|            | **UNITED  STATES**                      | OMB APPROVAL                                                                         |
|------------|-----------------------------------------|--------------------------------------------------------------------------------------|
| ** ** | **SECURITIES  AND EXCHANGE COMMISSION** | OMB Number:                                                                     | 3235-0416 |
| ** ** | **Washington,  D.C. 20549**             | Expires:                                                                             | March 31, 2007 |
| ** ** | ** **                              | Estimated average burden                                                             |
| ** ** | ** **                              | hours per response . . . . . . . . | 182 |
| ** ** | **FORM 10-QSB**                         | ** **                                                                           |
|            |                                         |                                                                                      |  |  |  |

 

**(Mark One)**

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

** **

**For the quarterly periodended September 30, 2006**

** **

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

** **

**For the Transition PeriodFrom                     To                    **

** **

**Commission file number000-50572**

** **

**SOUTHWEST CASINO CORPORATION**

(Exact name of smallbusiness issuer as specified in its charter)

| **Nevada**                                                         |   | **87-0686721**                     |
|--------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization)    |   | (IRS Employer  Identification No.) |
|                                                               |   |                               |
| **2001  Killebrew Drive, Suite 350, Minneapolis, Minnesota 55425** |
| (Address of  principal executive offices)                          |
|                                                               |
| **(952)  853-9990**                                                |
| (Issuer’s  telephone number)                                  |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES x   NOo

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act)

YES o   NOx

State the number of shares outstanding of each of theissuer’s classes of common stock as of the latest practicable date: 19,688,656as of September 30, 2006.

Transitional Small Business Disclosure Format (checkone): YES o   NOx

 

 

----

**SOUTHWESTCASINO CORPORATION**

**FORM10-QSBSeptember 30, 2006**

**TABLEOF CONTENTS**

**Description**
| PART I.    | FINANCIAL INFORMATION                                                                                               |   |
|-----------------|---------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.    | Financial Statements                                                                                                | 1      |
|            | Consolidated  Balance Sheet (Unaudited) September 30, 2006                                                          | 2      |
|            | Consolidated  Statements of Operations (Unaudited) for the Three and Nine Months ended  September 30, 2006 and 2005 | 3      |
|            | Consolidated  Statements of Cash Flows (Unaudited) for the Nine Months ended September 30,  2006 and 2005           | 4      |
|            | Notes to  Unaudited Consolidated Financial Statements                                                               | 5      |
| ITEM 2.    | Management’s  Discussion and Analysis or Plan of Operation                                                     | 14     |
| ITEM 3.    | Controls and  Procedures                                                                                            | 23     |
|            |                                                                                                                |   |
| PART II.   | OTHER INFORMATION                                                                                                   |   |
| ITEM 1.    | Legal Proceedings                                                                                                   | 24     |
| ITEM 6.    | Exhibits                                                                                                            | 24     |
| SIGNATURE  PAGE | 25                                                                                                                  |

 

*In thisForm 10-QSB, references to “Southwest,” “the company,” “we,” “our” or “us,”unless the context otherwise requires, refer to Southwest Casino Corporationand its consolidated subsidiaries.*

i

----

**PART I — FINANCIALINFORMATION**

**Item 1. FinancialStatements.**
| **FINANCIAL STATEMENTS**                                                                                            | 1      |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Consolidated  Balance Sheet (Unaudited), September 30, 2006                                                         | 2      |
| Consolidated  Statements of Operations (Unaudited) for the Three and Nine Months ended  September 30, 2006 and 2005 | 3      |
| Consolidated  Statement of Cash Flows (Unaudited) for the Nine Months ended September 30,  2006 and 2005            | 4      |
| Notes to  Unaudited Consolidated Financial Statements                                                               | 5      |

 

1

----

**SOUTHWEST CASINO CORPORATIONConsolidated Balance Sheets (Unaudited)September 30, 2006**
| ASSETS                                                                                                 |       |        |       |
|--------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                   | ** ** | **2006**    | ** ** |
| CURRENT ASSETS                                                                                         |       |        |       |
| Cash and Cash  Equivalents                                                                             |       | $           | 1,755,381  |   |
| Accounts  Receivable                                                                                   |       | 60,157      |       |
| Management Fees  Receivable                                                                            |       | 575,039     |       |
| Inventories                                                                                            |       | 183,363     |       |
| Prepaid Expenses                                                                                       |       | 573,657     |       |
| Total Current  Assets                                                                                  |       | $           | 3,147,597  |   |
|                                                                                                   |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                 |       |        |       |
| Leasehold  Improvements                                                                                |       | 15,734,877  |       |
| Furniture and  Equipment                                                                               |       | 6,060,901   |       |
| Accumulated  Depreciation                                                                              |       | (10,573,462 | )          |
| Net Property and  Equipment                                                                            |       | $           | 11,222,316 |   |
|                                                                                                   |       |        |       |
| OTHER ASSETS                                                                                           |       |        |       |
| Intangible  Assets                                                                                     |       | $           | 438,646    |   |
| Deposits                                                                                               |       | 62,305      |       |
| Investment in  Unconsolidated Subsidiary                                                               |       | 4,640,895   |       |
| Deferred Tax  Asset                                                                                    |       | —      |       |
| Total Other  Assets                                                                                    |       | $           | 5,141,846  |   |
|                                                                                                   |       |        |       |
| TOTAL ASSETS                                                                                           |       | $           | 19,511,759 |   |
|                                                                                                   |       |        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                             |       |        |       |
|                                                                                                   |       |        |       |
| CURRENT LIABILITIES                                                                                    |       |        |       |
| Accounts Payable                                                                                       |       | $           | 404,066    |   |
| Accrued Expenses                                                                                       |       | 1,021,202   |       |
| Accrued  Liabilities - Related Parties                                                                 |       | 122,467     |       |
| Notes Payable                                                                                          |       | 446,292     |       |
| Current Portion  of Long-Term Liabilities                                                              |       | 2,207,737   |       |
| Accrued Interest  Payable                                                                              |       | 9,635       |       |
| Total Current  Liabilities                                                                             |       | $           | 4,211,399  |   |
|                                                                                                   |       |        |       |
| LONG-TERM LIABILITIES                                                                                  |       |        |       |
| Long-Term  Liabilities Net of Current Portion                                                          |       | $           | 7,706,615  |   |
|                                                                                                   |       |        |       |
| STOCKHOLDERS’ EQUITY                                                                              |       |        |       |
| Preferred Stock,  $.001 Par Value; 30,000,000 Shares Authorized                                        |       | $           | —     |   |
| Common Stock,  $.001 Par Value 50,000,000 Shares Authorized, 19,688,656 Shares Issued and  Outstanding |       | 19,689      |       |
| Additional  Paid-in Capital                                                                            |       | 17,198,898  |       |
| Accumulated  Deficit                                                                                   |       | (9,624,842  | )          |
| Total  Stockholders’ Equity                                                                       |       | 7,593,745   |       |
|                                                                                                   |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                        |       | $           | 19,511,759 |   |

 

SeeNotes to Unaudited Consolidated Financial Statements

2

----

**SOUTHWEST CASINO CORPORATIONConsolidated Statements of Operations (Unaudited)**
| ** **                                                                                                                                            | ** ** | **For the three months  ended  September 30, 2006** | ** ** | **For the three months  ended  September 30, 2005** | ** ** | **For the nine months  ended  September 30, 2006** | ** ** | **For the nine months  ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | ** **                                                                   | ** ** | ** **                                                                   | ** ** | ** **                                                                  | ** ** | ** **                                                                  | ** ** |
| **REVENUES**                                                                                                                                          |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| Casino                                                                                                                                                |       | $                                                                            | 4,216,390  |                                                                         | $          | 4,138,250                                                                   |       | $                                                                           | 11,587,076 |   | $ | 11,536,240 |   |
| Food &  Beverage/Hotel                                                                                                                            |       | 194,496                                                                      |       | 148,277                                                                      |       | 452,552                                                                     |       | 349,806                                                                     |       |
| Management and  Consulting                                                                                                                            |       | 1,468,192                                                                    |       | 1,427,880                                                                    |       | 4,562,005                                                                   |       | 3,640,785                                                                   |       |
| Entertainment                                                                                                                                         |       | 11,304                                                                       |       | 11,807                                                                       |       | 17,429                                                                      |       | 18,492                                                                      |       |
| Other                                                                                                                                                 |       | 39,062                                                                       |       | 75,198                                                                       |       | 129,295                                                                     |       | 152,856                                                                     |       |
|                                                                                                                                                  |       | 5,929,444                                                                    |       | 5,801,412                                                                    |       | 16,748,357                                                                  |       | 15,698,179                                                                  |       |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| **EXPENSES**                                                                                                                                          |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| Casino                                                                                                                                                |       | $                                                                            | 3,022,993  |                                                                         | $          | 2,934,007                                                                   |       | $                                                                           | 8,751,517  |   | $ | 8,684,013 |   |
| Food &  Beverage/Hotel                                                                                                                            |       | 385,210                                                                      |       | 402,570                                                                      |       | 1,091,744                                                                   |       | 1,107,546                                                                   |       |
| Corporate Expense                                                                                                                                     |       | 741,101                                                                      |       | 552,419                                                                      |       | 2,053,397                                                                   |       | 1,950,283                                                                   |       |
| Project  Development Costs                                                                                                                            |       | 47,642                                                                       |       | 138,194                                                                      |       | 225,125                                                                     |       | 653,739                                                                     |       |
| Entertainment                                                                                                                                         |       | 53,069                                                                       |       | 82,263                                                                       |       | 102,649                                                                     |       | 134,862                                                                     |       |
| Depreciation and  Amortization                                                                                                                        |       | 542,728                                                                      |       | 584,417                                                                      |       | 1,627,833                                                                   |       | 1,775,433                                                                   |       |
|                                                                                                                                                  |       | 4,792,743                                                                    |       | 4,693,870                                                                    |       | 13,852,265                                                                  |       | 14,305,876                                                                  |       |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| **INCOME FROM OPERATIONS**                                                                                                                            |       | $                                                                            | 1,136,701  |                                                                         | $          | 1,107,542                                                                   |       | $                                                                           | 2,896,092  |   | $ | 1,392,303 |   |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| **OTHER INCOME (EXPENSE)**                                                                                                                            |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| Interest Income                                                                                                                                       |       | $                                                                            | 762        |                                                                         | $          | 1,412                                                                       |       | $                                                                           | 1,934      |   | $ | 5,473 |   |
| Interest Expense                                                                                                                                      |       | (307,699                                                                     | )          | (228,389                                                                     | )          | (892,222                                                                    | )          | (751,067                                                                    | )          |
| Loss on  Disposition of Property and Equipment                                                                                                        |       | (11,126                                                                      | )          | (41,465                                                                      | )          | (11,126                                                                     | )          | (42,480                                                                     | )          |
|                                                                                                                                                  |       | (318,063                                                                     | )          | (268,442                                                                     | )          | (901,414                                                                    | )          | (788,074                                                                    | )          |
| **Income(loss) before income  taxes, equity in earnings of unconsolidated subsidiaries and minority  interest in in loss of consolidated subsidiary** |       | 818,638                                                                      |       | 839,100                                                                      |       | 1,994,678                                                                   |       | 604,229                                                                     |       |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| Income taxes                                                                                                                                          |       | (214,988                                                                     | )          | —                                                                       |       | (615,342                                                                    | )          | —                                                                      |       |
| Minority interest  in loss of consolidated subsidiary                                                                                                 |       | —                                                                       |       | 62,096                                                                       |       | —                                                                      |       | 189,980                                                                     |       |
| Loss of Unconsolidated  Subsidiaries, Net of Tax Benefit                                                                                              |       | (43,667                                                                      | )          | —                                                                       |       | (144,132                                                                    | )          | —                                                                      |       |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| **NET INCOME (LOSS)**                                                                                                                                 |       | $                                                                            | 559,983    |                                                                         | $          | 901,196                                                                     |       | $                                                                           | 1,235,204  |   | $ | 794,209 |   |
|                                                                                                                                                  |       |                                                                         |       |                                                                         |       |                                                                        |       |                                                                        |       |
| **Income (loss) per share - basic**                                                                                                                   |       | $                                                                            | 0.03       |                                                                         | $          | 0.05                                                                        |       | $                                                                           | 0.06       |   | $ | 0.04 |   |
| **Income (loss) per share - diluted**                                                                                                                 |       | $                                                                            | 0.03       |                                                                         | $          | 0.04                                                                        |       | $                                                                           | 0.06       |   | $ | 0.04 |   |
| **Weighted average common shares  outstanding - basic**                                                                                               |       | 19,688,656                                                                   |       | 19,400,884                                                                   |       | 19,671,249                                                                  |       | 19,471,448                                                                  |       |
| **Weighted average common shares outstanding -  diluted**                                                                                             |       | 20,664,715                                                                   |       | 21,898,384                                                                   |       | 20,690,557                                                                  |       | 22,186,531                                                                  |       |

 

SeeNotes to Unaudited Consolidated Financial Statements

3

----

**SOUTHWEST CASINO CORPORATIONConsolidated Statements of Cash Flows (Unaudited)For the Nine Months Ended September 30, 2006 and 2005**
| ** **                                                                                 | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| ** **                                                                                 |       |       |       |      |       |
| Cash Flows from  Operating Activities:                                                     |       |       |       |      |       |
| Net Income  (Loss)                                                                         |       | $          | 1,235,204  |      | $          | 794,209 |   |
| Adjustments to  Reconcile Net Income (Loss) to  Net Cash Provided by Operating Activities: |       |       |       |      |       |
| Minority  Interest in Loss of Consolidated Subsidiary                                      |       | —     |       | (189,980  | )          |
| Depreciation and  Amortization                                                             |       | 1,627,833  |       | 1,775,433 |       |
| Amortization of Loan  Costs                                                                |       | 123,730    |       | —    |       |
| Loss on Disposition  of Property and Equipment                                             |       | 11,126     |       | 43,374    |       |
| Common Stock  Issued for Non-Cash Compensation                                             |       | 134,082    |       | 15,875    |       |
| Loss of  Unconsolidated Subsidiaries                                                       |       | 185,974    |       | —    |       |
| Write-off of  Land Option                                                                  |       |       |       | 249,778   |       |
| Change in  Current Assets and Liabilities,  (Increase) Decrease in Restricted Cash         |       | 2,656      |       | 48,881    |       |
| (Increase)  Decrease in Receivables                                                        |       | (66,402    | )          | (222,757  | )          |
| (Increase)  Decrease in Inventories                                                        |       | (35,080    | )          | 4,689     |       |
| (Increase)  Decrease in Prepaid Expenses                                                   |       | 25,714     |       | (16,646   | )          |
| (Increase) Decrease  in Deferred Tax Asset                                                 |       | 573,000    |       | —    |       |
| Increase  (Decrease) in Accounts Payable                                                   |       | (276,721   | )          | (916,743  | )          |
| Increase  (Decrease) in Accrued Expenses                                                   |       | (55,036    | )          | (81,723   | )          |
| Increase  (Decrease) in Accrued Interest Payable                                           |       | (7,917     | )          | (33,463   | )          |
| Net Cash  Provided By Operating Activities                                                 |       | $          | 3,478,163  |      | $          | 1,470,927 |   |
|                                                                                       |       |       |       |      |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                      |       |       |       |      |       |
| Purchase of  Property and Equipment                                                        |       | (328,534   | )          | (610,937  | )          |
| (Increase)  Decrease in Deposits                                                           |       | 14,000     |       | (1,126    | )          |
| Payment of  Capitalized License                                                            |       | —     |       | (189,179  | )          |
| Investment in  Unconsolidated subsidiary                                                   |       | (528,502   | )          | —    |       |
| Net Cash Used In  Investing Activities                                                     |       | $          | (843,036   | )         | $          | (801,242 | ) |
|                                                                                       |       |       |       |      |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                      |       |       |       |      |       |
| Net Advances on  Short-Term Notes Payable                                                  |       | $          | —     |      | $          | (346,949 | ) |
| Principal  Payments on Long-Term Borrowings                                                |       | (1,976,891 | )          | (571,090  | )          |
| Proceeds from  Investors in Consolidated - Minority Interest                               |       | —     |       | 1,140,325 |       |
| Proceeds from  Issuance of Common Stock and Exercise of Warrants                           |       | 12,000     |       | 49,000    |       |
| Settlement of  Convertible Subordinated Debentures                                         |       | —     |       | (25,000   | )          |
| Payments for Liabilities  Owed to Related Parties                                          |       | (110,000   | )          | —    |       |
| Net Cash  Provided (Used) by Financing Activities                                          |       | $          | (2,074,891 | )         | $          | 246,286 |   |
|                                                                                       |       |       |       |      |       |
| Net Increase in  Cash and Cash Equivalents                                                 |       | 560,236    |       | 915,971   |       |
|                                                                                       |       |       |       |      |       |
| CASH AND CASH  EQUIVALENTS                                                                 |       |       |       |      |       |
| Beginning of  Period                                                                       |       | 1,195,145  |       | 750,556   |       |
| End of Period                                                                              |       | $          | 1,755,381  |      | $          | 1,666,527 |   |
|                                                                                       |       |       |       |      |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION                                          |       |       |       |      |       |
| Interest Paid                                                                              |       | $          | 773,683    |      | $          | 679,305 |   |
| Income Taxes Paid                                                                          |       | $          | 22,506     |      | $          | — |   |
|                                                                                       |       |       |       |      |       |
| SUPPLEMENTAL DISCLOSURE  OF NON-CASH INVESTING AND FINANCING ACTIVITIES                    |       |       |       |      |       |
| Warrants Issued  in Exchange for Services                                                  |       | $          | —     |      | $          | 15,875 |   |
| Capital Assets Acquired  with Acounts Payable                                              |       | $          | 68,081     |      | $          | 101,225 |   |

 

SeeNotes to Unaudited Consolidated Financial Statements

4

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**SOUTHWESTCASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)SEPTEMBER 30, 2006**

----

##### **NOTE1 — BASIS OF PRESENTATION**

The unaudited consolidated financial statements ofSouthwest Casino Corporation, a Nevada corporation (the “Company”), have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”) applicable to interim financial information. Accordingly,certain information normally included in the annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States has been condensed or omitted. For further information, pleaserefer to the annual audited consolidated financial statements of the Company,and the related notes included within the Company’s Annual Report on Form10-KSB for the year ended December 31, 2005, filed with the SEC on March 31,2006.

In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included, consistingonly of normal recurring adjustments. The results for the current interimperiod are not necessarily indicative of the results to be expected for thefull year.

Certain minor reclassifications to amounts previouslyreported have been made to conform to the current period presentation. Thesereclassifications had no effect on net income.

**NOTE 2 —NEW MANAGEMENT CONTRACT**

On March 24, 2006, Southwest entered into a GamingManagement Agreement with the Otoe-Missouria Tribe of Indians. Under the termsof the Gaming Management Agreement, Southwest will have exclusive managementresponsibility for the Tribe’s Seven Clans Paradise Casino near Ponca City,Oklahoma. Southwest will receive management fees equal to 20 percent of the netrevenue from gaming and non-gaming activity at the facility. The managementagreement runs for 5 years beginning on the first day that Southwest beginsmanagement of the facility.

This agreement must be approved by the National IndianGaming Commission (“NIGC”) before it becomes effective. Currently, the NIGC isperforming a background investigation of the Company, its executive officers,directors, and shareholders as part of its contract approval process. Inaddition, the NIGC has reviewed the agreement and provided comments on it toSouthwest and the Tribe on two occasions. The Tribe has not responded to thesecond set of comments. At this time, the Company cannot predict how long thebackground investigation may take to complete, the total costs related to thebackground investigation and approval process to be paid by the Company, if orwhen the Tribe will respond to the NIGC comments, and if or when NIGC approvalof the agreement may be received.

**NOTE 3 — STOCK OPTIONS AND AWARDS**

Stock option plans:

On July 15, 2004,Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino andHotel Corp. 2004 Stock Incentive Plan that had been adopted by the company’sBoard of Directors effective June 1, 2004. Under the terms of thereorganization completed July 22, 2004, Southwest Casino Corporation assumedthe rights and obligations of Southwest Casino and Hotel Corp. under this plan.The plan permits Southwest Casino Corporation to issue incentive awards to allemployees of Southwest Casino Corporation or any of its subsidiaries and anynon-employee directors, consultants or independent contractors of the Companyor any of its subsidiaries. Incentive awards under the plan include “incentiveoptions” under Section 422 of the Internal Revenue Code of 1986, “non-statutorystock options” that do not qualify for “incentive option” treatment, stockappreciation rights, restricted stock awards, performance units and stockbonuses. A maximum of 1,500,000 shares of Southwest Casino Corporation commonstock are reserved for issuance under the plan. As of September 30, 2006,925,000 options were issued and are outstanding.

In addition to theassumption of the 2004 Stock Incentive Plan, Southwest Casino Corporationassumed outstanding non-plan options to acquire shares of Southwest Casino andHotel Corp. common stock as part of its reorganization. The Company assumedobligations in the form of stock options to issue 1,575,000 shares of itscommon stock at a weighted average price of $.62 per share.

5

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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Valuation and ExpenseInformation under SFAS 123(R)

On January 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123 (revised2004), *Share-Based Payment* (“SFAS123(R)”), which requires the measurement and recognition of compensationexpense for all stock-based payment awards made to employees and directorsincluding employee stock options and employee stock purchases based onestimated fair values. In March 2005, the SEC issued Staff Accounting BulletinNo. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied certainprovisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s consolidated statement of operations. SFAS123(R) supersedes the Company’s previous accounting under the provisions ofSFAS No. 123, *Accounting for Stock-BasedCompensation*(“SFAS 123”). As permitted by SFAS 123, the Companymeasured compensation cost for options granted before January 1, 2006, inaccordance with Accounting Principles Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees*andrelated interpretations. Accordingly, before January 1, 2006 no accountingrecognition was given to stock options granted at fair market value until theywere exercised. Upon exercise, net proceeds, including tax benefits realized,were credited to equity.

The Company adopted SFAS123(R) using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the first day ofthe Company’s fiscal year 2006. In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). The effect of the change was to decrease net earnings for thethree and nine months ended September 30, 2006 by $40,294 and $125,705 andbasic and diluted earnings per share by $0.002 and $0.006, respectively, ascompared to what results for the period would have been had the intrinsicmethod been used. There was no share-based compensation expense related toemployee stock options and employee stock purchases recognized in the financialstatements during the three and nine months ended September 30, 2005.

Options are granted toemployees and directors at prices equal to the market value of the stock on thedates the options are granted. The options granted have terms of 5 to 10 yearsfrom the grant date and granted options typically vest quarterly over a one tothree year period. The fair value of each option is amortized into compensationexpense over the period the option vests. We have estimated fair value of allstock options as of the date of grant applying the Black-Scholes pricingvaluation model. The application of this valuation model involves assumptionsthat are judgmental and sensitive in the determination of compensation expense.No options were granted during the three months ended September 30, 2006. Thekey assumptions used in determining the fair value of options during the ninemonths ended September 30, 2006 were:

|                                          | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| Expected price  volatility               |       | 105% - 112                                                    | %          |
| Risk-free  interest rate                 |       | 4.42% - 5.05                                                  | %          |
| Weighted average  expected life in years |       | 10 years                                                      |       |
| Dividend yield                           |       | 0                                                             | %          |
| Pre-vesting  forfeiture rate             |       | 0                                                             | %          |
| Weighted-average Fair  value             |       | $                                                             | 0.61       |   |
|                                          |            |                                                               |            |  |

 

Historical informationwas the primary basis for the selection of the expected volatility, expecteddividend yield, and the expected lives of the options. The risk-free interestrate was selected based upon yields of U.S. Treasury issues with a term equalto the expected life of the option being valued. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Pre-vesting forfeitures were estimated to be zero in the three and nine monthsended September 30, 2006 based primarily on historical experience. Ifpre-vesting forfeitures occur in the future, the Company will record thebenefit related to those forfeitures as the forfeitures occur. In the Company’spro forma information required under SFAS 123(R) for the periods before March31, 2006, the Company also accounted for forfeitures as they occurred.

6

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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Status of optionsduring the nine months ended September 30, 2006
| ** **                                 | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------|------------|
| Balance at  December 31, 2005              |       | 1,775,000                |       | $                                              | 0.65       |                                             |       |                                |       |   |
| Granted (1)                                |       | 725,000                  |       | $                                              | 0.66       |                                             |       |                                |       |   |
| Forfeited/cancelled/expired                |       | 0                        |       |                                           |       |                                             |       |                                |       |
| Exercised                                  |       | 0                        |       |                                           |       |                                             |       |                                |       |
| Balance at  September 30, 2006             |       | 2,500,000                |       | $                                              | 0.65       |                                             |       |                                |       |   |
|                                       |       |                     |       |                                           |       |                                             |       |                                |       |
| Options  outstanding at September 30, 2006 |       | 2,500,000                |       | $                                              | 0.65       |                                             | 6.3 years  |                                | $          | 0 |   |
| Options exercisable at  September 30, 2006 |       | 1,912,917                |       | $                                              | 0.65       |                                             | 5.4 years  |                                | $          | 0 |   |

----

(1) - See Note 13

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on Southwest CasinoCorporation closing stock price of $0.52 per share on September 30, 2006, thatthe option holders would have received had all option holders exercised theiroptions as of that date. As of September 30, 2006, the Company’s unrecognizedshare-based compensation related to stock options was approximately $343,000.This cost is expected to be expensed over a weighted average period of two andone-half years.

Consolidated pro forma information required under SFAS123(R)

The following table illustrates the effect on netincome and earnings per share if we had applied the fair value recognitionprovisions of SFAS No. 123(R) during the three and nine months ended September30, 2005. For the purpose of this pro forma disclosure, the value of theoptions is estimated using Black-Scholes option-pricing model and amortized toexpense over the options vesting periods.
| ** **                                                                                                                           | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Net Income as  Reported                                                                                                              |       | $                                                              | 901,196    |                                                          | $          | 794,209 |   |
| Deduct: Total  stock-based compensation expenses determined under fair value based method  for all awards, net of related tax effect |       | 14,258                                                         |       | 82,694                                                        |       |
| *Pro  forma* net income                                                                                                              |       | $                                                              | 886,938    |                                                          | $          | 711,515 |   |
|                                                                                                                                 |       |                                                           |       |                                                          |       |
| Income per  share:                                                                                                                   |       |                                                           |       |                                                          |       |
| Basic — as reported                                                                                                             |       | $                                                              | 0.05       |                                                          | $          | 0.04 |   |
| Basic —*pro forma*                                                                                                              |       | $                                                              | 0.05       |                                                          | $          | 0.04 |   |
| Fully-diluted — as reported                                                                                                     |       | $                                                              | 0.04       |                                                          | $          | 0.04 |   |
| Fully-diluted — *pro forma*                                                                                                     |       | $                                                              | 0.04       |                                                          | $          | 0.03 |   |

 

On November 10, 2005, theFASB issued FASB Staff Position No. FAS 123(R)-3 (“FSP 123(R)”), TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards. FSP 123(R)-3 permits the Company to elect from alternative transitionmethods for calculating the pool of tax benefits available to absorb taxdeficiencies recognized subsequent to the adoption of FAS 123(R). No taxbenefit has been recorded on the share based compensation expense for the ninemonth period ended September 30, 2006.

##### **NOTE4 —********PROMOTIONAL ALLOWANCES**

Revenue does not include theretail amount of rooms, food, and beverages provided gratuitously to customers,which was approximately $895,000 and $934,000 for the nine months endedSeptember 30, 2006 and 2005, respectively and was approximately $315,000 and$385,000 for the three months ended September 30, 2006 and 2005, respectively.

7

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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**NOTE 5 — INTANGIBLE ASSETS AND CASINOMANAGEMENT AGREEMENT**

Intangible Assets, net ofamortization consisted of the following at September 30:

|                                          | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|
| Casino  management contract rights       |       | $        | 339,870    |   |
| Loan costs —  long-term obligations |       | 98,776   |       |
| Total                                    |       | $        | 438,646    |   |

 

Future amortization ofmanagement contract rights and loan costs are as follows:

| Twelve Months Ended September 30, | ** ** |
|-------------------------------------------------------|------------|
| 2007                                                  |       | $ | 438,646 |   |
|                                                       |            |  |  |  |

 

The Company entered intoan agreement with the Cheyenne and Arapaho Tribes of Oklahoma (CATO) formanagement of its casinos located in Oklahoma that was to expire on May 19,2004. In exchange for extending the contract through May 19, 2007, the Companyhas transferred title to a tract of land to CATO. The exchange took place in2003 and the cost of the land is being amortized over the term of themanagement contract.

Loan costs in the amountof $254,001 were incurred in connection with a term loan of $2,500,000 fromCrown Bank. The loan costs are being amortized over the term of the loan.

**NOTE 6— NORTH METRO HARNESSINITIATIVE, LLC (“North Metro”)**

The Company evaluates whether North Metro should betreated as a variable interest entity (“VIE”) subject to consolidation duringthe applicable reporting periods under Financial Accounting Standards BoardInterpretation 46(R) — *Consolidation of VariableInterest Entities (as amended*). The Company determined that NorthMetro should be treated as a VIE and that North Metro should be consolidatedwithin the Company’s financial statements for the nine months ended September30, 2005 for the following reason: The Company held 50% of North Metro’s votingrights but as of September 30, 2005, the Company had provided approximately 67%of North Metro’s financial support. Because the Company would absorb financiallosses of North Metro that were disproportionate to its 50 percent decisionmaking power, the Company determined that North Metro was a VIE subject toconsolidation for the period ended September 30, 2005

Due to contributions of capital made by MTR-Harness,Inc. (“MTR”) as of October 20, 2005, in accordance with the North Metro MemberControl Agreement dated June 8, 2004, the Company no longer provides financialsupport in excess of its 50 percent decision making power. As of September 30,2006, the Company has provided approximately 39 percent of the financialsupport, but still retains its 50 percent decision making power. Therefore,since October 20, 2005, the Company has accounted for its investment in NorthMetro on the equity method.

For the three and nine months ended September 30,2006, the Company has recorded a loss from this unconsolidated subsidiary, netof tax benefit of $39,618 and $140,083, respectively, as follows:

|                                                         | ** ** | **Three months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| North Metro:                                            |       |                                                           |       |                                                          |       |
| Revenues                                                |       | $                                                              | 18,218     |                                                          | $          | 18,218 |   |
| Lobbying expenses                                       |       | $                                                              | 24,000     |                                                          | $          | 102,000 |   |
| License fees — Minnesota Racing Commission         |       | 61,090                                                         |       | 187,881                                                       |       |
| Other expenses                                          |       | 40,817                                                         |       | 100,285                                                       |       |
| Total expenses                                          |       | $                                                              | 125,907    |                                                          | $          | 390,166 |   |
| Net (loss)                                              |       | $                                                              | (107,689   | )                                                             | $          | (371,948 | ) |
|                                                    |       |                                                           |       |                                                          |       |
| Southwest Casino  Corporation:                          |       |                                                           |       |                                                          |       |
| 50% share of net (loss)                                 |       | (53,845                                                        | )          | (185,974                                                      | )          |
| Net tax benefit                                         |       | 10,178                                                         |       | 41,842                                                        |       |
| (Loss) of  unconsolidated subsidiary net of tax benefit |       | $                                                              | (43,667    | )                                                             | $          | (144,132 | ) |

 

8

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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For the three and ninemonths ended September 30, 2005, the Company consolidated the results ofoperations of North Metro, resulting in recording development expenses of$124,193 and $379,960 net of minority interest in the loss from consolidatedsubsidiary of $62,096 and $189,980.

**NOTE 7- LINE OF CREDIT**

On October 20, 2005, the Company entered into anagreement to borrow up to $450,000 under a revolving line of credit due April30, 2007. The interest rate is Prime +1%, and not less than 7.5%. Currently theinterest rate is 9.25%. At September 30, 2006, $3,708 was available to borrow.The loan is guaranteed to the extent of $300,000 by three principal officers ofthe Company. The line of credit is included in notes payable on theaccompanying balance sheet.

**NOTE 8 — EARNINGS (LOSS) PERSHARE**

For all periods, basicearnings (loss) per share is calculated by dividing earnings (loss) by theweighted-average number of common shares outstanding. Diluted earnings pershare for the three and nine months ended September 30, 2006 and 2005, reflectthe effect of all potentially dilutive common shares outstanding by dividingnet earnings by the weighted-average of all common and potentially dilutiveshares outstanding.

##### The following is a reconciliation of basic and diluted earnings pershare:

| Three months ended September 30, 2006: | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted  Average Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings per  Share                                       |       | $                                  | 559,983    |                                             | 19,688,656 |                         | $          | 0.03 |   |
| Effect of Dilutive Securities:                                  |       |                               |       |                                             |       |                         |       |
| Outstanding  Options and Warrants                               |       |                               |       | 976,059                                          |       |                         |       |
|                                                            |       | $                                  | 559,983    |                                             | 20,664,715 |                         | $          | 0.03 |   |

 

| Three months ended September 30, 2005: | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted  Average Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings per  Share                                       |       | $                                  | 901,196    |                                             | 19,400,884 |                         | $          | 0.05 |   |
| Effect of Dilutive  Securities:                                 |       |                               |       |                                             |       |                         |       |
| Outstanding  Options and Warrants                               |       |                               |       | 2,497,500                                        |       |                         |       |
|                                                            |       | $                                  | 901,196    |                                             | 21,898,384 |                         | $          | 0.04 |   |

 

| Nine months ended September 30, 2006: | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted  Average Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings per  Share                                      |       | $                                  | 1,235,204  |                                             | 19,671,249 |                         | $          | 0.06 |   |
| Effect of Dilutive  Securities:                                |       |                               |       |                                             |       |                         |       |
| Outstanding  Options and Warrants                              |       |                               |       | 1,019,308                                        |       |                         |       |
|                                                           |       | $                                  | 1,235,204  |                                             | 20,690,557 |                         | $          | 0.06 |   |

 

| Nine months ended September 30, 2005: | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted  Average Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings per  Share                                      |       | $                                  | 794,209    |                                             | 19,471,448 |                         | $          | 0.04 |   |
| Effect of Dilutive  Securities:                                |       |                               |       |                                             |       |                         |       |
| Outstanding  Options and Warrants                              |       |                               |       | 2,715,083                                        |       |                         |       |
|                                                           |       | $                                  | 794,209    |                                             | 22,186,531 |                         | $          | 0.04 |   |

 

9

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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**NOTE 9 — INCOME TAXES**

Management evaluated itsprobable ability to utilize deferred tax assets arising from net operating losscarry forwards, deferred tax assets and other ordinary items and determinedthat a valuation allowance was appropriate during the three and nine monthsended September 30, 2005 based upon prior years net losses. As a result of thisevaluation, the Company did not recognize a tax benefit during the nine monthsended September 30, 2005. At December 31, 2003, the Company established adeferred tax asset relating to net operating losses. Management evaluated allevidence and determined that a portion of the deferred tax assets relating tonet operating losses would be utilized in 2006 based upon forecasted income forthe Company in 2006. During the three and nine months ended September 30, 2006,the Company has recorded a tax provision. In addition, during the three monthsended September 30, 2006, the Company reduced a portion of the valuationallowance to offset net income for the three months ended September 30, 2006,as net income exceeded management’s forecasted income for 2006. Managementevaluated the valuation allowance against the deferred tax assets at September30, 2006 and did not reverse the valuation allowance due to the uncertainty ofcontinuing the management relationship with the Cheyenne and Arapaho Tribes. Asof September 30, 2006, the Company’s deferred tax asset is zero.

**NOTE 10 — RELATED PARTY TRANSACTIONS**

At its meeting on April26, 2006, the independent members of the Company’s Board of Directors approvedone-time payments to James Druck, CEO, Thomas Fox, President and CFO, andJeffrey Halpern, Vice President of Government Affairs, as partial repayments ofthe Company’s outstanding liabilities for their unpaid salaries, the majorityof which is from years before 1998. The Board approved payments of $50,000 toMr. Druck and Mr. Halpern and $10,000 to Mr. Fox. The Company made thesepayments to Mr. Halpern on April 28, 2006 and Mr. Druck and Mr. Fox on May 15,2006. As of September 30, 2006, the remaining balance outstanding is $122,467.

During the nine monthsended September 30, 2006 and 2005, the Company paid Berc & Fox Limited$15,150 and $15,398 for tax and accounting services, respectively. North Metropaid Berc & Fox Limited $975 during the nine months ended September 30,2006 for tax services. Thomas Fox is a shareholder and officer in Berc &Fox Limited.

##### **NOTE11 — PROJECT DEVELOPMENT COSTS**

The Company continues to pursue additional gamingopportunities and as a result continues to incur project development expenses.For the three and nine months ended September 30, 2006, development expenseswere $47,642 and $225,125. For the three and nine months ended September 30,2005, development expenses were $138,194 and $653,739. Included in the ninemonths ended September 30, 2005 amount is a $249,778 write-off of an option toacquire the Gold Rush real estate that the Company allowed to expire unexercisedon February 28, 2005. In addition, the Company included development expensesincurred by North Metro Harness Initiative, LLC, in the Company’s consolidatedfinancial statements for the three and nine months ended September 30, 2005.See Note 6.

**NOTE 12 — SEGMENT INFORMATION**

Segment informationrelated to the three months ended September 30, 2006 follows:
| ** **                                   | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Project**     | ** ** | **Reconciling**    | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (2)** | ** ** | **Total**  | ** ** |
|                                         |       |           |       |           |       |            |       |               |       |       |       |
| Revenues                                     |       | $              | 4,461,252  |           | $          | 1,468,192       |       | $                  | —     |       | $          | — |   | $ | 5,929,444 |   |
| Segmented profit (loss)  before income taxes |       | 359,352        |       | 506,928        |       | (101,486        | )          | 53,844             |       | 818,638    |       |
| Segmented assets                             |       | 13,489,529     |       | 1,357,680      |       | 4,664,550       |       | —             |       | 19,511,759 |       |
|                                              |            |                |            |                |            |                 |            |                    |            |            |            |  |  |  |  |  |

 

10

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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Segment informationrelated to the three months ended September 30, 2005 follows:
| ** **                                   | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Project**     | ** ** | **Reconciling**    | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)** | ** ** | **Total**  | ** ** |
|                                         |       |           |       |           |       |            |       |               |       |       |       |
| Revenues                                     |       | $              | 4,373,532  |           | $          | 1,427,880       |       | $                  | —     |       | $          | — |   | $ | 5,801,412 |   |
| Segmented profit (loss)  before income taxes |       | 248,812        |       | 714,481        |       | (124,194        | )          | 62,097             |       | 901,196    |       |
| Segmented assets                             |       | 15,223,110     |       | 2,614,456      |       | 2,706,678       |       | —             |       | 20,544,244 |       |
|                                              |            |                |            |                |            |                 |            |                    |            |            |            |  |  |  |  |  |

 

Segment informationrelated to the nine months ended September 30, 2006 follows:
| ** **                                   | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Project**     | ** ** | **Reconciling**    | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (2)** | ** ** | **Total**  | ** ** |
|                                         |       |           |       |           |       |            |       |               |       |       |       |
| Revenues                                     |       | $              | 12,186,352 |           | $          | 4,562,005       |       | $                  | —     |       | $          | — |   | $ | 16,748,357 |   |
| Segmented profit (loss)  before income taxes |       | 386,257        |       | 1,833,546      |       | (411,099        | )          | 185,974            |       | 1,994,678  |       |
| Segmented assets                             |       | 13,489,529     |       | 1,357,680      |       | 4,664,550       |       | —             |       | 19,511,759 |       |
|                                              |            |                |            |                |            |                 |            |                    |            |            |            |  |  |  |  |  |

 

Segment informationrelated to the nine months ended September 30, 2005 follows:
| ** **                                   | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Project**     | ** ** | **Reconciling**    | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)** | ** ** | **Total**  | ** ** |
| ** **                                   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | ** **         | ** ** | ** ** | ** ** |
| Revenues                                     |       | $              | 12,057,394 |           | $          | 3,640,785       |       | $                  | —     |       | $          | — |   | $ | 15,698,179 |   |
| Segmented profit (loss)  before income taxes |       | 15,144         |       | 969,046        |       | (379,961        | )          | 189,980            |       | 794,209    |       |
| Segmented assets                             |       | 15,223,110     |       | 2,614,456      |       | 2,706,678       |       | —             |       | 20,544,244 |       |
|                                              |            |                |            |                |            |                 |            |                    |            |            |            |  |  |  |  |  |

----

(1)                                   Reconcilingitem is loss in subsidiary allocated to minority interest.

(2)                                   Reconcilingitem is the loss of unconsolidated subsidiary before income taxes.

**NOTE 13 — BOARD OF DIRECTORS**

On January 10, 2006, aspart of the Company’s compensation for independent members of its Board ofDirectors, Southwest granted non-qualified options to purchase 150,000 sharesof its common stock at a price of $0.65 per share to each of the fourindependent members of its Board of Directors. These options vest in 12 equalinstallments on the last day of each fiscal quarter of the company over thenext three years and remain exercisable for 10 years. If a director’s serviceon the Southwest Board terminates due to mandatory retirement, the options willcontinue to vest and remain exercisable for the full 10 years. If a director’sservice terminates due to death or disability, the options will remainexercisable, to the extent vested at the time service terminated, for 12months. If a director’s service terminates for any other reason, the optionswill remain exercisable, to the extent vested at the time service terminated,for 90 days. If a change in control of Southwest occurs, as defined in theCompany’s 2004 Stock Incentive Plan, the options will immediately vest in fulland remain exercisable for the entire 10-year term.

On January 10, 2006, theBoard of Directors established an Audit Committee and elected David Abramson,Jim Holmes, and Gregg Schatzman to serve on the Committee. The Board ofDirectors elected David Abramson as Chair of its Audit Committee. Mr. Abramsonreceived options to purchase 75,000 shares of common stock, on the same termsas described in the preceding paragraph, in consideration of his service asAudit Committee Chair.

11

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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##### **NOTE14 - COMMITMENTS AND CONTINGENCIES**

##### **ManagementAgreement:**

As discussed in Note 5, the Company has an agreement withthe Cheyenne and Arapaho Tribes of Oklahoma (CATO) for management of CATO’scasinos located in Concho and Clinton, Oklahoma that expires on May 19, 2007.The management fees received from this contract are significant to the Company’scash flow from operations. The Company is currently working to extend theCompany’s management relationship with CATO. We have been invited, along with other management companies, to presentour proposal to manage the casinos beyond May 19, 2007 at a Tribal Councilmeeting on November 18, 2006. If the Company is unsuccessful inextending this relationship it will have a material adverse impact on theCompany’s cash flow from operations.

**North Metro Harness Initiative, LLC (“North Metro”)commitments:**

The Company owns a 50 percent membership interest inNorth Metro. North Metro has entered into an agreement for the development ofthe land, buildings and related property to operate a racetrack and card room.Fees related to the agreement total 3% of the project cost, which is defined asthe total development cost less the cost to purchase the land. The agreementbegan on May 1, 2003, and continues until the completion of the project, unlessearlier terminated. North Metro currently pays fees of $6,000 per month, plusapplicable out of pocket expenses. Upon the start of construction, two thirdsof the total expected fee (less previous monthly payments) is due. If theagreement is terminated before completion of the project, any unpaid fees aredetermined based on the completed status of the project at the time oftermination, as defined in the agreement.

North Metro has also entered into agreements tomonitor legislation and perform lobbying activities related to its racetrackand card room development. These agreements are generally on a month-to-monthbasis, and may be terminated by either party to the agreement. North Metro paysthe monthly commitments of approximately $18,000 per month during the Minnesotalegislative session and approximately $8,000 outside of the Minnesotalegislative session.

**Legal Proceeding**

North Metro:

In January 2005, theMinnesota Racing Commission voted to grant class A and B licenses to own andoperate a harness racetrack and card room to North Metro Harness Initiative,LLC, in which the Company owns a 50% membership interest. These licenses permitNorth Metro to develop and run a harness racetrack and a 50-table card room inthe City of Columbus in Anoka County, Minnesota. North Metro intervened inlitigation brought by an anti-gambling citizens group against the MinnesotaRacing Commission in an attempt to invalidate those licenses. In June 2005, theDistrict Court issued a summary judgment order dismissing plaintiff’s claimsand in favor of the Minnesota Racing Commission and North Metro. On June 6,2006 the Minnesota Court of Appeals affirmed the decision of the District Courtto dismiss the case. The plaintiffs did not file a timely request for reviewwith the Minnesota Supreme Court, concluding this lawsuit in July 2006.

Other:

The Company is involvedin various claims, legal actions and complaints arising in the ordinary courseof business. In the opinion of management, any losses that may occur from thesematters are adequately covered by insurance or are provided for in our financialstatements, and the ultimate outcome of these other matters will not have amaterial effect on our financial position or results of operations.

**NOTE 15 - NEW ACCOUNTINGPRONOUNCEMENTS**

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and for interimperiods within those years. This statement defines fair value, establishes aframework for measuring fair value and expands the related disclosurerequirements. We are currently evaluating the potential impact of thisstatement.

In June 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - anInterpretation of FASB Statement No. 109” (Interpretation No. 48).Interpretation No. 48 clarifies the accounting for uncertain tax positions inaccordance with SFAS 109, “Accounting for Income Taxes.” Pursuant toInterpretation 

12

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**SOUTHWEST CASINO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006**

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No. 48, the Company willbe required to recognize in its financial statements the largest tax benefit ofa tax position that is “more-likely-than-not” to be sustained on audit, basedsolely on the technical merits of the position as of the reporting date. Onlytax positions that meet the “more-likely-than-not” threshold at that date maybe recognized. The term “more-likely-than-not” means a likelihood of more than50 percent. Interpretation No. 48 also provides guidance on new disclosurerequirements, reporting and accrual of interest and penalties, accounting ininterim periods and transition. The cumulative effect of initially applyingInterpretation No. 48 will be recognized as a change in accounting principle asof the date of adoption. We have begun to evaluate the impact of applying thisinterpretation as of January 1, 2007, the effective date of the interpretationfor the Company. We do not expect Interpretation No. 48 to have a materialimpact on our financial position, results of operation or cash flows.

**NOTE 16 —SUBSEQUENT EVENTS**

TheCompany entered into an amendment of its term loan with Crown Bank in October2006. The agreement has been amended to allow the Company to repay theremaining principal in seven equal payments through April 30, 2007 as opposedto the original agreement under which the Company would have been required torepay the remaining principal in five equal principal payments through March 1,2007. Monthly principal payments will be $148,810 as compared to the originalpayments of $208,333.

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**Item 2. Management’sDiscussion and Analysis or Plan of Operation**

The following is adiscussion and analysis of the financial position and operating results ofSouthwest Casino Corporation (referred to in this discussion, together with itsconsolidated subsidiaries where appropriate, as “Southwest Casino”, “Southwest”,the “Company”, “we”, “our” and “us”) for the three and nine months endedSeptember 30, 2006 and 2005.

***Summary ofConsolidated Operating Results:***

For the quarter ended September 30, 2006, Southwesthad net income of $559,983 on revenue of $5,929,444 compared to net income of$901,196 on revenue of $5,801,412 for the same period in 2005. This amounts tobasic and fully diluted earnings of $0.03 per outstanding share during thethird quarter of 2006, as compared to earnings of $0.05 per outstanding share($0.04 per share on a fully-diluted basis) during the third quarter of 2005.

For the nine months ended September 30, 2006,Southwest had net income of $1,235,204 on revenue of $16,748,357 compared tonet income of $794,209 on revenue of $15,698,179 for the same period during2005. This amounts to basic and fully diluted earnings of $0.06 per outstandingshare in the first nine months of 2006, as compared to basic and fully dilutedearnings of $0.04 per outstanding share during the first nine months of 2005.

Net income and earningsper share for the third quarter of 2006 were lower than the third quarter of2005, primarily due to a charge for income taxes of approximately $215,000 in2006 as compared to $0 in the same period in the prior year. Additionally,interest expense was higher in the third quarter of 2006 than 2005 byapproximately $80,000.

For the nine months endedSeptember 30, 2006, we attribute our improvement in operating results primarilyto the increased management fees generated at the casinos we manage for theCheyenne and Arapaho Tribes of Oklahoma and the absence in 2006 of anapproximately $250,000 expense related to the expiration during the firstquarter of 2005 of an option to acquire the real property that houses our GoldRush and Gold Digger’s casinos in Cripple Creek, Colorado.

***Overview:***

Our principal business is the management, operationand development of gaming facilities in emerging and established gamingjurisdictions. Currently, we operate three casinos in Cripple Creek, Colorado —Gold Rush Hotel and Casino, Gold Digger’s and Uncle Sam’s. We also manage twoNative American gaming operations in Oklahoma for the Cheyenne and ArapahoTribes of Oklahoma, Lucky Star - Concho and Lucky Star - Clinton. Lucky Star -Concho is located on U.S. Highway 81, just north of the Oklahoma community ofEl Reno. Lucky Star - Clinton is located 60 miles west of Lucky Star - Conchoin the community of Clinton, Oklahoma on Old Route 66 near Interstate I-40.

We continually evaluate other management, consulting,development and acquisition opportunities related to gaming that have thepotential to generate new revenue streams for us. New opportunities for whichwe have an agreement or have received the appropriate licenses include:

·                  InJanuary 2005, the Minnesota Racing Commission voted to grant class A and Blicenses to own and operate a harness racetrack and card room to North MetroHarness Initiative, LLC, (“North Metro”) in which we own a 50% membershipinterest. These licenses permit North Metro to develop and run a harnessracetrack and a 50-table card room in the City of Columbus, Anoka County,Minnesota. Lawsuits against the Minnesota Racing Commission (“MRC”) challengingthe validity of those licenses concluded in favor of MRC and North Metro duringJuly 2006. We are now actively engaged in pre-construction activities andarranging construction financing for the project.

·                  On March 24, 2006 we entered into aGaming Management Agreement with the Otoe-Missouria Tribe of Indians in northcentral Oklahoma. Under this agreement, we will manage the Tribe’s Seven ClansParadise Casino near Ponca City, Oklahoma. Southwest will receive managementfees equal to 20 percent of the net revenue from gaming and non-gaming activityat the facility. The Management Agreement has a five-year term beginning on thedate Southwest assumes management of the facility. We have submitted theagreement to the National Indian Gaming Commission (“NIGC”) for approval. Theagreement is not effective, and we cannot provide any services or receive anycompensation under the agreement until we receive that approval. At this timewe can not predict how long the NIGC will take to complete its ongoing 

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backgroundinvestigation of Southwest, the total costs related to the NIGC’s backgroundinvestigation and approval process that Southwest will be required to pay, ifor when the Tribe will respond to outstanding comments on the managementagreement from the NIGC, and if or when the NIGC will approve the managementagreement.

***Operating segments:***

Our executive officers review operating results,assess performance and make decisions related to the allocation of resources ona property-by-property basis. We, therefore, believe that each property is anoperating segment. In order to provide more detail in a more understandablemanner than would be possible on a consolidated basis, and to facilitatediscussion of operating revenue, we have grouped our properties as follows:

| **Casino Management:**    | **Casino Operations:**                |
|---------------------------|---------------------------------------|
| Lucky Star — Concho  | Gold Rush/ Gold Digger’s Casinos |
| Lucky Star — Clinton | Uncle Sam’s Casino               |

 

**Casino Management:**

Southwest Casino and Hotel Corp. manages two casinosfor the Cheyenne and Arapaho Tribes of Oklahoma under the Third Amended andRestated Gaming Management Agreement dated June 16, 1995. This Agreement hasbeen extended twice and currently expires on May 19, 2007. Southwest is working to extend thisrelationship beyond May 19, 2007, but is uncertain whether we will continue tomanage these casinos after that date. We have been invited, along with othermanagement companies, to present our proposal to manage the casinos beyond May19, 2007 at a Tribal Council meeting on November 18, 2006. If this relationshipis not extended, the Company will lose this revenue source in May 2007, whichwould have a material adverse effect on our operating results.

###### **Lucky Star - Concho**

We earned management feesof $896,449 and $1,000,181 from Lucky Star - Concho during the three monthsended September 30, 2006 and 2005, respectively, a decrease of 10.4%. We earnedmanagement fees of $2,809,052 and $2,355,217 from Lucky Star - Concho duringthe nine months ended September 30, 2006 and 2005, respectively, an increase of19.3%. The dramatic increase in management fees for the nine months endedSeptember 30, 2006 as compared to the same period in the prior year is thedirect result of the Tribes signing a gaming compact with the state of Oklahomain April 2005 and the subsequent addition and effective management of the newgaming opportunities permitted under that compact. The compact allows LuckyStar — Concho to offer its patrons card games including poker, as well ascertain Class III electronic games permitted under the compact, all of whichhave resulted in a significant increase in revenue. The decrease in managementfees in the third quarter of 2006 compared to the same period in the prior yearis due to greater competition from other tribal gaming operations closer toOklahoma City and from Remington Park, a racetrack in Oklahoma City that beganoffering electronic gaming near the end of 2005, and increases in fuel coststhat reduce patrons’ discretionary spending. We anticipate that the fourthquarter revenues will also be adversely affected by increased competition.

**Lucky Star - Clinton**

We earned management feesof $571,743 and $427,699 from Lucky Star - Clinton during the three monthsended September 30, 2006 and 2005, respectively, an increase of 33.7%. Weearned management fees of $1,752,953 and $1,285,568 from Lucky Star - Clintonduring the nine months ended September 30, 2006 and 2005, respectively, anincrease of 36.4%. The increase in management fees is the result of an improvedmix of games on the floor, including the introduction of slim line cabinetsthat allowed us to put more gaming machines in the same amount of space, andthe successful renegotiation of machine vendor fees on a number of our morepopular electronic games. Even though Lucky Star — Clinton is at capacity interms of how many gaming machines and customers the facility can accommodate,especially on weekends, we continue to anticipate increases in revenues duringthe fourth quarter of 2006 compared to the comparable period in the prior year.

In addition, in earlyNovember 2006, we received a Class ‘B’ license under which Lucky Star - Clintonwill also offer Class III games permitted under the gaming compact with 

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the State of Oklahoma. Weanticipate that providing these additional gaming opportunities will furtherimprove operating results at this facility.

###### **Other Matters**

On March 4, 2006, the Tribes rescinded their priorapproval of an amendment to the Gaming Management Agreement under which we wereto assist them in developing an additional gaming facility at Canton Lakes,Oklahoma. This amendment had been submitted to the NIGC for approval inSeptember 2003, but that approval had not been received.

In conjunction with seeking a continued gamingmanagement relationship with the Tribes beyond May 2007, we are also discussingwith the Tribes the possibilities of expanding both the Concho and Clintonfacilities.

**Casino operations**:

**Gold Rush/Gold Digger’s CasinoResults**
| ** **       | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                      | 3,957,770  |                                                   | $          | 3,872,556                            |       | 2.2                                                   | %          | $                                                     | 10,856,649 |                                 | $          | 10,799,025 |   | 0.5 | % |
| Total revenues   |       | 4,166,323                                              |       | 4,089,986                                              |       | 1.9                                  | %          | 11,412,467                                            |       | 11,290,598                                            |       | 1.1                                  | %          |
| EBITDA           |       | 1,127,107                                              |       | 1,154,387                                              |       | (2.4                                 | %)         | 2,651,195                                             |       | 2,696,442                                             |       | (1.7                                 | %)         |
| Operating margin |       | 27.1                                                   | %          | 28.2                                                   | %          |                                 |       | 23.2                                                  | %          | 23.9                                                  | %          |                                 |       |
|                  |            |                                                        |            |                                                        |            |                                      |            |                                                       |            |                                                       |            |                                      |            |  |  |  |  |

 

Three Months EndedSeptember 30, 2006 v September 30, 2005:

Gold Rush/Gold Digger’s (“GRGD”)recorded a 2.2% increase in casino revenues for the quarter although theCripple Creek market increased by less than 1.0%. GRGD attributes this increasein gaming revenues to increased marketing efforts. Due to increased marketingcosts, EBITDA fell slightly (2.4%) compared to prior year. We continue to seehigh gas prices reduce the number of visits our patrons are able to make asmost live about an hour’s drive from Cripple Creek. We also have increasedcompetition as a nearby competitor expanded their facility by about 80 machinesyear-over-year, which has had an adverse impact on us. We expect this conditionto stabilize in 2007.

Nine Months EndedSeptember 30, 2006 v September 30, 2005:

Gold Rush/Gold Digger’srecorded a 0.5% increase in casino revenues for the nine months ended September30, 2006 compared to prior year. The market increased by less than 2.0% for thesame time period. GRGD revenue has been adversely impacted by a casinoexpansion at a nearby competitor that increased their slot capacity by morethan 80 machines. We expect this situation to stabilize in 2007. For theperiod, EBITDA is about flat compared to prior year. We expect operatingresults in the fourth quarter of 2006 to be improved over the comparable periodin the prior year, unless we encounter adverse weather conditions on weekends inthe fourth quarter of 2006.

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**Uncle Sam’s Casino Results**:
| ** **       | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                      | 258,620    |                                                   | $          | 265,694                              |       | (2.7                                                  | %)         | $                                                     | 730,427    |                                 | $          | 737,215 |   | (0.9 | %) |
| Total revenues   |       | 279,601                                                |       | 266,543                                                |       | 4.9                                  | %          | 752,043                                               |       | 739,669                                               |       | 1.7                                  | %          |
| EBITDA           |       | (89,389                                                | )          | (131,831                                               | )          | 32.2                                 | %          | (329,946                                              | )          | (454,002                                              | )          | 27.3                                 | %          |
| Operating margin |       | (32.0                                                  | %)         | (49.5                                                  | %)         |                                 |       | (43.9                                                 | %)         | (61.4                                                 | %)         |                                 |       |
|                  |            |                                                        |            |                                                        |            |                                      |            |                                                       |            |                                                       |            |                                      |            |  |  |  |  |

 

Three Months EndedSeptember 30, 2006 v September 30, 2005:

Uncle Sam’s enjoyed a4.9% increase in total revenues for the third quarter compared to prior year.Late in the second quarter, Uncle Sam’s opened the Altitude Night Club &Bar, which helped increase traffic and revenues during the quarter,particularly on weekends. The higher revenues along with reduced expenseshelped improve EBITDA by more than $40,000.

Nine Months EndedSeptember 30, 2006 v September 30, 2005:

Uncle Sam’s increasedtotal revenues by 1.7% relative to prior year in large part due to the newAltitude Night Club & Bar that opened late in the second quarter of 2006.These higher revenues along with reduced expenses allowed Uncle Sam’s toimprove EBITDA by nearly $125,000. Uncle Sam’s also did not have the burden ofthe poker room in 2006, which reduced expenses this year and, in turn, helpedimprove EBITDA.

***Project Development***costs for the three and nine months ended September 30, 2006 were $47,642 and$225,125 as compared to $138,194 and $653,739 for the three and nine monthsended September 30, 2005. Project development costs for the nine months endedSeptember 30, 2005 included a $249,778 write off of an option to acquire theGold Rush/Gold Digger’s real estate, which expired unexercised on February 28,2005. In addition, for the three and nine months ended September 30, 2005, theCompany consolidated the results of operations of North Metro, recordingdevelopment expenses of $124,192 and $379,960 net of minority interest in theloss from consolidated subsidiary of $62,096 and $189,980. North Metro is nolonger consolidated in our financial statements. See Note 6 to our consolidatedfinancial statements.

In the first nine monthsof 2006, we continued to pursue other gaming opportunities. The pursuit ofthese new initiatives resulted in signing a five-year management contract withthe Otoe-Missouria Tribe of Oklahoma. We have submitted the agreement to theNational Indian Gaming Commission for approval. We cannot begin to perform workunder this contract until it is approved. Currently, the NIGC is performing abackground investigation of the Company, its executive officers, directors andshareholders as part of its contract approval process. In addition, the NIGChas reviewed the agreement and provided comments on it to Southwest and theTribe on two occasions. The Tribe has not responded to the second set ofcomments. At this time, the Company cannot predict how long the backgroundinvestigation may take to complete, the total costs related to the backgroundinvestigation and approval process to be paid by the Company, if or when theTribe will respond to the NIGC comments, and if or when NIGC approval of theagreement may be received.

In February 2006, we formed a new subsidiary to pursueopportunities in the charitable gaming market, Southwest CharitableEnterprises, LLC. For the three and nine months ended September 30, 2006, thisentity has incurred approximately $37,285 and $88,523 in expenses, which areincluded in project development costs.

***Corporate expenses***were $741,101 and $552,419 during the three months ended September 30, 2006 and2005, respectively an increase of $188,682. Corporate expenses were $2,053,397and $1,950,283 during the nine months 

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ended September 30, 2006 and 2005, respectively, anincrease of $103,114. The increase in corporate expenses during the threemonths ended September 30, 2006 over the comparable period in 2005 is primarilydue to increased salary expense of approximately $52,000, increased board feesof approximately $46,000, increased fees with the National Indian GamingAssociation of $31,000 and increased travel related expenses of $30,000. Theincrease in corporate expenses for the nine months ended September 30, 2006over the comparable period in the prior year is primarily due to increasedboard fees and salaries of approximately $195,000 offset by reduced legal feesof approximately $98,000 due in part to the settlement of a contract disputethat had required us to pay significant legal expenses during the prior yearperiod.

***Interest Expense***was $307,699 and $228,389 for the three months ended September 30, 2006 and2005, respectively and $892,222 and $751,067 for the nine months endedSeptember 30, 2006 and 2005, respectively. Interest expense increased 34.7% and18.8% during the three and nine months ended September 30, 2006 when comparedto the same period in 2005 as a result of interest incurred in connection withthe $2,500,000 loan we secured in order to meet our obligations to fund capitalcontributions to North Metro Harness Initiative, LLC.

***Minority interestin loss of consolidated subsidiary and loss of unconsolidated subsidiary, netof tax benefit*** represents our partner’s share of thelosses during the three and nine months ended September 30, 2005 and our shareof the losses during the three and nine months ended September 30, 2006. Duringthe three and nine months ended September 30, 2005 the results of North Metrowere consolidated with our financial statements; however on October 20, 2005North Metro became an unconsolidated subsidiary. See Note 6 to our consolidatedfinancial statements for our evaluation of the financial reporting for our 50%interest in North Metro.

***Effective tax rate*** for the three andnine months ended September 30, 2006 was 26.3% and 30.8%. At December 31, 2003,the Company established a deferred tax asset relating to net operating losses.Management evaluated all evidence and determined that a portion of the deferredtax assets relating to net operating losses would be utilized in 2006 basedupon forecasted income for the Company in 2006. During the three and ninemonths ended September 30, 2006, the Company has recorded a tax provision. Asof September 30, 2006 the remaining deferred tax asset was utilized. Inaddition, during the three months ended September 30, 2006, the Company reduceda portion of the valuation allowance to offset net income for the nine monthsended September 30, 2006, as net income exceeded management’s forecastedincome. Management evaluated the valuation allowance against the deferred taxassets at September 30, 2006 and did not reverse the valuation allowance due tothe uncertainty of continuing the management relationship with the Cheyenne andArapaho Tribes past May 2007. As of September 30, 2006, the Company’s deferredtax asset is zero.

We did not record a tax benefit for the losses duringthe three and nine months ended September 30, 2005, primarily due to thevaluation allowance for deferred tax assets and lack of certainty that netoperating loss carryforwards available to offset future income would not belimited under Section 382 of the Internal Revenue Code of 1986.

***Liquidity andCapital Resources:***

We generate cash flow from our Oklahoma managementactivities and casino operations in Colorado. We use the cash flows generatedto pay off debt in accordance with our agreements, fund reinvestment inexisting properties for both refurbishment and replacement of assets, and topursue additional growth opportunities. To balance our cash requirements wesupplement the cash flows generated by our operations with funds provided byfinancing activities.

Our cash flows from operations will be sufficient tomeet our normal operating and debt repayment requirements during the nexttwelve months. If we are unsuccessful in continuing our management relationshipwith the Cheyenne and Arapaho Tribes past May 2007, we will likely have toraise additional capital through debt or equity financing for periods after thenext 12 months. North Metro will need additional debt financing to fund thedevelopment of the racetrack and card room in Minnesota.

We continue to review additional opportunities toacquire or invest in companies, properties and other investments that meet ourstrategic and return on investment criteria. If we complete a materialacquisition or investment, our operating results and financial condition couldchange significantly in future periods. In addition, any new opportunity wouldin all likelihood require new equity or debt financing.

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Net cash provided byoperating activities during the nine months ended September 30, 2006 was$3,478,163 compared to $1,470,927 during the same period in the prior year, anincrease of $2,007,236. The increase between periods is primarily due to anincrease in management fees of $921,220, decreased payments of accounts payableand accrued liabilities of $692,255 and a decrease in project development costsof $165,336, net of the write-off of an option to purchase the real estate atGold Rush, which expired unexercised in February 2005, of $249,778.

Net cash used in investing activities for the firstnine months of 2006 was $843,036 compared to net cash used in investingactivities of $801,242 during the first nine months of 2005, an increase of$41,794. The increase in use of cash between the periods was due primarily toan increase in our investment in North Metro of approximately $339,000 (NorthMetro was consolidated in the prior year and is unconsolidated in the currentyear, see Note 6 to our consolidated financial statements) offset by a decreasein purchases of property and equipment of approximately $282,000.

Net cash used infinancing activities for the nine months ended September 30, 2006 was$2,074,891 compared to net cash provided by financing activities for the ninemonths ended September 30, 2005 of $246,286. During the nine months endedSeptember 30, 2006 we made payments of $1,976,891 on long-term borrowings.During the nine months ended September 30, 2005 we made payments on long-termborrowings and notes payable of $918,039, which were offset by funding of$1,140,325 from our minority partner in NMHI. At that time, North Metro was aconsolidated subsidiary of Southwest and those contributions were reported ascash provided by financing activities. The increase in payments on long-termobligations during 2006 is primarily related to our $2.5 million term noteentered into in October 2005. For the nine months ended September 30, 2006, wemade principal payments of $1.25 million relating to the term note. During2006, we also paid $110,000 to three officers related to unpaid compensationfrom prior periods.

***Line of Credit.***On October 20, 2005, we established a $450,000 line of credit with Crown Bankof Minneapolis, Minnesota that replaced a $450,000 line of credit withAssociated Bank of Minneapolis. The line of credit is due April 30, 2007 with avariable interest rate at one percent above prime but not less than 7.5% (9.25%at September 30, 2006). As of September 30, 2006, the outstanding balance was$446,292. Our three principal officers have guaranteed up to $300,000 of thisline of credit.

***Term Note*.** On October 20, 2005, theCompany entered into a term loan to borrow $2.5 million. The loan is due April30, 2007 with a variable interest rate at one percent above prime but not lessthan 7.5% (9.25% at September 30, 2006). The repayment period will extend toMay 31, 2008, if the Company achieves certain business goals. Twelveshareholders of the Company, including our three principal officers and a memberof our board of directors, guarantee the loan. The term note provided forinterest only until April 1, 2006 at which time we began making principalpayments of $208,333 per month plus interest.

TheCompany entered into an amendment of its term loan with Crown Bank in October2006. The agreement has been amended to allow the Company repay the remainingprincipal in seven equal payments through April 30, 2007 as opposed to theoriginal agreement under which the Company would have been required to repay theremaining principal in five equal principal payments through March 1, 2007.Monthly principal payments will be $148,810 as compared to the originalpayments of $208,333.

***Equipment Loan.***OnDecember 23, 2005, the Company negotiated a loan of $460,324 to pay offoutstanding payables in connection with the installation of a player trackingsystem at our three casinos in Cripple Creek, Colorado. The loan is for a termof 48 months with interest equal to the prime rate, which is 8.25% as ofSeptember 30, 2006***.***Theoutstanding balance as of September 30, 2006 was $383,603.

***Effects of CurrentEconomic and Political Conditions:***

**Competitive Pressures:**

Many casino operators are either entering or expandingin our markets — Colorado and Oklahoma — thereby increasing competition. Ascompanies have completed new or expanded projects, supply has sometimes grownat a 

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faster pace than demand, and competition has increasedsignificantly. Furthermore, several operators, including Southwest, have plansfor additional developments or expansions in our markets.

Although, the short-term effect on Southwest of thesecompetitive developments generally has been negative, we are not able todetermine the long-term impact, whether favorable or unfavorable, thatdevelopment and expansion trends and events will have on current or futuremarkets. We believe that the geographic diversity of our operations, ourservice training, our rewards and customer loyalty programs, and our continuingefforts to improve our facilities will insure continued customer loyalty andwill enable us to face the competitive challenges present within our industry.

**Political Uncertainties:**

The casino entertainment industry is subject topolitical and regulatory uncertainty. From time to time, individual jurisdictionshave considered legislation or referendums that could adversely impact ouroperations. The likelihood or outcome of similar legislation and referendums inthe future is difficult to predict.

The casino entertainment industry represents asignificant source of tax revenues to the various jurisdictions in whichcasinos operate. From time to time, various state and federal legislators andofficials have proposed changes in tax laws, or in the administration of taxlaws, that would affect the industry. It is not possible to determine withcertainty the scope or likelihood of possible future changes in tax laws or inthe administration of tax laws. If adopted, changes in tax law could have amaterial adverse effect on our financial results.

***Significant AccountingPolicies and Estimates:***

We prepare our Consolidated Financial Statements inconformity with accounting principles generally accepted in the United States.Certain of our accounting policies, including, but not limited to, theestimated lives assigned to our assets, the determination of bad debt, assetimpairment, and income taxes, require that we apply significant judgment indefining the appropriate assumptions for calculating financial estimates. Bytheir nature, these judgments are subject to an inherent degree of uncertainty.Our judgments are based on our historical experience, terms of existingcontracts, our observance of trends in the industry, information provided byour customers and information available from other outside sources, as appropriate.We cannot assure you that our actual results will not differ from ourestimates. For a discussion of our significant accounting policies andestimates, please refer to Management’s Discussion and Analysis or Plan ofOperation and Notes to Consolidated Financial Statements presented in the 2005Financial Statements included in our Annual Report on Form 10-KSB.

***Share-Based Compensation Expense:***

On January 1, 2006, weadopted Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123(R)”), whichrequires us to measure and recognize compensation expense for all share-basedpayment awards made to employees and directors, including employee and directorstock options and employee and director stock purchases, based on estimatedfair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS 123(R). We apply certain provisions of SAB 107 in ouradoption of SFAS 123(R).

SFAS 123(R) requires usto estimate the fair value of share-based payment awards on the date of grantusing an option-pricing model. The value of the portion of the award that weultimately expect to vest is recognized as expense over the requisite serviceperiods in our consolidated statement of operations. SFAS 123(R) supersedes ourprevious accounting under the provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”). As permitted by SFAS 123,we measured compensation cost for options granted before January 1, 2006, inaccordance with Accounting Principles Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees*andrelated interpretations. Accordingly, no accounting recognition was given tostock options granted at fair market value until they were exercised. Uponexercise, net proceeds, including tax benefits realized, were credited toequity.

We adopted SFAS 123(R)using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the first day ofour fiscal year 2006. In accordance with the modified prospective transitionmethod, our consolidated financial statements for prior periods have not beenrestated to 

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reflect, and do notinclude, the impact of SFAS 123(R). Share-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Share-basedcompensation expense recognized in our unaudited consolidated statement ofoperations for the three and nine months ended September 30, 2006 was $40,294and $125,705 and included both compensation expense for share-based paymentawards granted before, but not vested as of January 1, 2006 based on the grantdate fair value estimated in accordance with the pro forma provisions of SFASNo. 123 and compensation expense for the share-based payment awards grantedafter January 1, 2006. There was no share-based compensation expense related toemployee and director stock options and employee and director stock purchasesrecognized during the three and nine months ended September 30, 2005.

Upon adoption of SFAS123(R), we continue to use the Black-Scholes option pricing method that we hadused to establish fair value of options granted before January 1, 2006. Ourdetermination of fair value of share-based payment awards on the date of grantusing an option-pricing model is affected by our stock price as well asassumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, our expected stock pricevolatility and actual and projected employee stock option exercise behaviors.Any changes in these assumptions may materially affect the estimated fair valueof the share-based award.

In November 2005, theFASB issued FSP FAS 123(R)-3, Transition Election Related to Accounting for theTax Effects of Share-Based Payment Awards (“FSP 123R-3”). FSP 123R-3 provides asimplified alternative method to calculate the beginning pool of excess taxbenefits against which excess future deferred tax assets (that result when thecompensation cost recognized for an award exceeds the ultimate tax deduction)could be written off under Statement 123R. The guidance in FSP 123R-3 waseffective on November 10, 2005. We may make a one-time election to adopt thetransition method described in FSP 123R-3 before the end of our fiscal yearending December 31, 2006. No tax benefit has been recorded on the share-basedcompensation for the nine month period ended September 30, 2006.

***New Accounting Pronouncements*:**

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and for interimperiods within those years. This statement defines fair value, establishes aframework for measuring fair value and expands the related disclosurerequirements. We are currently evaluating the potential impact of thisstatement.

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”(Interpretation No. 48). Interpretation No. 48 clarifies the accounting foruncertain tax positions in accordance with SFAS 109, “Accounting for IncomeTaxes.” Pursuant to Interpretation No. 48, the Company will be required torecognize in its financial statements the largest tax benefit of a tax positionthat is “more-likely-than-not” to be sustained on audit, based solely on thetechnical merits of the position as of the reporting date. Only tax positionsthat meet the “more-likely-than-not” threshold at that date may be recognized.The term “more-likely-than-not” means a likelihood of more than 50 percent.Interpretation No. 48 also provides guidance on new disclosure requirements,reporting and accrual of interest and penalties, accounting in interim periodsand transition. The cumulative effect of initially applying Interpretation No.48 will be recognized as a change in accounting principle as of the date ofadoption. We have begun to evaluate the impact of applying this interpretationas of January 1, 2007, the effective date of the interpretation for theCompany. We do not expect Interpretation No. 48 to have a material impact onour financial position, results of operation or cash flows.

***Non-GAAP Financial Measures:***

Our executive officersconsider “EBITDA” (earnings before interest, taxes, depreciation andamortization) a useful tool for measuring the operating performance ofSouthwest. EBITDA is also a widely used measure of operating performance in thegaming industry and a principal basis for valuation of gaming companies. We useEBITDA to establish budgets, analyze results as compared to our budgets, and asa basis for incentive compensation for some personnel. However, EBITDA is not ameasurement of financial performance under accounting principles generallyaccepted in the United States and should not be considered an alternative tonet income, cash flows from operating activities, or other performance measuresderived in accordance with accounting principles generally accepted in theUnited States as indicators of our operating performance or as measures of ourliquidity. Southwest has significant 

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uses of cash flows,including capital expenditures, interest payments and debt principal repaymentsthat are not reflected in our EBITDA calculations. Our management uses EBITDA,and we present it in this discussion and analysis, only as a supplement tomeasures prepared in accordance with accounting principles generally acceptedin the United States. Please be aware that other companies in our industry maycalculate EBITDA differently than we do, which limits its usefulness as acomparative measure.

***Forward-LookingStatements:***

This Quarterly Report on Form 10-QSB contains “forward-lookingstatements” intended to qualify for the safe harbor from liability establishedby the Private Securities Litigation Reform Act of 1995. You can identify thesestatements by the fact that they do not relate strictly to historical orcurrent facts. These statements often contain words such as “may,” “will,” “project,”“might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,”“continue” or “pursue,” or the negative or other variations of those words orcomparable terminology. In particular, they include statements relating to,among other things, future actions, new projects, strategies, futureperformance, the outcome of contingencies such as legal proceedings and futurefinancial results. We have based these forward-looking statements on ourcurrent expectations and projections about future events.

We caution thereader that forward-looking statements involve risks and uncertainties thatcannot be predicted or quantified and, consequently, actual results may differmaterially from those expressed or implied in the forward-looking statements.These risks and uncertainties include, but are not limited to, the followingfactors as well as other factors described from time to time in our reportsfiled with the Securities and Exchange Commission:

·                  the continuationor extension of management contracts with our Tribal partners;

·                  our ability tobuild and maintain healthy personal and professional relationships with tribesand their officials;

·                  the potentialchange of policies and personnel of tribal governments, which could adverselyaffect our relationships;

·                  the effects ofcompetition, including location of competitors and operating and marketcompetition;

·                  access toavailable and feasible financing;

·                  our ability torecoup costs of capital investments through higher revenues;

·                  success of ourcustomer tracking and customer loyalty programs;

·                  abnormal gamingholds;

·                  litigationoutcomes and judicial actions, including gaming legislation, referenda andtaxation;

·                  the effect of economic,credit and capital market conditions on the economy in general, and on gamingcompanies in particular;

·                  constructionfactors, including delays, zoning issues, environmental restrictions, soil andwater conditions, weather and other hazards, site access matters and buildingpermit issues;

·                  the effects ofenvironmental and structural building conditions relating to the Company’sproperties;

·                  changes in laws(including increased tax rates), regulations or accounting standards,third-party relationships and approvals, and decisions of courts, regulatorsand governmental bodies; and

Any forward-looking statements are made pursuant tothe Private Securities Litigation Reform Act of 1995 and, as such, speak onlyas of the date made. We undertake no obligation to publicly update anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

## ***Risk Factors***

In reviewing this quarterly report on Form 10-QSB, youshould carefully consider the matters concerning Southwest Casino Corporationdescribed under the heading “Risk Factors” in the annual report on Form 10-KSBfiled by the Corporation on March 31, 2006, which are incorporated in thisdocument by reference.

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**Item 3. Controlsand Procedures**

We maintain disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) designed to ensure that information required to be disclosed by usin the reports we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms,and that this information is accumulated and communicated to our management,including our principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

Our management evaluated,with the participation of our principal executive officer and principalfinancial officer, the effectiveness of the design and operation of ourdisclosure controls and procedures as of September 30, 2006. Based on thatevaluation and the similar evaluations of our disclosure controls andprocedures as of December 31, 2005 and March 31, 2005, our principal executiveofficer and principal financial officer concluded that as of those dates ourdisclosure controls and procedures were ineffective because of the materialweakness in our internal control over financial reporting described below.Notwithstanding the existence of this material weakness in our internal controlover financial reporting, our management, including our principal executiveofficer and principal financial officer, believes that the consolidatedfinancial statements included in this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

Amaterial weakness is a significant deficiency that, by itself or in combinationwith other control deficiencies, results in more than a remote likelihood thata material financial misstatement will not be prevented or detected. Inconnection with their audit of our financial statements for the year endedDecember 31, 2005, our independent auditors determined that a materialadjustment to our consolidated financial statements was necessary related tothe transition of North Metro Harness Initiative, LLC from a consolidated to anunconsolidated subsidiary.

Ourmanagement determined that this material weakness resulted from the relativelysmall size of our accounting department. To address this issue, we have hired anew Chief Financial Officer, Ms. Tracie Wilson, who began working for us inJune. Ms. Wilson is a Certified Public Accountant with experience in publiccompany financial reporting. Ms. Wilson provides us with additional expertisein preparation of our financial statements, including issues related toaccounting for matters that are outside the ordinary course of our business. Webelieve the addition of Ms. Wilson will eliminate the material weakness in ourinternal control over financial reporting that was previously identified by ourindependent auditors. However, because Ms. Wilson joined Southwest late in thesecond quarter, our management has not had sufficient time to evaluate theimpact of Ms. Wilson’s work on the effectiveness of our disclosure controls andprocedures over the full reporting period.

**Changes in Internal Controls overFinancial Reporting**

There were no changes inour internal controls over financial reporting during the third quarter of 2006that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

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**PARTII - OTHER INFORMATION**

**Item1. Legal Proceedings.**

See Items 3 and 9 of ourAnnual Report on Form 10-KSB, filed March 31, 2006, for a description of ourpending legal proceedings.

North Metro HarnessInitiative, LLC (“North Metro”), in which Southwest Casino and Hotel Corp. ownsa 50 percent membership interest, intervened in litigation brought by ananti-gambling citizens group against the Minnesota Racing Commission in anattempt to invalidate the class A and B racing licenses granted to North Metro.In June 2005, the District Court issued a summary judgment order dismissingplaintiff’s claims and in favor of the Minnesota Racing Commission and NorthMetro. On June 6, 2006 the Minnesota Court of Appeals affirmed the decision ofthe District Court to dismiss the case. The plaintiffs did not file a timelyrequest for review of the appellate court ruling with the Minnesota SupremeCourt, ending this litigation in July 2006.

**Item6. Exhibits**

The following exhibitsare attached to this Quarterly Report on Form 10-QSB:
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  SEC Rule 13a-14.                                                                                                  |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Financial and Accounting  Officer Pursuant to SEC Rule 13a-14                                                                                |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                    |
| 32.2 |   | Certification of Principal Financial and Accounting  Officer Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

In accordance with the requirements of the Securitiesand Exchange Act of 1934, as amended, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
| November 14, 2006 | **SOUTHWEST CASINO CORPORATION** |
|-------------------|----------------------------------|
|              | ** **                       |
|              | By:                              | /s/ James B. Druck |
|              |                             | James B. Druck |
|              |                             | Chief Executive Officer (principal executive  officer) |
|              |                             |   |
|              | By:                              | /s/ Thomas E. Fox |
|              |                             | Thomas E. Fox |
|              |                             | President and Chief Operating Officer (principal  financial and accounting officer) |

 

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