**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT 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.) |

 

**310Fourth Street**

**NiagaraFalls, New York (Seneca Nation Territory) 14303**

**(716) 299-1100**

(Address,including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant has (1) has filed allreports required to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o   No x

AtFebruary 12, 2007, the registrant had no outstanding shares of common stock.The registrant is wholly owned by the Seneca Nation of Indians.

 

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**TABLE OF CONTENTS**
|                                                | ** **                                                                                                | ** ** |
|------------------------------------------------|-----------------------------------------------------------------------------------------------------------|------------|
| **PART I.   FINANCIAL  INFORMATION** |                                                                                                      |       |
| Item 1.                                        | Financial Statements                                                                                      |       |   |
|                                           | Consolidated Balance  Sheets as of December 31, 2006 (Unaudited) and September 30, 2006                   |       |   |
|                                           | Consolidated Statements  of Operations for the three months ended December 31, 2006 and 2005  (Unaudited) |       |   |
|                                           | Consolidated  Statements of Cash Flows for the three months ended December 31, 2006 and  2005 (Unaudited) |       |   |
|                                           | Notes to Condensed  Consolidated Financial Statements                                                     |       |   |
| Item 2.                                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |       |   |
| Item 3.                                        | Quantitative  and Qualitative Disclosures About Market Risk                                               |       |   |
| Item 4.                                        | Controls and Procedures                                                                                   |       |   |
|                                           |                                                                                                      |       |   |
| **PART II.   OTHER INFORMATION**     |                                                                                                      |       |
| Item  1.                                       | Legal  Proceedings                                                                                        |       |   |
| Item  1A.                                 | Risk  Factors                                                                                             |       |   |
| Item 2.                                        | Unregistered Sales  of Equity Securities and Use of Proceeds                                              |       |   |
| Item 3.                                        | Defaults Upon  Senior Securities                                                                          |       |   |
| Item 4.                                        | Submission of Matters  to a Vote of Security Holders                                                      |       |   |
| Item  5.                                       | Other  Information                                                                                        |       |   |
| Item  6.                                       | Exhibits                                                                                                  |       |   |
|                                           | Signatures                                                                                                |       |   |

 

ii

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**PART I. FINANCIAL INFORMATION**

**Item I.                     Financial Statements**

**SENECAGAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                         | ** ** | **December 31,  2006**          | ** ** | **September 30,  2006** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                         |       |                                 |       |                         |       |
| Current assets:                    |       |                                 |       |                         |       |
| Cash and cash  equivalents         |       | $                                    | 53,255     |                         | $          | 78,195 |   |
| Short-term  investments            |       | 39,600                               |       | 62,300                       |       |
| Receivables from  affiliates       |       | 223                                  |       | 410                          |       |
| Other  receivables, net            |       | 1,992                                |       | 2,139                        |       |
| Inventories                        |       | 2,760                                |       | 2,734                        |       |
| Other current  assets              |       | 7,194                                |       | 6,268                        |       |
| Total current  assets              |       | 105,024                              |       | 152,046                      |       |
|                               |       |                                 |       |                         |       |
| Property and equipment,  net       |       | 647,304                              |       | 615,207                      |       |
| Restricted cash                    |       | 26,040                               |       | 25,800                       |       |
| Other long-term assets             |       | 48,277                               |       | 47,323                       |       |
|                               |       |                                 |       |                         |       |
| Total assets                       |       | $                                    | 826,645    |                         | $          | 840,376 |   |
|                               |       |                                 |       |                         |       |
| **Liabilities and Capital**        | ** ** | ** **                           | ** ** | ** **                   | ** ** |
| Current liabilities:               |       |                                 |       |                         |       |
| Trade payables                     |       | 7,192                                |       | 4,939                        |       |
| Construction  payables — SCMC |       | 27,263                               |       | 52,489                       |       |
| Distributions  payable to Nation   |       | 36,000                               |       | 24,000                       |       |
| Exclusivity fees  payable          |       | 6,996                                |       | 7,263                        |       |
| Accrued interest                   |       | 6,042                                |       | 15,104                       |       |
| Customer point liability           |       | 11,334                               |       | 11,632                       |       |
| Accrued regulatory expenses        |       | 16,722                               |       | 14,700                       |       |
| Other current  liabilities         |       | 19,985                               |       | 26,271                       |       |
| Total current  liabilities         |       | 131,534                              |       | 156,398                      |       |
|                               |       |                                 |       |                         |       |
| Long-term debt                     |       | 494,597                              |       | 494,347                      |       |
|                               |       |                                 |       |                         |       |
| Total  liabilities                 |       | 626,131                              |       | 650,745                      |       |
|                               |       |                                 |       |                         |       |
| Capital:                           |       |                                 |       |                         |       |
| Retained earnings                  |       | 200,514                              |       | 189,631                      |       |
|                               |       |                                 |       |                         |       |
| Total liabilities and  capital     |       | $                                    | 826,645    |                         | $          | 840,376 |   |

 

See accompanying notes toconsolidated financial statements.

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**SENECAGAMING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **December 31,**            | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Revenues**                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Gaming                                   |       | $                                | 141,273    |   | $ | 110,039 |   |
| Food and  beverage                       |       | 13,269                           |       | 9,786 |   |
| Lodging                                  |       | 4,658                            |       | — |   |
| Retail,  entertainment and other         |       | 5,245                            |       | 4,722 |   |
| Less:  Promotional allowances            |       | (24,266                          | )          | (15,631 | ) |
|                                     |       |                             |       |   |   |
| Net revenues                             |       | 140,179                          |       | 108,916 |   |
|                                     |       |                             |       |   |   |
| **Expenses**                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Gaming                                   |       | 32,980                           |       | 28,040 |   |
| Food and  beverage                       |       | 11,297                           |       | 8,810 |   |
| Lodging                                  |       | 2,367                            |       | — |   |
| Retail,  entertainment and other         |       | 3,570                            |       | 3,012 |   |
| Advertising,  general and administrative |       | 35,258                           |       | 31,420 |   |
| Pre-opening  costs                       |       | 4,679                            |       | 3,056 |   |
| Depreciation and  amortization           |       | 11,076                           |       | 7,071 |   |
|                                     |       |                             |       |   |   |
| Total operating  expenses                |       | 101,227                          |       | 81,409 |   |
|                                     |       |                             |       |   |   |
| Operating income                         |       | 38,952                           |       | 27,507 |   |
| Other  non-operating expenses            |       | (286                             | )          |   |   |
| Interest income                          |       | 1,403                            |       | 1,528 |   |
| Interest expense                         |       | (8,563                           | )          | (7,749 | ) |
|                                     |       |                             |       |   |   |
| Net income                               |       | $                                | 31,506     |   | $ | 21,286 |   |

 

See accompanyingnotes to consolidated financial statements.

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**                | ** ** |
| ** **                                                                         | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash  flows relating to operating activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                    | 31,506     |   | $ | 21,286 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 11,076                               |       | 7,071 |   |
| Amortization of deferred financing costs and debt  discount                        |       | 808                                  |       | 787 |   |
| Provision for bad debts                                                            |       | 77                                   |       | 107 |   |
| Other, net                                                                         |       | —                               |       | 8 |   |
|                                                                               |       |                                 |       |   |   |
| Change in  operating assets and liabilities:                                       |       |                                 |       |   |   |
| Current assets                                                                     |       | (695                                 | )          | 189 |   |
| Long-term assets                                                                   |       | (10                                  | )          | — |   |
| Current liabilities                                                                |       | (11,638                              | )          | (9,193 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash  provided by operating activities                                         |       | 31,124                               |       | 20,255 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash  flows relating to investing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchases of  property and equipment                                               |       | (68,399                              | )          | (58,700 | ) |
| Land acquisition  costs                                                            |       | (2,125                               | )          | (12,663 | ) |
| Sales  (purchases) of investments, net                                             |       | 22,700                               |       | (1,909 | ) |
| Deposit to  collateralize letter of credit                                         |       | (240                                 | )          | (34,055 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in  investing activities                                             |       | (48,064                              | )          | (107,327 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash  flows relating to financing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Payment of  deferred financing costs                                               |       | —                               |       | (345 | ) |
| Distributions  paid to the Nation                                                  |       | (8,000                               | )          | (4,585 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in  financing activities                                             |       | (8,000                               | )          | (4,930 | ) |
|                                                                               |       |                                 |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (24,940                              | )          | (92,002 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash and cash  equivalents balances:                                               |       |                                 |       |   |   |
| Beginning of period                                                                |       | 78,195                               |       | 142,467 |   |
| End of period                                                                      |       | $                                    | 53,255     |   | $ | 50,465 |   |
|                                                                               |       |                                 |       |   |   |
| Supplemental  disclosures of cash flow information                                 |       |                                 |       |   |   |
| Non-cash  investing activities:                                                    |       |                                 |       |   |   |
| Distribution of  acquired real property to the Nation                              |       | $                                    | 623        |   | $ | 4,685 |   |

 

See accompanying notes toconsolidated financial statements.

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**SENECAGAMING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.**            Organization and Basis of Presentation

The consolidated financial statements include theaccounts of Seneca Gaming Corporation, or SGC, and its wholly ownedsubsidiaries, or collectively, the Company. In consolidation, all intercompany balances and transactions have beeneliminated.  The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and notes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of the Company’s management,all adjustments, consisting of normal recurring accruals, considered necessaryfor a fair presentation have been included. Operating results for the three months ended December 31, 2006 are notnecessarily indicative of the results that may be expected for the year endedSeptember 30, 2007.  For furtherinformation, reference is made to the consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 2006 (“2006 Form 10-K”), as well as our otherfilings with the Securities Exchange Commission (the “SEC”) pursuant to theSecurities Exchange Act of 1934, as amended, and the Securities Act of 1933, asamended.

SGC, which was formed on August 1, 2002, iswholly owned by the Seneca Nation of Indians, or the Nation, a federallyrecognized Indian nation.  SGC wasorganized by the Nation to operate and manage its Class III gamingactivities pursuant to the Indian Gaming Regulatory Act of 1988, or IGRA.  Under IGRA, federally recognized Indiantribes are permitted to conduct full-scale casino gaming operations on triballand, subject to, among other things, the negotiation of a compact with theaffected state.  Pursuant to IGRA, theNation entered into the Nation-State Gaming Compact with the State of New Yorkin August 2002, or the Compact, which has been approved by the Federal Bureauof Indian Affairs, Department of the Interior. The Compact expires in December 2016 and may be renewed by the Nationand the State of New York for an additional seven year period.  The Compact provides the Nation the exclusiveright, subject to certain limited exceptions, to conduct Class III gamingactivities at three sites in the western region of the State of New York.

The Nation’s Council, or the Council, acts as the Nation’slegislative authority, and acts on the Nation’s behalf with respect toSGC.  The Council also established theSeneca Gaming Authority, or SGA, to regulate the gaming activities of SGC underthe Compact.

The Council, at the request of the SGC Board of Directors,chartered three subsidiary corporations of SGC to operate the three sitesauthorized by the Compact.  In addition,the SGC Board of Directors hired the executive management of SGC, including thePresident and Chief Executive Officer, to oversee, develop, and manage thethree sites. The subsidiary corporations are as follows:

·              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’s casino, or SenecaNiagara Casino, commenced December 31, 2002.  On December 30, 2005, SNFGC officially openedthe first 10 of 26 floors of rooms of its luxury hotel, which includes 35,000square feet of additional gaming space, three new restaurants, three new retailstores and a 25,200 square-foot multi-purpose room and an additional8,000 square feet of conference and banquet space.  On March 31, 2006, the remaining 16 floors,including a penthouse floor featuring luxurious one and two bedroom suites withbutler service, were officially opened, along with a full-service spa, salon,fitness center and pool.**** The luxury hotel is adjacent and

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connected to the Seneca Niagara Casino.  The entire complex, including the luxuryhotel and the Seneca Niagara Casino, is referred to as the Seneca NiagaraCasino and Hotel.

STGC was formed on September 20, 2003 to operatethe Nation’s gaming activities in Salamanca, New York on its existingterritorial land. Operations at STGC’s casino, or Seneca Allegany Casino,commenced May 1, 2004.  Constructionis progressing on a 212-room resort hotel including approximately 70,000 squarefeet of gaming space, three additional restaurants, and a spa and fitnesscenter.  The permanent gaming floorofficially opened on December 28, 2006, with the hotel and related amenitiesscheduled to open by March 31, 2007.

SEGC was formed on August 9, 2003 to operate theNation’s gaming activities in Erie County, New York.  On October 3, 2005, the Nation acquiredapproximately nine acres of land in the inner-harbor district of downtownBuffalo.  SEGC commenced construction ofits Seneca Buffalo Creek Casino on those nine acres on December 8,2005.  The exclusive right, under theCompact, to establish and operate a third Class III gaming facility inErie County may terminate if the Nation or SEGC fails to commenceClass III gaming operations in Erie County by December 9, 2007.  

**2.**                                      Long-Term Debt

Long-term debt, as described below, consists of the2004 and 2005 71⁄4% senior notes.

**71⁄4% Senior Notes**

On May 5, 2004, SGC issued $300.0 million in71⁄4% senior notes due 2012, or the 2004 senior notes.  The 2004 senior notes are guaranteed bySNFGC, STGC and SEGC.  The $288.7 millionnet proceeds from the 2004 senior notes were, or will be, used principally tofund in whole or in part (a) the repayment in May 2004 of vendor equipmentfinancing, (b) SNFGC’s construction and equipping of the luxury hotel, (c) theacquisition of the remaining acreage in the 50-acre footprint in Niagara Falls,as provided for in the Compact, (d) the payment of $22.0 million in August 2004to satisfy the obligation to the Empire State Development Corporation inconnection with the transfer of certain property to the Nation for use as theSeneca Niagara Casino, and (e) a $25.0 million distribution to the Nation, paidin 2004.

On May 23, 2005, SGC issued an additional $200.0million in 71⁄4% senior notes due 2012, Series B, or the 2005 senior notes.  The 2005 senior notes are treated as a singleclass with the 2004 senior notes and are identical to the 2004 senior notes,except for certain tax attributes and prior to November 1, 2005 the amount ofinterest accrued thereon.  Gross proceedsfrom the 2005 senior notes were approximately $193.0 million.  The gross proceeds from the 2005 seniornotes, were, or will be, used to (a) pay in full and terminate on May 23, 2005,the senior secured term loan, or the Term Loan, made by Freemantle Limited, orFreemantle, to SNFGC in November 2002, for a negotiated amount of approximately$126.7 million, representing $80.0 million in outstanding principal andapproximately $46.7 million for interest on such principal, at a prescribedinterest rate, that would have otherwise been payable if the Term Loan had notbeen paid on May 23, 2005, but was instead paid 181⁄2 months prior to itsNovember 22, 2007 stated maturity, (b) to fund certain costs associated withthe expansion of the Company’s 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.

Interest on the 2004 and 2005 senior notes is payablesemi-annually on May 1 and November 1.  The2004 and 2005 senior notes are unsecured and rank equally.  As of December 31, 2006, aggregate accruedinterest on the 2004 and 2005 senior notes was $6.0 million.

The Indenture governing the 2004 and 2005 senior notescontains certain financial and non-financial covenants.  The financial covenants include limitationson restricted payments and the incurrence of indebtedness, while thenon-financial covenants include reporting obligations and compliance with laws andregulations.  As of December 31, 2006,SGC was in compliance with all covenants in the Indenture.

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**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) andSTGC (effective as of May 1, 2004), for use of the land and/or buildings whichare currently used in operating the Seneca Niagara Casino and Hotel and theSeneca Allegany Casino, respectively. The STGC Head Lease is currently an oral agreement.  STGC is in the process of formalizing awritten agreement with the Nation.  Theseagreements expire at the end of the Compact in 2016, or  in 2023 assuming renewal for the seven yearperiod.  As of October 1, 2005, and forthe quarter ended December 31, 2006, monthly lease payments for both SNFGC andSTGC were $1,287,500.  On December 11,2006, the lease payments were increased by 3% effective October 1, 2006, to$1,326,125 per month, as approved by the board of directors.  The lease payments may be further increasedby up to 3% each October 1 going forward. Lease payment increases must be authorized by the board of directors ofSGC and are restricted under the terms of the Indenture governing the seniornotes.  Rent under the SNFGC lease ispayable only to the extent that sufficient funds are available, measured on anannual basis, from the net proceeds derived from the operation of the casinofacilities and other related operations. If on an annual basis sufficient funds are not available, any shortfallin the rent amount does not accumulate. Due to the related party nature of these leases, which can beeffectively modified by the Nation, the Company records monthly lease expenseequal to the required payment amount for the respective month.  These leases contain no renewal options orescalation clauses.

Effective April 1, 2006, SEGC leases the land uponwhich the planned Seneca Buffalo Creek Casino is expected to operate from theNation pursuant to an oral agreement. For the first six months, SEGC made monthly lease payments of $520,000to the Nation.  Effective October 1,2006, the SGC board of directors approved an increase to SEGC’s monthly leasepayments to $1,250,000.  Lease paymentincreases must be authorized by the board of directors of SGC and arerestricted under the terms of the Indenture governing the senior notes.  SEGC is in the process of formalizing awritten agreement with the Nation.

Expenses resulting fromthe above lease agreements were as follows for the three-month periods endedDecember 31, 2006 and 2005:
|            | ** ** | **Three Months Ended**            | ** ** |
|------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **December 31,**                       | ** ** |
| ** ** | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(in millions of dollars)** | ** ** |
| SNFGC      |       | $                                           | 4.0        |   | $ | 3.9 |   |
|       |       |                                        |       |   |   |
| STGC       |       | 4.0                                         |       | 3.9 |   |
|       |       |                                        |       |   |   |
| SEGC       |       | 3.8                                         |       | — |   |
|       |       |                                        |       |   |   |
|       |       | $                                           | 11.8       |   | $ | 7.8 |   |

 

SNFGC and STGC bothrecord the lease costs as a component of advertising, general andadministrative costs in the accompanying consolidated statements ofoperations.  SEGC records the lease costas a component of pre-opening costs in the accompanying consolidated statementsof operations.

**Other Related Party Transactions**

SNFGC, STGC andSEGC have each entered into a construction management agreement with SenecaConstruction Management Corporation (SCMC) for the construction of the luxuryhotel project at Seneca Niagara Casino, the construction of the resort hotelproject at Seneca Allegany Casino, and construction of the planned SEGCtemporary Buffalo Creek Casino.  SCMC iswholly owned by the Nation.  For thethree-month period ended December 31, 2006, SNFGC, STGC and SEGC havecollectively made payments to SCMC for construction management fees and otherrelated costs of $0.5 million.

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The Company leasesspace within both Seneca Niagara Casino and Hotel and Seneca AlleganyCasino for operation of the poker rooms by the Nation.  For the three-month periods ended December31, 2006 and 2005, the Company recorded $0.3 million and $0.3 million of rentalincome and fees, respectively.  AtDecember 31, 2006 and 2005, the Company has recorded $0.2 million and $0.5million, respectively, as a receivable from the Nation relating to poker roomrentals and fees.

EffectiveSeptember 1, 2006, the Company declared cash distributions to the Nationtotaling $26.0 million, payable in thirteen equal monthly payments of $2.0million beginning September 2006. Effective December 1, 2006, the Company declared additional cashdistributions to the Nation totaling $20.0 million, payable in ten equalmonthly payments of $2.0 million beginning December 2006.  For the three months ended December 31, 2006,the Company paid cash distributions of $8.0 million to the Nation pursuant tothe foregoing declarations.

Duringthe three months ended December 31, 2006 and 2005, the Company distributed tothe Nation acquired real property of $0.6 million and $4.7 million,respectively, for use in its casino operations. Such distribution amounts were based on the acquisition cost of the realproperty.

Inaddition, the Company has recorded approximately $35.9 million in land andrelated acquisition costs as other long-term assets in the accompanying balancesheets as of December 31, 2006, which are intended to be transferred to theNation.

TheCompany is charged by the Nation for SGA costs, which are incurred by theNation.  SGA costs charged to the Companywere approximately $2.4 million for both the three months ended December 31,2006 and 2005.  The Company also incurscosts, which are passed through to the Nation for New York State gamingregulatory services, New York State Police and Cattaraugus County SheriffDepartment services.  The Company has recordedcosts of approximately $2.1 million and $1.8 million for the three-monthperiods ended December 31, 2006 and 2005, respectively, in connection withthese services.  At December 31, 2006 andSeptember 30, 2006, approximately $16.7 million and $14.7 million,respectively, of SGA, other regulatory, and police costs were recorded ascurrent liabilities.

STGC leases officespace in a building owned by the brother of Maribel Printup, a member of theCompany’s board of directors.  For thethree-month periods ended December 31, 2006 and 2005, such lease expensetotaled $61,000 and $60,000, respectively.

During the threemonths ended December 31, 2006, SNFGC paid RGBK, Inc. approximately $33,000 forkitchen design services.  A principal ofthis firm is a brother-in-law of SGC’s Senior Vice President of GamingOperations, Michael Speller.

**4.**                                      Commitments and Contingencies

**The Seneca Nation Compact**

As part of its Compact, the Nation agrees tocontribute to the State of New York a portion of the proceeds from the operationand conduct of each category of gaming device for which exclusivity exists,based on the win of such machines (cash dropped into machines, after payoutsbut before expenses) and totaled on a cumulative quarterly basis to be adjustedannually at the end of the relevant calendar year.  The exclusivity fee to the State of New Yorkfor years 1-4 (through December 31, 2006) is 18.0% payable on an annualbasis.  Thereafter, the exclusivity feeis 22.0% for years 5-7 (through December 31, 2009), payable on a semi-annualbasis and 25.0% for years 8-14 (through December 31, 2016) payable on aquarterly basis.

Pursuant to the Compact, amounts due to New York Stateare payable by the Nation.  In February,2005, SNFGC and STGC commenced monthly payments to the Nation of each entity’sprior month’s exclusivity fees.  For thethree months ended December 31, 2006 and 2005, total exclusivity fees were$20.7 million and $16.5 million, respectively. Of the $20.7 million exclusivity fee for the three months ended December31, 2006, $14.9 million was attributable to SNFGC and $5.8 million wasattributable to STGC.

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**Planned Additional CasinoLocation and Current 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 plannedconstruction of the third casino, in Erie County, as well as the currentexpansion by STGC at Seneca Allegany Casino, will require significant capitaloutlays.  The amount and timing of thesecapital expenditures are dependent on various factors including financingavailability, certain Nation and other governmental approvals, the effects oflegal proceedings, construction timelines, and the performance of the Company’stwo operating casinos.

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

You should read the following discussion and analysisin conjunction with the sections titled “Financial Statements” and “Notes toConsolidated Financial Statements” included elsewhere in this Form 10-Q.  References below to years are to fiscal yearsof SGC unless otherwise noted. SGC’s fiscal year is from October 1 throughSeptember 30.

**Forward-LookingStatements**

Whenused in this Quarterly Report on Form 10-Q, in other filings with the SEC, inour press releases or in our other public communications, the words “believe,” “estimate,”“anticipate,” “expect,” “contemplate,” “may,” “will” and similar expressionsare intended to identify forward-looking statements.  Statements looking forward in time areincluded in this Quarterly Report on Form 10-Q pursuant to the “safe harbor”provision of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risksand uncertainties, which could cause actual results to differ materially,including, but not limited to, the risk factors contained or referenced hereinand in our other reports filed with the SEC pursuant to the Securities ExchangeAct of 1934, as amended, including our 2006 Form 10-K.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation toupdate these forward-looking statements to reflect events or circumstancesoccurring after the date hereof.

**Overview**

SGC is wholly owned by the Nation and chartered tomanage and direct all 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 IIIgaming facility, Seneca Niagara Casino and Hotel (then Seneca Niagara Casino),on Nation Territory in the City of Niagara Falls, New York on December 31,2002, featuring Class III slot machines, table games and keno.  Our expanded facility at Seneca NiagaraCasino and Hotel, including a 604-room luxury hotel with additional gamingspace, three restaurants, a multi-purpose room, meeting rooms, and a spa andsalon was substantially open at December 31, 2005 and completely open at March31, 2006.  This facility is operated byour wholly owned subsidiary SNFGC.  OnMay 1, 2004, we opened our second Class III gaming facility, SenecaAllegany Casino, on the Nation’s Territory in the City of Salamanca, NewYork.  This facility featuresClass III slot machines and table games. This facility is operated by our wholly owned subsidiary STGC.  On December 28, 2006, we officially openedour permanent gaming floor at Seneca Allegany Casino, and expect to open ournew 212-room resort hotel with its amenities by March 31, 2007.  Under the Compact, the Nation has theexclusive right (subject to certain limited exceptions) to establish and operatea third Class III gaming facility to be located in Erie County, NewYork.  On October 3, 2005, theNation acquired approximately nine acres of land in the inner harbor districtof Buffalo (Buffalo Creek Territory).  Wecommenced construction of the Seneca Buffalo Creek Casino on those nine acreson December 8, 2005.  The exclusiveright, under the Compact, to establish and operate a third Class IIIgaming facility in Erie County may terminate if the Nation or SEGC fails tocommence Class III gaming operations in Erie County by December 9,2007.  We expect to open a temporaryClass III gaming facility by May 31, 2007, which we believe fulfills the Nation’sCompact obligations as to the third Class III gaming facility in order tomaintain our exclusivity rights under the Compact.  See “Executive Summary — Seneca Buffalo CreekCasino” and “Part II. Item 1. — Legal Proceedings” for information regardingthe status of and litigation related to our Seneca Buffalo Creek Casino.

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**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 include gaming, dining,lodging, entertainment and retail.  Forthe three months ended December 31, 2006 and 2005, approximately 94% and 95%,respectively, of our net revenue was derived from our gaming activities.

*Key Performance Indicators.*    Our operating results are dependent on thevolume of patrons at our casinos and our ability to attract them for repeatvisits.

*Seneca Niagara Casino and Hotel. *   Seneca NiagaraCasino and Hotel continues to rely primarily on drive-in and bus patrons fromthe Buffalo, Niagara Falls, and Rochester areas in New York and secondarilyfrom the Erie, Pennsylvania area, Ohio and other parts of New York.  Since its partial opening onDecember 30, 2005, and with a more notable increase since final completionof the luxury hotel and amenities in March 2006, Seneca Niagara Casino andHotel has experienced continuous growth in its patron base.  With the completion of our 604-room luxuryhotel and related amenities in March 2006, we believe we have increasedhigher-end patron volume, gaming activity and length of stay, and extended ourgeographic penetration, and appealed to a more diverse demographic base.  Since the full opening of the luxury hotel onMarch 31, 2006, our average occupancy rate has been approximately 80%.  During the same period approximately 71% ofour occupied rooms were complimentary rooms for our gaming patrons.  The cost to construct and equip the luxuryhotel was approximately $234.0 million.

*Seneca Allegany Casino.*    Since opening on May 1, 2004, SenecaAllegany Casino has experienced steady growth in its patron base, net revenue,and profitability.  Seneca AlleganyCasino has attracted patrons from the southern portion of Western New York,Erie and Pittsburgh, Pennsylvania, and Ohio. From opening through December 31, 2006, approximately 68% of the casino’spatron base has come from outside of the State of New York.

We are constructing a 212-room resort hotel and permanent casino atSeneca Allegany Casino.  On December 28,2006, we officially opened the new permanent gaming floor, and we expect toopen the resort hotel, two fine dining restaurants, a 24-hour casualrestaurant, retail and certain related amenities, by March 31, 2007.  We expect that the total cost to constructand equip the resort hotel and permanent casino will be from $156.0 to$167.0 million.  We believe thisexpansion is necessary to provide a first-class gaming experience for ourpatrons, to increase their length of stay and to maintain the competitiveposition of this facility in light of expected future competition inPennsylvania.  We also plan to convertthe temporary facility into an event center with a capacity for 1,700 people,along with additional administrative and support space.  We plan to continue to fund this expansionwith cash flows from operations and cash on hand.  As of December 31, 2006, we have capitalizedapproximately $121.0 million of costs on this expansion.

*Seneca Buffalo Creek Casino.    *On October 3, 2005,the Nation acquired approximately nine acres of land in the inner-harbordistrict of Buffalo.  Initially, the nineacre parcel was bisected by a two-block section of a street owned by the Cityof Buffalo (Fulton Street).  In November2006, we acquired the two-block section of Fulton Street from the City ofBuffalo for a purchase price of $631,600. In order to meet the requirements of the Compact, on December 8, 2005 webegan construction of a temporary Class III gaming facility on the SenecaBuffalo Creek Territory.  This temporaryfacility is expected to be approximately 6,000 square feet, and will featureapproximately 125 slot machines and a snack bar.  We continue to proceed with our plans to openthe temporary Seneca Buffalo Creek Casino in May 2007, but no later than theDecember 9, 2007 Compact deadline.

In addition, we continue to finalize our plans for a permanent casino onthe Seneca Buffalo Creek Territory.  Ourability to complete, and the timing of the opening of both the temporary andpermanent Seneca Buffalo Creek Casinos will depend on various factors,including existing legal challenges. Reference is made to our Form 10-K for the year ended September 30, 2006for a description of the legal proceedings relating to our planned SenecaBuffalo Creek Casino.  See also “Part II.Item 1 - Legal Proceedings” for material developments regarding certain ofthese proceedings.  In the event that weare able to open a casino in Erie County, this casino will be owned andoperated by SEGC.

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TheSeneca Buffalo Creek Casino permanent facility is expected to initiallyfeature:

·                  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.

Our cost estimate of approximately $125.0 million toconstruct and equip the permanent Seneca Buffalo Creek Casino, or casinofeatures as outlined above may change as we finalize the design for thepermanent Seneca Buffalo Creek Casino. We intend to operate the permanent Seneca Buffalo Creek Casino in amanner that will complement both Seneca Niagara Casino and Hotel and SenecaAllegany Casino.

*Marketing.    *We use an integrated marketing strategy to attract andretain our patrons and to brand the Seneca name as the premier gaming andentertainment experience in Western New York. We coordinate our marketing events to maximize the quality and length ofstay of patron visits and, in the future will do so, to minimize competitionamong our gaming and entertainment facilities. With the opening of the luxury hotel and related amenities at the SenecaNiagara Casino and the planned March 2007 opening of the resort hotel at SenecaAllegany Casino, we have increased and intend to further increase our marketingefforts in the region, including areas of New York outside of the Niagara Fallsand Salamanca areas, in Pennsylvania and Ohio, and Toronto.  Upon its opening, the permanent SenecaBuffalo Creek Casino will benefit from our increasing patron base from outsidethe immediate region.

*Current, Continued and Future Reliance on Cash Flow*.*    *Weintend to fund the maintenance of our facilities and our current and plannedexpansion projects from our cash flow and cash on hand.  We currently rely and will continue to relyon our ability to generate cash flow from operations to service our debtfinancing.

*Seasonality.*     Due to the continued construction andexpansion activity during our initial years of operation, we have not yet beenable to clearly determine the effect, if any, of seasonality on our operations.

*OverallOutlook.*     Since theopening on December 31, 2002 of the Seneca Niagara Casino, we have investedsignificantly in the development, expansion and maintenance of our gamingproperties. In the remainder of fiscal 2007, investments are planned to continuewith the expected opening of our 212-room resort hotel and amenities at SenecaAllegany Casino by  March 31, 2007, theplanned opening of our temporary Seneca Buffalo Creek Casino, and the plannedstart of construction of our permanent Seneca Buffalo Creek Casino.

We believe the WesternNew York hotel, entertainment and gaming markets are significantly underserved,and our exclusivity, as provided in the Nation’s Compact with the State of NewYork, gives us the opportunity to serve these markets by providing our patronswith unique entertainment and gaming experiences. In addition, the March 2006opening of our hotel at Seneca Niagara Casino and Hotel has enabled us topenetrate a wider geographic area and attract higher-end gaming patrons,providing us with a competitive advantage.

We believe we are thepremier gaming operator in western New York state, and in the areas of northernPennsylvania and Ohio within our primary and secondary markets. To further thatobjective, and to provide for expanded opportunities in the convention andtourism markets, we continue to proceed with a master planning process for theNiagara Falls, Allegany and Buffalo gaming and related facilities. A principalgoal is for each of

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these facilities tocomplement each other, offering diverse gaming, hotel and entertainmentexperiences for our guests.

**CriticalAccounting Policies and Estimates**

There have been no changes in critical accountingpolicies and estimates since the filing of our 2006 Form 10-K for the yearended September 30, 2006.

**Operating Results- Three Months Ended December 31, 2006 Compared to the Three Months EndedDecember 31, 2005**

*OperatingResults*
|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **December 31,**                                | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                     |       |                                                 |       |   |   |
| Net revenue                              |       | $                                                    | 140,179    |   | $ | 108,916 |   |
| ** **                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating  expenses:                     |       |                                                 |       |   |   |
| Gaming                                   |       | 32,980                                               |       | 28,040 |   |
| Food and  beverage                       |       | 11,297                                               |       | 8,810 |   |
| Lodging                                  |       | 2,367                                                |       | — |   |
| Retail, entertainment  and other         |       | 3,570                                                |       | 3,012 |   |
| Advertising,  general and administrative |       | 35,258                                               |       | 31,420 |   |
| Pre-opening  costs                       |       | 4,679                                                |       | 3,056 |   |
| Depreciation                             |       | 11,076                                               |       | 7,071 |   |
|                                     |       |                                                 |       |   |   |
| Operating income                         |       | $                                                    | 38,952     |   | $ | 27,507 |   |

 

The most important factors and trends contributing toour operating performance during the three months ended December 31, 2006 and2005 were:

·                  Ourcontinued expansion at and investment in both of our properties, most notablyour December 31, 2005 partial opening and March 31, 2006 complete opening ofthe 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 Hotel and SenecaAllegany Casino to our primary and secondary target markets located within 100miles and 175 miles, respectively, of such casinos.

·                  Ourability to enroll over 1.2 million patrons in our cross-property Seneca LinkPlayer’s Card program, which has increased our ability to use effective directmail and targeted marketing programs to establish patron loyalty to the Senecabrand 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 ticket redemption machines, player tracking systemenhancements and the on-going development of a Seneca brand inter-propertyprogressive link.

·                  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.

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*Detailed Revenue Information*
|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **December 31,**                                | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Gaming revenue:                          |       |                                                 |       |   |   |
| Slots                                    |       | $                                                    | 121,185    |   | $ | 94,687 |   |
| Table games                              |       | 20,002                                               |       | 15,244 |   |
| Keno                                     |       | 86                                                   |       | 108 |   |
|                                     |       |                                                 |       |   |   |
| Gaming revenue                           |       | 141,273                                              |       | 110,039 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue:                     |       |                                                 |       |   |   |
| Food and  beverage                       |       | 13,269                                               |       | 9,786 |   |
| Lodging                                  |       | 4,658                                                |       | — |   |
| Retail,  entertainment and other         |       | 5,245                                                |       | 4,722 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue                      |       | 23,172                                               |       | 14,508 |   |
| Less promotional  allowances and credits |       | (24,266                                              | )          | (15,631 | ) |
|                                     |       |                                                 |       |   |   |
| Net revenue                              |       | $                                                    | 140,179    |   | $ | 108,916 |   |

 

Our gaming revenue for the three months ended December31, 2006 increased relative to the comparable period in the prior year, due to(a) the opening of the additional gaming space at Seneca Niagara Casino andHotel on December 15, 2005, which added approximately 950 slot machines and 21table games to our operations, (b) Seneca Allegany Casino’s addition of 119slot machines, primarily during the fourth quarter of 2005, and (c) continuedgrowth in our patron base.  The openingof our luxury hotel at Seneca Niagara Casino and Hotel supported our increasedgaming revenue for the three months ended December 31, 2006 in relation to theprior year quarter, enabling us to utilize more effective marketing andpromotional programs.  As of December 31,2006, our gaming operations featured an aggregate 141 table games and 6,520 slotmachines, representing a net increase of 34 table games and 1,302 slot machinesfrom December 31, 2005.  During theseperiods, the number of patrons enrolled in our Seneca Link Player’s Cardprogram has steadily increased.  As ofDecember 31, 2006, we had over 1.2 million patrons enrolled, an increase ofapproximately 247,000 patrons, or 25% over the number of enrolled members atDecember 31, 2005.

Our net gaming revenue, which excludes promotionalslot credits of $9.4 million and $6.5 million in the quarters ended December31, 2006 and 2005, respectively, increased $28.4 million, or 27%.  During the three months ended December 31,2006, Seneca Niagara Casino and Hotel’s net gaming revenue increased $26.9million, or 39%, principally attributable to the casino expansion and supportedby the new luxury hotel and amenities. Of this increase, $22.1 million was due to increased net slotrevenue.  The $2.9 million increase inpromotional slot credits was principally due to increased slot play, along withslightly higher redemptions resulting from a marketing promotion duringNovember 2006 which allowed patrons to exchange a portion of their player’sclub points for promotional slot credits. Seneca Allegany Casino’s net gaming revenue for the quarter ended December31, 2006 was $35.4 million, an increase of $1.5 million, or 4%, from thequarter ended December 31, 2005, mainly due to increased net slot revenuebetween the two periods.**  **The revenue growth at SenecaAllegany Casino for the quarter ended December 31, 2006 was negatively impactedby on-going construction disruption, particularly while we were transitioningfrom our temporary gaming floor to our new permanent gaming floor duringDecember 2006.

Our food and beverage revenue and retail revenue haveincreased in direct relation to our increase in gaming revenue.  There is a direct relationship between ourfood and beverage revenue and retail revenue to our gaming revenue because asignificant portion of this revenue is generated from players’ point redemptions.

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For the three months ended December 31, 2006 and 2005,59% and 61%, respectively, of our food and beverage revenue and 85% and 88% ofour retail revenue, respectively, represented players’ point redemptions.  For the three months ended December 31, 2006,our consolidated food and beverage revenue increased $3.5 million, or 35% overthe same period in 2005, to $13.3 million.

Seneca Niagara Casino and Hotel’s food and beveragerevenue for the quarter ended December 31, 2006 increased $3.3 million, or 49%,in relation to the comparable prior year period, mainly due to the net additionof three restaurants and two full-service bars, in conjunction with the openingof our expanded gaming space and a portion of the luxury hotel in late December2005.

Lodging revenue represents rentals of rooms in theluxury hotel in Niagara Falls, which partially opened in late December 2005,and completely opened on March 31, 2006. For the three months ended December 31, 2006 our occupancy percentagewas approximately 85%, based upon the average number of rooms available duringthe period.  Complimentary roomsaccounted for approximately 72% of our occupied rooms.

For the three months ended December 31, 2006, ourretail, entertainment and other revenue increased by $0.6 million inrelation to the comparable 2005 period. This increase was primarily attributable to higher entertainment revenueof $0.6 million at our Seneca Niagara Casino and Hotel, due to an increasednumber of headline concerts at the Seneca Events Center during the quarterended December 31, 2006.

*DetailedOperating Expenses Information*
|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **December 31,**                                | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating  expenses                      |       |                                                 |       |   |   |
| Gaming                                   |       | $                                                    | 32,980     |   | $ | 28,040 |   |
| Food and  beverage                       |       | 11,297                                               |       | 8,810 |   |
| Lodging                                  |       | 2,367                                                |       | — |   |
| Retail,  entertainment and other         |       | 3,570                                                |       | 3,012 |   |
| Advertising,  general and administrative |       | 35,258                                               |       | 31,420 |   |
| Pre-opening  costs                       |       | 4,679                                                |       | 3,056 |   |
| Depreciation and  amortization           |       | 11,076                                               |       | 7,071 |   |
| Operating expenses                       |       | $                                                    | 101,227    |   | $ | 81,409 |   |

 

Gaming expenses principally consist of costs incurredfrom operating our table games and slot machines, of which the primarycomponents are related payroll and employee benefit costs, and the slotexclusivity fee due to New York State pursuant to the Compact.   The slot exclusivity fee increased by $4.2million from $16.5 million for the three months ended December 31, 2005 to$20.7 million for the three months ended December 31, 2006, due to higher netslot revenues.  In addition,gaming-related wages increased $0.8 million or 9% in relation to the prior yearquarter primarily due to certain wage increases and additional staffing tosupport the increased number of table games.

Food and beverage expenses are costs we incur for theoperation of our restaurants, snack bars and beverage outlets.  The primary components of these expenses arethe cost of food and beverage products and related payroll and employee benefitexpenses.  For the quarter ended December31, 2006, food and beverage product costs increased $1.0 million due to higherrevenue, mostly attributable to our additional new restaurants at SenecaNiagara Casino and Hotel.  Food andbeverage payroll and benefits increased $1.5 million in relation to the samequarter in the prior year, due principally to the increased staffing related tothe opening of three additional restaurants, two additional bars and anightclub, in conjunction with the luxury hotel expansion at Seneca NiagaraCasino and Hotel.

Lodging expenses represent our costs to operate SNFGC’sluxury hotel.  The components of theseexpenses include payroll and other employee benefit expenses, guest amenitysupplies, laundry and other expenses.

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Retail, entertainment and other expenses represent ourcosts to operate our retail shops and entertainment offerings.  The components of these expenses includerelated payroll and employee benefit costs, the purchase of products offeredfor sale in our retail outlets, and contract costs for entertainers.  For the three months ended December 31, 2006,these costs increased approximately $0.6 million, or 19%, over the comparable2005 period, due principally to a $0.5 million increase in headlineentertainment costs in the current year’s quarter at the Seneca Niagara Casinoand Hotel.

Advertising, general and administrative expenses areincurred to support our operations.  These expenses consist primarily of related payroll and employeebenefits costs, regulatory, advertising, rent, marketing, insurance, legal andenergy costs.  For the three months endedDecember 31, 2006 and 2005, such costs were $35.3 million and $31.4 million,respectively, an increase of $3.9 million, or 12%.  The increase was mainly attributable to a$1.6 million increase in related payroll and benefits costs, primarily in thefacilities and maintenance areas, $0.5 million increase in energy costs, a $0.2million increase in the head lease expense with the Nation, a $1.2 millionincrease in advertising costs supporting entertainment and other amenities,primarily at Seneca Niagara Casino and Hotel, a $0.3 million increase inregulatory costs and a $0.2 million increase in insurance costs.

Pre-opening expenses are non-recurring costs incurredto support the expected opening of new facilities.  For the three months ended December 31, 2006and 2005, such costs were $4.7 million and $3.1 million, respectively, anincrease of $1.6 million.  The increasewas mainly due to $3.8 million in head lease expense in the quarter endedDecember 31, 2006 related to SEGC’s lease of land on the Seneca Buffalo Creek Territory for the constructionand operation of the Seneca Buffalo Creek Casino, partially offset by theabsence of pre-opening costs in the current quarter relating to Seneca NiagaraCasino and Hotel, which opened in late December 2005.

For the three months ended December 31, 2006 and 2005,depreciation and amortization expense was $11.1 million and $7.1 million,respectively, an increase of $4.0 million, or 57%.  This increase was attributable to the openingof our additional gaming and retail space and luxury hotel at Seneca NiagaraCasino and Hotel, which cost approximately $234.0 million and was completelyplaced into service on March 31, 2006.

*Non-Operating Expenses*

The following tablesummarizes information related to interest on our long-term debt:
|                  | ** ** | **Three Months Ended**                     | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **December 31,**                                | ** ** |
| ** **       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest expense |       | $                                                    | 8,563      |   | $ | 7,749 |   |
|                  |            |                                                      |            |  |  |  |  |

 

Our interest expense for the three months ended December31, 2006 increased $0.8 million over the three months ended December 31,2005.  This increase was primarilyattributable to a $0.8 million reduction in the amount of interest capitalizedin the quarter ended December 31, 2006 in relation to the 2005 quarter.  Capitalized interest relating to constructionprojects for the quarters ended December 31, 2006 and 2005 was $1.3 million and$2.1 million, respectively, and are recorded as components of net property and equipmentwithin the accompanying consolidated balance sheets.

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**Liquidityand Capital Resources**

*Cash Flows*
|                                               | ** ** | **Three Months Ended**                     | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **December 31,**                                | ** ** |
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash  provided by operations              |       | $                                                    | 31,124     |   | $ | 20,255 |   |
|                                          |       |                                                 |       |   |   |
| Cash flows  relating to investing activities: |       |                                                 |       |   |   |
| Capital expenditures                          |       | (68,399                                              | )          | (58,700 | ) |
| Payments for land acquisitions                |       | (2,125                                               | )          | (12,663 | ) |
| Payment to collateralize letter of credit     |       | (240                                                 | )          | (34,055 | ) |
| Sales (purchases) of investments, net         |       | 22,700                                               |       | (1,909 | ) |
| Net cash used in investing activities         |       | (48,064                                              | )          | (107,327 | ) |
|                                          |       |                                                 |       |   |   |
| Cash flows  relating to financing activities: |       |                                                 |       |   |   |
| Payment of deferred financing costs           |       | —                                               |       | (345 | ) |
| Distributions paid to the Nation              |       | (8,000                                               | )          | (4,585 | ) |
| Net cash used in financing activities         |       | (8,000                                               | )          | (4,930 | ) |
|                                          |       |                                                 |       |   |   |
| Net decrease in cash  and cash equivalents    |       | $                                                    | (24,940    | ) | $ | (92,002 | ) |

 

*Cash Flows—Operating Activities.*    The $10.9 million increase in cash flows fromoperations during the three months ended December 31, 2006 compared to the sameperiod in 2005 resulted principally from a $10.2 million increase in net incomeover the prior year, principally due to the positive financial impact of theluxury hotel and expanded gaming and amenities at Seneca Niagara Casino andHotel.

*Cash Flows—Investing Activities.*    Our capital expenditures of$68.4 million during the three months ended December 31, 2006 were mainlycomprised of $50.5 million of costs associated with the construction andequipping of the resort hotel and permanent gaming and amenities at the SenecaAllegany Casino and $11.0 million related to final close-out of the luxuryhotel at Seneca Niagara Casino.  Theremaining capital expenditures were principally for the acquisition of equipmentfor existing casino operations and building an additional parking lot at SenecaNiagara Casino and Hotel.  Sales andpurchases of investments represent transactions in short-term investments ofexcess cash in instruments having a maturity of more than 90 days.

On July 13, 2006, we acquired through condemnationapproximately 18 acres of land and trade fixtures appurtenant thereto fromFallsite, LLC (“Fallsite”) and Fallsville, LLC (“Fallsville”) for an aggregateinitial advance payment of $18.0 million. The land is a portion of the land inthe City of Niagara Falls, New York designated under the Compact for ownershipby the Nation.  We intend to acquire theremaining approximate five acres of the approximate 50 acres in the City ofNiagara Falls, New York so designated. Under the Compact, the Nation is required to fund the acquisition ofthis property, including all related costs and expenses.  As initial security for the Nation’sobligations to pay site acquisition costs and in furtherance of the ongoingcondemnation proceeding, the Company was required to deliver, and hasdelivered, to the Empire State Development Corporation, or ESDC, a letter ofcredit in the amount of $33.5 million representing 150% of the then estimate ofthe total remaining site acquisition costs not yet paid by the Company.  If the estimate of such site acquisitioncosts increases or if certain other events occur, the Company may have toprovide an additional letter of credit or replace the existing one with one fora larger monetary amount or, if acceptable to the ESDC, provide a supplementalcash escrow amount.  The current requiredletter of credit amount is approximately $25.8 million. This outstandingletter of credit is 100% collateralized by a cash deposit in an interest-bearingrestricted account with a bank.  In conjunctionwith the Fallsite acquisition transaction referenced above, on July 10, 2006,$7.7 million was drawn under the letter of credit as partial funding of thepurchase and the balance was paid from our operating cash.  Pursuant to the New York State Eminent DomainProcedure Laws, the New York state courts will determine the final purchaseprice to be paid to

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Fallsite and Fallsville.  On July 26, 2006, each of Fallsite andFallsville filed notice of claims seeking $40 million and $35 million, respectively,for their land and trade fixtures.  Wehave been informed that appraisals for the land and trade fixtures prepared byESDC’s appraisers are $12.3 million and $5.2 million, respectively.  If the New York state courts determine thatthe value for the land and trade fixtures is higher than what ESDC hasdetermined to be their values, then we would be liable for the difference andpotentially also responsible for certain additional costs and payments toFallsite and Fallsville, such as their attorney fees. The additional 18 acresof recently-acquired land has not yet been transferred to the Nation. We canprovide no assurance that, upon transfer of such land to the Nation, restrictedfee status for such land will be sought by the Nation or, if sought, approved.

*Cash Flows—Financing Activities.*     Effective September 1, 2006, the Companydeclared a cash distribution of $26.0 million to the Nation, payable inthirteen equal installments of $2.0 million, beginning in September 2006.  Effective December 11, 2006, the Companydeclared an additional cash distribution of $20.0 million to the Nation,payable in ten equal installments of $2.0 million, beginning in December 2006.

*Principal Debt Arrangements.*    As of December 31, 2006, our long-term debtconsists of $300.0 million in 2004 senior notes and $200.0 million in 2005senior notes.  The senior notes carry afixed annual interest rate of 71⁄4% and semi-annual interest payments are due onMay 1 and November 1.

On May 23, 2005, we issued an additional $200.0 millionin 71⁄4% senior notes due 2012, Series B, or the 2005 senior notes.  The 2005 senior notes are treated as a singleclass with the 2004 senior notes and are identical to the 2004 senior notes,except for certain tax attributes and prior to November 1, 2005 the amount ofinterest accrued thereon.  Gross proceedson the 2005 senior notes were approximately $193.0 million.  The gross proceeds of the 2005 senior noteswere, or will 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, orFreemantle, to SNFGC in November 2002, for a negotiated amount of approximately$126.7 million, representing $80.0 million in outstanding principal andapproximately $46.7 million for interest on such principal, at a prescribedinterest rate, that would have otherwise been payable if the Term Loan had notbeen paid on May 23, 2005, but was instead paid 181⁄2 months prior to itsNovember 22, 2007 stated maturity (resulting in a reduction of future interestpayments that would have otherwise been payable under the Term Loan if it hadnot been paid in full, by approximately $18.0 million), (b) to fund certaincosts associated with the expansion of our operations, (c) to pay $5.2 millionin fees and expenses associated with the offering of the 2005 senior notes,including the related exchange offer, and (d) for general corporatepurposes.  Interest on the 2004 and 2005senior notes is payable semi-annually on November 1 and May 1.  The 2004 and 2005 senior notes are unsecuredand rank equally.  As of December 31,2006, aggregate accrued interest on the 2004 and 2005 senior notes was$6.0 million.

We expect cash generated from our operations,available cash and cash equivalents and short-term investments as of December31, 2006 to be sufficient to fund our expansion plans described below, serviceour debt, and meet our working capital requirements for at least the next 12months.  However, our ability to fund ouroperations, make planned capital expenditures and service our debt depends onour future operating performance, cash flow and cash distributions to ourowner, the Nation (which distributions are subject to the restrictions andlimitations set forth in the indenture governing the 2004 and 2005 senior notes),which are in turn subject to prevailing economic conditions, and to financial,business and other factors, some of which are beyond our control.  Additionally, unlike traditionalcorporations, we are prohibited by law from generating cash through an offeringof equity securities.  Also, our abilityto incur additional indebtedness is limited under the terms of the indenturegoverning the 2004 and 2005 senior notes.

We are highly leveraged and have significant interestpayment requirements on our 2004 and 2005 senior notes.  As such, limitations on our capital resourcescould force us to delay or abandon capital projects as well as the constructionand development of new properties.

*Expansion Plans*

During the next 18 months, we plan to makesubstantial capital improvements to our gaming facilities.  We recently completed construction of thepermanent gaming floor at the Seneca Allegany Casino and are constructing a212-room resort hotel at this property. The permanent casino floor was officially opened on December 28, 2006and we

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expect to open the hotel with related amenities byMarch 31, 2007.  We estimate the totalcost to complete the resort hotel and permanent casino to be from$156.0 million to $167.0 million.

We commenced construction of our Seneca Buffalo CreekCasino on December 8, 2005.  The cost toconstruct and equip the permanent facility is expected to be approximately$125.0 million, and is planned to initially feature 1,900 to 2,200 slotmachines, 30 to 50 table games, a fine dining restaurant, a 24-hour casualdining restaurant, a bar, a multi-purpose room for entertainment and otherevents, a retail store and a 2,500-space parking garage. As previously noted,we plan to open a temporary Class III gaming facility and to commence gamingoperations on the Seneca Buffalo Creek Territory in May 2007, although existinglegal challenges may delay such opening. Reference is made to our Form 10-K for the year ended September 30, 2006for a description of certain legal proceedings relating to our planned SenecaBuffalo Creek Casino.  See also “Part II.Item 1 – Legal Proceedings” for material developments regarding certain ofthese proceedings.

**Regulation**

Our operations are regulated by Nation laws, theCompact and federal statutes, most notably the Indian Gaming Regulatory Act, orIGRA.  Several bills have been proposedduring the current and recent sessions of Congress that could affect Indiangaming.  Most notably, Senator McCain’sS. 2078, the Indian Gaming Regulatory Act Amendments of 2006 and CongressmanPombo’s (R-CA) H. 4893, Restricting Indian Gaming to Homelands of Tribes Act of2006, propose additional regulations for tribes and more restrictions on “off-reservation”gaming.  Also, the administration haspublished proposed regulations relative to off-reservation gaming.  Certain of such bills and regulations, ifenacted, could impair the ability of the Nation and SGC to expand its gamingoperations and adversely impact the future growth of the Nation’s revenuebase.  In addition, from time to time,various government officials have proposed taxing Indian casino gaming orotherwise limiting or restricting the conduct of gaming operations by Indiantribes.  No assurance can be given thatsuch legislation, if and when enacted by Congress, would not have a materialadverse effect on the operations of SGC. If Congress were to enact comprehensive amendments to the IGRA, suchlegislation could have a material adverse effect on the operations of SGC.  In addition, under federal law, gaming on theNation’s lands may be dependent upon the permissibility under New York law ofcertain forms of gaming or similar activities. If New York State were to make various forms of gaming illegal oragainst public policy (or the courts were to similarly rule), or otherwise totake a legal position adverse to SGC, such actions could have a materialadverse effect on our ability to conduct our gaming operations as currentlyconducted.  Moreover, a 1996 U.S. SupremeCourt decision may permit a state to avoid or refuse to negotiate amendments toexisting compacts such as the Compact.

**New Accounting Pronouncements**

There are no accounting standards that have not yetbeen adopted which are expected to have a material impact on our financialreporting

**Item 3.**                                                           Quantitativeand Qualitative Disclosures About Market Risk

Reference is made to our 2006 Annual Report on Form10-K for a complete discussion of the Company’s market risk.  This market risk information has notmaterially changed in the interim period.

**Item 4.**                                                           Controlsand Procedures

**Evaluation of Disclosure Controls and Procedures**

We maintain disclosure controls and procedures (asthat term is defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, or the Exchange Act) that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our President and Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and

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procedures, management recognized that any controlsand procedures, no matter how well designed and operated, have inherentlimitations due to cost issues, the possibility of human error, judgments andassumptions regarding the likelihood of future events, and the circumventionand overriding of the controls and procedures.  Accordingly, even effective disclosure of controls and procedures canprovide only reasonable assurance of achieving the desired control objectives.

The Company’s management, under the supervision andwith participation of our President and Chief Executive Officer and ChiefFinancial Officer (as our principal executive officer and principal financialofficer, respectively), has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures.  Based on that evaluation, our President andChief Executive Officer and Chief Financial Officer have concluded that thedesign and operation of our disclosure controls and procedures as of December31, 2006 provided reasonable assurance that the disclosure controls andprocedures are effective to accomplish their objectives.

**Changes inInternal Control over Financial Reporting**

There has not been any change in our internal controlover financial reporting identified in connection with the evaluation requiredby Exchange Act Rules 13a-15 or 15d-15 or otherwise that occurred during thequarter ended December 31, 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**Part II.     OTHER INFORMATION**

**Item 1.**                                                           LegalProceedings

***SNFGC v. Klewin BuildingCompany, Inc., C.R. Klewin Gaming & Hospitality, Inc., and T.D. Banknorth,N.A.; T.D. Banknorth, N.A. v. JCJ Architecture, Inc. f/k/a Jeter, Cook &Jepson-Architects, Inc.**(Supreme Court, ComplexLitigation Docket, Hartford, Connecticut; Docket No. X03-CV-05-4009818-S)***

Consistent with information previously reported in ourForm 10-K for the year ended September 30, 2006, on August 24, 2005, SNFGCfiled a complaint against Klewin and BankNorth, as joint defendants, in theSuperior Court for the Judicial District of New London, Connecticut. The suitwas filed to obtain immediate injunctive relief in conjunction with the pendingdemand for arbitration by SNFGC related to Klewin ‘s failure to make requiredpayments to the subcontractors for the construction of Seneca Niagara Casino’snew luxury hotel. SNFGC filed the complaint in order to enjoin the defendantsfrom utilizing approximately $14.6 million paid by SNFGC into an account withBankNorth in the name of Klewin, which was set up by SNFGC principally for thepurpose of paying Klewin’s subcontractors (including the architect) on theconstruction project. SNFGC was subsequently informed by Klewin thatapproximately $14.6 million paid by SNFGC into the account was “swept” byBankNorth and, as a result, several subcontractors (including the architect)were not paid by Klewin. Among other things, the complaint seeks temporary andpermanent injunctive relief requiring that the defendants return to the accountthe approximate $14.6 million that has been removed from that account andtemporary and permanent injunctive relief enjoining defendants from utilizingthe approximate $14.6 million that has been removed from the account,other than for payment of Klewin’s subcontractors on the constructionprojects.  We subsequently advanced funds directly to the architect and tothe Seneca Construction Management Corporation for payment to the remainingsubcontractors.

As a material development for the quarter endedDecember 31, 2006 (and consistent with information previously reported in ourForm 10-K for the year ended September 30, 2006), on December 1, 2006, thecourt granted SNFGC’s motion for an attachment pendente lite to the value of$11.2 million, which motion applied to all real property, bank accounts, andother assets owned by Klewin (other than the bank account at issue). Klewin filed a notice of appeal on December 7, 2006, and the court has subsequentlyheld that the attachment will not be stayed pending appeal.

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***SNFGC and STGC, as assignees v.T.D. BankNorth, N.A. (Niagara County Supreme Court; Index No. 124716)***

Consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006, on December 23, 2005, SNFGC and STGC filed a complaint inNiagara County Supreme Court seeking to recover monies taken by BankNorth thatwere originally directed to the Klewin subcontractors and to the architect,along with an award of attorneys’ fees, under Section 77 of the NewYork Lien Law and under the theory of common law conversion.   SNFGCand STGC commenced the action as assignees of the claims of the subcontractorsand the architect.  On February 27, 2006, BankNorth filed a motion todismiss the action, claiming that the trust fund provisions of the New YorkLien Law do not apply and the Connecticut action was filed first, before theNew York action.  An order denying BankNorth’s motion to dismiss was filedon May 24, 2006.  BankNorth served its answer to SNFGC’s complaint on June28, 2006, and also filed a motion to reargue and renew its prior motion todismiss.

As amaterial development for the quarter ended December 31, 2006 (and consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006), on December 8, 2006, the court granted the defendant’smotion to reargue and granted the defendant’s previously denied motion forsummary judgment.

Wecan provide no assurance that we will be able to recover all or any portion ofthe approximate $14.6 million at issue in the foregoing matters involvingKlewin and BankNorth.

***Citizens Against Casino Gamblingv. Kempthorne (1:06-cv-00001-WMS (WDNY)) (formerly Citizens Against CasinoGambling v. Norton)***

Consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006,  in January 2006, anaction was filed in the United State District Court, Western District of NewYork by various plaintiffs against the United States Department of Interior,the National Indian Gaming Commission and three individuals in their officialcapacities as Secretary of the Interior, Acting Assistant Secretary of theInterior for Indian Affairs and Chairman of the National Indian GamingCommission.  The action seeks declaratory and injunctive relief under theAdministrative Procedure Act, the Declaratory Judgments Act, the NationalHistoric Preservation Act (NHPA), the National Environmental Policy Act (NEPA)and the Indian Regulatory Gaming Act and is principally directed at thedecisions and actions of the defendants that permit the construction andoperation of our Seneca Buffalo Creek Casino.  The plaintiffs claim thatthe defendants have failed to comply with NEPA, NHPA, and IGRA and haverequested that the Court take numerous actions including declaring that thelands acquired by the Nation pursuant to Seneca Nation Land Claims SettlementAct of 1990 (SNLCSA) are not gaming eligible Indian lands within the meaning ofIGRA and declaring that the Nation’s Compact violates IGRA.  If theplaintiffs are successful, the Nation would be unable to conduct any gamingupon lands acquired pursuant to SNLCSA.

As amaterial development for the quarter ended December 31, 2006 (and consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006), on November 1, 2006 oral argument was heard on thedefendant’s motion to dismiss for lack of jurisdiction, on the Nation’s amicusmotion to dismiss based upon failure to join the Nation as a necessary partyand sovereign immunity, and on the plaintiff’s motion for summary judgment.

Consistentwith information previously reported in our Current Report on Form 8-K filed onJanuary 17, 2007, on January 12, 2007, the District Court granted the defendant’smotion to dismiss for lack of subject matter jurisdiction, denied the Nation’smotion to dismiss (holding, in part, that the Nation was not a necessary partybecause the U.S. government’s interests were aligned with those of the Nationand that the U.S. government (through the U.S. Department of Justice) wasvigorously defending the case), and denied, as moot, the plaintiff’s motion forsummary judgment.  In reaching its decision to dismiss on the basis of alack of subject matter jurisdiction, the Court determined that, notwithstandingthe U.S. Department of Interior’s prior determination that the Nation’s BuffaloCreek Territory constitutes “Indian Lands” within the meaning of the IGRA, theNational Indian Gaming Commission (NIGC) must make its own “Indian Lands”determination, and further ordered that the Nation’s 2002

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gamingordinance (which had been approved by the NIGC) be vacated insofar as itpermits Class III gaming on the Nation’s Buffalo Creek Territory (the Courtspecifically limited its holding to the Nation’s Buffalo Creek Territory).

On January 29, 2007, the U.S. Department of Justicefiled a motion for reconsideration.

Althoughthe Court permitted the Nation to file a brief as amicus curiae, the Nation isnot a party to this action, and as such, neither it nor SGC has the ability todirect or control any aspect of the litigation, including the JusticeDepartment’s motion for reconsideration and any other motions or appealsrelating to the Court’s January 12, 2007 decision or the NIGC’s “Indian Lands”determination referenced above.

SGChas previously disclosed that it intends to open the approximate 6,000 squarefoot temporary Seneca Buffalo Creek Casino in May 2007 and to thereaftercommence construction of a permanent facility on the Buffalo CreekTerritory.  SGC intends to continue with construction of the temporaryfacility during the pendency of the NIGC “Indian Lands” determination and anyappeals from the Court’s January 12, 2007 decision, but SGC may be delayed inthe opening of the temporary Seneca Buffalo Creek Casino by May 2007, or unableto conduct Class III gaming on the Buffalo Creek Territory, based upon thestatus and outcome of the NIGC “Indian Lands” determination referenced above,the Justice Department’s motion for reconsideration, and any other motions orappeals relating to the Court’s January 12, 2007 decision.

***Scott v. Pataki (NYS SupremeCourt, Erie County, Index No. 001189/06)***

Consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006, on or about February 1, 2006, an action was filed in theNew York Supreme Court, County of Erie, by various plaintiffs against George E.Pataki, in his official capacity as Governor of the State of New York; StateGaming Officials of the New York State Wagering Board; City of Buffalo; CommonCouncil of the City of Buffalo; Anthony Masiello in his previous capacity asMayor of Buffalo; Byron Brown in his capacity as Mayor of Buffalo; City ofBuffalo Department of Public Works; Buffalo Sewer Authority; and NiagaraFrontier Transportation Authority.  The action initially sought directiveand injunctive relief under the State Environmental Quality Review Act (SEQRA);the First Parks, Recreation, Historic Preservation Law (PRHPL); First CityEnvironmental Review Ordination (CERO); and Freedom of Information Law (FOIL)and is principally directed at the decisions and actions of the defendants inconnection with our Seneca Buffalo Creek Casino.  The plaintiffs initiallyclaimed that the defendants had failed to comply with SEQRA, PRHPL, CERO and FOILand had requested that the Court take numerous actions including directingcompliance with SEQRA, PRHPL, CERO and FOIL and restraining further actionrelating to the development of our Seneca Buffalo Creek Casino.  In June2006, the plaintiffs amended their complaint to drop their claims againstGovernor Pataki, the State Gaming Officials and the Niagara FrontierTransportation Authority, and added the Buffalo City Department of EconomicDevelopment, Permits and Inspections as a party.  The amended complaint alsodropped all claims except for the SEQRA and CERO claims.

As amaterial development for the quarter ended December 31, 2006 (and consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006), in October 2006, the plaintiffs moved for an injunction toprevent the Buffalo Creek Agreement with the City of Buffalo (filed as Exhibit10.1 to our Current Report on Form 8-K filed on November 14, 2006) frombeing executed and performed, but the motion was denied based upon the judge’sdetermination that the plaintiffs failed to show a likelihood of success on themerits.  The plaintiffs have appealed the denial of the injunction to theNew York Supreme Court Appellate Division.  A hearing on the appeal is scheduledfor February 22, 2007.

Ifthe plaintiffs are successful, the Nation may be delayed in the completion ofthe Seneca Buffalo Creek Casino at this site or may be unable to complete theSeneca Buffalo Creek Casino at this site.  Certain of these plaintiffs arealso plaintiffs in the federal lawsuit captioned *CitizensAgainst Casino Gambling v. Kempthorne*referenced above.

***Warren v. United States(1:06-cy-00226-JTE (WDNY))***

Consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006, on or about April 6, 2006, an action was filed in theUnited State District Court, Western District of New York, by Daniel T. Warren,a pro se plaintiff, against the United States of America, the United States Departmentof the Interior, the

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NIGC,and five individuals in their official capacities as Acting Secretary of theInterior, Acting Assistant Secretary of the Interior for Indian Affairs andChairman of the NIGC, as well as Governor George E. Pataki, as Governor of theState of New York, and Cheryl Ritchko-Buley, as Chairwoman of the New YorkState Racing and Wagering Board.  The action initially sought declaratory and injunctive relief as to numerous matters including declaringthat IGRA is unconstitutional, that the Compact violates IGRA, that the NewYork Constitution is not preempted by IGRA, that New York does not have theauthority under state law to enter into a tribal state compact under IGRA, thatcertain actions of the defendants were not in accordance with law, and thatcertain 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 toSNLCSA. On August 16, 2006, the plaintiff amended his complaint bringing: a Tenth Amendment challenge to IGRA;  a claim that the Compact violatesIGRA by providing for gaming which is not otherwise lawful in New York; a claimthat both the Compact and the statute authorizing the Governor of New York toenter into the Compact violate various provisions of the New York Constitution;and a claim that the United States has failed to promulgate regulations forgaming on off-reservation territory, in violation of its statutoryduties.  The effect of such amendment was to limit the claims remaining inthe case, by dropping many of the federal law claims in the original complaint.

As amaterial development for the quarter ended December 31, 2006 (and consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006), on December 1, 2006, the court heard argument on theplaintiff’s motion to join additional parties in which he sought to add asdefendants (1) Barry E. Snyder, Sr., as President of the Seneca Nation ofIndians; (2) John Pasqualoni, as President and CEO of SGC; (3) the SenecaNation of Indians; and (4) SGC.

Ifthe plaintiff is successful in this lawsuit, the Nation could be unable toconduct any gaming upon lands acquired pursuant to SNLCSA.

***County of Erie v. City ofBuffalo (NYS Supreme Court, Index No. 2006-10440)***

Consistentwith information previously reported in our Form 10-K for the year endedSeptember 30, 2006, on November 6, 2006, a new action was brought in New YorkSupreme Court, County of Erie, by the County of Erie, New York, Joel Giambra(as County Executive), and Andrew Eszak (as Commissioner of the County of ErieDepartment of Environment and Planning), against the City of Buffalo, MayorByron Brown and the Buffalo Common Council seeking to invalidate the BuffaloCreek Agreement (on the basis that the City failed to refer the agreement tothe County under Section 239-m of the New York State General MunicipalLaw.  The defendants filed a motion to dismiss on December 1, 2006, whichis pending before the court.  If the plaintiffs are successful, the Nationmay be delayed in the completion of the Seneca Buffalo Creek Casino or may beunable to complete the Seneca Buffalo Creek Casino as planned.

**Item 1A.**                                                  RiskFactors

There are no material changes from the risk factorspreviously disclosed in our Annual Report on Form 10-K for the fiscal yearended September 30, 2006, except as disclosed in this Form 10-Q, includingwithout limitation, the risk factors relating to our Seneca Buffalo CreekCasino set forth in “Item 2 — Management’s Discussion and Analysis of FinancialCondition and Results of Operations” — “Executive Summary — Buffalo CreekCasino”.

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

Not applicable.

**Item 3.**                                                           DefaultsUpon Senior Securities

Not applicable.

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

Not applicable.

**Item 5.**                                                           OtherInformation

As previously disclosed in a Current Report on Form 8-K filed with theSEC on February 7, 2007, John Pasqualoni, SGC’s President and CEO, and JosephA. D’Amato, SGC’s Chief Operating Officer, both tendered their resignations forpersonal reasons effective as of February 7, 2007.

Also, as previously disclosed in a Current Report on Form 8-K filed withthe SEC on February 7, 2007, the Board of Directors announced the appointment ofBrian Hansberry as interim President and CEO of SGC and its subsidiaries.  Mr. Hansberry has consented to serve in allof the foregoing capacities.

On February 13, 2007, Michael Speller, SGC’s Senior Vice Presidentof Gaming Operations, delivered written notice of voluntary terminationpursuant to Section 5(e) of his employment agreement, with suchtermination to be effective as of June 19, 2007.

**Item 6.****                                                           Exhibits**
|  (a) |   | Exhibits (listed according to the number assigned in  the table in Item 601 of Regulation S-K): |
|-----------|--------|-------------------------------------------------------------------------------------------------|

 
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                       |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                  |
| 10.1         |       | Agreement between the City of Buffalo, New York,  Seneca Gaming Corporation, Seneca Erie Gaming Corporation and the Seneca  Nation of Indians, effective November 9, 2006 (incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed on November 14, 2006).  |
|         |       |                                                                                                                                                                                                                                                                                  |
| 10.2         |       | Employment Agreement, dated December 15, 2006,  and effective as of June 22, 2006, between SGC and  Patrick M. Fox (incorporated by reference to Exhibit 10.29 to  SGC’s Annual Report on Form 10-K filed with the SEC on December 18,  2006. |
|         |       |                                                                                                                                                                                                                                                                                  |
| 10.3         |       | Separation Agreement between Seneca Gaming  Corporation and John Pasqualoni effective February 7, 2007 (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February  7, 2007).                                                                     |
|         |       |                                                                                                                                                                                                                                                                                  |
| 10.4         |       | Separation Agreement between Seneca Gaming  Corporation and Joseph D’Amato effective February 7, 2007 (incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed on February  7, 2007).                                                                 |
|         |       |                                                                                                                                                                                                                                                                                  |
|  31.1   |       | Certification of Brian Hansberry, Principal  Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities  Exchange Act of 1934 (filed herewith).                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                  |
|  31.2   |       | Certification of Patrick M. Fox, Principal Financial  Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of  1934 (filed herewith).                                                                                                                           |
|         |       |                                                                                                                                                                                                                                                                                  |
|  32.1   |       | Certification of Brian Hansberry, Principal  Executive Officer and Patrick M. Fox, 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).                                                   |

 

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**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.

DatedFebruary 13, 2007
|  /s/ Brian Hansberry                      |   |
|------------------------------------------------|--------|
| Brian Hansberry                                |   |
| Interim  President and Chief Executive Officer |   |
| (Principal  Executive Officer)                 |   |
|                                           |   |
|                                           |   |
|  /s/ Patrick M. Fox                       |   |
| Patrick M. Fox                                 |   |
| Chief Financial  Officer                       |   |
| (Principal  Financial and Accounting Officer)  |   |

 

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