocations or adjustments as the Committee may specify within the applicable period). Each such goal may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on current internal targets, the past performance of the Company (including the performance of one or more subsidiaries, divisions and/or operating units) and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital (including, but limited to, the cost of capital), stockholders’ equity and/or shares outstanding, or to assets or net assets. In all cases, the performance goals shall be such that they satisfy any applicable requirements under Treas. Reg. Sec. 1.162-27(e)(2) (as amended from time to time) that the achievement of such goals be “substantially uncertain” at the time that they are established, and that the award opportunity be defined in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goal has been met, and, subject to the Committee’s right to apply negative discretion (within the meaning of Treas. Reg. Sec. 1.162-27(d)(iii)), the amount of the Award payable as a result of such performance. To the extent applicable, the measures used in setting performance goals set under the Plan for any given performance period shall be determined in accordance with GAAP and in a manner consistent with the methods used in the Company’s audited financial statements, without regard to: (i) extraordinary items as determined by the Company’s independent public accountants in accordance with GAAP; (ii) changes in accounting, unless, in each case, the Committee decides otherwise within the applicable period; or (iii) non-recurring acquisition expenses and restructuring charges. Notwithstanding the foregoing, in calculating operating earnings or operating income (including on a per Share basis), the Committee may, within the applicable period for a given performance period, provide that such calculation shall be made on the same basis as reflected in a release of the Company’s earnings for a previously completed period as specified by the Committee. For purposes hereof, the “applicable period,” with respect to any performance period, is the period commencing on or before the first day of the performance period and ending no later than the earlier of (x) the ninetieth (90 ^th ) day of the performance period, or (y) the date on which twenty-five percent (25%) of the performance period has been completed.

      (x)  “Person” means any individual, corporation, partnership, association or trust.

      (y)  “Plan” means the Lakes Entertainment, Inc. 2007 Stock Option and Compensation Plan, as may be amended from time to time.

      (z)  “Restricted Stock” means any Share granted under Section 7(a) of the Plan.

      (aa)  “Restricted Stock Unit” means any unit granted under Section 7(a) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date.

      (bb)  “Rule 16b-3” means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act or any successor rule or regulation.

      (cc)  “Section  162(m) ” means Section 162(m) of the Code, or any successor provision, and the applicable Treasury Regulations promulgated thereunder.

      (dd)  “Shares” means shares of common stock, par value of $0.01 per share, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c)of the Plan.

      (ee)  “Stock Appreciation Right” means any right granted under Section 6(b) of the Plan.

      (ff) “Stock Award” means any Share granted under Section 7(c) of the Plan.

      Section 3. Administration

      (a)  Power and Authority of the Committee . The Plan shall be administered by the Committee. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or the method by which payments or other rights are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement, provided, however, that, except as otherwise provided in Section 4(c) hereof, the Committee shall not, without receiving prior approval of the Company’s shareholders, reprice, adjust or amend the exercise price of Options or the grant price of Stock Appreciation Rights previously awarded to any Participant, whether through amendment, cancellation and replacement grant, or any other means; (vi) accelerate the exercisability of any Award or the lapse of restrictions relating to any Award; (vii) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (viii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable to a Participant with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder of the Award or the Committee; (ix) interpret and administer the Plan and any instrument or agreement, including any Award Agreement, relating to the Plan; (x) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (xi) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award or Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and

binding upon any Participant, any holder or beneficiary of any Award or Award Agreement, and any employee or Consultant of the Company or any Affiliate.

      (b)  Action of the Committee. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either: (a) acts of a majority of the members of the Committee present at any meeting at which a quorum is present; or (b) acts approved in writing by a majority of the members of the Committee without a meeting. The Committee may appoint a chairman or a secretary as it deems appropriate.

      (c)  Delegation . The Committee may delegate its powers and duties under the Plan to one or more Directors or executive officers of the Company, or a committee of Directors or executive officers, subject to such terms, conditions and limitations as the Committee may establish in its sole discretion; provided, however, that the Committee may not delegate its power and authority with regard to: (a) the grant of an Award to any person who is a “covered employee” within the meaning of Section 162(m) of the Code or who, in the Committee’s judgment, is likely to be a covered employee at any time during the period an Award hereunder to such employee would be outstanding; or (b) the selection for participation in the Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an Award to such an officer or other person.

      (d)  Power and Authority of the Board of Directors . Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan, unless the exercise of such powers and duties by the Board would cause the Plan not to comply with the requirements of Section 162(m) of the Code.

      (e)  Liability and Indemnification of Plan Administrators. No member of the Board or Committee, nor any executive officer to whom the Committee delegates any of its power and authority hereunder, shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Board, the Committee and the executive officers shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorneys’ fees) arising therefrom to the full extent permitted by law, except as otherwise may be provided in the Company’s Articles of Incorporation, Bylaws, and under any directors’ and officers’ liability insurance that may be in effect from time to time.

      Section 4. Shares Available for Awards

      (a) Shares Available . Subject to adjustment as provided in Section 4(c) of the Plan, the aggregate number of Shares that may be issued under all Awards under the Plan shall be 2,500,000. Shares to be issued under the Plan will be authorized but unissued Shares or Shares that have been reacquired by the Company and designated as treasury shares. Shares that are subject to Awards that terminate, lapse or are cancelled or forfeited shall be available again for grant under the Plan. Shares that are tendered by

a Participant or withheld by the Company as full or partial payment to the Company of the purchase or exercise price relating to an Award or to satisfy tax withholding obligations relating to an Award shall not be available for future grants under the Plan. In addition, if Stock Appreciation Rights are settled in Shares upon exercise, the aggregate number of Shares subject to the Award rather than the number of Shares actually issued upon exercise shall be counted against the number of Shares authorized under the Plan.

      (b)  Accounting for Awards . For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan.

      (c)  Adjustments . In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is required to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of: (a) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards; (b) the number and type of Shares (or other securities or other property) subject to outstanding Awards; and (c) the purchase or exercise price with respect to any Award.

     Additionally, in the event that a company acquired by the Company or any Affiliate or with which the Company or any Affiliate combines has shares available under a pre-existing plan approved by shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Shares authorized for grant under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not employees or Directors prior to such acquisition or combination.

      (d)  Award Limitations .

     (i) 1 62(m) Limitation . No Participant may be granted an Award or Awards under the Plan for more than 400,000 Shares (subject to adjustment as provided in Section 4(c) of the Plan) in the aggregate, or, in the case of a Cash Award pursuant to Section 7(d), for more than $200,000 in any calendar year.

     (ii) Incentive Stock Option Limitation. The aggregate number of Shares which may be issued under Incentive Stock Options is 500,000 (subject to adjustment as provided in Section 4(c) of the Plan).

      Section 5. Eligibility

     Any Eligible Person may be designated to be a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services provided by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. The Committee’s selection of an Eligible Person to be a Participant with respect to an Award shall not require the Committee to select such Eligible Person to receive any other Award at any time.

     An Incentive Stock Option may be granted to full-time or part-time employees (which term as used herein includes, without limitation, officers and Directors who are also employees) only, and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a “subsidiary corporation” of the Company within the meaning of Section 424(f)of the Code or any successor provision.

     Notwithstanding anything in this Section 5 to the contrary, a Non-employee Director shall be a Participant with respect to the Option granted to him or her pursuant to Section 6(a)(iv) of the Plan.

      Section 6. Options and Stock Appreciation Rights.

      (a)  Options . The Committee may grant Options with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Exercise Price . The purchase price per Share purchasable under an Option shall be determined by the Committee and shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option; provided, however, that the Committee may designate a per share exercise price below Fair Market Value on the date of grant if the Option is granted in substitution for a stock option previously granted by an entity that is acquired by or merged with the Company or an Affiliate.

     (ii) Option Term . The term of each Option shall be fixed by the Committee but shall not be longer than 10 years from the date of grant.

     (iii) Time and Method of Exercise . The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms in which, payment of the exercise price with respect thereto may be made or deemed to have been made.

     (iv) Special Rules for Non-Employee Directors. Notwithstanding the preceding provisions of this Section 6(a), each Non-employee Director, upon becoming a Non-employee Director, shall receive a Non-qualified Stock Option to purchase 25,000 Shares, which Option shall be subject to the following terms:

     (A) The Option may not be exercised before the expiration of one year from its date of grant.

     (B) Each year that the Non-employee Director continues to serve on the Board, beginning with the first anniversary of the date of grant of the Option, twenty-five percent (25%) of the total number of Shares covered by the Option shall become exercisable; provided, however, that the Option shall become exercisable immediately in full in the event of: (I) the death of the Non-employee Director while serving as a Non-employee Director; (II) the removal of the Non-employee Director from the Board without cause; (III) the failure to re-nominate or re-elect the Non-employee Director to the Board; (IV) the occurrence of a Change in Control of the Company while the Non-employee Director is serving as a Non-employee Director; and (V) the voluntary resignation of the Non- Employee Director from the Board, provided a majority of the Board members (excluding the Non-Employee Director) agree to accelerate the vesting of the Option and determines in good faith that such acceleration is in the best interest of the Company.

     (C) If a person ceases to be a Non-employee Director for reasons other than death while holding an Option, such person may, at any time within three (3) years of the date he or she ceases to be a Non-employee Director (but in no event after the Option has expired pursuant to Section 6(a)(ii)) exercise the Option to the extent the Option was exercisable as of the date he or she ceased to be a Non-employee Director.

     (D) If any person who is or was a Non-employee Director dies while holding an Option, his executors, administrators, heirs or distributees, as the case may be, may, at any time within one year after the person’s date of death (but in no event after the Option has expired pursuant to Section 6(a)(ii)), exercise the Option to the extent the Option was (or became) exercisable as of the date of the person’s death.

     (E) In all other respects the Option shall conform to the requirements set forth in 6(a)(i) through 6(a)(iii), above.

     (v) Incentive Stock Options Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply to the grant of Options that are intended to qualify as Incentive Stock Options:

     (A) The aggregate Fair Market Value (determined as of date the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all of the Company’s plans) shall not exceed $100,000.

     (B) Any Award Agreement granting Incentive Stock Options under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain all provisions required in order for the Award to qualify as an Incentive Stock Option.

     (C) All Incentive Stock Options must be granted within ten (10) years from the earlier of the date on which the Plan is adopted by the Board or the date the Plan is approved by the stockholder of the Company.

     (D) No Incentive Stock Option shall be granted to a Participant who, at the time of grant would own (within the meaning of Section 422 of the Code) stock possessing more than ten percent (10%) of the total combined voting power of the Company (within the meaning of Section 422 of the Code).

      (b)  Stock Appreciation Rights . The Committee may grant Stock Appreciation Rights subject to the terms of the Plan and such additional terms and conditions not inconsistent with the provision of the Plan as the Committee shall determine. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive in cash or Shares (as specified by the Committee) upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right; provided, however, that the Committee may designate a per share grant price below Fair Market Value on the date of grant if the Stock Appreciation Right is granted in substitution for a stock appreciation right previously granted by an entity that is acquired by or merged with the Company or an Affiliate.

      Section 7. Restricted Stock, Restricted Stock Units, Performance Awards, Stock Awards, Other Stock-Based Awards and Cash Awards, Dividend Equivalents

      (a)  Restricted Stock and Restricted Stock Units. The Committee may grant Awards of Restricted Stock and Restricted Stock Units with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Restrictions . Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect

thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate. The minimum vesting period of such Awards shall be one year from the date of grant. Notwithstanding the foregoing, the Committee may permit acceleration of vesting of such Awards in the event of the Participant’s death, disability or retirement.

     (ii) Issuance and Delivery of Shares . Any Restricted Stock granted under the Plan shall be issued at the time such Awards are granted and may be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock. Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the Participant promptly after the applicable restrictions lapse or are waived. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holder of the Restricted Stock Units.

     (iii) Forfeiture . Except as otherwise determined by the Committee, upon a Participant’s termination of employment or cessation of services as a Consultant, including resignation or removal as a Director (in either case, as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units held by the Participant at such time shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units.

      (b)  Performance Awards . The Committee may grant Performance Awards denominated in Shares that may be settled or payable in Shares (including, without limitation, Restricted Stock or Restricted Stock Units) or cash. Performance Awards granted to Participants who may be “covered employees” under Section 162(m) of the Code are intended to be “qualified performance-based compensation” within the meaning of Section 162(m). Performance Awards shall, to the extent required by Section 162(m), be conditioned solely on the achievement of one or more objective Performance Goals, and such Performance Goals shall be established by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m). Subject to the terms of the Plan and any applicable Award Agreement, the Performance Goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award, and any other terms and conditions of any Performance Award shall be determined by the Committee. The Committee shall also certify in writing that such Performance Goals have been met prior to payment of the Performance Awards to the extent required by Section 162(m).

      (c)  Stock Awards . The Committee may grant Shares without restrictions thereon in its discretion. Subject to the terms of the Plan, Stock Awards may have such terms and conditions as the Committee shall determine.

      (d)  Other Stock-Based Awards and Cash Awards . The Committee may grant such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. The Committee shall determine the terms and conditions of such Awards, subject to the terms of the Plan and the Award Agreement. Shares, or other securities delivered pursuant to a purchase right granted under this Section 7(d), shall be purchased for consideration having a value equal to at least 100% of the Fair Market Value of such Shares or other securities on the date the purchase right is granted. In addition the Committee may, in its discretion, grant Cash Awards to Eligible Employees according to such terms and conditions as the Committee may establish, subject to the terms of the Plan and the Award Agreement.

      (e)  Dividend Equivalents . The Committee may grant Dividend Equivalents under which the Participant shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of any cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan, such Dividend Equivalents may have such terms and conditions as the Committee shall determine.

      Section 8. General Rules Applicable to Awards

      (a)  Consideration for Awards . Awards may be granted for no cash consideration or for any cash or other consideration as may be determined by the Committee or required by applicable law.

      (b)  Awards May Be Granted Separately or Together . Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

      (c) Forms of Payment under Awards . Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property, withholding Shares otherwise issuable under the Award, or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on

installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

      (d)  Term of Awards . The term of each Award shall be for a period not longer than 10 years from the date of grant.

      (e)  Limits on Transfer of Awards . Except as otherwise provided by the Committee or the terms of this Plan, no Award and no right under any such Award shall be transferable by a Participant other than by will or by the laws of descent and distribution. The Committee may establish procedures as it deems appropriate for a Participant to designate a Person or Persons, as beneficiary or beneficiaries, to exercise the rights of the Participant and receive any property distributable with respect to any Award in the event of the Participant’s death. The Committee, in its discretion and subject to such additional terms and conditions as it determines, may permit a Participant to transfer a Non-Qualified Stock Option to any “family member” (as such term is defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act of 1933, as amended) at any time that such Participant holds such Option, provided that such transfers may not be for value ( i.e. , the transferor may not receive any consideration therefor) and the family member may not make any subsequent transfers other than by will or by the laws of descent and distribution. Each Award under the Plan or right under any such Award shall be exercisable during the Participant’s lifetime only by the Participant (except as provided herein or in an Award Agreement or amendment thereto relating to a Non-Qualified Stock Option) or, if permissible under applicable law, by the Participant’s guardian or legal representative. No Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

      (f)  Restrictions; Securities Exchange Listing . All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may cause appropriate entries to be made or legends to be placed on the certificates for such Shares or other securities to reflect such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been admitted for trading on such securities exchange.

      Section 9. Change in Control

     Notwithstanding anything in the Plan or an Award Agreement to the contrary: (a) the restrictions on all Awards of Restricted Stock and Restricted Stock Units shall lapse; (b) all outstanding Options and Stock Appreciation Rights shall become exercisable; (c) the performance requirements applicable to all Performance Shares shall be deemed to have been met and payment made immediately, if subsequent to the date that the Plan is approved by the Board a Change in Control occurs unless otherwise

determined by the Board and a majority of the Continuing Directors. For purposes of this Section 7, a “Continuing Director” is a Director who: (i) was a Director at the time any of the events described in Section 2(f) constituting a Change in Control occurred or at the time any person publicly announces an intention to acquire twenty percent (20%) or more of the equity securities of the Company; (ii) has held the position of Director for more than two (2) years as of the applicable date in (i), above; or (iii) is a Director nominated and approved by the Continuing Directors.

     Subject to the preceding paragraph, in the event that the Company is a party to a merger, exchange or reorganization, outstanding Awards shall be subject to the terms and conditions of the agreement of merger, exchange or reorganization, which may include, without limitation, accelerating the vesting or exercise date of Awards and the cancellation of outstanding Awards in exchange for the immediate distribution of a cash payment equal to: (a) in the case of Options and Stock Appreciation Rights, the difference between the Fair Market Value on the date of the Change of Control and the exercise price multiplied by the number of Shares subject to the Option or Stock Appreciation Right, and (b) in the case of Restricted Stock, Restricted Stock Units, and Performance Stock Awards, the Fair Market Value of a Share on the date of the Change in Control multiplied by the number of Shares then subject to the Award.

      Section 10. Amendment and Termination; Corrections

      (a)  Amendments to the Plan . The Board may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, prior approval of the stockholders of the Company shall be required for any amendment to the Plan that:

     (i) requires stockholder approval under the rules or regulations of the Securities and Exchange Commission, the NASDAQ Stock Market LLC, or any other securities exchange that are applicable to the Company;

     (ii) increases the number of shares authorized under the Plan as specified in Section 4(a) of the Plan;

     (iii) increases the number of Shares subject to the limitations contained in Section 4(d) of the Plan;

     (iv) permits repricing of Options or Stock Appreciation Rights without prior shareholder approval;

     (v) permits the award of Options or Stock Appreciation Rights at a price less than 100% of the Fair Market Value of a Share on the date of grant of such Option or Stock Appreciation Right, contrary to the provisions of Sections 6(a)(i) and 6(b)(ii) of the Plan; or

     (vi) would cause Section 162(m) of the Code to become unavailable with respect to the Plan.

      (b) Amendments to Awards . Subject to the provisions of the Plan, the Committee may waive any conditions of or rights of the Company under any

outstanding Award, prospectively or retroactively. Except as otherwise provided in the Plan, the Committee may amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, but no such action may adversely affect the rights of the holder of such Award without the consent of the Participant or holder or beneficiary thereof.

      (c)  Correction of Defects, Omissions and Inconsistencies . The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award or Award Agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the Plan.

      Section 11. Tax Withholding

     The Company may take such action as it deems appropriate to withhold or collect from a Participant the applicable federal, state, local or foreign payroll, withholding, income or other taxes that are required to be withheld or collected by the Company upon the grant, exercise, vesting or payment of an Award. The Committee may require the Company to withhold Shares having a Fair Market Value equal to the amount necessary to satisfy the Company’s minimum statutory withholding requirements upon the grant, exercise, vesting or payment of an Award from Shares that otherwise would have been delivered to a Participant. The Committee may, subject to any terms and conditions that the Committee may adopt, permit a Participant to elect to pay all or a portion of the minimum statutory withholding taxes by: (a) having the Company withhold Shares otherwise to be delivered upon the grant, exercise, vesting or payment of an Award with a Fair Market Value equal to the amount of such taxes; (b) delivering to the Company Shares other than Shares issuable upon the grant, exercise, vesting or payment of an Award with a Fair Market Value equal to the amount of such taxes; or (c) paying cash. Any such election must be made on or before the date that the amount of tax to be withheld is determined.

      Section 12. General Provisions.

      (a)  No Rights to Awards . No Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

      (b)  Award Agreements . No Participant shall have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

      (c)  No Rights of Stockholders . Except with respect to Restricted Stock and Stock Awards, neither a Participant nor the Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company with respect to any Shares issuable upon the exercise or payment of any Award, in whole or in part, unless and until the Shares have been issued.

      (d)  No Limit on Other Compensation Plans or Arrangements . Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation plans or arrangements.

      (e)  No Right to Employment, Directorship, or to Provide Other Services. The grant of an Award shall not be construed as giving a Participant the right to be retained as an employee of the Company or any Affiliate, or a Director to be retained as a Director, nor any other service provider to be retained by the Company, nor will it affect in any way the right of the Company or an Affiliate to terminate a Participant’s employment or other services at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment or other services for the Company free from any liability or any claim under the Plan or any Award, unless otherwise expressly provided in the Plan or in any Award Agreement.

      (f)  Governing Law . The internal law, and not the law of conflicts, of the State of Minnesota, shall govern all questions concerning the validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award.

      (g)  Severability . If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

      (h)  No Trust or Fund Created . Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

      (i)  Securities Matters . The Company shall not be required to deliver any Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied.

      (j)  No Fractional Shares . No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Share or whether such fractional Share or any rights thereto shall be canceled, terminated or otherwise eliminated.

      (k)  Headings . Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

      Section 13. Effective Date of the Plan

     The Plan in its original form became effective as of June 6, 2007, the date stockholders of the Company approved the Plan at the annual meeting of stockholders of the Company held on such date; provided, however, amending and restating of the Plan shall be subject to and be effective upon approval by the stockholders of the Company at the annual meeting of stockholders of the Company to be held on August 6, 2009.

      Section 14. Term of the Plan

     The Plan shall terminate at midnight on June 5, 2017, unless terminated before then by the Board. Awards may be granted under the Plan until the Plan terminates or until all Shares available for Awards under the Plan have been purchased or acquired; provided, however, that Incentive Stock Options may not be granted following the 10-year anniversary of the Board’s adoption of the Plan. The Plan shall remain in effect as long as any Awards are outstanding.

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