** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

----

**FORM 10-Q**

| **x**                                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                            | ** **                                                                                               |
| **For the  quarterly period ended March 31, 2006**                                                                                                                               |
| ** **                                                                                                                                                                            | ** **                                                                                               |
| **OR**                                                                                                                                                                                |
| ** **                                                                                                                                                                            | ** **                                                                                               |
| **o**                                                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                            | ** **                                                                                               |
| **For the  transition period from           to             ** |

 

**CommissionFile Number: **333-117633

**SENECA GAMING CORPORATION**

(Exact name of registrantas specified in its charter)

| **Not Applicable**                                               | **7990**                                                   | **54-2122988**                        |
|------------------------------------------------------------------|------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (Primary  Standard Industrial  Classification Code Number) | (I.R.S. Employer  Identification No.) |

 

**310 Fourth Street**

**Niagara Falls, New York(Seneca Nation Territory) 14303**

**(716) 299-1100**

(Address, including zip code, and telephone number,

including area code, ofregistrant’s principal executive offices)

Indicate by check markwhether the registrant has (1) has filed all reports required to be filedby Section 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x     No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large accelerated filer  o | Accelerated  filer o | Non-accelerated  filer x |
|---------------------------------|---------------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o     No x

At May 9, 2006, the registrant had no outstandingshares of common stock. The registrant is wholly owned by the Seneca Nation ofIndians.

 

----

**TABLE OF CONTENTS**

 
|               | ** ** | ** **                                                                                                       | ** ** | **Page  Number** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| **PART  I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                       |       | 1                |       |
|          |       |                                                                                                             |       |             |       |
| Item  1.      |       | Financial  Statements                                                                                            |       | 1                |       |
|          |       | Consolidated  Balance Sheets as of March 31, 2006 (Unaudited) and; September 30, 2005                            |       | 1                |       |
|          |       | Consolidated Statements of Income for the Three Months  and Six Months Ended March 31, 2006 and 2005 (Unaudited) |       | 2                |       |
|          |       | Consolidated Statements of Cash Flows for the Six  Months Ended March 31, 2006 and 2005 (Unaudited)         |       | 3                |       |
|          |       | Notes to Consolidated Financial Statements                                                                       |       | 4                |       |
|          |       |                                                                                                             |       |             |       |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                      |       | 10               |       |
|          |       |                                                                                                             |       |             |       |
| Item 3.       |       | Quantitative and Qualitative Disclosures About Market  Risk                                                      |       | 26               |       |
|          |       |                                                                                                             |       |             |       |
| Item 4.       |       | Controls and Procedures                                                                                          |       | 28               |       |
|          |       |                                                                                                             |       |             |       |
| **PART  II.** | ** ** | **OTHER  INFORMATION**                                                                                           |       | 29               |       |
| ** **    | ** ** | ** **                                                                                                       |       |             |       |
| Item  1.      |       | Legal  Proceedings                                                                                               |       | 29               |       |
|          |       |                                                                                                             |       |             |       |
| Item  1A.     |       | Risk  Factors                                                                                                    |       | 30               |       |
|          |       |                                                                                                             |       |             |       |
| Item 2.       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                     |       | 30               |       |
|          |       |                                                                                                             |       |             |       |
| Item 3.       |       | Defaults Upon Senior Securities                                                                                  |       | 31               |       |
|          |       |                                                                                                             |       |             |       |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                              |       | 31               |       |
|          |       |                                                                                                             |       |             |       |
| Item  5.      |       | Other  Information                                                                                               |       | 31               |       |
|          |       |                                                                                                             |       |             |       |
| Item 6.       |       | Exhibits                                                                                                         |       | 32               |       |
|          |       |                                                                                                             |       |             |       |
|          |       | Signatures                                                                                                       |       | 33               |       |
|          |       |                                                                                                             |       |             |       |

 

i

----

**PART I.****                                                   ****FINANCIAL INFORMATION**

**Item I.****                                                              FinancialStatements**

**SENECAGAMING CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                         | ** ** | **March 31,  2006**             | ** ** | **September 30,  2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                         | ** ** | ** **                           | ** ** | ** **                   | ** ** |
|                               | ** ** | ** **                           | ** ** | ** **                   | ** ** |
| Current assets:                    | ** ** | ** **                           | ** ** | ** **                   | ** ** |
| Cash and cash equivalents          | ** ** | $                                    | 55,302     |                         | $          | 142,467 | ** ** |
| Short-term investments             |       | 82,350                               |       | 96,091                       |       |
| Receivables from affiliates        |       | 1,362                                |       | 875                          |       |
| Other receivables, net             |       | 1,910                                |       | 1,979                        |       |
| Inventories                        |       | 2,666                                |       | 2,095                        |       |
| Other current assets               |       | 5,713                                |       | 6,437                        |       |
| Total current assets               |       | 149,303                              |       | 249,944                      |       |
|                               |       |                                 |       |                         |       |
| Property and  equipment, net       |       | 535,912                              |       | 430,418                      |       |
| Restricted cash                    |       | 33,500                               |       | -                            |       |
| Other long-term  assets            |       | 29,200                               |       | 18,486                       |       |
| Total assets                       |       | $                                    | 747,915    |                         | $          | 698,848 |   |
|                               |       |                                 |       |                         |       |
| **Liabilities and Capital**        |       |                                 |       |                         |       |
|                               |       |                                 |       |                         |       |
| Current liabilities:               |       |                                 |       |                         |       |
| Trade payables                     |       | 5,476                                |       | 3,898                        |       |
| Due to Nation                      |       | 262                                  |       | -                            |       |
| Construction payables — SCMC  |       | 35,464                               |       | 10,894                       |       |
| Construction payables — Other |       | -                                    |       | 23,341                       |       |
| Exclusivity fees payable           |       | 6,958                                |       | 5,717                        |       |
| Accrued interest                   |       | 15,104                               |       | 14,218                       |       |
| Customer point  liability          |       | 12,005                               |       | 10,682                       |       |
| Accrued  regulatory expenses       |       | 10,944                               |       | 9,347                        |       |
| Other current liabilities          |       | 19,190                               |       | 17,974                       |       |
| Total current liabilities          |       | 105,403                              |       | 96,071                       |       |
|                               |       |                                 |       |                         |       |
| Long-term debt                     |       | 493,849                              |       | 493,352                      |       |
|                               |       |                                 |       |                         |       |
| Total liabilities                  |       | 599,252                              |       | 589,423                      |       |
|                               |       |                                 |       |                         |       |
| Capital:                           |       |                                 |       |                         |       |
| Retained earnings                  |       | 148,663                              |       | 109,425                      |       |
|                               |       |                                 |       |                         |       |
| Total  liabilities and capital     | ** ** | $                                    | 747,915    |                         | $          | 698,848 | ** ** |

 

See accompanying notes to consolidated financialstatements.

1

----

**SENECAGAMING CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(Unaudited)**
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                         | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)**             | ** ** |
| **Revenues**                             | ** ** | ** **                                       | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                       | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming                                   |       | $                                                | 126,615    |                                           | $          | 103,495 |   | $ | 236,653 |   | $ | 207,786 |   |
| Food and  beverage                       |       | 12,559                                           |       | 9,873                                          |       | 22,345 |   | 19,550 |   |
| Lodging                                  |       | 1,521                                            |       | —                                         |       | 1,582 |   | — |   |
| Retail,  entertainment and other         |       | 4,852                                            |       | 4,049                                          |       | 9,513 |   | 8,283 |   |
| Less: Promotional  allowances            |       | (16,290                                          | )          | (11,136                                        | )          | (31,921 | ) | (21,462 | ) |
|                                     |       |                                             |       |                                           |       |   |   |   |   |
| Net revenues                             |       | 129,257                                          |       | 106,281                                        |       | 238,172 |   | 214,157 |   |
|                                     |       |                                             |       |                                           |       |   |   |   |   |
| **Expenses**                             |       |                                             |       |                                           |       |   |   |   |   |
| ** **                               |       |                                             |       |                                           |       |   |   |   |   |
| Gaming                                   |       | 32,859                                           |       | 27,925                                         |       | 60,899 |   | 56,552 |   |
| Food and  beverage                       |       | 11,565                                           |       | 8,346                                          |       | 20,375 |   | 17,037 |   |
| Lodging                                  |       | 1,388                                            |       | —                                         |       | 1,492 |   | — |   |
| Retail,  entertainment and other         |       | 2,872                                            |       | 2,311                                          |       | 5,774 |   | 5,192 |   |
| Advertising,  general and administrative |       | 32,423                                           |       | 29,637                                         |       | 63,848 |   | 58,867 |   |
| Pre-opening  costs                       |       | 1,875                                            |       | 119                                            |       | 4,932 |   | 183 |   |
| Depreciation and  amortization           |       | 8,291                                            |       | 6,469                                          |       | 15,362 |   | 12,836 |   |
|                                     |       |                                             |       |                                           |       |   |   |   |   |
| Total operating  expenses                |       | 91,273                                           |       | 74,807                                         |       | 172,682 |   | 150,667 |   |
|                                     |       |                                             |       |                                           |       |   |   |   |   |
| Operating income                         |       | 37,984                                           |       | 31,474                                         |       | 65,490 |   | 63,490 |   |
| Interest income                          |       | 1,356                                            |       | 1,009                                          |       | 2,827 |   | 2,012 |   |
| Interest expense                         |       | (7,214                                           | )          | (10,849                                        | )          | (14,906 | ) | (22,805 | ) |
|                                     |       |                                             |       |                                           |       |   |   |   |   |
| Net income                               |       | $                                                | 32,126     |                                           | $          | 21,634 |   | $ | 53,411 |   | $ | 42,697 |   |

 

See accompanying notes toconsolidated financial statements.

2

----

**SENECAGAMING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)**           | ** ** |
| **Cash flows relating to  operating activities:**                                  |       |                                           | ** ** |   |   |
|                                                                               |       |                                           | ** ** |   |   |
| Net income                                                                         |       | $                                              | 53,411     | ** ** | $ | 42,697 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                           | ** ** |   |   |
| Depreciation and amortization                                                      |       | 15,362                                         | ** ** | 12,836 |   |
| Amortization of deferred financing costs and debt  discount                        |       | 1,585                                          | ** ** | 1,264 |   |
| Other, net                                                                         |       | 210                                            | ** ** | (191 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| Change in operating  assets and liabilities:                                       |       |                                           | ** ** |   |   |
| Current assets                                                                     |       | (467                                           | )          | (2,074 | ) |
| Long-term assets                                                                   |       | —                                         | ** ** | 40 |   |
| Current liabilities                                                                |       | 7,841                                          | ** ** | (36,423 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| Net cash  provided by operating activities                                         |       | 77,942                                         | ** ** | 18,149 |   |
|                                                                               |       |                                           | ** ** |   |   |
| **Cash flows relating to  investing activities:**                                  |       |                                           | ** ** |   |   |
|                                                                               |       |                                           | ** ** |   |   |
| Purchases of  property and equipment                                               |       | (119,635                                       | )          | (85,984 | ) |
| Payments for  land acquisitions                                                    |       | (15,946                                        | )          | (580 | ) |
| Sales  (purchases) of investments, net                                             |       | 13,741                                         | ** ** | (53,859 | ) |
| Payment to  collateralize letter of credit                                         |       | (33,500                                        | )          | — |   |
|                                                                               |       |                                           | ** ** |   |   |
| Net cash used in  investing activities                                             |       | (155,340                                       | )          | (140,423 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| **Cash flows relating to  financing activities:**                                  |       |                                           | ** ** |   |   |
|                                                                               |       |                                           | ** ** |   |   |
| Payments to  sinking fund                                                          |       | —                                         | ** ** | (17,631 | ) |
| Repayments of  long-term debt                                                      |       | —                                         | ** ** | (278 | ) |
| Payment of  deferred financing costs                                               |       | (542                                           | )          | (519 | ) |
| Dividends paid  to the Nation                                                      |       | (9,225                                         | )          | (1,092 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| Net cash used in  financing activities                                             |       | (9,767                                         | )          | (19,520 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (87,165                                        | )          | (141,794 | ) |
|                                                                               |       |                                           | ** ** |   |   |
| Cash and cash  equivalents balances:                                               |       |                                           | ** ** |   |   |
| Beginning of period                                                                |       | 142,467                                        | ** ** | 211,595 |   |
|                                                                               |       |                                           | ** ** |   |   |
| End of period                                                                      |       | $                                              | 55,302     | ** ** | $ | 69,801 |   |
|                                                                               |       |                                           | ** ** |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                                           | ** ** |   |   |
| Non-cash investing  activities:                                                    |       |                                           | ** ** |   |   |
| Distribution of  property to the Nation                                            |       | $                                              | (4,686     | ) | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

3

----

**SENECAGAMING CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.             Organizationand Basis of Presentation**

The consolidated financial statements includethe accounts of Seneca Gaming Corporation, or SGC, and its wholly ownedsubsidiaries, or collectively, the Company. In consolidation, all intercompanybalances and transactions have been eliminated. The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of the Company’s management, all adjustments, consisting of normalrecurring accruals, considered necessary for a fair presentation have beenincluded. Operating results for the three months and six months ended March 31,2006 are not necessarily indicative of the results that may be expected for theyear ended September 30, 2006. For further information, reference is madeto the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended September 30,2005.

SGC, which was formed on August 1, 2002,is wholly owned by the Seneca Nation of Indians, or the Nation, a federallyrecognized Indian tribe. SGC was organized by the Nation to operate and manageits Class III Gaming activities pursuant to the Indian Gaming RegulatoryAct of 1988, or IGRA. Under IGRA, federally recognized Indian tribes arepermitted to conduct full-scale casino gaming operations on tribal land,subject to, among other things, the negotiation of a compact with the affectedstate. Pursuant to IGRA, the Nation entered into the Nation-State GamingCompact with the State of New York in August 2002, or the Compact, whichhas been approved by the Federal Bureau of Indian Affairs, Department of theInterior. The Compact provides the Nation the exclusive right to conduct Class IIIgaming activities at three sites in the western region of the State of NewYork.

The Nation’s Constitution established the TribalCouncil, or the Council, to act as the Nation’s legislative authority. TheCouncil acts on the Nation’s behalf with respect to SGC, and the Councilestablished the Seneca Gaming Authority, or SGA, to regulate the gamingactivities of SGC under the Compact.

The Council, at the request of the SGC Board ofDirectors, chartered three subsidiary corporations of SGC to operate the threesites authorized by the Compact. In addition, the SGC Board of Directors hiredthe executive management of SGC, including the President and Chief ExecutiveOfficer, to oversee, develop, and manage the three sites. The subsidiarycorporations are as follows:

4

----

·              Seneca Niagara Falls GamingCorporation, or SNFGC

·              Seneca Territory GamingCorporation, or STGC

·              Seneca Erie Gaming Corporation, orSEGC

SNFGC was formed on August 1, 2002 to operate theNation’s gaming activities in Niagara Falls, New York. Operations at SNFGC’scasino, or Seneca Niagara Casino, commenced December 31, 2002. On December 30,2005, SNFGC officially opened the first 10 of 26 floors of rooms of its luxuryhotel, which includes 35,000 square feet of additional gaming space, 3 newrestaurants, 3 new retail stores and a 25,200 square-foot multi-purpose roomand an additional 8,000 square feet of conference and banquet space. On March 31,2006, the remaining 16 floors, including a penthouse floor featuring luxuriousone and two bedroom suites with butler service, were officially opened, alongwith a full-service spa, salon, fitness center and pool. The luxury hotel isadjacent and connected to the Seneca Niagara Casino. The entire complex,including the luxury hotel and the Seneca Niagara Casino, is referred to as theSeneca Niagara Casino and Hotel. 

STGC was formed on September 20, 2003 to operatethe Nation’s gaming activities in Salamanca, New York on its territorial land.Operations at STGC’s casino, or Seneca Allegany Casino, commenced May 1,2004. Construction was recently commenced on a 220-room hotel includingapproximately 70,000 square feet of gaming space, three additional restaurants,and a spa and fitness center.

SEGC was formed on August 9, 2003 to operate theNation’s gaming activities in Erie County, New York. On October 3, 2005,the Nation acquired approximately nine acres of land in the historic waterfrontdistrict of downtown Buffalo. SEGC commenced construction of its Seneca BuffaloCreek Casino on those nine acres on December 8, 2005. The exclusive right,under the Compact, to establish and operate a third Class III gamingfacility in Erie County may terminate if the Nation or SEGC fails to commence Class IIIgaming operations by December 9, 2007.

**2.**                                      Long-Term Debt

Long-term debt, as described below, consistsof the 2004 and 2005 71⁄4% senior notes. 

**71⁄4% Senior Notes**

On May 5, 2004, SGC issued$300.0 million in 71⁄4% senior notes due 2012, or the 2004 senior notes. The2004 senior notes are guaranteed by SNFGC, STGC and SEGC or collectively, theGuarantors. The $288.7 million net proceeds from the 2004 senior notes were, orwill be, used principally to fund in whole or in part (a) the repayment inMay 2004 of vendor equipment financing, (b) SNFGC’s construction andequipping of the luxury hotel, (c) the acquisition of the remaining 24acres in Niagara Falls, as provided for in the Compact, (d) the payment of$22.0 million in August 2004 to satisfy the obligation to the Empire StateDevelopment Corporation in connection with the transfer of certain property tothe Nation for use as the Seneca Niagara Casino, and (e) a $25.0 milliondistribution to the Nation, paid in 2004.

5

----

On May 23, 2005, SGC issued anadditional $200.0 million in 71⁄4% senior notes due 2012, Series B, or the2005 senior notes. The 2005 senior notes are treated as a single class with the2004 senior notes and are identical to the 2004 senior notes, except forcertain tax attributes and prior to November 1, 2005 the amount ofinterest accrued thereon. Proceeds from the 2005 senior notes wereapproximately $193.0 million. The proceeds from the 2005 senior notes, were, orwill be, used to (a) pay in full and terminate on May 23, 2005, thesenior secured term loan, or the Term Loan, made by Freemantle Limited, or Freemantle,to SNFGC in November 2002, for a negotiated amount of approximately $126.7million, representing $80.0 million in outstanding principal and approximately$46.7 million for interest on such principal, at a prescribed interest rate,that would have otherwise been payable if the Term Loan had not been paid on May 23,2005, but was instead paid 81⁄2 months prior to its November 22, 2007 statedmaturity, (b) to fund certain costs associated with the expansion of ouroperations, (c) to pay $5.2 million in fees and expenses associated withthe offering of the 2005 senior notes, including the related exchange offer,and (d) for general corporate purposes.

Interest on the 2004 and 2005 senior notes ispayable semi-annually on May 1 and November 1. The 2004 and 2005senior notes are unsecured and rank equally. As of March 31, 2006,aggregate accrued interest on the 2004 and 2005 senior notes was$15.1 million.

The Indenture governing the 2004 and 2005senior notes contains certain financial and non-financial covenants. Thefinancial covenants include limitations on restricted payments and theincurrence of indebtedness, while the non-financial covenants include reportingobligations and compliance with laws and regulations. As of March 31,2006, SGC was in compliance with all covenants in the Indenture.

**Term Loan**

SNFGC entered into a five-year Term Loan withFreemantle on November 22, 2002. The Term Loan provided $80.0 millionin financing for the initial construction of the Seneca Niagara Casino andother related costs.

As discussed above, on May 23, 2005, the Term Loan was paid infull. The negotiated payment in full of the Term Loan resulted in a charge toearnings in May 2005 on the early extinguishment of the Term Loan ofapproximately $49.2 million, including the write-off of $2.5 million ofdeferred financing costs.

**Derivative Instruments**

SGC is considered an “end user” of derivativeinstruments and has engaged in derivative transactions for risk managementpurposes only. Effective on May 25, 2004, SGC entered into two interestrate cap agreements for an aggregate notional amount of $80.0 million,equal to the then outstanding balance of the Term Loan. The instruments werepurchased for approximately $1.1 million each, $2.2 million in total.Periodic

6

----

changes in the fair market value of the instrumentswere recorded as adjustments to interest expense. Both instruments were sold inthe third quarter of 2005 subsequent to the payment in full and termination ofthe Term Loan. Gross proceeds from the sale of these instruments were $0.7million.

**3.****                                      Related-PartyTransactions**

**Land Leases from the Nation**

The Nation has entered into an operating leaseagreement (each a Head Lease) with each of SNFGC (dated October 25, 2002)and STGC (beginning May 1, 2004), for use of the land and/or buildingswhich are currently used in operating the Seneca Niagara Casino and Hotel andthe Seneca Allegany Casino, respectively. The STGC Head Lease is currently anoral agreement. STGC is in the process of formalizing a written agreement withthe Nation. These agreements expire at the end of the Compact, in 2023. Monthlypayments for both SNFGC and STGC were initially $1.0 million. On March 1,2005 and June 1, 2005, respectively, the monthly payments for STGC andSNFGC were increased to $1.3 million. The lease payments may increase by 3%annually on each October 1 over the remaining lease life. Annual increasesmust be authorized by the board of directors of SGC and, subject to compliancewith the terms of the Indenture governing the senior notes, may exceed 3%. Rentis payable only to the extent that sufficient funds are available, measured onan annual basis, from the net proceeds derived from the operation of the casinofacilities and other related operations. If on an annual basis sufficient fundsare not available, any shortfall in the rent amount does not accumulate. Due tothe related party nature of these leases, which can be effectively modified bythe Nation, the Company records monthly lease expense equal to the requiredpayment amount for the respective month. These leases contain no renewaloptions or escalation clauses.

On April 18, 2006, the SGC board of directorsapproved 3% increases to lease payments for both SNFGC and STGC, to $1.3million, effective October 1, 2005. The increased expense has beenrecorded during the 2006 fiscal year.

Effective April 1, 2006, SEGC leases the landupon which the Seneca Buffalo Creek Casino will operate from the Nationpursuant to an oral agreement, as authorized by the SGC board of directors on April 18,2006. SEGC will pay a monthly lease payment of $0.5 million to the Nation,beginning April 1, 2006. SEGC is in the process of formalizing a writtenagreement with the Nation.

Lease expense resulting from the above agreements wereas follows for the three and six month periods ended March 31, 2006 and2005:

7

----

 

 

|            | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                         | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(In Millions of Dollars)**      | ** ** |
| SNFGC      |       | $                                                | 3.9        |                                           | $          | 3.0 |   | $ | 7.7 |   | $ | 6.0 |   |
| STGC       |       | 3.9                                              |       | 3.3                                            |       | 7.7 |   | 6.3 |   |
|       |       | $                                                | 7.8        |                                           | $          | 6.3 |   | $ | 15.4 |   | $ | 12.3 |   |

 

**Other Related Party Transactions**

SNFGC, STGC and SEGC haveeach entered into a construction management agreement with Seneca ConstructionManagement Corporation (SCMC) for the construction of the luxury hotel projectat Seneca Niagara Casino, the construction of the resort hotel project atSeneca Allegany Casino, and the demolition of certain buildings on the site forthe planned SEGC casino. SCMC is wholly owned by the Nation. For thethree-month and six-month periods ended March 31, 2006, SNFGC, STGC andSEGC have collectively made total payments to SCMC of $34.1 million and $71.9million, respectively. As of March 31, 2006, the Company has recorded asreceivables from affiliates $0.8 million relating to net advances made to SCMC.Construction management fees otherwise due SCMC will be applied to reduce thesereceivables.

Asof January 1, 2005, the Company transferred all Class II operationsto the Nation, including its poker operations. The Company leases space withinboth Seneca Niagara Casino and Hotel and Seneca Allegany Casino foroperation of the poker rooms by the Nation. For the three-month periods ended March 31,2006 and 2005, the Company recorded $0.6 million and $0.3 million of rentalincome and fees, respectively. For the six-month periods ended March 31,2006 and 2005, the Company recorded $0.9 million and $0.3 million of rentalincome and fees, respectively. At March 31, 2006 and 2005, the Company hasrecorded $0.5 million and $0.2 million, respectively, as a receivable from theNation relating to poker room rentals and fees.

Forthe six months ended March 31, 2006, the Company declared dividends of$9.5 million to the Nation, of which $9.2 million was paid as of March 31,2006. The unpaid amount is shown as due to Nation on the accompanyingconsolidated balance sheets. During the six months ended March 31, 2005,the Company declared and paid dividends of $0.4 million, and also paid adividend of $0.7 million declared in a prior year.

Duringthe quarter ended December 31, 2005, SEGC distributed real property of$4.7 million for use in its casino operations to the Nation. Such distributionamount was based on the acquisition costs.

Inaddition, the Company has recorded approximately $11.1 million in landacquisitions as other long-term assets in the accompanying balance sheets as ofMarch 31, 2006, 

8

----

whichwere transferred to the Nation in April 2006.

TheCompany is charged by the Nation for SGA costs, which are incurred by theNation. SGA costs charged to the Company were approximately $2.6 million and$2.2 million for the three months ended March 31, 2006 and 2005,respectively, and $4.9 million and $4.1 million for the six months ended March 31,2006 and 2005, respectively. The Company also incurs costs, which are passedthrough to the Nation for New York State gaming regulatory services, New YorkState Police and Cattaraugus County Sheriff Department services. The Companyhas recorded costs of approximately $1.9 million and $2.1 million for thethree-month periods ended March 31, 2006 and 2005, respectively, and $3.7million and $4.2 million for the six months ended March 31, 2006 and 2005,respectively, in connection with these services. At March 31, 2006 and2005, approximately $10.9 million and $7.0 million, respectively, of the SGA,other regulatory, and police costs were recorded as current liabilities.

Duringthe quarters ended March 31, 2006 and 2005, the Company purchased $34,000and $42,000, respectively, of tobacco products from an entity in which theowner is a member of the Council. Total purchases from this vendor for the sixmonths ended March 31, 2006 and 2005 were $72,000 and $148,000,respectively.

STGCleases office space in a building owned by the brother of a member of the Company’sboard of directors. For the three-month periods ended March 31, 2006 and2005, such lease expense totaled $60,000 and $58,000, respectively. During thesix- month periods ended March 31, 2006 and 2005, such lease expensetotaled $119,000 and $116,000, respectively.

**4.**                                      Commitments and Contingencies

**The Seneca Nation Compact**

Under the Compact, the Nation has agreed tocontribute to the State of New York a portion of the proceeds from theoperation and conduct of each category of gaming device for which exclusivityexists, based on the win of such machines (cash dropped into machines, afterpayouts but before expenses) and totaled on a cumulative quarterly basis to beadjusted annually at the end of the relevant calendar year. The exclusivity feeto the State of New York for years 1-4 is 18.0% paid on an annual basis. Thereafter,the exclusivity fee is 22.0% for years 5-7 on a semi-annual basis and 25.0% foryears 8-14 on a quarterly basis.

Pursuant to the Compact, amounts due to NewYork State are payable by the Nation. In February, 2005, Seneca Niagara Casinoand Seneca Allegany Casino commenced monthly payments to the Nation of eachentity’s prior month’s exclusivity fees. For the three months ended March 31,2006 and 2005, total exclusivity fees were $19.2 million and $16.0 million,respectively. Of the $19.2 million exclusivity fee for the three months ended March 31,2006, $13.2 million was attributable to SNFGC and $6.0 million was attributableto STGC. For the six months ended March 31, 2006 and 2005, total 

9

----

exclusivity fees were $35.7 million and $31.5million, respectively. Of the $ 35.7 million exclusivity fee for the six monthsended March 31, 2006, $24.2 million was attributable to SNFGC and $11.5million was attributable to STGC.

**Additional Casino Locationand Planned Expansion**

Asdescribed in Note 1, the Compact provides the Nation the exclusive right toconduct Class III gaming activities at three sites in the western regionof the State of New York. The planned construction of our third casino in ErieCounty as well as expansion by SNFGC and STGC at Seneca Niagara Casino andHotel and Seneca Allegany Casino, respectively, will require significantcapital outlays. The amount and timing of these capital expenditures aredependent on various factors including financing availability, certain Nationapprovals and local governmental cooperation, the effects of legal proceedings,construction timelines, and the performance of the Company’s two operatingcasinos.

**Item 2.**                                                           Management’sDiscussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunctionwith the sections titled “Financial Statements” and “Notes to ConsolidatedFinancial Statements” included elsewhere in this Form 10-Q. Referencesbelow to years are to fiscal years of SGC unless otherwise noted. SGC’s fiscalyear is from October 1 through September 30.

**Forward-Looking Statements**

When used in this Quarterly Report on Form 10-Q,in other filings with the SEC, in our press releases or in our other publiccommunications, the words “believe,” “estimate,” “anticipate,” “expect,” “contemplate,”“may,” “will” and similar expressions are intended to identify forward-lookingstatements. Statements looking forward in time are included in this QuarterlyReport on Form 10-Q pursuant to the “safe harbor” provision of the PrivateSecurities Litigation Reform Act of 1995. Such statements are subject tocertain risks and uncertainties, which could cause actual results to differmaterially, including, but not limited to, the risk factors contained orreferenced herein and in our other reports filed with the SEC pursuant to theSecurities Exchange Act of 1934, as amended, including our 2005 Form 10-K.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. We undertake no obligationto update these forward-looking statements to reflect events or circumstancesoccurring after the date hereof.

10

----

**Overview**

SGC is wholly owned by the Nation and chartered to manage and directall of the Nation’s Class III gaming operations.  The Nation entered into a Compact with NewYork State on August 18, 2002 that provides the Nation with the right toestablish and operate three Class III gaming facilities in Western NewYork. We opened our first Class III gaming facility on Nation Territory inthe City of Niagara Falls, New York on December 31, 2002, featuring Class IIIslot machines, table games and keno. By March 31, 2006, we had completed a604-room luxury hotel with additional gaming space, three restaurants, amulti-purpose room, meeting rooms, and a spa and salon. This facility isoperated by our wholly owned subsidiary SNFGC. On May 1, 2004, we openedour second Class III gaming facility, Seneca Allegany Casino, on theNation’s Territory in the City of Salamanca, New York. This facility features Class IIIslot machines and table games. This facility is operated by our wholly ownedsubsidiary STGC.

Under the Compact, the Nation also has an exclusiveright to establish and operate a third Class III gaming facility in ErieCounty, New York. On October 3, 2005, the Nation acquired approximatelynine acres of land in the historic waterfront district of downtown Buffalo. TheCompany commenced construction of its Seneca Buffalo Creek Casino on those nineacres on December 8, 2005. The exclusive right, under the Compact, toestablish and operate a third Class III gaming facility in Erie County mayterminate if the Nation or SEGC fails to commence Class III gamingoperations in Erie County by December 9, 2007. See “Executive Summary —Seneca Buffalo Creek Casino” and “Part II. Item 1. — Legal Proceedings”for information regarding litigation related to our Seneca Buffalo CreekCasino.

**Executive Summary**

*Our Current Operations.*   We currently operate two Class IIIgaming facilities, Seneca Niagara Casino and Hotel, on Nation territory locatedin the City of Niagara Falls, New York, and Seneca Allegany Casino, on Nationterritory located in the City of Salamanca, New York. Our operations includegaming, dining, lodging, entertainment and retail. For the three months and sixmonths ended March 31, 2006, approximately 94% of our net revenue wasderived from our gaming activities.

*Key Performance Indicators.*   Our operating results are dependent on thevolume of profitable patrons visiting our casinos, our ability to attract themfor repeat visits, our provision of superior service to our patrons and theexpansion of and reinvestment in our facilities.

*SenecaNiagara Casino and Hotel.*   Seneca Niagara Casinoand Hotel currently relies primarily on drive-in and bus patrons from theBuffalo, Niagara Falls, and Rochester areas in New York and secondarily fromthe Erie, Pennsylvania area, Ohio and other parts of New York. Since opening onDecember 31, 2002, Seneca Niagara Casino has experienced steady growth inits patron base. With our recently opened 604-room hotel and related amenities,we intend to extend our geographic penetration, appeal to a more 

11

----

diverse demographic baseand increase visits of existing profitable patrons. The luxury hotel includes: 

·                  604 rooms, including 118 suites ofvarious sizes, with 10 floors officially opened on December 30, 2005, andthe remaining floors opened on March 31, 2006; 

·                  35,000 square feet of additionalgaming space featuring approximately 950 slot machines and 33 table games (12of which were relocated from the existing gaming areas), which additionalgaming space opened on December 15, 2005; 

·                  a full-service luxury spa and salon,which opened on March 31, 2006; 

·                  a 25,200 square-foot multi-purposeroom and an additional 8,000 square feet of conference and banquet space, allof which opened on December 31, 2005; 

·                  two specialty restaurants, a 24-hourcasual dining restaurant and a deli, with the specialty restaurants havingopened on December 27, 2005 and January 19, 2006, the casual diningrestaurant having opened on December 23, 2005, and the deli having  opened on December 15, 2005; and 

·                  approximately 2,300 square feet ofretail space for three stores, with two stores having opened on December 15,2005 and one having opened on December 30, 2005.

*Seneca Allegany Casino.*  Since opening on May 1, 2004, SenecaAllegany Casino has experienced steady growth in its patron base, net revenue,and profitability. Seneca Allegany Casino has attracted patrons from thesouthern portion of Western New York, Erie and Pittsburgh, Pennsylvania, andOhio. From opening through March 31, 2006, approximately 67% of the casino’spatron base have come from outside of the State of New York.

In July 2005, we opened our 1,850-space parking garage and we areconstructing a 220-room hotel and casino at Seneca Allegany Casino. We believethis expansion is necessary to provide a first-class gaming experience for ourpatrons and to maintain the competitive position of the facility in light ofexpected future casino gaming competition in Pennsylvania. We expect that thetotal cost of this expansion project, including the cost of our recently openedparking garage, will be between $187.0 and $198.0 million, and we plan tocontinue to fund this expansion with cash flows from operations at SenecaAllegany Casino and borrowings from SGC. We are targeting opening the entirefacility by late December 2006. 

*SenecaBuffalo Creek Casino.    *Inaddition to Seneca Niagara Casino and Hotel and Seneca Allegany Casino, theNation has the exclusive right under the Compact to construct our third Class IIIgaming facility in Erie County, New York. On October 3, 2005 the Nationacquired approximately nine acres of land in the historic waterfront districtof downtown Buffalo. We commenced construction of our Erie County gamingfacility, which we refer to as the Seneca Buffalo Creek Casino, on those nineacres, 

12

----

constituting the Nation’sBuffalo Creek Territory, on December 8, 2005. The initial phase toconstruct and equip the Seneca Buffalo Creek Casino is expected to costapproximately $125.0 million. The Seneca Buffalo Creek Casino is expected toinitially feature:

·                  1,900 to 2,200 slot machines;

·                  30 to 50 table games;

·                  a fine dining restaurant;

·                  a 24-hour casual dining restaurant;

·                  a bar;

·                  a multi-purpose room withentertainment seating for approximately 500 guests;

·                  one retail store; and

·                  a 2,500-space parking garage.

The Nation’s exclusive right under the Compact withNew York State to establish and operate a Class III gaming facility inErie County, New York, may terminate if the Nation fails to commence Class IIIgaming operations in Erie County by December 9, 2007. We expect to openthe Seneca Buffalo Creek Casino by the December 9, 2007 deadline. Ourability to open the Seneca Buffalo Creek Casino with a design to accommodatethe features outlined above will depend on various factors, including the levelof cooperation received from local governmental officials forcertain infrastructure improvements to the surrounding area and the effectof existing legal challenges by various plaintiffs (certain of which, ifsuccessful, could result in our inability to conduct gaming on our BuffaloCreek Territory). See “Part II. Item 1. Legal Proceedings.”  Wecontinue to explore various design changes to the casino program outlined abovein the event that local officials prove uncooperative. In the event that we areable to open a casino in Erie County, this casino will be owned and operated bySEGC. We intend to (a) operate Seneca Buffalo Creek Casino in a mannerthat will complement both Seneca Niagara Casino and Hotel and Seneca AlleganyCasino, and to (b) integrate the marketing of all these facilities in aneffort to maximize our patron volumes at all three properties and to promotethe Seneca brand name.

*Marketing.    *We use an integratedmarketing strategy to attract and retain our patrons and to brand the Senecaname as the premier gaming and entertainment experience in Western New York. Wecoordinate our marketing events to maximize the quality and length of stay ofpatron visits and, in the future will do so, to minimize competition among ourgaming and entertainment facilities. With the recent opening of the luxuryhotel and related amenities at the Seneca Niagara Casino and the planned December 2006opening of the resort hotel at Seneca Allegany Casino, we have commenced andintend to 

13

----

increase our marketing efforts in the region, including regions of NewYork outside the Niagara and Salamanca metropolitan areas, Pennsylvania andOhio, and Toronto. Upon its opening, the Seneca Buffalo Creek Casino will beincorporated to benefit from our increasing patron base from outside theimmediate region.

*Current, Continued and Future Reliance on Cash Flow*.*   *Weintend to fund the maintenance of our facilities and our planned futureexpansion projects from our cash flow and cash on hand. We currently rely andwill continue to rely on our ability to generate cash flow from operations torepay our debt financing.

*Seasonality.*   Our results of operations have not beenseasonal in nature.

*Overall Outlook.*   As discussed in more detail above, sinceinception, we have invested heavily in our operations and plan to continue todo so during the remainder of fiscal 2006 and 2007. We believe that investmentsin additional gaming space and non-gaming amenities at our facilities, and ourexclusive ability to offer Class III gaming in Western New York, have madeus the premier gaming and entertainment corporation in Western New York, andwill enable us to capitalize on what we believe is an underserved market inWestern New York, Pennsylvania and parts of Ohio, and to capture some of themarket share from our competitors in this region and in Fort Erie and NiagaraFalls, Canada.

**CriticalAccounting Policies and Estimates**

There have been no changes in critical accounting policies andestimates since the filing of our 2005 Form 10-K for the year ended September 30, 2005.

**Operating Results —Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31,2005**

*Operating Results*

|                                          | ** ** | **Three Months Ended  March 31,**     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Net revenue                              |       | $                                                    | 129,257    |   | $ | 106,281 |   |
|                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating  expenses:                     |       |                                                 | ** ** |   |   |
| Gaming                                   |       | 32,859                                               | ** ** | 27,925 |   |
| Food and  beverage                       |       | 11,565                                               | ** ** | 8,346 |   |
| Lodging                                  |       | 1,388                                                | ** ** | — |   |
| Retail, entertainment  and other         |       | 2,872                                                | ** ** | 2,311 |   |
| Advertising,  general and administrative |       | 32,423                                               | ** ** | 29,637 |   |
| Pre-opening  costs                       |       | 1,875                                                | ** ** | 119 |   |
| Depreciation                             |       | 8,291                                                | ** ** | 6,469 |   |
|                                     |       |                                                 | ** ** | ** ** | ** ** |
| Operating income                         |       | $                                                    | 37,984     | ** ** | $ | 31,474 |   |

 

14

----

The most important factors and trends contributing to our operatingperformance during the three months ended March 31, 2006 and 2005 were:

·                  Ourcontinued expansion at and investment in both of our properties, most notablyour December 31, 2005 partial opening and March 31, 2006 completeopening of the luxury hotel expansion project at Seneca Niagara Casino and the July 1,2005 opening of the parking garage at Seneca Allegany Casino. 

·                  Ourability to successfully market Seneca Niagara Casino and Seneca Allegany Casinoto our primary and secondary target markets located within 100 miles and 175miles, respectively, of such casinos.

·                  Ourability to enroll approximately 1.1 million patrons in our cross-propertySeneca Link Player’s Card program, which has increased our ability to useeffective direct mail and targeted marketing programs to establish patronloyalty to the Seneca brand at a profitable level.

·                  Ourmix of slot machines, which we believe is superior to our competition andincludes the latest product introductions by leading United States andinternational slot manufacturers.

·                  Ouruse of current information technology, including “ticket-in/ticket-out” slotmachines, automated jackpot payment machines, coinless slots, electronic slotbonusing and database programs to increase operating efficiencies.

·                  Ourability to operate at a high margin, which we achieve through the carefulmonitoring and control of labor costs and the effective use of our marketingand advertising expenditures.

15

----

*Detailed Revenue Information*

|                                          | ** ** | **Three Months Ended  March 31,**     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Gaming revenue:                          |       |                                                 | ** ** |   |   |
| Slots                                    |       | $                                                    | 108,400    | ** ** | $ | 87,515 |   |
| Table games                              |       | 18,101                                               | ** ** | 15,801 |   |
| Other                                    |       | 114                                                  | ** ** | 179 |   |
|                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Gaming revenue                           |       | 126,615                                              | ** ** | 103,495 |   |
|                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Non-gaming revenue:                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Food and  beverage                       |       | 12,559                                               | ** ** | 9,873 |   |
| Lodging                                  |       | 1,521                                                | ** ** | — |   |
| Retail,  entertainment and other         |       | 4,852                                                | ** ** | 4,049 |   |
|                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Non-gaming  revenue                      |       | 18,932                                               | ** ** | 13,922 |   |
| Less promotional  allowances and credits |       | (16,290                                              | )          | (11,136 | ) |
|                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net revenue                              |       | $                                                    | 129,257    |   | $ | 106,281 |   |

 

Our gaming revenue for the three months endedMarch 31, 2006 increased relative to the comparable period in the prioryear, due to (a) the opening of the additional gaming space at SenecaNiagara Casino and Hotel on December 15, 2005, which added approximately950 slot machines and 21 table games to our operations, (b) SenecaAllegany Casino’s addition of 119 slot machines, primarily during the fourthquarter of 2005, (c) continued growth in our patron base, and (d) mildwinter weather. The opening of our luxury hotel at Seneca Niagara Casino andHotel and the July 1, 2005 completion of our parking garage at SenecaAllegany Casino supported our increased gaming revenue for the three monthsended March 31, 2006. As of March 31, 2006, our gaming operationsfeatured an aggregate 124 table games and 6,282 slot machines availableto our patrons, representing a net increase of 2 table games and 1,155 slotmachines from March 31, 2005. During these periods, the number of patronsenrolled in our Seneca Link Player’s Card program has steadily increased. As ofMarch 31, 2006, we had approximately 1.1 million patrons enrolled, anincrease of approximately 0.3 million patrons, or 36% over the number ofenrolled members at March 31, 2005.

Our net gaming revenue, which excludes promotional credits of $5.3million and $3.0 million in the quarters ended March 31, 2006 and 2005,respectively, increased $20.8 million, or 21%, for the three months ended March 31,2006 relative to the comparable period ended March 31, 2005. During thethree months ended March 31, 2006, Seneca Niagara Casino and Hotel’s netgaming revenue increased $15.2 million, or 22%, principally attributable to thecasino expansion and supported by the new luxury hotel and amenities. Of thisincrease, $13.0 million was due to increased net slot revenue. Seneca AlleganyCasino’s net gaming revenue for the quarter ended March 31, 2006 was $35.9million, an increase of $5.6 million or 18% from the quarter ended March 31,2005. 

16

----

This increase was mainly due to a $5.6 million increase in net slotrevenue between the two periods.

Our food and beverage revenue and retail revenue have increased indirect relation to our increase in gaming revenue. There is a direct relationshipbetween our food and beverage revenue and retail revenue to our gaming revenuebecause a significant portion of this revenue is generated from players’ pointredemptions. For the three months ended March 31, 2006 and 2005, 60% and57%, respectively, of our food and beverage revenue and 85% and 86% of ourretail revenue, respectively, represented players’ point redemptions. For thethree months ended March 31, 2006, our consolidated food and beveragerevenue increased $2.7 million, or 27% over the same period in 2005, to $12.6million.

Seneca Niagara Casino’s food and beverage revenue for the quarter endedMarch 31, 2006 increased $2.2 million in relation to the comparable prioryear period, mainly due to the net addition of three restaurants and two full-servicebars, in conjunction with the partial opening of our luxury hotel in December 2005.

For the three months ended March 31, 2006 Seneca Allegany Casinogenerated an additional $0.5 million or 19%, in food and beverage revenuecompared to the comparable prior year period, primarily due to increasedredemption of players’ points during 2006. 

Lodging revenue represents rentals of rooms in the luxury hotel inNiagara Falls, which partially opened in December 2005, and completelyopened on March 31, 2006. For the three months ended March 31, 2006our occupancy percentage at the hotel was approximately 70%, based upon theaverage number of rooms available during the period. Complimentary roomsaccounted for approximately 80% of our occupied rooms.

For the three months ended March 31, 2006, our retail,entertainment and other revenue increased by $0.8 million in relation tothe comparable 2005 period. This increase was primarily attributable to higherentertainment revenue at our Seneca Niagara Casino and Hotel of $0.6 million,due to an increased number of headline concerts at the new Seneca Events Centerduring 2006.

17

----

*DetailedOperating Expenses Information*

|                                          | ** ** | **Three Months Ended  March 31,**              | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)**          | ** ** |
| Operating expenses                       | ** ** | ** **                                                    |       |   |   |
| Gaming                                   |       | $         32,859 |       | $         27,925 |   |
| Food and  beverage                       |       | 11,565                                                        |       | 8,346 |   |
| Lodging                                  |       | 1,388                                                         |       | — |   |
| Retail,  entertainment and other         |       | 2,872                                                         |       | 2,311 |   |
| Advertising,  general and administrative |       | 32,423                                                        |       | 29,637 |   |
| Pre-opening  costs                       |       | 1,875                                                         |       | 119 |   |
| Depreciation and  amortization           |       | 8,291                                                         |       | 6,469 |   |
| Operating expenses                       |       | $         91,273 |       | $         74,807 |   |

 

Gaming expenses principally consist of costs incurred from operatingour table games and slot machines, of which the primary components are relatedpayroll and employee benefit costs, and the slot exclusivity fee due to NewYork State pursuant to the Compact.  Theslot exclusivity fee increased by $3.2 million from $16.0 million for thethree months ended March 31, 2005 to $19.2 million for the three monthsended March 31, 2006, due to higher slot revenues. In addition,gaming-related payroll and benefits costs increased $1.0 million in relation tothe prior year quarter primarily due to wage adjustments for certain table gamespersonnel, and promotional expenses increased by $0.4 million.

Food and beverage expenses are costs we incur for the operation of ourrestaurants, snack bars and beverage outlets. The primary components of theseexpenses are the cost of food and beverages and related payroll and employeebenefit expenses. For the quarter ended March 31, 2006, food and beverageproduct costs increased $1.3 million related to the revenue increases, and foodand beverage payroll and benefits increased $1.5 million in relation to thesame quarter in the prior year, due to the increased staffing related to theopening of three additional restaurants and two additional bars, in conjunctionwith the luxury hotel expansion at Seneca Niagara Casino and Hotel.

Lodging expenses represent our costs to operate SNFGC’s luxury hotel. Thecomponents of these expenses include payroll and other employee benefitexpenses, guest amenity supplies, laundry and other expenses.

Retail, entertainment and other expenses represent our costs to operateour retail shops and entertainment offerings. The components of these expensesinclude related payroll and employee benefit costs, the purchase of productsoffered for sale in our retail outlets, and contract costs for entertainers. Forthe three months ended March 31, 2006 in relation to the same period in2005, these costs increased approximately $0.6 million, or 17%, due mainly to anincrease in the number of headline entertainment events in the current quarterat the Seneca Niagara Casino and Hotel.

18

----

Advertising, general and administrative expenses are incurred tosupport our operations.  These expensesconsist primarily of related payroll and employee benefits costs, regulatory,advertising, rent, marketing, insurance, legal and energy costs. For the threemonths ended March 31, 2006 and 2005, such costs were $32.4 million and$29.6 million, respectively, a $2.8 million increase, or 9%. The increase wasmainly attributable to a $1.5 million increase in the head lease expense withthe Nation for both casinos in relation to the same period in 2005, a $0.6million increase in energy costs and a $0.1 million increase in regulatorycosts in the three months ended March 31, 2006 over the same period in2005.

*Non-Operating Expenses*

Thefollowing table summarizes information related to interest on our long-termdebt:

|                  | ** ** | **Three Months Ended  March 31,**     | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Interest expense |       | $                                                    | 7,214      | ** ** | $ | 10,849 |   |
|                  |            |                                                      |            |  |  |  |  |

 

Our interest expense for the three months ended March 31, 2006decreased $3.6 million over the three months ended March 31, 2005. Thisdecrease was primarily attributable to the payment in full and termination ofSNFGC’s Term Loan in May 2005,partially offset by additional interest expense relating to the $200 million insenior notes issued in May 2005. In addition, capitalized interest,relating to increased capital spending for our construction of the luxury hotelat Seneca Niagara Casino and the parking garage at Seneca Allegany Casino,during the quarters ended March 31, 2006 and 2005, totaled $2.7 millionand $1.2 million, respectively. 

19

----

**Operating Results — Six MonthsEnded March 31, 2006 Compared to the Six Months Ended March 31, 2005**

*OperatingResults*

|                                         | ** ** | **Six Months Ended  March 31,**       | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Net revenue                             |       | $                                                    | 238,172    |   | $ | 214,157 |   |
|                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating expenses:                     |       |                                                 | ** ** |   |   |
| Gaming                                  |       | 60,899                                               | ** ** | 56,552 |   |
| Food and beverage                       |       | 20,375                                               | ** ** | 17,037 |   |
| Lodging                                 |       | 1,492                                                | ** ** | — |   |
| Retail,  entertainment and other        |       | 5,774                                                | ** ** | 5,192 |   |
| Advertising, general and administrative |       | 63,848                                               | ** ** | 58,867 |   |
| Pre-opening costs                       |       | 4,932                                                | ** ** | 183 |   |
| Depreciation                            |       | 15,362                                               | ** ** | 12,836 |   |
|                                    |       |                                                 | ** ** | ** ** | ** ** |
| Operating income                        |       | $                                                    | 65,490     | ** ** | $ | 63,490 |   |

 

The most important factors and trends contributing to our operating performanceduring the six months ended March 31, 2006 and 2005 were similar to thosenoted above for the three month periods ended March 31, 2006 and 2005.

*Detailed Revenue Information*

|                                          | ** ** | **Six Months Ended  March 31,**       | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Gaming revenue:                          |       |                                                 |       |   |   |
| Slots                                    |       | $                                                    | 203,086    |   | $ | 171,727 |   |
| Table games                              |       | 33,345                                               | ** ** | 32,316 |   |
| Class II  and other                 |       | 222                                                  | ** ** | 3,743 |   |
|                                     |       |                                                 | ** ** |   |   |
| Gaming revenue                           |       | 236,653                                              | ** ** | 207,786 |   |
|                                     |       |                                                 | ** ** |   |   |
| Non-gaming  revenue:                     |       |                                                 | ** ** |   |   |
| Food and beverage                        |       | 22,345                                               | ** ** | 19,550 |   |
| Lodging                                  |       | 1,582                                                | ** ** | — |   |
| Retail, entertainment and other          |       | 9,513                                                | ** ** | 8,283 |   |
|                                     |       |                                                 | ** ** |   |   |
| Non-gaming  revenue                      |       | 33,440                                               | ** ** | 27,833 |   |
| Less promotional  allowances and credits |       | (31,921                                              | )          | (21,462 |   |
|                                     |       |                                                 | ** ** |   |   |
| Net revenue                              |       | $                                                    | 238,172    | ** ** | $ | 214,157 |   |

20

----

 

Our gaming revenue for the six months ended March 31,2006 increased relative to the comparable period last year due to (a) theopening of the additional gaming space at Seneca Niagara Casino and Hotel on December 15,2005, which added approximately 950 slot machines and 21 table games to ouroperations, (b) the addition of 119 slot machines at Seneca AlleganyCasino, (c) continued growth in our patron base, and (d) mild winterweather. The opening of our luxury hotel and the 2005 completion of our parkinggarage supported our increased gaming revenue for the three months ended March 31,2006. As of March 31, 2006, our gaming operations featured an aggregate of124 table games and 6,282 slot machines available to our patrons,representing a net increase of 2 table games and 1,155 slot machines from March 31,2005. During these periods, the number of patrons enrolled in our Seneca LinkPlayer’s Card program has steadily increased. As of March 31, 2006, we hadapproximately 1.1 million patrons enrolled, an increase of approximately 0.3million patrons, or 36% over the number of enrolled members at March 31,2005.

Our net gaming revenue, which excludes promotional credits of $11.8million and $5.4 million in the six-month periods ended March 31, 2006 and2005, respectively, increased $22.4 million, or 11%, for the six months ended March 31,2006 relative to the comparable six-month period ended March 31, 2005. Duringthe six months ended March 31, 2006, Seneca Niagara Casino and Hotel’s netgaming revenue increased $13.6 million, or 10%, principally attributable to thecasino expansion and supported by the new luxury hotel and its amenities. Suchamount includes a $1.4 million decrease in Class II revenues, whichoperations were transferred to the Nation on January 1, 2005. Seneca AlleganyCasino’s net gaming revenue for the six months ended March 31, 2006 was$69.9 million, an increase of $8.8 million or 14% from the six months ended March 31,2005. This increase was mainly due to a $10.5 million increase in net slotrevenue between the two periods, partially offset by a decrease of $1.9 millionin Class II revenues, which operations were also transferred to the Nationon January 1, 2005.

Our food and beverage revenue and retail revenue have increased indirect relation to our increase in gaming revenue. There is a directrelationship between our food and beverage revenue and retail revenue to ourgaming revenue because a significant portion of this revenue is generated fromplayers’ point redemptions. For the six months ended March 31, 2006 and2005, 60% and 55%, respectively, of our food and beverage revenue and 87% and87% of our retail revenue, respectively, represented players’ point redemptions.For the six months ended March 31, 2006, food and beverage revenueincreased $2.8 million, or 14% to $22.3 million. For the six months ended March 31,2006 Seneca Allegany Casino generated an additional $0.9 million in food andbeverage revenue compared to the prior period, primarily due to increasedredemption of players’ points during 2006. Seneca Niagara Casino and Hotel’sfood and beverage revenue for the six months ended March 31, 2006increased $1.9 million, or 13%, in relation to the comparable prior period,mainly due to the net addition of three restaurants and two full-service bars,in conjunction with the opening of our luxury hotel in December 2005.

Lodging revenue represents rentals of rooms in the luxury hotel inNiagara Falls, which partially opened in December 2005, and completelyopened on March 31, 2006. Since 

21

----

opening, the hotel has generated an occupancy percentage ofapproximately 70%, based upon the average number of rooms available during theperiod. Complimentary rooms accounted for approximately 80% of our occupiedrooms.

For the six months ended March 31, 2006, our retail, entertainmentand other revenue increased by $1.2 million in relation to the comparable2005 period. This increase was primarily attributable to a $0.6 millionincrease in retail revenues at Seneca Allegany Casino, along with higherentertainment revenue at our Seneca Niagara Casino and Hotel of $0.5 million,due to an increased number of headline concerts at the new Seneca Events Centerduring 2006.

*DetailedOperating Expenses Information*

|                                         | ** ** | **Six Months Ended  March 31,**       | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Operating expenses                      | ** ** | ** **                                           | ** ** |   |   |
| Gaming                                  |       | $                                                    | 60,899     | ** ** | $ | 56,552 |   |
| Food and beverage                       |       | 20,375                                               | ** ** | 17,037 |   |
| Lodging                                 |       | 1,492                                                | ** ** | — |   |
| Retail, entertainment and other         |       | 5,774                                                | ** ** | 5,192 |   |
| Advertising, general and administrative |       | 63,848                                               | ** ** | 58,867 |   |
| Pre-opening costs                       |       | 4,932                                                | ** ** | 183 |   |
| Depreciation and amortization           |       | 15,362                                               | ** ** | 12,836 |   |
| Operating  expenses                     |       | $                                                    | 172,682    | ** ** | $ | 150,667 |   |

 

Gaming expenses principally consist of costs incurred from operatingour table games and slot machines, of which the primary components are relatedpayroll and employee benefit costs, and the slot exclusivity fee due to NewYork State pursuant to the Compact. The slot exclusivity fee increased by $4.2million from $31.5 million for the six months ended March 31, 2005 to$35.7 million for the six months ended March 31, 2006. In addition,gaming-related payroll and benefits costs increased $0.6 million in relation tothe prior year six month period primarily due to wage adjustments for certaintable games personnel. This was partially offset by a decrease in certainpromotional expenses between the periods.

Food and beverage expenses are costs we incur for the operation of ourrestaurants, snack bars and beverage outlets. The primary components of theseexpenses are the cost of food and beverages and related payroll and employeebenefit expenses. For the six months ended March 31, 2006, food andbeverage product cost increased $1.3 million associated with our revenueincrease, and food and beverage payroll and benefits increased $1.6 million inrelation to the six months ended March 31, 2005, due to the increasedstaffing related to the opening of three additional restaurants and twoadditional bars, in conjunction with the luxury hotel expansion at SenecaNiagara Casino and Hotel.

22

----

Lodging expenses represent our costs to operate SNFGC’s luxury hotel. Thecomponents of these expenses include payroll and other employee benefitexpenses, guest amenity supplies, utilities and laundry and other expenses.

Retail, entertainment and other expenses represent our costs to operateour retail shops and entertainment offerings. The components of these expensesinclude related payroll and employee benefit costs, the purchase of productsoffered for sale in our retail outlets, and contract costs for entertainers. Forthe six months ended March 31, 2006 in relation to the same period in2005, these costs increased approximately $0.6 million, or 11%, due mainly toan increase in headline entertainment events in the current year at the SenecaNiagara Casino and Hotel.

Advertising, general and administrative expenses are incurred tosupport our operations.  These expensesconsist primarily of related payroll and employee benefits costs, regulatory,advertising, rent, marketing, insurance, legal and energy costs. For the sixmonths ended March 31, 2006 and 2005, such costs were $63.8 million and$58.9 million, respectively, a $4.9 million increase, or 8%. The increase wasmainly attributable to a $3.1 million increase in the head lease expense withthe Nation for both casinos in relation to the same period in 2005, a $0.9million increase in costs and a $0.3 million increase in regulatory costs inthe six months ended March 31, 2006 over the same period in 2005.

*Non-Operating Expenses*

Thefollowing table summarizes information related to interest on our long-termdebt:

|                  | ** ** | **Six Months Ended  March 31,**       | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Interest expense |       | $                                                    | 14,906     | ** ** | $ | 22,805 |   |
|                  |            |                                                      |            |  |  |  |  |

 

Our interest expense for the six months ended March 31, 2006decreased $7.9 million over the six months ended March 31, 2005. Thisdecrease was primarily attributable to the payment in full and termination ofSNFGC’s Term Loan in May 2005,partially offset by additional interest expense relating to the $200 millionadditional senior notes issued in May 2005. In addition, capitalizedinterest, related to increased capital spending for our construction of thehotel at Seneca Niagara Casino and the parking garage at Seneca Allegany Casinoduring the six months ended March 31, 2006 and 2005, totaled $4.7 millionand $1.7 million, respectively.

23

----

**Liquidity and Capital Resources**

*Cash Flows*

|                                               | ** ** | **Six Months Ended  March 31,**       | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| Net cash  provided by operations              |       | $                                                    | 77,942     | ** ** | $ | 18,149 |   |
|                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Cash flows relating to  investing activities: | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Capital expenditures                          |       | (119,635                                             | )          | (85,984 | ) |
| Payments for land acquisitions                |       | (15,946                                              | )          | (580 | ) |
| Payment to collateralize letter of credit     |       | (33,500                                              | )          | — |   |
| Sales (purchases) of investments              |       | 13,741                                               | ** ** | (53,859 | ) |
| Net cash used in investing activities         |       | (155,340                                             | )          | (140,423 | ) |
|                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Cash flows relating to  financing activities: | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payments to sinking fund, net                 | ** ** | **—**                                           | ** ** | (17,631 | ) |
| Repayment of long-term debt                   | ** ** | **—**                                           | ** ** | (278 | ) |
| Payment of deferred financing costs           |       | (542                                                 | )          | (519 | ) |
| Dividends paid to the Nation                  |       | (9,225                                               | )          | (1,092 | ) |
| Net cash used in financing activities         |       | (9,767                                               | )          | (19,520 | ) |
|                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net decrease in cash  and cash equivalents    |       | $                                                    | (87,165    | ) | $ | (141,794 | ) |

 

*Cash Flows—Operating Activities.*   The increase in cash flows from operations forthe six months ended March 31, 2006 compared to the same period in 2005resulted principally from a $10.7 million increase in net income over the prioryear, along with the effect of a change in payment frequency regarding stateexclusivity fees. In January 2005, the Company paid $57.1 million forexclusivity fees to the Nation related to the entire 2004 calendar year. Subsequentto that payment, the Company began paying exclusivity fees to the Nation on amonthly basis for the prior month’s fees due.

*Cash Flows—Investing Activities.*   Our capital expenditures of$119.6 million during the six months ended March 31, 2006 were mainlycomprised of $104.3 million of costs associated with the construction andequipping of the luxury hotel at the Seneca Niagara Casino and $5.9 millionrelated to the construction of the Seneca Allegany Casino garage and hotel. Theremaining capital expenditures were principally for the acquisition ofequipment for the existing casino operations, and a cogeneration plant and anightclub at Seneca Niagara Casino and Hotel. Sales and purchases ofinvestments represent transactions in short-term investments of excess cash ininstruments having a maturity of more than 90 days.

We intend to acquire the remaining approximate 24acres of the approximate 50 acres in the City of Niagara Falls, New York,designated by New York State under the Compact for ownership by the Nation. Underthe Compact, the Nation is required to fund the acquisition of this property,including all related costs and expenses. As initial security 

24

----

for the Nation’s obligations to pay site acquisitioncosts and in furtherance of the ongoing condemnation proceeding, the Companywas required to deliver, and did deliver in October 2005, to the Empire StateDevelopment Corporation, or ESDC, a letter of credit in the amount of $33.5million representing 150% of the then estimate of the total remaining siteacquisition costs not yet paid by the Company. If the estimate of such siteacquisition costs increases or if certain other events occur, the Company mayhave to provide an additional letter of credit or replace the existing one withone for a larger monetary amount or, if acceptable to the ESDC, provide asupplemental cash escrow amount. This outstanding letter of credit is 100% collateralizedby a cash deposit in an interest-bearing restricted account with a bank. TheESDC has recently advised us that the estimate of the total remaining siteacquisition costs is expected to increase by approximately $10.2 million due tocertain anticipated site appraised value increases.  Based on this expected site acquisition costsincrease, the letter of credit amount would increase to $48.8 million.  We are currently considering paying all, or asubstantial portion, of the expected site acquisition costs increase in cash tothe ESDC, as opposed to providing an additional or replacement letter of creditin order to comply with ESDC requirements.

*Cash Flows—Financing Activities.*   During the quarter ended December 31,2004, the Company paid $12.0 million into a sinking fund related to the TermLoan. In May 2005, the Term Loan was terminated and the sinking fundbalance (including accumulated earnings) was transferred to cash and short-terminvestments.

*Principal Debt Arrangements.*   As of March 31, 2006, our long-term debtconsists of $300.0 million in 2004 senior notes and $200.0 million in 2005senior notes. The notes carry a fixed annual interest rate of 71⁄4% andsemi-annual interest payments are due on May 1 and November 1.

On May 23, 2005, we issued an additional$200.0 million in 71⁄4% senior notes due 2012, Series B, or the 2005 seniornotes. The 2005 senior notes are treated as a single class with the 2004 seniornotes and are identical to the 2004 senior notes, except for certain taxattributes and prior to November 1, 2005 the amount of interest accruedthereon. Gross proceeds on the 2005 senior notes were approximately $193.0million. The proceeds of the 2005 senior notes were, or will be, used to (a) payin full and terminate on May 23, 2005, the senior secured term loan, orthe Term Loan, made by Freemantle Limited, or Freemantle, to SNFGC in November 2002,for a negotiated amount of approximately $126.7 million, representing $80.0million in outstanding principal and approximately $46.7 million for intereston such principal, at a prescribed interest rate, that would have otherwisebeen payable if the Term Loan had not been paid on May 23, 2005, but wasinstead paid 81⁄2 months prior to its November 22, 2007 stated maturity(resulting in a reduction of future interest payments that would have otherwisebeen payable under the Term Loan if it had not been paid in full, byapproximately $18.0 million), (b) to fund certain costs associated withthe expansion of our operations, (c) to pay $5.2 million in fees andexpenses associated with the offering of the 2005 senior notes, including therelated exchange offer, and (d) for general corporate purposes. Intereston the 2004 and 2005 senior notes is payable semi-annually on November 1and May 1. The 2004 and 2005 senior notes are unsecured and rank equally. Asof March 31, 2006, aggregate accrued interest on the 2004 and 2005 seniornotes was $15.1 million.

We expect cash generated from our operations, available cash and cashequivalents and short-term investments as of March 31, 2006 to besufficient to fund our expansion plans described below, service our debt, andmeet our working capital requirements for the near 

25

----

future. However, our ability to fund our operations, make plannedcapital expenditures and service our debt depends on our future operatingperformance and cash flow, which are in turn subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond our control. Additionally, unlike traditional corporations, we areprohibited by law from generating cash through an offering of equity securities.In addition, our ability to incur additional indebtedness is limited under theterms of the indenture governing the 2004 and 2005 senior notes.

We are highly leveraged and have significant interest paymentrequirements on our 2004 and 2005 senior notes. As such, limitations on ourcapital resources could force us to delay or abandon capital projects as wellas the construction and development of new properties.

*Expansion Plans*

During the next 18 months, we plan to make substantial capitalimprovements to our gaming facilities. In December 2005, at Seneca NiagaraCasino and Hotel we had a partial opening of our new 604-room luxury hotel,including 35,000 square feet of additional gaming space with approximately 950slot machines and several new restaurants and retail stores. We completed andopened the remaining hotel rooms and amenities on March 31, 2006,including a full-service spa, salon, fitness center and pool. We expect thetotal cost to construct and equip the luxury hotel to be approximately $235.0to $240.0 million.

We have constructed a 1,850 space-parking garage and are constructing a220-room hotel and casino at our Seneca Allegany Casino. We estimate the totalcost to complete this project to be between $187.0 million and$198.0 million. The garage opened on July 1, 2005. We are targetingopening the entire facility in late December 2006.

We commenced construction of our Seneca Buffalo Creek Casino on December 8,2005. The initial phase of constructing and equipping this facility is expectedto cost approximately $125.0 million, and is planned to initially feature 1,900to 2,200 slot machines, 30 to 50 table games, a fine dining restaurant, a 24-hourcasual dining restaurant, a bar, a multi-purpose room for entertainment andother events, a retail store and a 2,500-space parking garage. Although thereare existing legal challenges, we plan to open the Seneca Buffalo Creek Casinoby December 9, 2007. See “Executive Summary — Seneca Buffalo Creek Casino”for a discussion of related considerations.

**Item 3.**                                                           **Quantitative and Qualitative Disclosures About Market Risk**

Reference is made to our 2005 Form 10-K for a complete discussionof the Company’s market risk. This market risk information has not materiallychanged in the interim period.

26

----

**Regulation**

Our operations are regulated by Nation laws, the Compact and federalstatutes, most notably the Indian Gaming Regulatory Act, or IGRA. Several billshave been proposed during the current and recent sessions of U.S. Congress thatcould affect Indian gaming. Notably, though its proposed legislation has yet tobe presented to Congress, the Policies and Procedures Subproject of the Bureauof Indian Affairs has proposed sweeping changes to the federal laws concerningIndians. Certain of such bills, if enacted, could impair the ability of theNation and SGC to expand its gaming operations and adversely impact the futuregrowth of the Nation’s revenue base. In addition, from time to time, variousgovernment officials have proposed taxing Indian casino gaming or otherwiselimiting or restricting the conduct of gaming operations by Indian tribes. Noassurance can be given that such legislation, if and when enacted by Congress,would not have a material adverse effect on the operations of SGC. Senator JohnMcCain, Chairman of the Senate Indian Affairs Committee, has held hearingsregarding possible amendments to IGRA. As it relates particularly tooff-reservation gaming, there have been several Congressional hearings held byboth the Seneca Indian Affairs Committee and the House Resources Committee. On October 31,2005, House Resources Committee Chairman Richard Pombo introduced H.R. 4893, abill to amend Section 20 of the Indian Gaming Regulatory Act. H.R. 4893 isdesigned to restrict off-reservation gaming activities by tribes. The HouseResources Committee has held a series of hearings in connection with H.R. 4893.On November 18, 2005, Senator McCain introduced S. 2078, the Indian GamingRegulatory Act Amendments of 2005. S. 2078 makes a number of amendments toIGRA, including: (1) expanding the authority of the National Indian GamingCommission (“NIGC”) over “gaming-related contracts”, (2) authorizing theNIGC to regulate Class III gaming, (3) limiting the lands eligiblefor gaming, and (4) making a number of technical amendments to IGRA. TheSenate Committee on Indian Affairs has held a series of hearings in connectionwith S. 2078. S. 2078 was reported out of the Senate Indian Affairs Committeeon March 29, 2006. If Congress were to enact comprehensive amendments toIGRA, such legislation could have a material adverse effect on the operationsof SGC. In addition, under federal law, gaming on the Nation’s lands may be dependentupon the permissibility under New York law of certain forms of gaming orsimilar activities. If New York State were to make various forms of gamingillegal or against public policy (or the courts were to rule similarly),or otherwise to take a legal position adverse to the Compact or any of itsprovisions, such actions could have a material adverse effect on the ability ofour casinos to conduct their gaming operations as currently conducted. Moreover,a 1996 U.S. Supreme Court decision may permit a state to avoid or refuse tonegotiate amendments to existing compacts such as the Compact.

**New AccountingPronouncements**

There are no accounting standards that have not yet been adopted whichare expected to have a material impact on our financial reporting.

27

----

**Item 4.**                                                           Controlsand Procedures

**Evaluation of Disclosure Controls and Procedures**

We maintain disclosure controls and procedures (as that term is definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, or the Exchange Act) that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our President and Chief Executive Officer and Senior VicePresident of Finance and Administration, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, have inherent limitationsdue to cost issues, the possibility of human error, judgments and assumptionsregarding the likelihood of future events, and the circumvention and overridingof the controls and procedures.  Accordingly, even effective disclosure ofcontrols and procedures can provide only reasonable assurance of achieving thedesired control objectives.

The Company’s management, under the supervision and with participationof our President and Chief Executive Officer and Senior Vice President ofFinance and Administration (as our principal executive officer and principalfinancial officer, respectively), has evaluated the effectiveness of the designand operation of our disclosure controls and procedures. Based on thatevaluation, our President and Chief Executive Officer and Senior Vice Presidentof Finance and Administration have concluded that the design and operation ofour disclosure controls and procedures as of March 31, 2006 providedreasonable assurance that the disclosure controls and procedures are effectiveto accomplish their objectives.

**Changes in InternalControl over Financial Reporting**

There has not been any change in our internal control over financialreporting identified in connection with the evaluation required by Exchange ActRules 13a-15 or 15d-15 or otherwise that occurred during the quarter endedMarch 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

28

----

**Part II.    OTHER INFORMATION**

**Item 1.**                                                           LegalProceedings

A.                                   Referenceis made to our Form 10-Q for the quarter ended December 31, 2005 andAmendment No. 4 to our Registration Statement on Form S-4 filed withthe SEC on February 3, 2006 for a full description of the legalproceedings pertaining to Klewin and BankNorth.

Consistent with information previously reported, on December 23,2005, SNFGC and STGC filed a complaint against BankNorth seeking to recover themonies taken by BankNorth that were originally directed to the subcontractorsand the architect, along with an award of attorneys’ fees, under Section 77of the New York Lien Law and under the theory of common law conversion. SNFGCand STGC have commenced the action as assignees of the claims of thesubcontractors and the architect. The action was filed in the Supreme Court forthe County of Niagara, State of New York bearing Index No. 124716. As amaterial development in the quarter ended March 31, 2006, on February 27,2006, BankNorth filed a motion to dismiss the action, claiming that the trustfund provisions of the New York Lien Law do not apply and the Connecticutaction was filed first before the New York action. SNFGC and STGC have opposedthe motion and the motion is scheduled to be heard before Supreme Court JusticeRichard Kloch on May 11, 2006 in Niagara Falls, New York.

B.                                     Twonew legal proceedings arising in the quarter ended March 31, 2006 havebeen previously reported in Amendment No. 4 to our Registration Statementon Form S-4 filed with the SEC on February 3, 2006. They are repeatedbelow and the first legal proceeding includes two subsequent developments.

In January 2006, an action was filed in the United States DistrictCourt, Western District of New York by various plaintiffs against the UnitedStates Department of the Interior, the National Indian Gaming Commission andthree individuals in their official capacities as Secretary of the Interior,Acting Assistant Secretary of the Interior for Indian Affairs and Chairman ofthe National Indian Gaming Commission. The action seeks declaratory andinjunctive relief under the Administrative Procedure Act, the DeclaratoryJudgements Act, the National Historic Preservation Act (NHPA), the NationalEnvironmental Policy Act (NEPA) and the Indian Regulatory Gaming Act (IGRA) andis principally directed at the decisions and actions of the defendants thatpermit the construction and operation of our Seneca Buffalo Creek Casino. Theplaintiffs claim that the defendants have failed to comply with NEPA, NHPA andIGRA and have requested that the Court take numerous actions includingdeclaring that the lands acquired by the Nation pursuant to SNLCSA are notgaming eligible Indian lands within the meaning of IGRA and declaring that theCompact violates IGRA. If the plaintiffs are successful, the Nation would beunable to conduct any gaming upon lands acquired pursuant to SNLCSA. On April 26,the Defendants filed a motion to dismiss. The County of Erie and Joel Giambra,individually and as County Executive, have moved to intervene in this matter.

29

----

On or about February 1, 2006, an actionwas filed in the New York Supreme Court, County of Erie by variousplaintiffs against George E. Pataki, in his official capacity as Governorof the State of New York; State Gaming Officials of the New York State WageringBoard; City of Buffalo; Common Council of the City of Buffalo; Anthony Masielloin his previous capacity as Mayor of Buffalo; Byron Brown in his capacity asMayor of Buffalo; City of Buffalo Department of Public Works; Buffalo SewerAuthority; and Niagara Frontier Transportation Authority. The action seeksdirective and injunctive relief under the State Environmental Quality ReviewAct (SEQRA); the First Parks, Recreation, Historic Preservation Law (PRHPL);First City Environmental Review Ordinance (CERO); and Freedom of InformationLaw (FOIL) and is principally directed at the decisions and actions of thedefendants in connection with our Seneca Buffalo Creek Casino. The plaintiffsclaim that the defendants have failed to comply with SEQRA, PRHPL, CERO, andFOIL and have requested that the Court take numerous actions includingdirecting compliance with SEQRA, PRHPL, CERO and FOIL and restraining furtheraction relating to the development of our Seneca Buffalo Creek Casino. If theplaintiffs are successful, the Nation may be delayed in the completion of theSeneca Buffalo Creek Casino at this site or may be unable to complete theSeneca Buffalo Creek Casino at this site. Certain of these plaintiffs are alsoplaintiffs in the federal lawsuit filed in January 2006 and referencedabove.

C.                                     On or about April 6, 2006, an action wasfiled in the United States District Court, Western District of New York (case #06-CV-226E) by Daniel T. Warren, a pro se plaintiff, against the United Statesof America, the United States Department of the Interior, the National IndianGaming Commission, and five individuals in their official capacities as ActingSecretary of the Interior, Acting Assistant Secretary of the Interior forIndian Affairs and Chairman of the National Indian Gaming Commission, as wellas Governor George E. Pataki, as Governor of the State of New York, and CherylRitchko-Buley, as Chairwoman of the New York State Racing and Wagering Board. Theaction seeks declaratory and injunctive relief as to numerous matters includingdeclaring that IGRA is unconstitutional, that the Compact violates IGRA, thatthe New York Constitution is not preempted by IGRA, that New York does not havethe authority under state law to enter into a tribal state compact under IGRA,that certain actions of the defendants were not in accordance with law, andthat certain lands purchased by the Nation were not subject to being taken intotrust or restricted fee status under the SNLCSA or were not pursuant tosettlement of a land claim within the meaning of IGRA; and enjoining thedefendants from taking actions which would further casino gambling in the stateof New York under IGRA or on any lands acquired by the Nation pursuant to theSNLCSA. If the plaintiffs are successful, the Nation could be unable to conductany gaming upon lands acquired pursuant to SNLCSA.

**Item 1A.**                                                  RiskFactors

There are no material changes from the risk factors previouslydisclosed in our Annual Report on Form 10-K for the fiscal year ended September 30,2005 except as disclosed in our Amendment No. 4 to Form S-4Registration Statement filed with the Securities and Exchange Commission on February 3,2006 and as disclosed in this Form 10-Q, including without limitation, therisk factors relating to our Seneca Buffalo Creek Casino set forth in “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations” — “Executive Summary — Seneca Buffalo Creek Casino”.

**Item 2.**                                                           UnregisteredSales of Equity Securities and Use of Proceeds

Not applicable.

30

----

**Item 3.**                                                           DefaultsUpon Senior Securities

Not applicable.

**Item 4.**                                                           Submissionof Matters to a Vote of Security Holders

Not applicable.

**Item 5.**                                                           OtherInformation

As previously disclosed in our Current Report on Form 8-Kfiled with the SEC on April 20, 2006, John Pasqualoni resigned as ourPresident and Chief Executive Officer effective July 31, 2006.

As previously disclosed in our Current Report on Form 8-Kfiled with the SEC on May 4, 2006, Annette Mohawk-Smith resigned as ourChief Financial Officer, effective April 28,  2006.

Effective as of May 9, 2006, SEGC entered into aconstruction management agreement with Seneca Construction ManagementCorporation (“SCMC’’), a wholly owned corporation of the Nation, to managecertain demolition work related to construction of the Seneca Buffalo CreekCasino in the City of Buffalo, New York. The agreement provides that SEGC willpay SCMC an amount equal to the direct out-of-pocket costs incurred by SCMC inperforming the work undertaken in connection with the agreement plus 4% of suchcosts. The agreement also provides that the estimated contract price for thework to be completed under the agreement is $2,530,345.47 and that the contractprice will not exceed this estimated contract price unless the price increaseis due to authorized changes. A copy of the construction management agreementis attached to this Form 10-Q as Exhibit 10.l.

31

----

**Item 6.****                                                          ****Exhibits**

(a)             Exhibits (listedaccording to the number assigned in the table in Item 601 of Regulation S-K):
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                            | **Description** | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|
| 10.1             |       | Construction Management  Agreement, dated and effective as of May 9, 2006, between Seneca Erie  Gaming Corporation, as Owner, and Seneca Construction Management Corporation,  as Construction Manager (filed herewith).                         |
|             |       |                                                                                                                                                                                                                                                  |
| 31.1             |       | Certification of John  Pasqualoni, Principal Executive Officer, pursuant to Rule 13a-14 and  15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                     |
|             |       |                                                                                                                                                                                                                                                  |
| 31.2             |       | Certification of Joseph  A. D’Amato, Principal Financial Officer, pursuant to Rule 13a-14 and  15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                              |
|             |       |                                                                                                                                                                                                                                                  |
| 32.1             |       | Certification of John Pasqualoni, Principal  Executive Officer and Joseph A. D’Amato, Principal Financial Officer,  pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of  the Sarbanes-Oxley Act of 2002 (filed herewith). |

 

32

----

**SIGNATURES**

**SENECA GAMING CORPORATION**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized. 

Dated May 10,2006

 
|                                                   |   |
|---------------------------------------------------|--------|
| /s/ John Pasqualoni                               |   |
| President and Chief Executive Officer             |   |
|                                              |   |
|                                              |   |
|                                              |   |
|                                              |   |
| /s/ Joseph A. D’Amato                        |   |
| Senior Vice President, Finance and Administration |   |
| (Principal Financial and Accounting Officer)      |   |

 

33

----