**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

**x**                              QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**For the quarterly periodended June 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 small business issuer as specified inits charter)

 

| **Nevada**                       |   | **87-0686721**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (IRS Employer        |
| incorporation or  organization)  |   | Identification  No.) |

 

**2001 Killebrew Drive,Suite 350, Minneapolis, Minnesota 55425**

(Address of principal executive offices)

 

**(952) 853-9990**

(Issuer’s telephone number)

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   YES x    NO o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   YES o    NO x

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

TransitionalSmall Business Disclosure Format (check one):   YES o    NO x

 

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**SOUTHWESTCASINO CORPORATION**

**FORM 10-QSB****June 30, 2006**

**TABLEOF CONTENTS**
| Description     | ** ** | ** **                                                                                                   | ** ** | ** ** | ** ** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|            |       |                                                                                                         |       |       |       |
| PART  I.        |       | FINANCIAL  INFORMATION                                                                                       |       |       |       |
| ITEM  1.        |       | Financial  Statements                                                                                        |       | 1          |       |
|            |       | Consolidated Balance Sheet (Unaudited) June 30, 2006                                                         |       | 2          |       |
|            |       | Consolidated Statements of Operations (Unaudited) for  the Three and Six Months ended June 30, 2006 and 2005 |       | 3          |       |
|            |       | Consolidated Statements of Cash Flows (Unaudited) for  the Six Months ended June 30, 2006 and 2005           |       | 4          |       |
|            |       | Notes to Unaudited Consolidated Financial Statements                                                         |       | 5          |       |
| ITEM 2.         |       | Management’s Discussion and Analysis or Plan of  Operation                                              |       | 13         |       |
| ITEM 3.         |       | Controls and Procedures                                                                                      |       | 21         |       |
|            |       |                                                                                                         |       |       |       |
| PART  II.       |       | OTHER  INFORMATION                                                                                           |       |       |       |
| ITEM  1.        |       | Legal  Proceedings                                                                                           |       | 22         |       |
| ITEM 4.         |       | Submission of Matters to a Vote of Security Holders                                                          |       | 22         |       |
| ITEM 6.         |       | Exhibits                                                                                                     |       | 22         |       |
| SIGNATURE  PAGE |       |                                                                                                         |       |

 

*In this Form 10-QSB,references to “Southwest,” “the company,” “we,” “our” or “us,” unless thecontext otherwise requires, refer to Southwest Casino Corporation and itsconsolidated subsidiaries.*

 

i

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**PART I —FINANCIAL INFORMATION**

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

 

1

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**SOUTHWESTCASINO CORPORATIONConsolidated Balance Sheets (Unaudited)June 30, 2006**
| ** **                                                                                            | ** ** | **2006**    | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                  |       |        |       |
| ASSETS                                                                                                |       |        |       |
|                                                                                                  |       |        |       |
| CURRENT ASSETS                                                                                        |       |        |       |
| Cash and Cash Equivalents                                                                             |       | $           | 1,424,949  |   |
| Accounts Receivable                                                                                   |       | 74,223      |       |
| Management Fees Receivable                                                                            |       | 535,430     |       |
| Inventories                                                                                           |       | 173,894     |       |
| Prepaid Expenses                                                                                      |       | 528,287     |       |
| Total Current Assets                                                                                  |       | $           | 2,736,783  |   |
|                                                                                                  |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                |       |        |       |
| Leasehold Improvements                                                                                |       | 15,734,377  |       |
| Furniture and Equipment                                                                               |       | 6,191,602   |       |
| Accumulated Depreciation                                                                              |       | (10,378,042 | )          |
| Net Property and Equipment                                                                            |       | $           | 11,547,937 |   |
|                                                                                                  |       |        |       |
| OTHER ASSETS                                                                                          |       |        |       |
| Intangible Assets                                                                                     |       | $           | 607,269    |   |
| Deposits                                                                                              |       | 62,305      |       |
| Investment in Unconsolidated Subsidiary                                                               |       | 4,544,739   |       |
| Deferred Tax Asset                                                                                    |       | 204,810     |       |
| Total Other Assets                                                                                    |       | $           | 5,419,123  |   |
|                                                                                                  |       |        |       |
| TOTAL ASSETS                                                                                          |       | $           | 19,703,843 |   |
|                                                                                                  |       |        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                            |       |        |       |
|                                                                                                  |       |        |       |
| CURRENT LIABILITIES                                                                                   |       |        |       |
| Accounts Payable                                                                                      |       | $           | 660,975    |   |
| Accrued Expenses                                                                                      |       | 699,590     |       |
| Accrued Liabilities - Related Parties                                                                 |       | 122,467     |       |
| Notes Payable                                                                                         |       | 446,292     |       |
| Current Portion of Long-Term Liabilities                                                              |       | 2,814,014   |       |
| Accrued Interest Payable                                                                              |       | 14,062      |       |
| Total Current Liabilities                                                                             |       | $           | 4,757,400  |   |
|                                                                                                  |       |        |       |
| LONG-TERM LIABILITIES                                                                                 |       |        |       |
| Long-Term Liabilities Net of Current Portion                                                          |       | $           | 7,952,975  |   |
|                                                                                                  |       |        |       |
| 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                                                                            |       | 17,158,604  |       |
| Accumulated Deficit                                                                                   |       | (10,184,825 | )          |
| Total Stockholders’ Equity                                                                       |       | 6,993,468   |       |
|                                                                                                  |       |        |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                      |       | $           | 19,703,843 |   |

 

See Notes to Unaudited Consolidated FinancialStatements

2

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**SOUTHWESTCASINO CORPORATIONConsolidated Statements of Operations (Unaudited)For the Six Months Ended June 30, 2006 and 2005**
| ** **                                                                                                                                             | ** ** | **For the  three months  ended June 30,  2006** | ** ** | **For the  three months  ended June 30,  2005** | ** ** | **For the  six months  ended June 30,  2006** | ** ** | **For the  six months  ended June 30,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **REVENUES**                                                                                                                                           | ** ** | ** **                                                          | ** ** | ** **                                                          | ** ** | ** **                                                        | ** ** | ** **                                                        | ** ** |
| Casino                                                                                                                                                 |       | $                                                                   | 3,869,351  |                                                                | $          | 3,834,634                                                         |       | $                                                                 | 7,370,686  |   | $ | 7,397,990 |   |
| Food & Beverage/Hotel                                                                                                                              |       | 142,792                                                             |       | 107,408                                                             |       | 258,056                                                           |       | 201,529                                                           |       |
| Management and Consulting                                                                                                                              |       | 1,391,195                                                           |       | 1,188,447                                                           |       | 3,093,813                                                         |       | 2,212,905                                                         |       |
| Entertainment                                                                                                                                          |       | 6,125                                                               |       | 6,685                                                               |       | 6,125                                                             |       | 6,685                                                             |       |
| Other                                                                                                                                                  |       | 34,938                                                              |       | 43,995                                                              |       | 90,233                                                            |       | 77,658                                                            |       |
|                                                                                                                                                   |       | 5,444,401                                                           |       | 5,181,169                                                           |       | 10,818,913                                                        |       | 9,896,767                                                         |       |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **EXPENSES**                                                                                                                                           | ** ** | ** **                                                          | ** ** | ** **                                                          | ** ** | ** **                                                        | ** ** | ** **                                                        | ** ** |
| Casino                                                                                                                                                 |       | $                                                                   | 2,819,353  |                                                                | $          | 2,852,759                                                         |       | $                                                                 | 5,728,524  |   | $ | 5,750,006 |   |
| Food & Beverage/Hotel                                                                                                                              |       | 353,655                                                             |       | 345,046                                                             |       | 706,534                                                           |       | 704,976                                                           |       |
| Corporate Expense                                                                                                                                      |       | 687,321                                                             |       | 706,458                                                             |       | 1,312,296                                                         |       | 1,397,864                                                         |       |
| Project Development Costs                                                                                                                              |       | 81,115                                                              |       | 196,896                                                             |       | 177,483                                                           |       | 515,545                                                           |       |
| Entertainment                                                                                                                                          |       | 34,749                                                              |       | 41,726                                                              |       | 49,580                                                            |       | 52,599                                                            |       |
| Depreciation and Amortization                                                                                                                          |       | 542,798                                                             |       | 595,877                                                             |       | 1,085,105                                                         |       | 1,191,016                                                         |       |
|                                                                                                                                                   |       | 4,518,991                                                           |       | 4,738,762                                                           |       | 9,059,522                                                         |       | 9,612,006                                                         |       |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **INCOME  FROM OPERATIONS**                                                                                                                            |       | $                                                                   | 925,410    |                                                                | $          | 442,407                                                           |       | $                                                                 | 1,759,391  |   | $ | 284,761 |   |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **OTHER INCOME (EXPENSE)**                                                                                                                             | ** ** | ** **                                                          | ** ** | ** **                                                          | ** ** | ** **                                                        | ** ** | ** **                                                        | ** ** |
| Interest Income                                                                                                                                        |       | $                                                                   | 555        |                                                                | $          | 1,316                                                             |       | $                                                                 | 1,172      |   | $ | 4,061 |   |
| Interest Expense                                                                                                                                       |       | (262,177                                                            | )          | (236,410                                                            | )          | (584,523                                                          | )          | (522,678                                                          | )          |
| Loss on Disposition of Property and Equipment                                                                                                          |       | —                                                              |       | (860                                                                | )          | —                                                            |       | (1,015                                                            | )          |
|                                                                                                                                                   |       | (261,622                                                            | )          | (235,954                                                            | )          | (583,351                                                          | )          | (519,632                                                          | )          |
| **Income (loss)  before income taxes, equity in earnings of unconsolidated subsidiaries and  minority interest in in loss of consolidated subsidiary** |       | 663,788                                                             |       | 206,453                                                             |       | 1,176,040                                                         |       | (234,871                                                          | )          |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| Income taxes                                                                                                                                           |       | (225,688                                                            | )          | —                                                              |       | (400,354                                                          | )          | —                                                            |       |
| Minority interest in loss of consolidated subsidiary                                                                                                   |       | —                                                              |       | 93,448                                                              |       | —                                                            |       | 127,884                                                           |       |
| Loss of Unconsolidated Subsidiaries, Net of Tax  Benefit                                                                                               |       | (60,523                                                             | )          | —                                                              |       | (100,465                                                          | )          | —                                                            |       |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **NET  INCOME (LOSS)**                                                                                                                                 |       | $                                                                   | 377,577    |                                                                | $          | 299,901                                                           |       | $                                                                 | 675,221    |   | $ | (106,987 | ) |
|                                                                                                                                                   |       |                                                                |       |                                                                |       |                                                              |       |                                                              |       |
| **Income  (loss) per share - basic**                                                                                                                   |       | $                                                                   | 0.02       |                                                                | $          | 0.02                                                              |       | $                                                                 | 0.03       |   | $ | (0.01 | ) |
| **Income  (loss) per share - diluted**                                                                                                                 |       | $                                                                   | 0.02       |                                                                | $          | 0.01                                                              |       | $                                                                 | 0.03       |   | $ | (0.01 | ) |
| **Weighted  average common shares outstanding - basic**                                                                                                |       | 19,688,656                                                          |       | 19,513,656                                                          |       | 19,662,545                                                        |       | 19,449,641                                                        |       |
| **Weighted average common shares  outstanding - diluted**                                                                                              |       | 20,845,522                                                          |       | 22,039,489                                                          |       | 20,703,397                                                        |       | 19,449,641                                                        |       |

 

See Notes to Unaudited Consolidated FinancialStatements

3

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**SOUTHWEST CASINOCORPORATIONConsolidated Statements of Cash Flows (Unaudited)For the Six Months Ended June 30, 2006 and 2005**
| ** **                                                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows from  Operating Activities:                                      |       |       |       |       |       |
| Net Income (Loss)                                                           |       | $          | 675,221    |       | $          | (106,987 | ) |
| Adjustments to  Reconcile Net Income (Loss) to                              |       |       |       |       |       |
| Net Cash  Provided by Operating Activities:                                 |       |       |       |       |       |
| Minority Interest in Loss of Consolidated Subsidiary                        |       | —     |       | (127,884   | )          |
| Depreciation and Amortization                                               |       | 1,085,106  |       | 1,161,252  |       |
| Amortization of loan costs                                                  |       | 82,559     |       | —     |       |
| Loss on Disposition of Property and Equipment                               |       | —     |       | 348        |       |
| Common Stock Issued for Non-Cash Compensation                               |       | 93,788     |       | 10,875     |       |
| Loss of Unconsolidated Subsidiaries                                         |       | 132,129    |       | —     |       |
| Write off of Land Option                                                    |       |       |       | 249,778    |       |
| Change in  Current Assets and Liabilities,                                  |       |       |       |       |       |
| (Increase) Decrease in Restricted Cash                                      |       | 2,656      |       | 49,541     |       |
| (Increase) Decrease in Receivables                                          |       | (68,617    | )          | (240,254   | )          |
| (Increase) Decrease in Inventories                                          |       | (25,611    | )          | 14,823     |       |
| (Increase) Decrease in Prepaid Expenses                                     |       | 71,084     |       | (25,133    | )          |
| (Increase) decrease in Deferred Tax Asset                                   |       | 368,190    |       | —     |       |
| Increase (Decrease) in Accounts Payable                                     |       | (67,719    | )          | 86,734     |       |
| Increase (Decrease) in Accrued Expenses                                     |       | (376,648   | )          | (336,685   | )          |
| Increase (Decrease) in Accrued Interest Payable                             |       | (3,490     | )          | (33,463    | )          |
| Net Cash Provided By Operating Activities                                   |       | $          | 1,968,648  |       | $          | 702,945 |   |
|                                                                        |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                       |       |       |       |       |       |
| Purchase of Property and Equipment                                          |       | (152,089   | )          | (356,039   | )          |
| (Increase) Decrease in Deposits                                             |       | 14,000     |       | (10,876    | )          |
| Payment of Capitalized License                                              |       | —     |       | (194,244   | )          |
| Investment in Unconsolidated Subsidiary                                     |       | (378,501   | )          | —     |       |
| Net Cash Used In Investing Activities                                       |       | $          | (516,590   | )          | $          | (561,159 | ) |
|                                                                        |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                       |       |       |       |       |       |
| Net Advances on Short-Term Notes Payable                                    |       | $          | —     |       | $          | (220,578 | ) |
| Principal Payments on Long-Term Borrowings                                  |       | (1,124,254 | )          | (370,522   | )          |
| Proceeds from Investors in Consolidated Subsidiary—  Minority Interest |       | —     |       | 982,325    |       |
| 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                            |       | $          | (1,222,254 | )          | $          | 415,225 |   |
|                                                                        |       |       |       |       |       |
| Net Increase in Cash and Cash Equivalents                                   |       | 229,804    |       | 557,011    |       |
|                                                                        |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS                                                  |       |       |       |       |       |
| Beginning of Period                                                         |       | 1,195,145  |       | 750,556    |       |
| End of Period                                                               |       | $          | 1,424,949  |       | $          | 1,307,567 |   |
|                                                                        |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION                           |       |       |       |       |       |
| Interest Paid                                                               |       | $          | 531,812    |       | $          | 495,529 |   |
| Income Taxes Paid                                                           |       | $          | 22,500     |       | $          | — |   |
|                                                                        |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF NON-CASH INVESTING AND FINANCING ACTIVITIES     |       |       |       |       |       |
| Capital Assets Acquired  with Acounts Payable                               |       | $          | 115,589    |       | $          | 72,201 |   |

 

See Notes to Unaudited Consolidated FinancialStatements

4

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

**NOTE 1—BASIS OF PRESENTATION**

The unaudited consolidated financial statements ofSouthwest Casino Corporation, a Minnesota corporation (the “Company”), havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”) applicable to interim financial information.  Accordingly, certain information normallyincluded in the annual financial statements prepared in accordance withaccounting principles generally accepted in the United States has beencondensed or omitted. For further information, please refer to the annualaudited consolidated financial statements of the Company, and the related notesincluded within the Company’s Annual Report on Form 10-KSB for the yearended 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.  These reclassifications had no effect on netincome.

**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, which must be approved by the NIGC beforeit becomes effective, Southwest will have exclusive management responsibilityfor the Tribe’s Seven Clans Paradise Casino near Ponca City, Oklahoma.Southwest will receive management fees equal to 20 percent of the net revenuefrom gaming and non-gaming activity at the facility. The management agreementruns for 5 years beginning on the first day that Southwest begins management ofthe facility.

**NOTE 3—STOCK OPTIONS AND AWARDS**

Stock option plans:

On July 15, 2004, SouthwestCasino and Hotel Corp. shareholders approved the Southwest Casino and HotelCorp. 2004 Stock Incentive Plan that had been adopted by the company’s Board ofDirectors effective June 1, 2004.  Underthe terms of the reorganization completed July 22, 2004, Southwest CasinoCorporation assumed the rights and obligations of Southwest Casino and HotelCorp. under this plan.  The plan permitsSouthwest Casino Corporation to issue incentive awards to all employees of SouthwestCasino Corporation or any of its subsidiaries and any non-employee directors,consultants or independent contractors of the Company or any of itssubsidiaries. Incentive awards under the plan include “incentive options” underSection 422 of the Internal Revenue Code of 1986, “non-statutory stock options”that do not qualify for “incentive option” treatment, stock appreciationrights, restricted stock awards, performance units and stock bonuses.  A maximum of 1,500,000 shares of SouthwestCasino Corporation common stock are reserved for issuance under the plan.

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 assumed obligations to issue1,575,000 shares of its common stock at a weighted average price of $.62 pershare.

Valuation and ExpenseInformation under SFAS 123(R)

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*,(“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all stock-based payment awards made to employees anddirectors including employee stock options and employee stock purchases basedon estimated fair values.  In March 2005,the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)relating to SFAS 123(R). The Company has applied certain provisions ofSAB 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.  SFAS 123(R) supersedes the Company’sprevious accounting under the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*(“SFAS 123”).As permitted by SFAS 123, the Company measured compensation cost foroptions granted prior to January 1, 2006, in accordance 

5

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

with AccountingPrinciples Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees*and relatedinterpretations. Accordingly, before January 1, 2006 no accounting recognitionwas given to stock options granted at fair market value until they wereexercised. Upon exercise, net proceeds, including tax benefits realized, werecredited to equity.

The Company adoptedSFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of the Company’s fiscal year 2006. In accordance with themodified prospective transition method, the Company’s consolidated financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). The effect of the change was todecrease net earnings for the three and six months ended June 30, 2006 by$66,080 and $85,411 and basic and diluted earnings per share by $0.003 and$0.004, respectively, as compared to what results for the period would havebeen had the intrinsic method been used. There was no share-based compensationexpense related to employee stock options and employee stock purchasesrecognized in the financial statements during the three and six months endedJune 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 ofeach option is amortized into compensation expense on the basis of the datevested to the term of grant.  We haveestimated fair value of all stock options as of the date of grant applying theBlack-Scholes pricing valuation model.  Theapplication of this valuation model involves assumptions that are judgmentaland sensitive in the determination of compensation expense.  The key assumptions used in determining thefair value of options during the three and six months ended June 30, 2006 were:

|                                          | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Expected price  volatility               |       | 112%                                                      |       | 105% - 112%                                             |       |
| Risk-free  interest rate                 |       | 5.05%                                                     |       | 4.42% - 5.05%                                           |       |
| Weighted average  expected life in years |       | 10 years                                                  |       | 10 years                                                |       |
| Dividend yield                           |       | 0%                                                        |       | 0%                                                      |       |
| Pre-vesting  forfeiture rate             |       | 0%                                                        |       | 0%                                                      |       |
| Weighted-average Fair  value             |       | $0.71                                                     |       | $0.61                                                   |       |

 

Historical information was the primary basis for theselection of the expected volatility, expected dividend yield, and the expectedlives of the options.  The risk-freeinterest rate was selected based upon yields of U.S. Treasury issues with aterm equal to the expected life of the option being valued.  SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Pre-vesting forfeitures wereestimated to be zero in the three and six months ended June 30, 2006 basedprimarily 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’s pro forma informationrequired under SFAS 123(R) for the periods prior to March 31, 2006, the Companyalso accounted for forfeitures as they occurred.

Status of options during the six months ended June 30,2006
| ** **                            | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------|------------|
| Balance at  December 31, 2005         |       | 1,775,000                |       | $                                              | 0.46       |                                             |       |                                |       |   |
| Granted (1)                           |       | 725,000                  |       | $                                              | 0.66       |                                             |       |                                |       |   |
| Forfeited/cancelled/expired           |       | 0                        |       |                                           |       |                                             |       |                                |       |
| Exercised                             |       | 0                        |       |                                           |       |                                             |       |                                |       |
| Balance at June  30, 2006             |       | 2,500,000                |       | $                                              | 0.48       |                                             |       |                                |       |   |
|                                  |       |                     |       |                                           |       |                                             |       |                                |       |
| Options  outstanding at June 30, 2006 |       | 2,500,000                |       | $                                              | 0.48       |                                             | 6.6 years  |                                | $          | 675,000 |   |
| Options exercisable at  June 30, 2006 |       | 1,827,292                |       | $                                              | 0.64       |                                             | 5.5 years  |                                | $          | 201,000 |   |

----

(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 $0.75 on June 30, 2006, that the optionholders would have received by had all option 

6

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

holders exercised their options as of that date.  As of June 30, 2006, the Company’sunrecognized share-based compensation related to stock options was approximately$388,000.  This cost is expected to beexpensed over a weighted average period of two and one-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 six months ended June 30,2005.  For the purpose of this pro formadisclosure, the value of the options is estimated using Black-Scholesoption-pricing model and amortized to expense over the options vesting periods.
| ** **                                                                                                                           | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Net Income  (Loss) as Reported                                                                                                       |       | $                                                         | 299,901    |                                                    | $          | (106,987 | ) |
| Deduct: Total stock-based compensation expenses  determined under fair value based method for all awards, net of related tax  effect |       | 15,147                                                    |       | 68,435                                                  |       |
| *Pro  forma* net income (loss)                                                                                                       |       | $                                                         | 284,754    |                                                    | $          | (175,422 |   |
|                                                                                                                                 |       |                                                      |       |                                                    |       |
| Income (loss) per  share:                                                                                                            |       |                                                      |       |                                                    |       |
| Basic — as reported                                                                                                             |       | $                                                         | 0.02       |                                                    | $          | (0.01 | ) |
| Basic —*pro forma*                                                                                                              |       | $                                                         | 0.01       |                                                    | $          | (0.01 | ) |

 

On November 10, 2005, the FASB issued FASB StaffPosition No. FAS 123(R)-3 (“FSP 123(R)”), Transition Election Related toAccounting for the Tax Effects of Share-Based Payment Awards.  FSP 123(R)-3 permits the Company to electfrom alternative transition methods for calculating the pool of tax benefitsavailable to absorb tax deficiencies recognized subsequent to the adoption ofFAS 123(R).  Companies may take up to oneyear from the effective date of FSP 123(R)-3 to evaluate the availabletransition alternatives and make a one-time election as to which method toadopt.  We are currently in the processof evaluating the alternative methods.

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

Revenue does not include the retail amount of rooms, food, andbeverages provided gratuitously to customers, which was $580,000 and $549,000for the six months ended June 30, 2006 and 2005, respectively and wasapproximately $289,000 and $247,000 for the three months ended June 30, 2006and 2005, respectively.

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

Intangible Assets, net of amortization consisted ofthe following at June 30:

|                                          | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|
| Casino  management contract rights       |       | $        | 467,321    |   |
| Loan costs —  long-term obligations |       | 139,948  |       |
| Total                                    |       | $        | 607,269    |   |

 

Future amortization of management contract rights andloan costs are as follows:

| Twelve Months Ended June 30, | ** ** |
|--------------------------------------------------|------------|
| 2007                                             |       | $ | 607,269 |   |
|                                                  |            |  |  |  |

 

The Company entered into an agreement with theCheyenne and Arapaho Tribes of Oklahoma (CATO) for management of its casinoslocated in Oklahoma that was to expire on May 19, 2004. In exchange forextending the contract through May 19, 2007, the Company has transferredtitle to a tract of land to CATO.  The exchange took place in 2003 and thecost of the land is being amortized over the term of the management contract.

Loan costs in the amount of $251,276 were incurred in connection with aterm loan of $2,500,000 from Crown Bank. The loan costs will be amortized over the term of the loan.

7

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

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

The Company evaluated 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 six months ended June 30,2005 for the following reason: The Company held 50% of North Metro’s votingrights but as of June 30, 2005, the Company had provided approximately 75% ofNorth Metro’s financial support.  Becausethe Company would absorb financial losses of North Metro that weredisproportionate to its 50 percent decision making power, the Companydetermined that North Metro was a VIE subject to consolidation for the periodended June 30, 2005

Due to contributions to 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 June 30, 2006,the Company has provided approximately 39 percent of the financial support, butstill retains its 50 percent decision making power.  Therefore, since October 20, 2005, theCompany has accounted for its investment in North Metro on the equity method.

For the three and six months ended June 30, 2006, theCompany has recorded a loss from this unconsolidated subsidiary, net of taxbenefit of  $60,524 and $100,465,respectively, as follows:

|                                                         | ** ** | **Three months  ended  June 30, 2006** | ** ** | **Six months  ended  June 30, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| North Metro:                                            |       |                                                  |       |                                                |       |
| Revenues                                                |       | $                                                     | —     |                                                | $          | — |   |
| Lobbying expenses                                       |       | $                                                     | 44,000     |                                                | $          | 78,000 |   |
| License fees — Minnesota Racing Commission         |       | 63,506                                                |       | 126,791                                             |       |
| Other expenses                                          |       | 53,232                                                |       | 59,468                                              |       |
| Total expenses                                          |       | $                                                     | 160,738    |                                                | $          | 264,259 |   |
| Net (loss)                                              |       | $                                                     | (160,738   | )                                                   | $          | (264,259 | ) |
|                                                    |       |                                                  |       |                                                |       |
| Southwest Casino  Corporation:                          |       |                                                  |       |                                                |       |
| 50% share of net (loss)                                 |       | (80,369                                               | )          | (132,130                                            | )          |
| Net tax benefit                                         |       | 19,846                                                |       | 31,664                                              |       |
| (Loss) of  unconsolidated subsidiary net of tax benefit |       | $                                                     | (60,523    | )                                                   | $          | (100,465 | ) |

 

For the three and six months ended June 30, 2005, theCompany consolidated the results of operations of North Metro, recordingdevelopment expenses of $186,896 and $255,767 net of minority interest in theloss from consolidated subsidiary of $93,448 and $127,884.

**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 the interest rate is 9.25%. At June30, 2006, $3,708 was available to borrow. The loan is guaranteed to the extent of $300,000 by three principalofficers of the Company.  The line ofcredit is included in notes payable on the accompanying balance sheet.

**NOTE 8—EARNINGS (LOSS) PER SHARE**

For all periods, basicearnings (loss) per share is calculated by dividing earnings (loss) by theweighted-average number of common shares outstanding.  Diluted earnings per share for the three andsix months ended June 30, 2006 and the three months ended June 30, 2005,reflect the effect of all potentially dilutive common shares outstanding bydividing net earnings by the weighted-average of all common and potentiallydilutive shares outstanding. The effects of stock options and warrants have notbeen included in diluted loss per share for the six months ended June 30, 2005as the effect would have been anti-dilutive as a result of losses.

8

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

The following is a reconciliation of basic and dilutedearnings per share:

**Three months endedJune 30, 2006:**

|                                  | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted Average  Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings  per Share        |       | $                                  | 377,577    |                                             | 19,688,656 |                         | $          | 0.02 |   |
| Effect of Dilutive  Securities:  |       |                               |       |                                             |       |                         |       |
| Outstanding Options and Warrants |       |                               |       | 1,156,866                                        |       |                         |       |
|                             |       | $                                  | 377,577    |                                             | 20,845,522 |                         | $          | 0.02 |   |

 

**Three months endedJune 30, 2005:**

|                                  | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted Average  Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings  per Share        |       | $                                  | 299,901    |                                             | 19,513,656 |                         | $          | 0.02 |   |
| Effect of Dilutive  Securities:  |       |                               |       |                                             |       |                         |       |
| Outstanding Options and Warrants |       |                               |       | 2,525,833                                        |       |                         |       |
|                             |       | $                                  | 299,901    |                                             | 22,039,489 |                         | $          | 0.01 |   |

 

**Six months endedJune 30, 2006:**

|                                  | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted Average  Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
| Basic Earnings  per Share        |       | $                                  | 675,221    |                                             | 19,662,545 |                         | $          | 0.03 |   |
| Effect of Dilutive  Securities:  |       |                               |       |                                             |       |                         |       |
| Outstanding Options and Warrants |       |                               |       | 1,040,852                                        |       |                         |       |
|                             |       | $                                  | 675,221    |                                             | 20,703,397 |                         | $          | 0.03 |   |

 

**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 six monthsended June 30, 2005 based upon prior years net losses.   As a result of this evaluation a tax benefitduring the six months ended June 30, 2005 was not recognized.  At December 31, 2003, the Company establisheda deferred tax asset relating to net operating losses.  Management evaluated all evidence anddetermined that a portion of the deferred tax assets relating to net operatinglosses would be utilized in 2006 based upon forecasted income for the Companyin 2006.  During the three and six monthsended June 30, 2006, the Company has recorded a tax provision and utilized aportion of the deferred tax asset.  As ofJune 30, 2006, the Company’s deferred tax asset is $204,810.

**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 from prioryears.  The Board approved payments of$50,000 to Mr. Druck and Mr. Halpern and $10,000 to Mr. Fox.  The Company made these payments to Mr.Halpern on April 28, 2006 and Mr. Druck and Mr. Fox on May 15, 2006.  As of June 30, 2006, the remaining balanceoutstanding is $122,467.

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

The Company continues to pursue additional gamingopportunities and as a result continues to incur project developmentexpenses.  For the three and six monthsended June 30, 2006, development expenses were $81,115 and $177,483.  For the three and six months ended June 30, 2005,development expenses were $196,896 and $515,545.  Included in the six month ended June 30, 2005amount is a $249,778 write off of an option to acquire the Gold Rush realestate, which expired unexercised on February 28, 2005.   In addition, the Company includeddevelopment expenses incurred by North Metro Harness Initiative, LLC, in theCompany’s consolidated financial statements for the three and six months endedJune 30, 2005. See Note 6.

9

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

**NOTE 12—SEGMENT INFORMATION**

Segment information related to the three months endedJune 30, 2006 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items(2)** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
|                                         |       |                   |       |                   |       |                    |       |                      |       |       |       |
| Revenues                                     |       | $                      | 4,053,206  |                   | $          | 1,391,195               |       | $                         | —     |       | $          | — |   | $ | 5,444,401 |   |
| Segmented profit  (loss) before income taxes |       | 264,662                |       | 480,241                |       | (161,484                | )          | 80,369                    |       | 663,788    |       |
| Segmented assets                             |       | 13,448,251             |       | 1,700,698              |       | 4,554,894               |       | —                    |       | 19,703,843 |       |
|                                              |            |                        |            |                        |            |                         |            |                           |            |            |            |  |  |  |  |  |

 

Segment information related to the three monthsended June 30, 2005 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items(1)** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
|                                         |       |                   |       |                   |       |                    |       |                      |       |       |       |
| Revenues                                     |       | $                      | 3,992,722  |                   | $          | 1,188,447               |       | $                         | —     |       | $          | — |   | $ | 5,181,169 |   |
| Segmented profit  (loss) before income taxes |       | 71,576                 |       | 321,773                |       | (186,896                | )          | 93,448                    |       | 299,901    |       |
| Segmented assets                             |       | 15,080,286             |       | 2,588,114              |       | 2,920,171               |       | —                    |       | 20,588,571 |       |
|                                              |            |                        |            |                        |            |                         |            |                           |            |            |            |  |  |  |  |  |

 

Segment information related to the six monthsended June 30, 2006 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items(2)** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
|                                         |       |                   |       |                   |       |                    |       |                      |       |       |       |
| Revenues                                     |       | $                      | 7,725,100  |                   | $          | 3,093,813               |       | $                         | —     |       | $          | — |   | $ | 10,818,913 |   |
| Segmented profit  (loss) before income taxes |       | 26,905                 |       | 1,326,618              |       | (309,613                | )          | 132,130                   |       | 1,176,040  |       |
| Segmented assets                             |       | 13,448,251             |       | 1,700,698              |       | 4,554,894               |       | —                    |       | 19,703,843 |       |
|                                              |            |                        |            |                        |            |                         |            |                           |            |            |            |  |  |  |  |  |

 

Segment information related to the six monthsended June 30, 2005 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items(1)** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                   | ** ** | ** **             | ** ** | ** **             | ** ** | ** **              | ** ** | ** **                | ** ** | ** ** | ** ** |
| Revenues                                     |       | $                      | 7,683,862  |                   | $          | 2,212,905               |       | $                         | —     |       | $          | — |   | $ | 9,896,767 |   |
| Segmented profit  (loss) before income taxes |       | (233,668               | )          | 254,565                |       | (255,767                | )          | 127,884                   |       | (106,987   | )          |
| Segmented assets                             |       | 15,080,286             |       | 2,588,114              |       | 2,920,171               |       | —                    |       | 20,588,571 |       |
|                                              |            |                        |            |                        |            |                         |            |                           |            |            |            |  |  |  |  |  |

----

(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 four independentmembers of its Board of Directors.  Theseoptions vest in 12 equal installments on the last day of each fiscal quarter ofthe company over the next three years and remain exercisable for 10 years.  If a director’s service on the SouthwestBoard terminates due to mandatory retirement, the option will continue to vestand remain exercisable for the full 10 years. If a director’s service terminates due to death or disability, theoption will remain exercisable, to the extent vested at the time service terminated,for 12 months.  If a director’s serviceterminates for any other reason, the option will remain exercisable, to theextent vested at the time service terminated, for 90 days. If a change incontrol of Southwest occurs, as defined in the 

10

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

Company’s 2004 StockIncentive Plan, the option will immediately vest in full and remain exercisablefor 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 of Directors elected David Abramsonas Chair of its Audit Committee.  Mr.Abramson received an option to purchase 75,000 shares of common stock, on thesame terms as described in the preceding paragraph, in consideration of hisservice as Audit Committee Chair.

##### **NOTE14—COMMITMENTS AND CONTINGENCIES**

##### **ManagementAgreement:**

As discussed in Note 5, the Company has an agreementwith the Cheyenne and Arapaho Tribes of Oklahoma (CATO) for management of CATO’scasinos located in Oklahoma that will expire on May 19, 2007.  The management fees received from thiscontract are significant to the Company’s cash flow from operations.  The Company is currently negotiating acontinuation of the Company’s management relationship with CATO.  However, if the Company is unsuccessful inextending this contract it will have a material adverse impact on the Company’scash flow from operations.

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

North Metro, in which the Company owns a 50 percentmembership interest, has entered into agreements to monitor legislation andperform lobbying activities related to its racetrack and card room development.These agreements are generally on a month-to-month basis, and may be terminatedby either party to the agreement. North Metro pays the monthly commitments ofapproximately $20,000 per month during the Minnesota legislative session andapproximately $8,000 outside of the Minnesota legislative session.

North Metro has also entered into an agreement for thedevelopment of the land, building and related property to operate a racetrackand card room.  Fees related to the agreement total 3% of the projectcost, which is defined as the total development cost less the cost to purchasethe land.  The agreement began on May 1, 2003, and continues untilthe completion of the project, unless earlier terminated.  North Metrocurrently pays fees of $6,000 per month, plus applicable out of pocketexpenses.  Upon the start of construction, two thirds of the totalexpected fee (less previous monthly payments) is due.  If the agreement isterminated before completion of the project, any unpaid fees are determinedbased on the completed status of the project at the time of termination, asdefined in the agreement.

**Legal Proceeding**

North Metro:

In January 2005, the Minnesota Racing Commission voted to grant class Aand B licenses to own and operate a harness racetrack and card room to NorthMetro Harness Initiative, LLC, in which the Company owns a 50% membershipinterest.  These licenses permit NorthMetro to develop and run a harness racetrack and a 50-table card room inColumbus Township, Anoka County, Minnesota. North Metro intervened in litigation brought by an anti-gamblingcitizens group against the Minnesota Racing Commission in an attempt toinvalidate those licenses.  Thislitigation began in Ramsey County, Minnesota District Court in December2004.  The anti-gambling group allegedthat members of the Minnesota Racing Commission violated Minnesota’s “openmeeting” law while considering North Metro’s application for licenses to buildand operate a harness racetrack and card room in Columbus Township, AnokaCounty, Minnesota.  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 ofAppeals affirmed the decision of the District Court to dismiss the case.  The plaintiffs did not file a timely requestfor review with the Minnesota Supreme Court, concluding this lawsuit.

In addition, on March 10, 2005, the anti-gambling group filed apetition with Minnesota Court of Appeals challenging the Minnesota RacingCommission’s grant of class A and class B licenses to North Metro.  On March 28, 2006, the Appellate Court affirmedthe decision of the Minnesota Racing Commission to grant licenses to NorthMetro.  On June 20, 2006, the SupremeCourt of the State of Minnesota issued an order denying further review of thatdecision.

11

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**SOUTHWEST CASINO CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006 and 2005**

Other:

The Company is involvedin various claims, legal actions and complaints arising in the ordinary courseof business.  In the opinion ofmanagement, any losses that may occur from these matters are adequately coveredby insurance or are provided for in our financial statements, and the ultimateoutcome of these other matters will not have a material effect on our financialposition or results of operations.

 

12

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

The following is a discussion and analysis of the financial positionand operating results of Southwest Casino Corporation (referred to in thisdiscussion, together with its consolidated subsidiaries where appropriate, as “SouthwestCasino”, “Southwest”, the “Company”, “we”, “our” and “us”) for the three andsix months ended June 30, 2006 and 2005.

***Summary ofConsolidated Operating Results:***

For the quarter ended June 30, 2006, Southwest had netearnings of $377,577 on revenue of $5,444,401 compared to net earnings of$299,901 on revenue of $5,181,169 for the same period in 2005.  This amounts to earnings of $0.02 peroutstanding share ($0.02 per share on a fully-diluted basis) during the secondquarter of 2006, as compared to earnings of $0.02 per outstanding share ($0.01per share on a fully-diluted basis) during the second quarter of 2005.

For the six months ended June 30, 2006, Southwest hadnet earnings of $675,221 on revenue of $10,818,913 compared to a net loss of$106,987 on revenue of $9,896,767 for the same period during 2005.  This amounts to earnings of $0.03 peroutstanding share ($0.03 per share on fully-diluted basis) in the first sixmonths of 2006, as compared to a loss of $0.01 per outstanding share during thefirst six months of 2005.

 We attribute ourimprovement in operating results during 2006 primarily to the increasedmanagement fees generated at the casinos we manage for the Cheyenne and ArapahoTribes of Oklahoma and the absence in 2006 of an approximately $250,000 expenserelated to the expiration during the first quarter of 2005 of an option toacquire the real property that houses our Gold Rush and Gold Digger’s casinosin 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.  Wealso manage two Native American gaming operations in Oklahoma for the Cheyenneand Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star -Clinton.  Lucky Star - Concho is locatedon U.S. Highway 81, just north of the Oklahoma community of El Reno.  Lucky Star - Clinton is located 60 miles westof Lucky Star - Concho in the community of Clinton, Oklahoma on Old Route 66near 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 we are pursuing 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, in which we own a 50% membership interest.  These licenses permit North Metro to developand run a harness racetrack and a 50-table card room in Columbus Township,Anoka County, Minnesota.  Ananti-gambling citizens group brought two lawsuits against the Minnesota RacingCommission challenging the validity of those licenses.  On June 6, 2006 the Minnesota Court ofAppeals affirmed a District Court decision to dismiss the first case and theplaintiffs did not file a timely request for review of that decision with theMinnesota Supreme Court. In the second case, an Appellate Court affirmed thedecision of the Minnesota Racing Commission to grant licenses to North Metro onMarch 28, 2006 and the Supreme Court issued an order denying further review ofthat decision on June 20, 2006.

As a result of the conclusion of both of these lawsuits, we are nowactively engaged in pre-construction activities and arranging constructionfinancing for the project.

·                  On March 24,2006 we entered into a Gaming Management Agreement with the Otoe-MissouriaTribe of Indians in north central Oklahoma. Under this agreement, we will manage the Tribe’s Seven Clans ParadiseCasino 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.  This agreement has been submitted to theNational Indian Gaming Commission (“NIGC”) for approval.  The agreement is not effective, and we cannotprovide any services or receive any compensation under the agreement, until wereceive that approval.  We cannot predictwhen the NIGC will approve the agreement. The Gaming Management Agreement has a five-year term beginning on thedate Southwest assumes management of the facility.

13

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***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 moreunderstandable manner than would be possible on a consolidated basis, and tofacilitate discussion of operating revenue, we have grouped our properties asfollows:

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

 

**CasinoManagement:**

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 has been extended twice andcurrently expires on May 19, 2007.  Southwest is seeking a continuation of thisrelationship beyond May 19, 2007, but is uncertain whether we will continue tomanage these casinos after that date.  Ifthis relationship is not extended, the Company will lose this revenue source inMay 2007, which would have a material adverse effect on our operating results.

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

We earned management fees of $841,848 and $771,607 from Lucky Star -Concho during the three months ended June 30, 2006 and 2005, respectively, anincrease of 9.1%.   We earned managementfees of $1,912,603 and $1,355,036 from Lucky Star - Concho during the sixmonths ended June 30, 2006 and 2005, respectively, an increase of 41.2%.   The dramatic increase in management fees isthe direct result of the Tribes signing a gaming compact with the state ofOklahoma in April 2005 and the subsequent addition and effective management ofthe new gaming opportunities permitted under that compact.  The compact allows Lucky Star — Concho tooffer its patrons card games and poker, as well as certain Class III electronicgames permitted under the compact, all of which have resulted in a significantincrease in revenue.  We anticipatecontinued increased management fees in the third quarter of 2006, as comparedto the same period in 2005, as we continue to refine the electronic game mix onthe floor and we improve offerings to the poker and card room players.  This may be offset by anticipated greatercompetition from other tribal gaming operations closer to Oklahoma City andfrom Remington Park, a racetrack in Oklahoma City that began offeringelectronic gaming near the end of 2005.

**Lucky Star - Clinton**

We earned management fees of $549,347 and $416,840 from Lucky Star -Clinton during the three months ended June 30, 2006 and 2005, respectively, anincrease of 31.8%.   We earned managementfees of $1,181,210 and $857,869 from Lucky Star - Clinton during the six monthsended June 30, 2006 and 2005, respectively, an increase of 37.7%.  The increase in management fees is the resultof an improved mix of games on the floor, including the introduction of slimline cabinets which allowed us to put additional gaming machines in the sameamount of space, and the successful renegotiation of machine vendor fees on anumber of our more popular electronic games. While Lucky Star — Clinton is at capacity in terms of how many gamingmachines and customers the facility can accommodate, especially on weekends, wecontinue to anticipate increases in revenues during the third quarter of 2006over the comparable period in the prior year.

###### **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 beensubmitted to the NIGC for approval in September 2003, but that approval had notbeen 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.

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**Casino operations**:

**GoldRush/Gold Digger’s Casino Results** 
| ** **       | ** ** | **Three Months  Ended June 30,  2006** | ** ** | **Three Months  Ended June 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Six Months  Ended June 30,  2006** | ** ** | **Six Months  Ended June 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                     | 3,605,416  |                                                  | $          | 3,593,365                            |       | 0.4                                                 | %          | $                                                   | 6,898,879  |                                 | $          | 6,926,469 |   | (0.4 | )% |
| Total revenues   |       | 3,783,360                                             |       | 3,740,333                                             |       | 1.2                                  | %          | 7,246,144                                           |       | 7,200,612                                           |       | 0.6                                  | %          |
| EBITDA           |       | 988,527                                               |       | 954,306                                               |       | 3.6                                  | %          | 1,538,115                                           |       | 1,542,055                                           |       | (0.3                                 | )%         |
| Operating margin |       | 26.1                                                  | %          | 25.5                                                  | %          |                                 |       | 21.2                                                | %          | 21.4                                                | %          |                                 |       |
|                  |            |                                                       |            |                                                       |            |                                      |            |                                                     |            |                                                     |            |                                      |            |  |  |  |  |

 

Gold Rush/Gold Digger’s recorded slightly lower revenues for the sixmonths ended June 30, 2006 as compared to the same period in the prior year, primarilyas a result of bad weather on key weekends in February 2006 .  Because Cripple Creek, Colorado sits high inthe Rocky Mountains and draws the majority of its business from cities andtowns at lower elevations, weekend snowstorms discourage many patrons fromdriving the mountain pass to our casinos. This has a significant impact on our operating results, particularly inthe first and fourth quarter of the year. The snowy weekend weather in February 2006 caused a decrease in revenuesfor the entire Cripple Creek market as compared to February 2005.  We also continued to experience higheroperating expenses in the first quarter due to increased costs associated withour player tracking and slot accounting system, which had not been approved bythe Colorado Division of Gaming and, therefore, required additional manpower tomeet reporting requirements.  In April2006 we completed testing and self-approval of the new system in accordancewith Colorado Division of Gaming procedures. As a result of being able toutilize the automated slot accounting system, we reduced operating expenses andimproved customer service during the second quarter of 2006.

**Uncle Sam’sCasino Results**:
| ** **       | ** ** | **Three Months  Ended June 30,  2006** | ** ** | **Three Months  Ended June 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Six Months  Ended June 30,  2006** | ** ** | **Six Months  Ended June 30,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                     | 263,935    |                                                  | $          | 241,269                              |       | 9.4                                                 | %          | $                                                   | 471,807    |                                 | $          | 471,521 |   | 0.1 | % |
| Total revenues   |       | 263,332                                               |       | 242,265                                               |       | 8.7                                  | %          | 472,442                                             |       | 473,126                                             |       | (0.1                                 | )%         |
| EBITDA           |       | (100,813                                              | )          | (168,386                                              | )          | 40.1                                 | %          | (240,557                                            | )          | (322,171                                            | )          | 25.3                                 | %          |
| Operating margin |       | (38.3                                                 | )%         | (69.5                                                 | )%         |                                 |       | (50.9                                               | )%         | (68.1                                               | )%         |                                 |       |
|                  |            |                                                       |            |                                                       |            |                                      |            |                                                     |            |                                                     |            |                                      |            |  |  |  |  |

 

Uncle Sam’s Casino is a facility with only 65 slotmachines that serves primarily the local residents market in CrippleCreek.  The local resident market is themost vulnerable to increased competition. Since the third quarter of 2004, when a new casino that also caters tothe local residents opened for business, we saw a steady decline in revenuesquarter over quarter at this facility until the second quarter of fiscal 2006,when we saw an increase of approximately 9%. We completed the testing and self-approval of our automated slotaccounting system in April and this has allowed us to reduce operating expensesand improve client service.

***Project DevelopmentCosts:***

Project development costs for the three and six monthsended June 30, 2006 were $81,115 and $177,483 as compared to $196,896 and$515,145 for the three and six months ended June 30, 2005.  Our operating results for the six monthsended June 30, 2005 included a $249,778 write off of an option to acquire the GoldRush/Gold Diggers real estate, which expired unexercised on February 28, 2005.  In addition, for the three and six monthsended June 30, 2005, the Company consolidated the results of operations ofNorth Metro, recording development expenses of $186,896 and $255,767 

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net of minority interest in the loss from consolidatedsubsidiary of $93,448 and $127,884.  NorthMetro is no longer consolidated in our financial statements.  See Note 6 to our consolidated financialstatements.

In the first six months of 2006, we continued topursue other gaming opportunities.  Thepursuit of these new initiatives has resulted in signing a five-year managementcontract with the Otoe-Missouria Tribe of Oklahoma.  We have submitted the agreement to theNational Indian Gaming Commission for approval. We cannot begin to perform work under this contract until it isapproved.  At this time, we cannotpredict when this contract may be approved.

In February 2006, we formed a new subsidiary to pursueopportunities in the charitable gaming market, Southwest Charitable Enterprise,LLC.  Since inception of operations, thisentity has incurred approximately $51,000 in expenses through June 30, 2006,which are included in project development costs.

***Corporate expenses***were $687,321 and $706,458 during the three months ended June 30, 2006 and2005, respectively a decrease of $19,137. Corporate expenses were $1,312,296 and $1,397,864 during the six monthsended June 30, 2006 and 2005, respectively, a decrease of $85,568.  The decrease in corporate expenses during thethree and six months ended June 30, 2006 over the comparable period in 2005 isprimarily due to the elimination of advisory fees and legal fees associatedwith the settlement of a contract dispute in the prior year.  We incurred advisory fees of $10,035 and$54,169 during the three and six months ended June 30, 2006.  We also incurred legal fees in connectionwith settling this contract of approximately $37,000 during the three and sixmonths ended June 30, 2006.  The contractwas terminated in April 2005.

***Interest Expense***increased 10.9% and 11.8% during the three and six months ended June 30, 2006when compared to the same period in 2005 as a result of interest incurred inconnection with the $2,500,000 loan we secured in order to meet our obligationsto fund capital contributions 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 six months ended June 30, 2005 and our share of thelosses during the three and six months ended June 30, 2006.  During the three and six months ended June30, 2005 the results of North Metro were consolidated with our financialstatements; however on October 20, 2005 North Metro became an unconsolidatedsubsidiary.  See Note 6 to ourconsolidated financial statements for our evaluation of the financial reportingfor our 50% interest in North Metro.

***Effective tax rate***for the three and six months ended June 30, 2006 was 34%.  We did not record a tax benefit for thelosses during the six months ended June 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 flowsgenerated to fund reinvestment in existing properties for both refurbishmentand replacement of assets, and to pursue additional growth opportunities. To balance our cash requirements we supplement the cash flows generated by ouroperations with funds provided by financing activities.

Our cash flows from operations will be sufficient tomeet our normal operating and debt repayment requirements during the nexttwelve months.  However, North Metro will need additional debt financingto fund the development 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 would in all likelihood require newequity or debt financing.

Net cash provided by operating activities during the six months endedJune 30, 2006 was $1,968,648 compared to $702,945 during the same period in theprior year, an increase of $1,265,703. The increase between periods is primarily due to an increase inmanagement fees of $829,653 as well as a decrease in corporate expenses andproject development costs of $225,107, net of the write-off of an option topurchase the real estate at Gold Rush, which expired unexercised in February2005, of $249,778.  The remainingincrease in net cash provided by operations is due to improved results at ourcasino operations in Cripple Creek, Colorado.

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Net cash used in investing activities for the firstsix months of 2006 was $516,590 compared to net cash used in investingactivities of $561,159 during the first six months of 2005, a decrease of$44,569.  The decrease in use of cash between the periods was dueprimarily to an increase in purchases of property and equipment ofapproximately $60,000 offset by a decrease in our investment in North Metro ofapproximately $83,000.  North Metro wasconsolidated in the prior year and is unconsolidated in the current year.  See Note 6 to our consolidated financialstatements.

Net cash (used in) financing activities for the six months ended June30, 2006 was $(1,222,254) compared to net cash provided by financing activitiesfor the six months ended June 30, 2005 of $415,225.  During the six months ended June 30, 2006 wemade payments of $1,124,254 on long-term borrowings.  During the six months ended June 30, 2005 wemade payments on long-term borrowings and notes payable of $591,100 which wereoffset by funding of $982,325 from our minority partner in NMHI.  At that time, North Metro was a consolidatedsubsidiary of Southwest and those contributions were reported as cash providedby financing activities.  The increase inpayments on long-term obligations during 2006 is primarily related to our $2.5million term note entered into in October 2005. During 2006 we also paid $110,000 to three officers related to unpaidcompensation from prior periods.

***Line of Credit.***  On October 20, 2005, we established a $450,000 line of credit with CrownBank of Minneapolis, Minnesota that replaced a $450,000 line of credit withAssociated Bank of Minneapolis.  The lineof credit is due April 30, 2007 with a variable interest rate at onepercent above prime but not less than 7.5% (9.25% at June 30, 2006).  As of June 30, 2006, the outstanding balancewas $446,292.  Our three principal officers have guaranteed up to $300,000of this line of credit.

***Term Note*.**  On October 20, 2005, the Company entered intoa term loan to borrow $2.5 million. The loan is due April 30, 2007 with avariable interest rate at one percent above prime but not less than 7.5% (9.25%at June 30, 2006). The repayment period will be extended to May 31, 2008, ifthe Company achieves certain business goals. Twelve shareholders of theCompany, including our three principal officers and a member of our board ofdirectors, guarantee the loan. The term note provided for interest only untilApril 1, 2006 at which time we began making principal payments of $208,333 permonth plus interest.

***Equipment Loan.*** On December 23, 2005, the Company negotiated aloan of $460,324 to pay off outstanding payables in connection with theinstallation of a player tracking system at our three casinos in Cripple Creek,Colorado. The loan is for a term of 48 months with interest equal to the primerate, which is 8.25% as of June 30, 2006. The outstanding balance as of June 30, 2006 was $412,374.

***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 faster pace than demand, and competition has increased significantly.Furthermore, several operators, including Southwest, have plans for additionaldevelopments or expansions.

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 andreferendums in the 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 legislatorsand officials have proposed changes in tax laws, or in the administration oftax laws, that would affect the industry.  It is not possible to determinewith certainty the scope or likelihood of possible future changes in tax lawsor in the administration of tax laws.  If adopted, changes in tax lawcould have a material adverse effect on our financial results.

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***SignificantAccounting Policies and Estimates:***

We prepare our Consolidated Financial Statements inconformity with accounting principles generally accepted in the UnitedStates.  Certain of our accounting policies, including, but not limitedto, the estimated lives assigned to our assets, the determination of bad debt,asset impairment, and income taxes, require that we apply significant judgmentin defining the appropriate assumptions for calculating financialestimates.  By their nature, these judgments are subject to an inherentdegree of uncertainty.  Our judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate.  We cannot assure you that ouractual results will not differ from our estimates.  For a discussion ofour significant accounting policies and estimates, please refer to Management’sDiscussion and Analysis or Plan of Operation and Notes to ConsolidatedFinancial Statements presented in the 2005 Financial Statements included in ourAnnual Report on Form 10-KSB.

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

On January 1, 2006,we adopted Statement of Financial Accounting Standards No. 123 (revised2004), *Share-Based Payment*, (“SFAS 123(R)”)which requires 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 AccountingBulletin No. 107 (“SAB 107”) relating to SFAS 123(R). Weapply certain provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R) requiresus to estimate the fair value of share-based payment awards on the date ofgrant using an option-pricing model. The value of the portion of the award thatwe ultimately expect to vest is recognized as expense over the requisiteservice periods in our consolidated statement of operations. SFAS 123(R)supersedes our previous accounting under the provisions ofSFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”). As permitted by SFAS 123, wemeasured compensation cost for options granted prior to January 1, 2006,in accordance 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 adoptedSFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of our fiscal year 2006. In accordance with the modifiedprospective transition method, our consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Share-based compensation expense recognized during the periodis based on the value of the portion of share-based payment awards that isultimately expected to vest during the period. Share-based compensation expenserecognized in our unaudited consolidated statement of operations for the threeand six months ended June 30, 2006 was $66,080 and $85,411 and included bothcompensation expense for share-based payment awards granted before, but not vestedas of January 1, 2006 based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS No. 123 andcompensation expense for the share-based payment awards granted afterJanuary 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 six months ended June 30, 2005

Upon adoption of SFAS 123(R),we also continued the use of the Black-Scholes option pricing method that wehad used to establish fair value of options granted before January 1,2006. Our determination of fair value of share-based payment awards on the dateof grant using an option-pricing model is affected by our stock price as wellas assumptions 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 Accountingfor the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). FSP 123R-3provides a simplified alternative method to calculate the beginning pool ofexcess tax benefits against which excess future deferred tax assets (thatresult when the compensation cost recognized for an award exceeds the ultimatetax deduction) could be written off under Statement 123R. The guidance inFSP 123R-3 was effective on November 10, 2005. We may make a one-time 

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election to adopt thetransition method described in FSP 123R-3 before the end of our fiscalyear ending December 31, 2006. We are currently evaluating the availabletransition alternatives of FSP 123R-3.

***Non-GAAPFinancial Measures:***

Our executive officersconsider “EBITDA” (earnings before interest, taxes, depreciation and amortization)a useful tool for measuring the operating performance of Southwest.  EBITDA is also a widely used measure ofoperating performance in the gaming industry and a principal basis forvaluation 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 a measurement offinancial performance under accounting principles generally accepted in theUnited States and should not be considered an alternative to net income, cashflows from operating activities, or other performance measures derived inaccordance with accounting principles generally accepted in the United Statesas indicators of our operating performance or as measures of ourliquidity.  Southwest has significantuses of cash flows, including capital expenditures, interest payments and debtprincipal repayments that are not reflected in our EBITDA calculations.  Our management uses EBITDA, and we present itin this discussion and analysis, only as a supplement to measures prepared inaccordance with accounting principles generally accepted in the UnitedStates.  Please be aware that othercompanies in our industry may calculate EBITDA differently than we do, whichlimits its usefulness as a comparative 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 identifythese statements 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, future performance,the outcome of contingencies such as legal proceedings and future financialresults. We have based these forward-looking statements on our currentexpectations and projections about future events.

We caution the reader thatforward-looking statements involve risks and uncertainties that cannot bepredicted or quantified and, consequently, actual results may differ materiallyfrom those expressed or implied in the forward-looking statements. These risksand uncertainties include, but are not limited to, the following factors aswell as other factors described from time to time in our reports filed with theSecurities 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 ofeconomic, credit and capital market conditions on the economy in general, andon gaming companies in particular;

·                  construction factors,including delays, zoning issues, environmental restrictions, soil and waterconditions, weather and other hazards, site access matters and building permitissues;

·                  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.

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## ***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. Controls and Procedures**

We maintain disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) designed to ensure that information requiredto be disclosed by us in the reports we file or submit under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized, andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that this information is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our principal executiveofficer and principal financial officer, the effectiveness of the design andoperation of our disclosure controls and procedures as of June 30, 2006.  Based on that evaluation and the similarevaluations of our disclosure controls and procedures as of December 31, 2005and March 31, 2005, our principal executive officer and principal financial officerconcluded that as of those dates our disclosure controls and procedures were ineffectivebecause of the material weakness in our internal control over financialreporting described below. Notwithstanding the existence of this material weakness in our internalcontrol over 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.  In connection with their audit of ourfinancial statements for the year ended December 31, 2005, our independentauditors determined that a material adjustment to our consolidated financialstatements was necessary due to errors in items on those financial statementsrelated to the transition of North Metro Harness Initiative, LLC from aconsolidated to an unconsolidated subsidiary.

Our management determined that this materialweakness resulted from the relatively small size of our accountingdepartment.  To address this issue, wehave hired a new Chief Financial Officer, Ms. Tracie Wilson, who began workingfor us in June.  Ms. Wilson is aCertified Public Accountant with experience in public company financialreporting.  Ms. Wilson provides us withadditional expertise in preparation of our financial statements, includingissues related to accounting for matters that are outside the ordinary courseof our business.  We believe the additionof Ms. Wilson will eliminate the material weakness in our internal control overfinancial reporting that was previously identified by our independentauditors.  However, because Ms. Wilsonjoined Southwest late in the second quarter, our management was unable to fullyevaluate the impact of Ms. Wilson’s work on the effectiveness of our disclosurecontrols and procedures over the full reporting period.

**Changes in Internal Controls over FinancialReporting**

On June 7, 2006, we hired Tracie Wilson as our Chief FinancialOfficer.  As Chief Financial Officer, Ms.Wilson has responsibility for our financial reporting and internalcontrols.  In connection with the hiringof Ms. Wilson, Thomas Fox resigned as Chief Financial Officer and continueswith Southwest as President and Chief Operating Officer.  Mr. Fox retains primary responsibility forfinancial reporting and supervisory authority over Ms. Wilson, our financialreporting, and our disclosure controls and procedures.

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**PART II -OTHER INFORMATION**

**Item 1. Legal Proceedings.**

See Items 3 and 9 of our Annual Report onForm 10-KSB, filed March 31, 2006, for a description of our pendinglegal proceedings.

North Metro Harness Initiative, LLC, in which Southwest Casino and HotelCorp. owns a 50 percent membership interest, intervened in litigation betweenan anti-gambling citizens group and the Minnesota Racing Commission.  This litigation began in Ramsey County,Minnesota District Court in December 2004. The anti-gambling group alleged that members of the Minnesota RacingCommission violated Minnesota’s “open meeting” law while considering NorthMetro’s application for licenses to build and operate a harness racetrack andcard room in Columbus Township, Anoka County, Minnesota.  In June 2005, the District Court issued asummary judgment order dismissing plaintiff’s claims and in favor of theMinnesota Racing Commission and North Metro. 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 timely request for with the MinnesotaSupreme Court, ending this litigation.

In addition, on March 10, 2005, the anti-gambling group filed apetition with Minnesota Court of Appeals challenging the Minnesota RacingCommission’s grant of class A and class B licenses to North Metro to developand operate the harness racetrack and card club.  On March 28, 2006, the Appellate Courtaffirmed the decision of the Minnesota Racing Commission to grant licenses toNorth Metro.  On June 20, 2006, theSupreme Court of the State of Minnesota issued an order denying further reviewof that decision.

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

We held our annual meeting of shareholders atour corporate offices on June 29, 2006. At that meeting our shareholderselected five directors, all of whom had previously served as Southwestdirectors and confirmed the selection of Eide Bailly LLP as our independentregistered public accounting firm and auditors for the fiscal year endingDecember 31, 2006.  The votes on each of these matters were as**** ****follows:

Election of Directors:

|                        | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker   Non-vote** | ** ** |
|------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------------------|------------|
| **David  H. Abramson** |       | 12,037,927 |       | 81,549      |       | 0           |       | 0                          |       |
| **Gus A.  Chafoulias** |       | 12,037,927 |       | 81,549      |       | 0           |       | 0                          |       |
| **James  B. Druck**    |       | 12,037,927 |       | 81,549      |       | 0           |       | 0                          |       |
| **Jim  Holmes**        |       | 12,037,927 |       | 81,549      |       | 0           |       | 0                          |       |
| **Gregg P. Schatzman** |       | 12,037,927 |       | 81,549      |       | 0           |       | 0                          |       |

 

Proposal #2, to confirm the selection of EideBailly LLP as public accountants and independent auditors for the fiscal yearending December 31, 2006.

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 11,512,959 |       | 125         |       | 606,392     |       | 0                    |       |

 

**Item 6.  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. |   |
| 10.1 |   | Employment Agreement  between Southwest and Tracie L. Wilson dated June 29, 2006.                                                                                                  |   |
| 10.2 |   | Stock Option Agreement  between Southwest and Tracie L. Wilson dated June 29, 2006                                                                                                 |   |

 

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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.
| August 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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