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

 

**(Mark One)**

 

| **ý****  QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                     |
|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                  |
| **For the quarterly period ended****September 30, 2005**                                                                              |
|                                                                                                                                  |
| **o****  TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                            |
|                                                                                                                                  |
| **For the Transition Period  From                To** |
|                                                                                                                                  |
| **Commission file number****000-50572**                                                                                               |

 

**SOUTHWESTCASINO CORPORATION**

(Exact name of small business issuer as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(952) 853-9990**

(Issuer’s telephone number)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.                                                                                                                                      YES  ý   NO  o

 

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

                                                                                                                                                                                                YES  o   NO  ý

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date:  19,588,656

 

Transitional Small BusinessDisclosure Format (check one):    Yes  o   No ý

 

 

----

 

**SOUTHWEST CASINO CORPORATION**

 

**FORM 10-QSB**

**SEPTEMBER 30, 2005**

 

**TABLE OF CONTENTS**

 
| **Description** |                                                                                                                       |   |
|-----------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|            |                                                                                                                       |   |
| PART I.         | FINANCIAL INFORMATION                                                                                                      | 3      |
| ITEM 1.         | Financial Statements                                                                                                       | 3      |
|            | Consolidated Balance Sheet  (Unaudited), September 30, 2005                                                                | 4      |
|            | Consolidated Statements of  Operations (Unaudited) for the Three Months and Nine Months ended September  30, 2005 and 2004 | 5      |
|            | Consolidated Statements of  Cash Flows (Unaudited) for the Nine Months ended June 30, 2005 and 2004                        | 6      |
|            | Notes to Unaudited  Consolidated Financial Statements                                                                      | 7      |
| ITEM 2.         | Management’s Discussion and  Analysis or Plan of Operation                                                            | 18     |
| ITEM 3.         | Controls and  Procedures                                                                                                   | 37     |
|            |                                                                                                                       |   |
| PART II.        | OTHER INFORMATION                                                                                                          | 38     |
| ITEM 1.         | Legal Proceedings                                                                                                          | 38     |
| ITEM 4.         | Submission  of Matters to a Vote of Security Holders                                                                       | 38     |
| ITEM 6.         | Exhibits                                                                                                                   | 39     |
| SIGNATURE PAGE  | 40                                                                                                                         |

 

*In this Form 10-QSB, references to “Southwest,” “thecompany,” “we,” “our” or “us,” unless the context otherwise requires, refer toSouthwest Casino Corporation.*

 

2

----

 

**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 

**SOUTHWEST CASINO CORPORATION**

 

**Table of Contents**

 
| **FINANCIAL STATEMENTS** |   |
|--------------------------|--------|
|                     |   | Consolidated Balance Sheet  (Unaudited), September 30, 2005 |   |
|                     |   | Consolidated Statements of  Operations (Unaudited) for the Three Months and Nine Months ended September  30, 2005 and 2004 |   |
|                     |   | Consolidated Statement of  Cash Flows (Unaudited) for the Nine Months ended September 30, 2005 and 2004 |   |
|                     |   | Notes to Unaudited  Consolidated Financial Statements |   |

 

3

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Balance Sheet (Unaudited)**

**September 30, 2005**

 
| ASSETS                                                                                                 |       |        |       |
|--------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                             | ** ** | ** **  | ** ** |
| CURRENT  ASSETS                                                                                        |       |        |       |
| Cash and Cash Equivalents                                                                              |       | $           | 1,666,527  |   |
| Cash - Restricted                                                                                      |       | 153,266     |       |
| Accounts Receivable                                                                                    |       | 113,443     |       |
| Management Fees Receivable                                                                             |       | 486,788     |       |
| Inventories                                                                                            |       | 150,035     |       |
| Prepaid Expenses                                                                                       |       | 657,256     |       |
| Total Current Assets                                                                                   |       | $           | 3,227,315  |   |
|                                                                                                   |       |        |       |
| PROPERTY AND  EQUIPMENT                                                                                |       |        |       |
| Real Estate Options                                                                                    |       | $           | 739,257    |   |
| Construction in Progress                                                                               |       | 1,343,472   |       |
| Leasehold Improvements                                                                                 |       | 15,671,888  |       |
| Furniture and Equipment                                                                                |       | 6,513,152   |       |
| Accumulated Depreciation                                                                               |       | (9,154,513  | )          |
| Net Property and Equipment                                                                             |       | $           | 15,113,256 |   |
|                                                                                                   |       |        |       |
| OTHER ASSETS                                                                                           |       |        |       |
| Intangible Assets                                                                                      |       | $           | 1,260,523  |   |
| Deposits                                                                                               |       | 101,150     |       |
| Deferred Tax Asset                                                                                     |       | 842,000     |       |
| Total Other Assets                                                                                     |       | $           | 2,203,673  |   |
|                                                                                                   |       |        |       |
| TOTAL ASSETS                                                                                           |       | $           | 20,544,244 |   |
|                                                                                                   |       |        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                              |       |        |       |
|                                                                                                   |       |        |       |
| CURRENT  LIABILITIES                                                                                   |       |        |       |
| Accounts Payable                                                                                       |       | $           | 1,969,731  |   |
| Accrued Expenses                                                                                       |       | 1,000,140   |       |
| Accrued Liabilities - Related Parties                                                                  |       | 495,459     |       |
| Notes Payable                                                                                          |       | 536,152     |       |
| Current Portion of Long-Term Liabilities                                                               |       | 777,802     |       |
| Convertible Subordinated Series A  Debentures                                                          |       | 75,000      |       |
| Accrued Interest Payable                                                                               |       | 76,312      |       |
| Total Current Liabilities                                                                              |       | $           | 4,930,596  |   |
|                                                                                                   |       |        |       |
| LONG-TERM  LIABILITIES                                                                                 |       |        |       |
| Long-Term Liabilities Net of Current  Portion                                                          |       | $           | 8,436,016  |   |
|                                                                                                   |       |        |       |
| COMMITMENTS  AND CONTINGENCIES                                                                         |       | $           | —     |   |
|                                                                                                   |       |        |       |
| MINORITY  INTEREST                                                                                     |       |        |       |
| Minority Interest in subsidiary                                                                        |       | $           | 950,346    |   |
|                                                                                                   |       |        |       |
| STOCKHOLDERS’  EQUITY                                                                             |       |        |       |
| Preferred Stock, $.001 Par Value 30,000,000  Shares Authorized                                         |       | $           | —     |   |
| Common Stock, $.001 Par Value, 75,000,000  Shares Authorized, 19,513,656 Shares Issued and Outstanding |       | $           | 19,588     |   |
| Additional Paid-in Capital - Warrants                                                                  |       | 34,750      |       |
| Additional Paid-in Capital                                                                             |       | 16,805,123  |       |
| Accumulated Deficit                                                                                    |       | (10,632,175 | )          |
| Total Stockholders’ Equity                                                                        |       | $           | 6,227,286  |   |
|                                                                                                   |       |        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                       |       | $           | 20,544,244 |   |

 

See Notes to Unaudited Consolidated Financials Statements

 

4

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Operations (Unaudited)**

 
| ** **                                              | ** ** | ** **            | ** ** | **Restated**          | ** ** | ** **            | ** ** | **Restated**          | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **The Nine Months**   | ** ** | **The Nine Months**   | ** ** | **The Three Months**  | ** ** | **The Three Months**  | ** ** |
| ** **                                              | ** ** | **Ended**             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                                              | ** ** | **September 30,2005** | ** ** | **September 30,2004** | ** ** | **September 30,2005** | ** ** | **September 30,2004** | ** ** |
| **REVENUES**                                            |       |                  |       |                  |       |                  |       |                  |       |
| Casino                                                  |       | $                     | 11,536,240 |                  | $          | 11,964,323            |       | $                     | 4,138,250  |   | $ | 4,094,896 |   |
| Food & Beverage/Hotel                               |       | 349,806               |       | 346,285               |       | 148,277               |       | 154,080               |       |
| Management and Consulting                               |       | 3,640,785             |       | 3,240,787             |       | 1,427,880             |       | 862,022               |       |
| Entertainment                                           |       | 18,492                |       | 102,430               |       | 11,807                |       | 84,047                |       |
| Other                                                   |       | 152,856               |       | 70,952                |       | 75,198                |       | 25,908                |       |
| Total Revenue                                           |       | 15,698,179            |       | 15,724,777            |       | 5,801,412             |       | 5,220,953             |       |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| **EXPENSES**                                            |       |                  |       |                  |       |                  |       |                  |       |
| Casino                                                  |       | $                     | 9,332,941  |                  | $          | 8,871,124             |       | $                     | 3,154,998  |   | $ | 3,010,979 |   |
| Food & Beverage/Hotel                               |       | 458,618               |       | 1,197,170             |       | 181,580               |       | 436,688               |       |
| Corporate Expense                                       |       | 1,950,283             |       | 2,903,237             |       | 552,419               |       | 1,506,145             |       |
| Project Development Costs                               |       | 653,739               |       | 836,763               |       | 138,194               |       | 267,284               |       |
| Entertainment                                           |       | 134,862               |       | 185,861               |       | 82,263                |       | 145,051               |       |
| Depreciation and Amortization                           |       | 1,775,433             |       | 1,799,647             |       | 584,417               |       | 767,288               |       |
| Total Expenses                                          |       | 14,305,876            |       | 15,793,802            |       | 4,693,871             |       | 6,133,435             |       |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Income (Loss) from Operations                           |       | $                     | 1,392,303  |                  | $          | (69,025               | )          | $                     | 1,107,541  |   | $ | (912,482 | ) |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| **OTHER INCOME (EXPENSE)**                              |       |                  |       |                  |       |                  |       |                  |       |
| Interest Income                                         |       | $                     | 5,473      |                  | $          | 8,622                 |       | $                     | 1,412      |   | $ | 830 |   |
| Interest Expense                                        |       | (751,067              | )          | (870,836              | )          | (228,389              | )          | (332,753              | )          |
| Loss on Disposition of Property and  Equipment          |       | (42,480               | )          | (9,909                | )          | (41,465               | )          | (4,992                | )          |
| Income from Debt Forgiveness                            |       | —                |       | 9,219                 |       | —                |       | —                |       |
| Total Other Income (Expense)                            |       | (788,074              | )          | (862,904              | )          | (268,442              | )          | (336,915              | )          |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Income (Loss) from Continuing Operations                |       |                  |       |                  |       |                  |       |                  |       |
| Before Income Taxes                                     |       | 604,229               |       | (931,929              | )          | 839,099               |       | (1,249,397            | )          |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Income Tax Benefit (Expense)                            |       | —                |       | —                |       | —                |       | 133,000               |       |
| Minority Interest in Income of Consolidated  Subsidiary |       | 189,980               |       | 10,000                |       | 62,097                |       | —                |       |
| Equity in Earning of Unconsolidated  Subsidiary         |       |                  |       | (2,351,733            | )          |                  |       | (1,902,148            | )          |
| Income (Loss) from Continuing Operations                |       | 794,209               |       | (3,273,662            | )          | 901,196               |       | (3,018,545            | )          |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| **DISCONTINUED OPERATIONS**                             |       |                  |       |                  |       |                  |       |                  |       |
| Loss from Discontinued Operations                       |       | $                     | —     |                  | $          | (256,582              | )          | $                     | —     |   | $ | — |   |
| Income Tax Benefit                                      |       | —                |       | —                |       | —                |       | (42,600               | )          |
| Total Discontinued Operations                           |       | —                |       | (256,582              | )          | —                |       | (42,600               | )          |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| **NET INCOME (LOSS)**                                   |       | $                     | 794,209    |                  | $          | (3,530,244            | )          | $                     | 901,196    |   | $ | (3,061,145 | ) |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Earnings per common share and common  equivalent share, |       |                  |       |                  |       |                  |       |                  |       |
| Basic:                                                  |       |                  |       |                  |       |                  |       |                  |       |
| Income (Loss) from continuing operations                |       | 0.04                  |       | (0.37                 | )          | 0.05                  |       | (0.19                 | )          |
| Discontinued operations                                 |       | —                |       | (0.03                 | )          | —                |       | (0.00                 | )          |
| Net Income (Loss)                                       |       | $                     | 0.04       |                  | $          | (0.40                 | )          | $                     | 0.05       |   | $ | (0.19 | ) |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Common Equivalent Shares Outstanding                    |       | 19,471,448            |       | 8,836,635             |       | 19,400,884            |       | 15,918,512            |       |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Earnings per common share and common  equivalent share, |       |                  |       |                  |       |                  |       |                  |       |
| Fully-diluted:                                          |       |                  |       |                  |       |                  |       |                  |       |
| Income (Loss) from continuing operations                |       | 0.04                  |       | (0.37                 | )          | 0.04                  |       | (0.19                 | )          |
| Discontinued Operations                                 |       | —                |       | (0.03                 | )          | —                |       | —                |       |
| Net Income (Loss)                                       |       | $                     | 0.04       |                  | $          | (0.40                 | )          | $                     | 0.04       |   | $ | (0.19 | ) |
|                                                    |       |                  |       |                  |       |                  |       |                  |       |
| Common Equivalent Shares Outstanding                    |       | 22,186,531            |       | 8,836,635             |       | 21,898,384            |       | 15,918,512            |       |

 

See Notes to Unaudited Consolidated Financials Statements

 

5

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                               | ** ** | ** **            | ** ** | **Restated**          | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **The Nine Months**   | ** ** | **The Nine Months**   | ** ** |
| ** **                                                                               | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                                                                               | ** ** | **September 30,2005** | ** ** | **September 30,2004** | ** ** |
| ** **                                                                               | ** ** | ** **            | ** ** | ** **            | ** ** |
| Cash Flows from Operating Activities:                                                    |       |                  |       |                  |       |
| Net Income (Loss)                                                                        |       | $                     | 794,209    |                  | $          | (3,530,244 | ) |
| Adjustments to Reconcile Net Income(Loss)  to Net Cash Provided by Operating Activities: |       |                  |       |                  |       |
| Minority Interest                                                                        |       | (189,980              | )          | (10,000               | )          |
| Depreciation and Amortization                                                            |       | 1,775,433             |       | 1,833,969             |       |
| (Gain) Loss on Disposition of Property and  Equipment                                    |       | 43,374                |       | 9,909                 |       |
| (Equity) Loss on Unconsolidated Subsidiary                                               |       | —                |       | 2,351,733             |       |
| Common Stock Issued for Non-Cash  Compensation                                           |       | 15,875                |       | 292,500               |       |
| Write off of Land Option cost incurred in  prior years                                   |       | 249,778               |       | —                |       |
|                                                                                     |       |                  |       |                  |       |
| Change in Current Assets and Liabilities,                                                |       |                  |       |                  |       |
| (Increase) Decrease in Restricted Cash                                                   |       | 48,881                |       | —                |       |
| (Increase) Decrease in Receivables                                                       |       | (222,757              | )          | 300,823               |       |
| (Increase) Decrease in Inventories                                                       |       | 4,689                 |       | 8,798                 |       |
| (Increase) Decrease in Prepaid Expenses                                                  |       | (16,646               | )          | 186,486               |       |
| Increase (Decrease) in Accounts Payable                                                  |       | (916,743              | )          | 197,890               |       |
| Increase (Decrease) in Accrued Expenses                                                  |       | (81,723               | )          | 438,617               |       |
| Increase (Decrease) in Accrued Interest  Payable                                         |       | (33,463               | )          | (233,744              | )          |
| Net Cash Provided By Operating Activities                                                |       | $                     | 1,470,927  |                  | $          | 1,846,737 |   |
|                                                                                     |       |                  |       |                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                     |       |                  |       |                  |       |
| Proceeds from Sale of Property and  Equipment                                            |       | $                     | —     |                  | $          | 30,505 |   |
| Purchase of Property and Equipment                                                       |       | (610,937              | )          | (1,332,512            | )          |
| Payment of Capitalized License                                                           |       | (189,179              | )          | —                |       |
| (Increase) Decrease in Deposits                                                          |       | (1,126                | )          | 37,940                |       |
| Investment in Unconsolidated Subsidiary                                                  |       | —                |       | (2,242,166            | )          |
| Proceeds from principal received on  long-term notes receivable                          |       | —                |       | 402,686               |       |
| Net Cash (Used In) Investing Activities                                                  |       | $                     | (801,242   | )                     | $          | (3,103,547 | ) |
|                                                                                     |       |                  |       |                  |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                     |       |                  |       |                  |       |
| Net Advances (Payments) on Short-Term Notes  Payable                                     |       | $                     | (346,949   | )                     | $          | 400,905 |   |
| Payment of Deferred Financing Costs                                                      |       | —                |       | (79,605               | )          |
| Proceeds from debenture issuance                                                         |       |                  |       | 2,449,760             |       |
| Principal Payments on Long-Term Borrowings                                               |       | (571,090              | )          | (806,328              | )          |
| Proceeds from Outside Investors - Minority  Interest                                     |       | 1,140,325             |       | 10,000                |       |
| Proceeds from Issuance of Preferred Stock  & Warrants                                |       | 49,000                |       | 80,000                |       |
| Payment of Subordinated Debentures                                                       |       | (25,000               | )          | (212,500              | )          |
| Net Cash Provided by Financing Activities                                                |       | $                     | 246,286    |                  | $          | 1,842,232 |   |
|                                                                                     |       |                  |       |                  |       |
| Net Increase (Decrease) in Cash and Cash  Equivalents                                    |       | 915,971               |       | 585,422               |       |
|                                                                                     |       |                  |       |                  |       |
| CASH AND CASH EQUIVALENTS                                                                |       |                  |       |                  |       |
| Beginning of Year                                                                        |       | 750,556               |       | 728,290               |       |
| End of Period                                                                            |       | $                     | 1,666,527  |                  | $          | 1,313,712 |   |
|                                                                                     |       |                  |       |                  |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                        |       |                  |       |                  |       |
| Interest paid                                                                            |       | $                     | 679,305    |                  | $          | 903,463 |   |
| Income taxes paid                                                                        |       | —                |       | —                |       |
|                                                                                     |       |                  |       |                  |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES                  |       |                  |       |                  |       |
| Warrants issued in exchange for services                                                 |       | $                     | 15,875     |                  | $          | 292,500 |   |
| Purchase of equipment with financing                                                     |       | —                |       | 1,144,500             |       |
| Capital Assets acquired with Accounts  Payable                                           |       | 101,225               |       | 307,063               |       |

 

See Notes to Unaudited Consolidated Financial Statements

 

6

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

**NOTE1 – ORGANIZATION AND NATURE OF OPERATIONS**

 

SouthwestCasino Corporation

 

The current structure ofSouthwest Casino Corporation resulted from a July 22, 2004 reorganizationconsummated by Lone Moose Adventures, Inc. (now Southwest Casino Corporation),a Nevada corporation, Lone Moose Acquisition Corporation, a Minnesotacorporation and wholly-owned subsidiary of Lone Moose Adventures, SouthwestCasino and Hotel Corp., a Minnesota corporation, and certain shareholders ofLone Moose Adventures.  In thereorganization, Lone Moose Acquisition Corporation merged with and intoSouthwest Casino and Hotel Corp. Southwest Casino and Hotel Corp. was the surviving corporation in thatmerger and became a wholly-owned subsidiary of Lone Moose Adventures.  Lone Moose Adventures changed its name toSouthwest Casino Corporation immediately after that merger.

 

In the reorganization, LoneMoose Adventures (now Southwest Casino Corporation) issued 16,161,343 shares ofits common stock to shareholders of Southwest Casino and Hotel Corp. to acquire100% of the issued and outstanding shares of common stock, Series C convertiblepreferred stock, and other convertible securities of Southwest Casino and HotelCorp.  The reorganization represents arecapitalization of Southwest Casino Corporation with accounting treatmentsimilar to that used in a reverse acquisition, except that no goodwill orintangible is recorded.  Arecapitalization is characterized by the merger of a private operating companyinto a non-operating public shell corporation with nominal net assets andtypically results in the owners and managers of the private company havingeffective operating control after the transaction.  Southwest Casino Corporation emerged as thesurviving reporting entity after the reorganization.

 

Southwest Casino Corporation,through its wholly-owned subsidiaries, operates three casinos in Cripple Creek,Colorado and manages Native American gaming facilities under contractualagreements.  Southwest Casino Corporation’soperations include the following consolidated subsidiaries:

 

SouthwestCasino and Hotel Corp.

 

Southwest Casino and HotelCorp. was formed in 1992 and provides management consulting services forcasinos under contractual agreements. The contractual agreements will expire inMay 2007 unless extended by an additional contractual agreement.  In addition, SWC&H operates Uncle Sam’sCasino in Cripple Creek, Colorado under a 5-year lease which was extended foran additional 5 years ending in 2009.

 

Gold Rush I,LLC

 

Gold Rush I, LLC was formedduring 1999 and operates the Gold Rush Hotel and Casino and Gold Digger’sCasino in Cripple Creek, Colorado under a long term capitalized leaseagreement.

 

SouthwestEntertainment. Inc.

 

Southwest Entertainment, Inc.,located in Minneapolis, Minnesota, was formed on November 4, 1998. The companyoperates an outdoor amphitheatre for entertainment events in Cripple Creek,Colorado.

 

SouthwestCasino Deadwood, LLC

 

Southwest Casino Deadwood, LLC,located in Deadwood, South Dakota, was formed on December 7, 1999 and beganoperating B.B. Cody’s Casino under lease in July 2000.  During December 2003, the Company decided todiscontinue operations in Deadwood.  SeeNote 10.

 

North MetroHarness Initiative, LLC.

 

North Metro Harness Initiative,LLC (a development stage Minnesota limited liability company) was formed onJune 16, 2003 for the purpose of developing, owning, and operating a harnessracetrack and card room north of

 

7

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

Minneapolis, Minnesota, inAnoka County.  North Metro was issued classA and class B racing licenses by the Minnesota Racing Commission on February16, 2005.  As a result of the MinnesotaRacing Commission’s decision, the Commission is being sued by a group opposedto the racetrack.  North Metro’sdevelopment of this project has been delayed pending resolution of thismatter.  North Metro’s activities are describedmore fully in Note 15.

 

SW Missouri,LLC

 

SW Missouri, LLC is a 30%shareholder in Southwest Missouri Gaming, LLC, which was pursuing state andlocal regulatory approval and acquiring property for a riverboat casino inRockaway Beach, Missouri.  Thisinitiative was defeated in a statewide primary election held on August 3,2004.  It is unlikely, but still possiblethat this initiative will be revived if the project was to gain greater supportfrom the surrounding communities, including Branson, MO.

 

### **NOTE2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The unaudited financial statements of the Companyhave been prepared pursuant to the rules and regulations of the Securities andExchange Commission. Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included in the accompanying financial statements. The results ofoperations for the nine months and three months ended September 30, 2005 and2004 are not necessarily indicative of the results to be expected for a fullyear.

 

These financial statementsshould be read in conjunction with the financial statements and notes includedin the Company’s financial statements for the year ended December 31, 2004.

 

# **Principlesof Consolidation**

 

# **Theaccompanying consolidated financial statements include the accounts ofSouthwest Casino Corporation and its subsidiaries.  All material inter-company transactions andbalances have been eliminated in consolidation.**

 

# **Basis ofAccounting**

 

# **Theconsolidated financial statements of the Company are prepared using the accrualbasis of accounting whereby revenues are recognized when earned and expensesare recognized when incurred.  This basisof accounting conforms to generally accepted accounting principles in theUnited States of America.**

 

Use of Estimates

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the period.  Actual results coulddiffer from those estimates.

 

Revenue Recognition

 

Casino revenue is the net win from gamingactivities, which is the difference between gaming wins and losses.  Revenue from food, beverage and hoteloperations is recorded upon delivery of goods or services, and excludespromotional allowances.  Revenue fromcasino management and consulting contracts with outside parties is recognizedover the term of the agreements. Consideration given in exchange for entering into long-term contracts isamortized over the life of the agreement.

 

8

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

OperatingSegments

 

The Company has segregated itsactivities into three operating segments based on operating and managementcharacteristics related to its sources of revenue or basis for accumulatingassets or expenses.  The segments aredefined as casino operations, casino management for unrelated parties, andcasino development activities.  Separateoperations are aggregated based on the above general segment descriptions.

 

Investments

 

Investments in entities where the Company has morethan a 20% but less than a 50% financial and voting interest are recorded onthe equity method of accounting.  Whenthe Company is a primary beneficiary of a Variable Interest Entity as definedunder FASB Interpretation 46(R), or when the Company has an investment of morethan 50% but less than 100%, the Company consolidates the entity and adjuststhe investment by minority interest holder for the portion of the income orloss allocable to the minority owner. See discussion of North Metro Harness Initiative, LLC in Note 15.

 

**NOTE 3 –RESTRICTED CASH**

 

Restricted Cash at September30, 2005 represents a bank escrow account set up to repurchase Series Aconvertible subordinated debentures that were outstanding as of July 14,2004.  See Note 7.

 

# **NOTE4 –PROMOTIONAL ALLOWANCES**

 

# **Revenuedoes not include the retail amount of rooms, food, and beverage providedgratuitously to customers, which was approximately $934,000 and $920,000 forthe nine months ended September 30, 2005 and 2004, respectively, and wasapproximately $335,000 and $347,000 for the three months ended September 30,2005 and 2004 respectively.**

 

**NOTE 5 –INTANGIBLE ASSETS AND CASINO MANAGEMENT AGREEMENT**

 
| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Intangible Assets  consisted of the following at September 30: |       |     |       |     |       |
|                                                           |       |     |       |     |       |
| Casino  management contract rights                             |       | $        | 849,675    |     | $          | 1,359,480 |   |
| Minnesota  Class A and B Racing License                        |       | 410,848  |       | —   |       |
| Total                                                          |       | $        | 1,260,523  |     | $          | 1,359,480 |   |

 

Futureamortization of management contract rights are as follows:

 
| **Twelve Months Ended September  30,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
|                                   |       |       |       |
| 2006                                   |       | $          | 509,805    |   |
| 2007                                   |       | $          | 339,870    |   |

 

TheCompany entered into an agreement with the Cheyenne and Arapaho Tribes ofOklahoma (CATO) for management of its casinos located in Oklahoma that was toexpire on May 19, 2004. In exchange for extending the contract through May 19,2007, the Company has transferred title to a tract of land to CATO.  The exchange took place in 2003.  Since the asset transfer is related to theextension agreement for management services, the cost of the land is beingamortized over the term of the agreement.

 

TheCompany earned management revenues related to the agreement with CATO of$3,640,785 and $3,240,787 for the nine months ended September 30, 2005 and2004, respectively.  The Company earnedmanagement revenues

 

9

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

relatedto the agreement with CATO of $1,427,800 and $862,022 for the three monthsended September 30, 2005 and 2004, respectively.

 

TheCompany has also expended funds to acquire class A and class B racing licensesfrom the Minnesota Racing Commission. Although these licenses are subject to renewal, the costs of obtainingthe initial license are considered to have an indefinite useful life because itis expected to generate cash flows indefinitely.

 

**NOTE 6 – NOTES PAYABLE**

 

The Company may borrow up to $450,000 under arevolving line of credit.  Interest ispayable at a variable rate (7.75% as of September 30, 2005). The line is dueMay 6, 2006, and is collateralized by substantially all assets.  At September 30, 2005, the line had a balanceof $446,292 with $3,708 available to draw. The line of credit is included in notes payable on the accompanyingbalance sheet.

 

The Company has entered into a collateral agreementand promissory note to collateralize a $500,000 bond related to the developmentof North Metro Harness Initiative, LLC. The promissory note is due on June 1,2006, with a variable interest rate (7.75% per year as of September 30,2005).  As of September 30, 2005, thenote had not been drawn.  The note ispersonally guaranteed by the Directors and a stockholder of the Company.

 

On October 12, 2004, the Company borrowed $500,000amortized over one year at $42,934 per month, at a variable rate (7.75% as ofSeptember 30, 2005) and personally guaranteed by the Directors of theCompany.  The last payment is due October12, 2005.  The balance of the loan was$44,600 as of September 30, 2005.

 

On June 24, 2005, the Company borrowed $45,000 withan interest rate of 7.75% due October 12, 2005. The note was personally guaranteed by the Directors of the Company.

 

For an update on notes payable, see Note 18 –Subsequent Events.

 

**NOTE 7 – SUBORDINATED DEBENTURES**

 

During 1993, the Company sold$8,250,000 of Series A convertible subordinated debentures paying interest at arate of 9.25% per year and due and payable July 15, 1998.  On July 8, 2004, the Company offered toredeem all remaining outstanding Series A debentures, in the principal amountof $362,500, which were then in default, in exchange for payment of allprincipal plus interest accrued through July 14, 2004, or conversion of theprincipal to common stock plus payment of accrued interest through July 14,2004.  The Company has paid all amountsnecessary to redeem the remaining Series A convertible subordinated debenturesin accordance with this offer into an escrow account established for thispurpose.  On February 14, 2005, adebenture holder converted his $25,000 debenture into 22,728 shares of commonstock. Therefore, as of September 30, 2005, Series A convertible subordinateddebentures in the principal amount of $75,000 remained outstanding with accruedinterest payable of $76,312.  Inaccordance with the July 8, 2004 redemption offer, we are no longer accruinginterest on the outstanding Series A debentures.

 

**NOTE 8 – PRIOR PERIOD ADJUSTMENT**

 

The statements of operations and cash flows for the three and ninemonths ended September 30, 2004 have been restated for correction of an errorin the recording of capital leases. The adjustments for the three months endedSeptember 30, 2004 result in an increase of net loss of $7,974 and $23,920 forthe nine months ended September 30, 2004 from amounts previously reported.

 

**NOTE 9 – STOCKOPTIONS AND WARRANTS**

 

On March 25, 2005, the Company issued 125,000 shares of common stock toa consultant to the racetrack development who exercised a warrant to purchasethose shares at a price of $0.12 per share.

 

10

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

On May 2, 2005, the Company issued 75,000 shares of common stock to aconsultant to the racetrack development who exercised a warrant to purchasethose shares at a price of $0.12 per share.

 

##### **NOTE 10 – DISCONTINUED OPERATIONS AND IMPAIRMENT**

 

During2003, as a result of continued losses from operations, the Company decided todiscontinue the operation of its casino in Deadwood, South Dakota. As a result,during 2004, the Company sold or abandoned certain assets and transferred theremaining assets to other casino operations. As of December 31, 2003, the valueof the assets sold was recorded as assets held for sale on the accompanyingbalance sheet. For the year ended December 31, 2003, the Company recorded aloss of $282,550 for the difference between the net book value of the assetssold or abandoned and the net proceeds received subsequent to December 31,2003. During the three months ended March 31, 2004, the Company incurred anadditional loss on disposal of assets of approximately $500 related to thisdiscontinued operation.

 

Inconnection with the discontinued operation, during the three months ended March31, 2004, the Company incurred termination and severance costs.  The total incurred was approximately $73,500,which was recorded as an expense of the discontinued operation in theaccompanying statement of operations. The liability related to the termination and severance benefits is asfollows:

 
| Liability Balance, December 31, 2003   |   | $      | — |   |
|----------------------------------------|--------|--------|--------|--------|
|                                   |   |   |   |
| Nine Months  Ended September 30, 2004: |   |   |   |
| Costs Charged to Expense               |   | 73,500 |   |
| Costs Paid                             |   | 73,500 |   |
|                                   |   |   |   |
| Liability  Balance, September 30, 2004 |   | $      | — |   |

 

The company paid all terminationbenefits by June 30, 2004.

 

# **NOTE11 – RELATED PARTY TRANSACTIONS**

 

The Company has aliability to certain officers and stockholders for unpaid compensation andexpenses of $250,699 and $272,950 as of September 30, 2005 and 2004,respectively.

 

In connection with theCompany’s investment in Southwest Missouri Gaming, LLC, the Company signed aone-year promissory note agreeing to pay to Prime Inc., the other member ofSouthwest Missouri Gaming, $367,000 plus interest at a variable rate equal toprime plus 2 percent for its share of expenses in connection with SouthwestMissouri Gaming’s unsuccessful efforts to develop a riverboat casino inRockaway Beach, Missouri.  Under thenote, the Company agreed to pay $5,000 per month, a principal payment of$100,000 on July 1, 2005, and the balance of the note on December 31,2005.  The note is secured by slotmachines owned by Gold Rush I, LLC.  Thebalance of the note as of September 30, 2005 is $244,760 and the interest rateas of September 30, 2005 is 8.75%.

 

During the nine monthsended September 30, 2005 and 2004, the Company paid Berc & Fox Limited$15,398 and $47,162 for tax and accounting services, respectively.  Thomas Fox is a shareholder and officer inBerc & Fox Limited.

 

During the nine monthsended September 30, 2005, the Company paid Jennifer Sparlin Druck $1,000 forentertainment services at the Gold Rush Palladium.  Ms. Druck is the wife of James Druck, anofficer of the Company.

 

#### **NOTE 12 –PROJECT DEVELOPMENT COSTS**

 

In February 2004,an option to purchase the Gold Rush real estate was negotiated with thelessor.  This option was for a term ofone year that expired on February 28, 2005, during which time, the Companycould purchase the

 

11

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

lessor’s interestin the property.  As consideration forthis option, the Company dismissed certain claims against the lessor and othercosts incurred in connection with a dispute regarding provisions of thelease.  These costs amounted to$249,778.  In 2005, these costs werewritten off as project development expense because the Company did not exerciseits option to purchase the Gold Rush real estate.

 

During the ninemonths ended September 30, 2005, $379,960 in project costs were incurred inconnection with the development of the racetrack and card room in Minnesota, ofwhich 50% or $189,980 was allocated to the minority interest.

 

#### **NOTE 13 –SEGMENT INFORMATION**

 

Segmentedinformation related to the nine months ended September 30, 2005 follows:

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

 

Segmented information relatedto the nine months ended September 30, 2004 follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
| Revenues                                    | ** ** | $              | 12,483,990 |           | $          | 3,240,787       |       | $               | —     |       | $          | — |   | $ | 15,724,777 |   |
| Segmented profit (loss) before income taxes |       | (284,484       | )          | (2,780,871     | )          | (474,889        | )          | 10,000          |       | (3,530,244 | )          |
| Segmented  assets                           |       | 16,238,019     |       | 2,593,963      |       | 1,595,184       |       | —          |       | 20,427,166 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |  |

 

Segmentedinformation related to the three months ended September 30, 2005 follows:

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

 

Segment information related to the threemonths ended September 30, 2004 follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
| Revenues                                    | ** ** | $              | 4,358,931  |           | $          | 862,022         |       | $               | —     |       | $          | — |   | 5,220,953 |   |
| Segmented profit (loss) before income taxes |       | 9,985          |       | (2,803,846     | )          | (267,284        | )          | —          |       | (3,061,145 | )          |
| Segmented  assets                           |       | 16,238,019     |       | 2,593,963      |       | 1,595,184       |       | —          |       | 20,427,166 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |

 

----

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

 

12

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

##### **NOTE 14 – EARNINGS PER SHARE AND STOCKHOLDERS EQUITY**

 

The following is areconciliation of basic and diluted earnings per share:

 

Three months ended September30, 2005:

 
| ** **                       | ** ** | ** **       | ** ** | **Weighted**      | ** ** | ** **    | ** ** |
|----------------------------------|------------|------------------|------------|-------------------|------------|---------------|------------|
| ** **                       | ** ** | ** **       | ** ** | **Average**       | ** ** | ** **    | ** ** |
| ** **                       | ** ** | **Net Earnings** | ** ** | **Equity**        | ** ** | **Earnings**  | ** ** |
| ** **                       | ** ** | **(Numerator)**  | ** ** | **(Denominator)** | ** ** | **Per Share** | ** ** |
|                             |       |             |       |              |       |          |       |
| Basic  Earnings per Share        |       | $                | 901,196    |              | $          | 19,400,884    |       | $ | .05 |   |
|                             |       |             |       |              |       |          |       |
| Effect of  Dilutive Securities:  |       |             |       |              |       |          |       |
| Outstanding Options and Warrants |       | —           |       | 2,497,500         |       |          |       |
|                             |       |             |       |              |       |          |       |
|                             |       | $                | 901,196    |              | $          | 21,898,384    |       | $ | .04 |   |

 

Nine months ended September 30,2005:

 
| ** **                       | ** ** | ** **       | ** ** | **Weighted**      | ** ** | ** **    | ** ** |
|----------------------------------|------------|------------------|------------|-------------------|------------|---------------|------------|
| ** **                       | ** ** | ** **       | ** ** | **Average**       | ** ** | ** **    | ** ** |
| ** **                       | ** ** | **Net Earnings** | ** ** | **Equity**        | ** ** | **Earnings**  | ** ** |
| ** **                       | ** ** | **(Numerator)**  | ** ** | **(Denominator)** | ** ** | **Per Share** | ** ** |
|                             |       |             |       |              |       |          |       |
| Basic  Earnings per Share        |       | $                | 794,209    |              | $          | 19,471,448    |       | $ | .04 |   |
|                             |       |             |       |              |       |          |       |
| Effect of  Dilutive Securities:  |       |             |       |              |       |          |       |
| Outstanding Options and Warrants |       | —           |       | 2,715,083         |       |          |       |
|                             |       |             |       |              |       |          |       |
|                             |       | $                | 794,209    |              | $          | 22,186,531    |       | $ | .04 |   |

 

The Company had a net loss forthe nine months ended September 30, 2004 and the three months ended September30, 2004; therefore, a calculation of earnings per share on a fully dilutedbasis would be anti-dilutive.

 

On July 14, 2005, theshareholders of Southwest Casino Corporation approved two amendments to theCompany’s Articles of Incorporation regarding authorized capital stock.  The first amendment increased the number ofauthorized shares of common stock from 50,000,000 shares to 75,000,000 shares.  The second amendment authorized the issuanceof up to 30,000,000 shares of undesignated preferred stock with rights andpreferences to be determined by the Company’s Board of Directors.

 

**NOTE 15 –CONSOLIDATED VARIABLE INTEREST ENTITY**

 

The Company formed North MetroHarness Initiative, LLC on June 16, 2003 and was the sole member of North Metrountil June 8, 2004.  On June 8, 2004, theCompany sold a 50 percent membership interest in North Metro to MTR-Harness,Inc. (“MTR-Harness”).  Under the terms ofthe North Metro Member Control Agreement: MTR-Harness contributed $10,000 toNorth Metro and a made a conditional commitment to provide an additional$7,490,000 if North Metro received the racing licenses from the MinnesotaRacing Commission required for development of the North Metro facility; theCompany agreed to contribute $1 million for pre-licensing costs to North Metroand an additional $1,500,000 after North Metro received its racing licenses;and the Company and MTR-Harness divided voting rights and decision-making powerover North Metro equally, 50 percent each.

 

13

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

The Company evaluated whetherNorth Metro should be treated as a variable interest entity (“VIE”) subject toconsolidation during the applicable reporting period under FIN 46(R).  The Company determined that North Metroshould be treated as a VIE for the following reason:

 

The Company lacked theability through voting or similar rights to make decisions regarding NorthMetro’s activities because the Company’s voting rights were not proportionateto the Company’s obligation to absorb expected losses of the entity during thethird quarter and the first nine months of 2005.  As of September 30, 2005, the Company hadprovided approximately 67 percent of North Metro’s financial support, but heldonly 50 percent of the North Metro voting power.  Because the Company would absorb financiallosses of North Metro that were disproportionate to its 50 percent decisionmaking power, we determined that North Metro is a VIE subject to consolidationfor the nine months and three months ended September 30, 2005.

 

North Metro has received aletter of commitment for debt financing for approximately 79% of the expectedtotal project cost of the race track and card room, with the remaining 21% tobe provided by North Metro.  Terms of thecommitment include a $33,000,000 loan amortized over 10 years with interest ata variable rate (1.74% above prime rate) and a 7% interest rate floor, and a$4,250,000 loan amortized over 5 years with interest at a fixed rate of20%.  In addition, 50% of net availablecash flow (after scheduled debt service and income taxes) will be required tobe held in an account to redeem the debt. Redemption under this provision occurs when the account equals theprincipal amount of the loan outstanding. Security for the loan will include a first mortgage, corporate guaranteeof the Company, and security interests in other assets of the Company.  The closing and funding of the loan areexpected to occur after various court challenges to North Metro’s class A and Bracing licenses are resolved.

 

The Company, through NorthMetro, has entered into an agreement for the development of the land, buildingand related property to operate a racetrack and card room.  Fees related to the agreement total 3% of theproject cost not to exceed $750,000, which is defined as the total developmentcost less the cost to purchase the land. The agreement began on May 1, 2003, and continues until the completionof the project, unless earlier terminated. Fees are payable at a rate of $6,000 per month, plus applicable out ofpocket expenses, beginning on May 1, 2003. Upon the start of construction, two thirds of the expected fee (lessprevious monthly payments) is due.  Ifthe agreement is terminated prior to the completion of the project, any unpaidfees are determined based on the completed status of the project at the time oftermination, as defined in the agreement.

 

The Company, through NorthMetro, has entered into consulting agreements with non-related parties tomonitor legislation and perform lobbying activities, and other public relationsand development activities related to establishing and developing the racetrack and card room.  The agreements aregenerally on a month-to-month basis, and may be terminated by either party tothe agreement.  The Company had monthlyobligations related to these agreements of approximately $20,000 per month forthe first six months of 2005.  Thismonthly obligation has been reduced to $12,000 each month for the balance of2005.

 

The Company has included thefollowing assets of North Metro in its consolidated financial statements as ofSeptember 30, 2005:

 
| Cash and Cash Equivalents |   | $         | 5,391     |   |
|---------------------------|--------|-----------|-----------|--------|
| Prepaid  Expenses         |   | 207,710   |      |
| Real Estate  Options      |   | 739,257   |      |
| Construction  in progress |   | 1,343,472 |      |
| Capitalized  Licenses     |   | 410,848   |      |
| Organization  Costs       |   | —    |      |
| Deposits                  |   | —    |      |
|                      |   |      |      |
| Total Assets              |   | $         | 2,706,678 |   |

 

14

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

# **NOTE16 – INCOME TAXES**

 

The Companyaccounts for its income taxes in accordance with Statement of FinancialAccounting Standards No. 109 (Statement 109). Under Statement 109, an asset and liability method is used wherebydeferred tax assets and liabilities are determined based upon temporarydifferences between bases used for financial reporting and income tax reportingpurposes.  Income taxes are providedbased on the enacted tax rates in effect at the time such temporary differencesare expected to reverse.  The Company hasprovided a valuation allowance for net operating loss carryforwards from prioryears because the Company was uncertain as to its ability to utilize the losscarryforwards against future income. This valuation allowance has been reduced based on the operating resultsthrough the first nine months of 2005 and, accordingly, there is no income taxexpense for the three months and nine months ended September 30, 2005.

 

#### **NOTE 17 – COMMITMENTS AND CONTINGENCIES**

 

On September 23, 2005,MBC Global, LLC, an advisor to the Company in connection with it sale of approximately$2.6 million of convertible promissory notes and corporate reorganizationduring June and July 2004, initiated an arbitration proceeding against theCompany.   MBC Global asserts claimsunder the terms of a letter agreement between the company and MBC Global datedJuly 1, 2004 that MBC Global terminated on April 26, 2005 for unpaid advisoryfees and expenses of approximately $242,000 and indemnification of expensesincurred by MBC Global in disputes with third parties. Management does not anticipatethat the liability, if any, will exceed amounts accrued in the accompanyingfinancial statements.  In addition,several investors that participated in the 2004 offering of convertiblepromissory notes through MBC Global have demanded rescission of theirinvestment in Southwest based on an assertion that disclosures provided to themin connection with the sale of the notes were inadequate.

 

# **NOTE18 – SUBSEQUENT EVENTS**

 

On October 20, 2005, SouthwestCasino and Hotel Corp. entered into a new $2.5 million term loan agreement withCrown Bank of Minneapolis, Minnesota. This loan accrues interest at a floating rate equal to the prime rateplus 1 percent with a minimum interest rate of 7.5 percent per year and aninitial interest rate of 7.75 percent. Southwest Casino and Hotel Corp. will pay accrued interest only on thisnote until April 2006, after which it will repay the outstanding principalbalance and accrued interest over 12 months, with final payment due April 30,2007.  The repayment period may be extendedif Southwest Casino and Hotel Corp. meets certain business goals.  This obligation is guaranteed by SouthwestCasino Corporation and secured by substantially all of the assets of SouthwestCasino Corporation and its subsidiaries. In addition, 12 shareholders of Southwest Casino Corporation have eachguaranteed a portion of the principal amount of this loan.  As required by Crown Bank, the shareholderguarantors of this loan include James Druck, CEO, Thomas Fox, President andCFO, and Jeffrey Halpern, Chairman of the Board of Directors, who have eachguaranteed repayment of up to $100,000 of principal and accrued interest.

 

In connection with enteringinto a $2.5 million term loan on October 20, 2005, Crown Bank replacedSouthwest Casino and Hotel Corp.’s $450,000 revolving line of credit fromAssociated Bank Minnesota, N.A.  The newline of credit has an outstanding balance as of October 20, 2005 ofapproximately $446,000.  This line ofcredit accrues interest at a variable rate equal to the prime rate plus 1percent with a minimum interest of 7.5 percent per year and an initial interestrate of 7.75 percent.  The credit line isguaranteed by Southwest Casino Corporation and secured by substantially all ofthe assets of Southwest Casino Corporation and its subsidiaries.  All outstanding principal and interest underthis line of credit is due April 30, 2007. James Druck, CEO, Thomas Fox, President and CFO, and Jeffrey Halpern,Chairman of the Board of Directors, have each guaranteed repayment of up to $100,000of principal and accrued interest, which guarantee applies to both the $2.5million term loan and the revolving line of credit.

 

In consideration of theiragreement to guarantee portions of the $2.5 million term loan from Crown Bankthat Southwest Casino and Hotel Corp. entered into on October 20, 2005,Southwest Casino Corporation issued 5-year fully-exercisable warrants topurchase 1,250,000 shares of its common stock to 12 shareholders.  Each shareholder guarantor received a warrantto purchase one share of common stock for each $2.00 of the term loanguaranteed by that shareholder.  Ofthese, warrants to purchase 1,100,000 shares of common stock have an exerciseprice of $0.50

 

15

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

per share.  In consideration of each of their guaranteesof $100,000 of loan proceeds, Jim Druck, CEO, Tom Fox, President and CFO, andJeff Halpern, Chairman of the Board of Directors, each received a warrant topurchase 50,000 shares of common stock at a price of $0.58 per share.  The $0.58 per share exercise pricerepresented the average closing market price of one share of Southwest CasinoCorporation common stock over the 10 trading days immediately preceding theclosing of the loan transaction.

 

On October 20, 2005, SouthwestCasino and Hotel Corp. made capital contributions of $2,330,130 to North MetroHarness Initiative, LLC, in which Southwest Casino and Hotel Corp. owns a 50percent membership interest.  Of thesecapital contributions, $1,250,000 was required to fulfill Southwest Casino andHotel Corp.’s capital commitments to North Metro under the North Metro HarnessInitiative, LLC Member Control Agreement dated June 8, 2004.  The remaining $1,080,130 of these capitalcontributions was an additional contribution agreed upon by Southwest Casinoand Hotel Corp. and MTR-Harness, Inc. as managing members of North Metro HarnessInitiative, LLC.

 

On October 20, 2005,MTR-Harness, Inc. made capital contributions of $5,760,043 to North MetroHarness Initiative, LLC, in which MTR-Harness, Inc. owns a 50 percentmembership interest.  Of thesecontributions, $4,679,913 was required to fulfill MTR-Harness, Inc.’s capitalcommitments to North Metro under the North Metro Harness Initiative, LLC MemberControl Agreement dated June 8, 2004. The remaining $1,080,130 of these capital contributions was anadditional contribution agreed upon by Southwest Casino and Hotel Corp. andMTR-Harness, Inc. as managing members of North Metro Harness Initiative,LLC.  These capital contributions byMTR-Harness, Inc. resulted in MTR-Harness, Inc.’s capital contributions toNorth Metro Harness Initiative, LLC, exceeding financial contributions fromSouthwest Casino and Hotel Corp. to North Metro Harness Initiative, LLC.  For this reason, North Metro will no longerbe consolidated with Southwest Casino Corporation and in future, financialresults will be reported as income (loss) from an unconsolidated subsidiary.

 

On October 20, 2005, NorthMetro Harness Initiative, LLC completed the purchase of approximately 165 acresof land in Columbus Township, Anoka County, Minnesota.  The purchase was completed in accordance withthe terms of an option agreement that commenced on March 1, 2003.  North Metro Harness Initiative, LLC notifiedthe seller of its intent to purchase the real estate under the terms of theoption agreement on July 27, 2005.  Thepurchase price for the land was $8,450,000 plus real estate commissions andcertain closing costs.  The price paid atclosing was reduced by $630,000, the amount of option payments made by NorthMetro under the option agreement.  NorthMetro intends to develop a harness racetrack and card room on the site.

 

On October 7, 2005, North MetroHarness Initiative, LLC purchased approximately 24 acres of land in the city ofHugo in Anoka County, Minnesota.  Thepurchase was completed in accordance with the terms of a Real Estate PurchaseAgreement entered into on May 31, 2005. Under the purchase agreement, the purchase price was $600,000 and NorthMetro also paid real estate commissions and certain closing costs.  The price paid at closing was reduced by$25,000, the amount of earnest money paid by North Metro Harness Initiative,LLC when the purchase agreement was executed. North Metro Harness Initiative, LLC intends to use the property forwetland mitigation work in connection with its development of a harness trackand card room in Columbus Township, Minnesota.

 

On October 14, 2005, NorthMetro Harness Initiative, LLC completed the purchase of approximately 13.4acres of land in Columbus Township, Anoka County, Minnesota.  The purchase was completed in accordance withthe terms of an option agreement that commenced on July 17, 2003.  North Metro notified the seller of its intentto purchase the real estate under the terms of the option agreement on July 18,2005.  The purchase price for the landwas $700,000 plus real estate commissions and certain closing costs.  The price paid at closing was reduced by$32,000, the amount of option payments made by North Metro under the optionagreement.  The site adjoins real estateon which North Metro intends to develop a harness racetrack and card room.

 

On October 19, 2005, SouthwestCasino and Hotel Corp. and MTR-Harness, Inc., which own 50 percent membershipinterests in North Metro Harness Initiative, LLC, each made capitalcontributions of $250,000 to North Metro Harness Initiative, LLC.  On October 19, 2005, North Metro HarnessInitiative, LLC used these capital contributions to purchase a $500,000, 30-daycertificate of deposit from Associated Bank Minnesota, NationalAssociation.  This certificate of depositsecures a $500,000 promissory note and letter of credit that, in turn, secure a

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2005 AND 2004**

 

$500,000 bond issued for thebenefit of the Minnesota Racing Commission.  The promissory note bears interest at avariable rate (7.75% per year as of September 30, 2005) and has not beendrawn.  North Metro must maintain thisbond under the terms of the class A and B racing licenses it holds from theMinnesota Racing Commission.  Thecertificate of deposit replaces a security interest in the proceeds of theThird Amended and Restated Gaming Management Agreement between Southwest Casinoand Hotel Corp. and the Cheyenne and Arapaho Tribes of Oklahoma and thepersonal guarantees of the directors of Southwest Casino Corporation that hadpreviously secured the $500,000 promissory note.

 

On October 10, 2005, SouthwestCasino Corporation and Southwest Casino and Hotel Corp. entered into aSettlement Agreement and Release of Claims with Corporate Capital Management,LLC in connection with a lawsuit initiated by Corporate Capital Management onMarch 3, 2005.  Under the terms of thesettlement agreement, Southwest issued warrants to purchase 50,000 shares ofits common stock at a price of $1.00 per share to affiliates of CorporateCapital Management to resolve allegations that Southwest failed to pay fees ordeliver securities in connection with a 2004 convertible debt offering andcorporate reorganization.  Southwest didnot admit any wrongdoing in connection with these claims and chose to settle toavoid the costs of litigation.

 

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**Item 2.****   ****Management’s Discussion andAnalysis 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 “Southwest”,the “Company”, “we”, “our” and “us”) for the nine months and three months endedSeptember 30, 2005 and 2004.

 

***Summary ofConsolidated Operating Results:***

 

For the quarter ended September 30, 2005,Southwest had net earnings of $901,196 on revenues of $5,801,412 as compared toa net loss of $3,061,145 on revenues of $5,220,953 for the same period of2004.  This amounts to earnings of $0.05per outstanding share ($0.04 per share on a fully-diluted basis) for the thirdquarter of 2005 as compared to a loss of $0.19 per outstanding share in thethird quarter of 2004.

 

For the nine months ended September 30, 2005, Southwest had a netincome of $794,209 on revenues of $15,698,179 as compared to a net loss of$3,550,244 on revenues of $15,724,777 for the same period of 2004.  This amounts to income of $0.04 peroutstanding share ($0.04 per share on a fully-diluted basis) forthe nine months ended September 30, 2005 as compared to a loss of $0.40 peroutstanding share in the nine months of 2004.

 

***Overview:***

 

Our principal business is the management, operation and development ofgaming facilities in emerging and established gaming jurisdictions.  Currently, we operate three casinos inCripple Creek, Colorado — Gold Rush, Gold Digger’s and Uncle Sam’s.  We also manage two Native American gamingoperations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma - LuckyStar Concho and Lucky Star Clinton. Lucky Star Concho is located on U.S. Highway 81, just north of theOklahoma community of El Reno.  LuckyStar Clinton is located 60 miles west of Lucky Star Concho in the community ofClinton, Oklahoma on Old Route 66 near Interstate I-40.  An amendment to our management contract withthe Tribes to develop and manage a third site at Canton Lake has been ratifiedby the Tribes and has been submitted to the National Indian Gaming Commissionfor approval.

 

We continuallyevaluate other management, consulting, development and acquisitionopportunities related to gaming that have the potential to generate new revenuestreams for us.

 

***Project DevelopmentCosts:***

 

*North Metro Harness Initiative, LLC*- In December 2003, we filed a license application with the Minnesota RacingCommission.  This license application wasamended to add a subsidiary of MTR Gaming Group, Inc. ( MTR- Harness, Inc.) asour 50% partner.  On January 19, 2005,the Minnesota Racing Commission approved North Metro’s racing licenses, whichwill enable us to develop and operate a harness race track and a 50-table cardroom in Columbus Township, Anoka County, Minnesota.  A local citizens group has filed two lawsuitsagainst the Minnesota Racing Commission in an attempt to get our licensesrevoked.  The Ramsey County, Minnesota,District granted the Minnesota Racing Commission’s motion for summary judgmentand dismissed the first lawsuit on June 23, 2005.  The citizens group filed an appeal of thatdecision on August 27, 2005.  The secondlawsuit remains pending in the Minnesota Court of Appeals.  We believe that these attempts to overturnNorth Metro’s racing licenses will be unsuccessful.  However, the ongoing litigation has delayedconstruction until the lawsuits are resolved. At this time, we cannot predict when that will occur.

 

In October 2005, MTRcontributed $7,397,763 and Southwest contributed $2,580,208 to North MetroHarness Initiative, Inc, bringing the total contributions by MTR and Southwestto $8,646,533 and $3,646,533, respectively.  In addition, we have advanced $1,501,561 to North Metro that will berepaid out of available cash flow from operations, but is not considered acapital contribution under the terms of the member control agreement.  These contributions were used to purchasethree parcels of land for a total

 

18

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purchase price of$9,750,000.  The plan is to use theseproperties in the development of a harness track and card room in ColumbusTownship.

 

For the nine months ended September 30, 2005 and 2004, we have expensed$189,980 and $464,889 respectively, net of loss allocated to minority interest,related to the North Metro project. For the three months ended September 30,2005 and 2004, we have expensed $62,097 and $267,284 respectively, net of lossallocated to minority interest. In addition, we have capitalized $2,495,577 inreal estate options, construction in progress, and license costs as of September30, 2005.

 

*Other Project Development Costs:* In the nine months ended September 30, 2005,the Company’s option to acquire the real estate currently leased by Gold RushI, LLC expired, which resulted in a write-off of capitalized costs of $249,778.

 

During 2003 and 2004, the Company pursued a change in the Missouriconstitution that would have enabled us to apply for a riverboat gaming licenseon the White River at Rockaway Beach. This initiative was defeated in a statewide primary election held in August2004.  During the nine months and threemonths ended September 30, 2004, the company expensed $2,713,607 and$1,902,148, including equity investment losses in an unconsolidated subsidiary.

 

***Operating segments:***

 

Our executive officers review operating results, assess performance andmake decisions related to the allocation of resources on a property-by-propertybasis. We, therefore, believe that each property is an operating 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 Operations:**

  Gold Rush/ Gold Digger’s Casino

  Uncle Sam’s Casino

 

**Casino Management:**

  Lucky Star – Concho

  Lucky Star – Clinton

 

**Casinooperations**:

**GoldRush/Gold Digger’s Casino Results**

 
| **Third Quarter** | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|--------------------------------------|------------|
|              |       |      |       |      |       |                                 |       |
| Casino  revenues  |       | $         | 3,872,556  |      | $          | 3,770,999                            |       | 2.7 | % |
| Total  revenues   |       | 4,089,986 |       | 3,950,339 |       | 3.5                                  | %          |
| EBITDA            |       | 1,154,387 |       | 881,608   |       | 30.9                                 | %          |
| EBTDA margin      |       | 28.2      | %          | 22.3      | %          |                                 |       |
|                   |            |           |            |           |            |                                      |            |  |  |

 

***Third Quarter*** –We have continued to improve operating results in the third quarter of2005.  Despite being at capacity in termsof number of machines on the floor, we were able to increase revenues by 3% andreduce operating costs by 4% by improving customer service, better utilizationof employees and controlling costs. The Cripple Creek market is still absorbingthe additional 600 slot machines added to the market in 2004, but we were ableto increase EBITDA 30.9% over last year, which is significant.  While the third quarter is traditionally thebest quarter in the year, we are pleased with the increase in EBITA margin to28% as compared to 22% in 2004.  Fourthquarter traditionally is the weakest quarter of the year, which, combined withthe impact of increased gas costs and increased heating costs, will result inlower revenues and lower profits as compared to third quarter; however, westill anticipate that we will outperform the fourth quarter of 2004 due toimprovements in key operating controls.

 

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| **First Nine Months** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-----------------------|------------|------------|------------|------------|------------|--------------------------------------|------------|
|                  |       |       |       |       |       |                                 |       |
| Casino  revenues      |       | $          | 10,799,025 |       | $          | 10,942,814                           |       | (1.3 | )% |
| Total  revenues       |       | 11,290,598 |       | 11,357,258 |       | (.6                                  | )%         |
| EBITDA                |       | 2,696,442  |       | 2,498,560  |       | 7.9                                  | %          |
| EBITDA  margin        |       | 23.9       | %          | 22.0       | %          |                                 |       |
|                       |            |            |            |            |            |                                      |            |  |  |

 

***First Nine Months***– As a result of focusing on customer service and improved controls overoperating expenses, the EBITDA margins have increased by 2% as compared to thefirst nine months of 2004 despite slightly lower revenues in 2005.  The lower revenues result from increasedcompetition in town — over 600 slot machines were added to the market in 2004 —and bad weather on key weekends in the first quarter of this year.  In 2004, we enjoyed an unusually mild winter,which contributed to increased revenues for 2004.  We continue to reduce operating expenses in2005 despite increases in costs associated with our new player tracking andslot accounting system that has not yet been approved by the Colorado Divisionof Gaming and, therefore, requires additional manpower to meet reportingrequirements.  Due to a change in therules for testing new slot tracking systems in Colorado, our testing has beendelayed; however, we are currently in the process of testing the trackingsystem at Gold Digger’s and plan to complete testing in all three casinos bythe end of first quarter 2006.  Once thesystem is fully operational, we anticipate that it will provide us with theopportunity to further reduce operating costs.

 

**UncleSam’s Casino**

 
| **Third Quarter** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-------------------|------------|----------|------------|----------|------------|--------------------------------------|------------|
|              |       |     |       |     |       |                                 |       |
| Casino  revenues  |       | $        | 265,694    |     | $          | 323,897                              |       | (18.0 | )% |
| Total  revenues   |       | 266,543  |       | 324,545  |       | (17.9                                | )%         |
| EBITDA            |       | (131,831 | )          | (54,391  | )          | 142.4                                | %          |
| EBITDA  margin    |       | (49.5    | )%         | (16.8    | )%         |                                 |       |
|                   |            |          |            |          |            |                                      |            |  |  |

 

***Third Quarter***-Uncle Sam’s Casino is a facility with only 67 slot machines that serves thelocal residents market in Cripple Creek, which is the most vulnerable toincreased competition. The opening of a new casino that also caters to thelocal residents market in July 2004 has substantially impacted casino revenuesat this facility.  In addition, a casinoadjacent to this location began construction on an expansion that has made itmore difficult for patrons to frequent our facility.  The construction next door is proceeding andwe are hopeful that opening this property in the fourth quarter or firstquarter next year will increase the traffic in front of our location.  In the third quarter, we discontinued pokeron the second floor of our facility. The poker did not increase traffic to thefacility and added to the operating costs. We continue to evaluate the types ofpromotions that will bring back the customers and improve profitability.  As discussed above, in the fourth quarter,which is traditionally weak, we expect a slow down in business due to increasedgas prices and the anticipation of increased heating costs this winter.  We believe that we will be able to controlcosts to limit the impact on overall corporate revenue. 

 
| **First Nine Months** | ** ** | **2005** | ** ** | **2004**  | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-----------------------|------------|----------|------------|-----------|------------|--------------------------------------|------------|
|                  |       |     |       |      |       |                                 |       |
| Casino  revenues      |       | $        | 737,215    |      | $          | 1,021,509                            |       | (27.8 | )% |
| Total  revenues       |       | 739,669  |       | 1,024,302 |       | (27.8                                | )%         |
| EBITDA                |       | (454,002 | )          | (185,294  | )          | 145.0                                | %          |
| EBITDA  margin        |       | (61.4    | )%         | (18.1     | )%         |                                 |       |
|                       |            |          |            |           |            |                                      |            |  |  |

 

***First Nine Months***– Despite our efforts to improve the operations of Uncle Sam’s Casino, wecontinue to realize substantial losses as a result of the opening of a newcasino that also caters to local residents and the

 

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addition of over 600 slot machines in July 2004 to the Cripple Creekmarket.  Also construction on anexpansion of the gaming facility next to our location has impeded pedestriantraffic flow to the facility; however, the construction is proceeding and theopening of this property may increase the activity at Uncle Sam’s.  The fourth quarter is always a difficultquarter and we are looking at additional ways to raise awareness for ourfacility while holding down expenses.

 

**Casino Management*:***

 

**Lucky Star Concho**

 

***Third Quarter*** -Management fees from Lucky Star Concho were $1,000,181 for the third quarter of2005 as compared to $505,002 for the third quarter of 2004, an increase of98%.  We have also increased managementfees over second quarter by 30%.  Theincrease in management fees is due primarily to the approval of the Tribes’compact with the state of Oklahoma and the Tribes’ approval of our Class IIIgaming license, which has allowed the facility to begin offering blackjack,poker, and video poker.  In May 2005, wealso opened a 150-seat restaurant.  Theexpanded gaming opportunities along with the new restaurant have increasedpatronage and significantly improved the profitability of this facility.  While the fourth quarter management fees willin all probability not exceed third quarter (a traditionally strong quarter) weanticipate substantial improvement over fourth quarter 2004 despite the impactof higher gas prices and anticipated higher home heating costs for ourcustomers.  In the fourth quarter, wealso anticipate additional competition that will come from other tribal gamingfacilities in the Oklahoma City market and from Remington Park, a racetrack inOklahoma City that will be allowed to offer the same type of gaming machines asthe tribal locations.

 

***First Nine Months***– Management fees from Lucky Star Concho were $2,355,217 for the nine monthsended September 30, 2005 as compared to $2,015,588 for the nine month endedSeptember 30, 2004, an increase of 16.8%. The increase is especially significant because we were able to earngreater management fees despite a decrease in our management fee percentagethat took effect in May 2004.  Asdiscussed above, the signing of the compact with Oklahoma in April 2005 hasexpanded the scope of gaming at this facility, which is directly responsiblefor the operating results in the first nine months of 2005 exceeding theoperating results for the first nine months of 2004.  We are encouraged by the operating resultsand anticipate continued growth as compared to last year over the next threequarters despite negative economic factors (such as increased gas and homeheating costs) and increased competition.

 

**Lucky Star Clinton**

 

***Third Quarter*** -Management fees from Lucky Star Clinton were $427,699 for the third quarter of2005 as compared to $357,020 for the third quarter of 2004, an increase of19.8%. The increase in management fees is significant because we have reachedcapacity at this facility.  We arecritically short of parking spaces. While we believe that the approval of theTribes’ compact with the state of Oklahoma, and the Tribes’ approval of ourClass III gaming license, which will allow the facility to offer blackjack,poker, and video poker in the future, provides opportunities for additionalrevenue growth, we currently do not have enough parking or a large enoughfacility to take advantage of these expanded gaming opportunities.  We have discussed with the Tribes thepossibility of expanding both the Concho and Clinton facilities.  However, as of this time, we have notobtained the approvals necessary to go forward with our expansion plans.

 

***First Nine Months***– Management fees from Lucky Star Clinton were $1,285,571 for the nine monthsended September 30, 2005 as compared to $1,225,199 for the nine month endedSeptember 30, 2004, an increase of 4.9%.  As a result of improved performance overall atthis facility, the increase in our management fee revenue is significantbecause this increase has occurred despite the decrease in our management feepercentage that took effect in May 2004. We are encouraged by the operating results to date and anticipatecontinued growth over the next three quarters resulting from reconfiguring thegaming floor to accommodate the new gaming devices that are now permitted inthe market, despite the limitations due to the size of the facility and spacefor parking and the negative economic factors discussed above.

 

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**OtherFactors Affecting Net Income:**

 
| ** **                                    | ** ** | **Third quarter** | ** ** | **Percentage  Increase** | ** ** | **First Nine months** | ** ** | **Percentage  Increase** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|--------------------------|------------|-----------------------|------------|--------------------------|------------|
| **Income/(Expense)**                          | ** ** | **2005**          | ** ** | **2004**                 | ** ** | **(Decrease)**        |       | **2005**                 |       | **2004** |   | **(Decrease)** |   |
| Income  (Expense)                             |       |              |       |                     |       |                  |       |                     |       |   |   |   |   |
| Southwest  Entertainment, Inc                 |       | $                 | (70,860    | )                        | $          | (73,306               | )          | (3.3                     | )%         | $ | (139,067 | ) | $ | (120,227 | ) | 15.7 | % |
| Corporate  Expenses                           |       | 552,419           |       | 1,506,145                |       | (63.3                 | )%         | 1,950,283                |       | 2,903,237 |   | (32.8 | )% |
| Interest  Expense (net)                       |       | (226,977          | )          | (331,923                 | )          | (31.6                 | )%         | (745,594                 | )          | (862,214 | ) | (13.5 | )% |
| Other  (income) Loss                          |       | (41,465           | )          | (4,992                   | )          | N/M                   |       | (42,480                  | )          | (690 | ) | N/M |   |
| Effective  tax rate                           |       | 0                 | %          | 42                       | %          | N/M                   |       | 0                        | %          | 42 | % | N/M |   |
| Minority  interests                           |       | 62,097            |       | —                   |       | N/M                   |       | 189,980                  |       | 10,000 |   | N/M |   |
| Discontinued operations, net of income  taxes |       | 0                 |       | 0                        |       |                  |       | 0                        |       | (256,582 | ) |   |   |
|                                               |            |                   |            |                          |            |                       |            |                          |            |  |  |  |  |  |  |  |  |

 

----

N/M = Not Material

 

***Southwest Entertainment, Inc.***is a wholly owned subsidiary of Southwest Casino and Hotel Corp. that conductsconcerts at the Gold Rush Palladium, a 1,200 seat outdoor amphitheater adjacentto the Gold Rush Casino.  We conductmusical events for the purpose of attracting people to Cripple Creek and ourcasino properties.

 

**Third Quarter** - During the third quarter, ourshows in 2005 were not as well attended as our one show in 2004; however, wespent less on the Acts and on advertising. As a result the loss in the third quarter 2005 was less than the loss inthird quarter 2004.

 

**First NineMonths**- We incurred increased maintenance costs andrent for use of the property during the first nine months of 2005, as comparedto the first nine months of 2004.

 

***Corporate expenses***decreased 63.3% in the third quarter due primarily to decreases in legal andaccounting expenses. In the third quarter of 2004, we raised $2.6 million inconvertible debentures and became a public company in a reverse mergertransaction.  The legal and accountingcosts associated with these transactions were substantial.   For the nine months ended September 30, 2005and 2004, corporate expenses decreased 32.8%. In addition to the reduction in legal and accounting expenses, we havealso reduced our payroll costs and travel related expenses.  This reduction is somewhat offset by anincrease in advisory fees incurred in connection with a contract entered intoin July, 2004 and an increase in insurance expense, primarily related to thecost of Directors and Officers insurance for a public company and an increasein policy limits.  We anticipate corporateexpenses in the fourth quarter will be consistent with the third quarteralthough in the first and second quarter of 2006, we anticipate spendingadditional funds on issues related to meeting Sarbanes-Oxley requirements.

 

***Interest Expense***decreased 31.6% for the third quarter of 2005 and 13.5% for the first ninemonths of 2005 as compared to 2004.  Thedecrease in interest expense is due primarily to an agreement with IGT tofinance our player tracking system in Colorado and amortization of long-termdebt in Colorado.  Interest expense inthe fourth quarter of 2005 and for 2006 will be higher because we have borrowed$2,500,000 at 1% above prime in order to meet our funding obligation for NMHI.

 

***Minority interest***represents the allocation of NMHI expenses to MTR Harness, Inc., the other 50percent member of NMHI, in accordance with our agreement to shareexpenses.  The increase in sharing ofexpenses in 2005 results from the Minnesota Racing Commission’s approval ofNMHI’s racing licenses application.

 

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***Effective tax rates***for all periods are lower than the federal and state statutory rates dueprimarily due to the valuation allowance for deferred tax assets and lack ofcertainty that net operating loss carryforwards available to offset futureincome will not be limited under Section 382 of the Internal Revenue Code of1986.

 

***Discontinued Operations***reflect the results of operations for Southwest Casino Deadwood, LLC, which weclosed February 28, 2004.

 

***Liquidity and Capital Resources:***

 

We generate cash flow from our Oklahoma management activities andcasino operations in Colorado.  We usethe cash flows generated to fund reinvestment in existing properties for bothrefurbishment and replacement of assets, and to pursue additional growthopportunities.  We supplement the cashflows generated by our operations with funds provided by financing activitiesto balance our cash requirements.

 

OnOctober 20, 2005, we entered into a new $2.5 million term loan agreement withCrown Bank of Minneapolis, Minnesota. This loan accrues interest at a floating rate equal to prime plus 1percent with a minimum interest rate of 7.5 percent per year and a currentinterest rate of 8 percent.  We arerequired to pay only accrued interest until April 2006, after which we will berequired to repay the outstanding principal balance and accrued interest over12 months, with final payment due April 30, 2007.  The repayment period may be extended if wemeet certain business goals.  This obligationis guaranteed by us and secured by substantially all of our assets.  In addition, 12 shareholders of the Companyhave each guaranteed a portion of the principal amount of this loan.  As required by Crown Bank, the shareholderguarantors of this loan include James Druck, CEO, Thomas Fox, President andCFO, and Jeffrey Halpern, Chairman of the Board of Directors, who have eachguaranteed repayment of up to $100,000 of principal and accrued interest.  As discussed above, the proceeds of this loanwere used primarily to fund our capital requirements to NMHI under the membercontrol agreement entered into in June 2004. Our current cash flows from operations should be sufficient tomeet our normal operating requirements including the terms of repayment for the$2.5 million loan during the next twelve months.  However, we will need additional equity anddebt financing to fund the development of the racetrack and card room inMinnesota, and pay for the player tracking and slot accounting system installedin Colorado.

 

In consideration of our shareholders’ agreement to guarantee portionsof the $2.5 million term loan from Crown Bank that we entered into on October20, 2005, we issued 5-year fully-exercisable warrants to purchase 1,250,000shares of its common stock to 12 shareholders. Each shareholder guarantor received a warrant to purchase one share ofcommon stock for each $2.00 of the term loan guaranteed by thatshareholder.  Of these, warrants topurchase 1,100,000 shares of common stock have an exercise price of $.50 pershare.  In consideration of each of theirguarantees of $100,000 of loan proceeds, Jim Druck, CEO, Tom Fox, President andCFO, and Jeff Halpern, Chairman of the Board of Directors, each received awarrant to purchase 50,000 shares of common stock at a price of $.58 pershare.  The $.58 per share exercise pricerepresented the average closing market price of one share of Southwest CasinoCorporation common stock over the 10 trading days immediately preceding theclosing of the loan transaction.

 

We continue to review additional opportunities to acquire or invest incompanies, properties and other projects that meet our strategic and return oninvestment criteria.  If a materialacquisition or investment is completed, our operating results and financialcondition could change significantly in future periods.

 

Net cash provided by operating activities during the first nine monthsof 2005 was $1,473,646 compared to $1,846,737 during the first nine months of2004, a decrease of $373,091. The decrease between periods is due primarily toa decrease in accounts payable and accrued expenses of $998,466 in the firstnine months of 2005 and an increase in management fees receivable of $209,837offset by an increase in accrued interest payable of $233,744.

 

Net cash used in investingactivities for the first nine months of 2005 was $(803,961) compared to netcash used in investing activities of $(3,103,547) during the first nine monthsof 2004, a decrease of $2,299,586.

 

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The decrease in use of cash in2005 is primarily due to the absence of an investment in the Rockaway Beachinitiative of $2,242,166 that occurred during the first nine months of 2004.

 

Net cash provided by financingactivities for the nine months ended September 30, 2005 was $246,286 comparedto net cash provided by financing activities for the nine months endedSeptember 30, 2004 of $1,842,232, a decrease of $1,595,946.  Funds in the amount of $2,449,760 wereprovided by the issuance of convertible debentures in 2004.  In 2005, our minority partner in NMHIprovided $1,140,325. Payments on short-term and long-term borrowings in 2005were approximately $943,000 and $618,000 in 2004, which is an increase of$325,000.

 

***Line of Credit.***  We have refinanced our $450,000 line ofcredit as of October 20, 2005 with Crown Bank and it is now due on April 30,2007 with a variable interest rate (currently 8% per year). At September 30,2005, approximately $446,000 had been drawn on the line of credit.  Thecredit line is guaranteed by us and secured by substantially all of ourassets.  In addition, James Druck, CEO,Thomas Fox, President and CFO, and Jeffrey Halpern, Chairman of the Board ofDirectors have each guaranteed repayment of up to $100,000 of principal andaccrued interest, which guarantee applies to both the $2.5 million term loanand the revolving line of credit.

 

***Promissory Note.* **We haveentered into a collateral agreement and promissory note to secure a $500,000bond related to the development of North Metro Harness Initiative, LLC.  The promissory note was renewed on May 1,2005, due on June 1, 2006, with a variable interest rate (currently 8% peryear).  At September 30, 2005, the notehad not been drawn.  On October 19, 2005, we and MTR-Harness,Inc., which also owns 50 percent membership interest in NMHI, each made capitalcontributions of $250,000 to NMHI.  NMHIused these capital contributions to purchase a $500,000, 30-day certificate ofdeposit from Associated Bank.  Thiscertificate of deposit now secures a $500,000 promissory note and letter ofcredit that, in turn, secure a $500,000 bond issued for the benefit of theMinnesota Racing Commission.  NMHI mustmaintain this bond under the terms of the class A and B racing licenses it holdsfrom the Minnesota Racing Commission. The certificate of deposit replaces a security interest in the proceedsof the Third Amended and Restated Gaming Management Agreement between SouthwestCasino and Hotel Corp. and the Cheyenne and Arapaho Tribes of Oklahoma and thepersonal guarantees of the directors of Southwest Casino Corporation that hadpreviously secured the $500,000 promissory note.

 

***Effects of Current Economic and Political Conditions:***

 

**CompetitivePressures:**

 

Many casinooperators are either entering or expanding in our markets – Colorado andOklahoma — thereby increasing competition. As companies complete new orexpanded projects, supply has sometimes grown at a faster pace than demand, andcompetition has increased significantly. Furthermore, several operators,including Southwest, have plans for additional developments or expansions.

 

Although, theshort-term effect on us of such competitive developments generally has beennegative, we are not able to determine the long-term impact, whether favorableor unfavorable, that development and expansion trends and events will have oncurrent or future markets. We believe that the geographic diversity of ouroperations, our service training, our rewards and customer loyalty programs,and our continuing efforts to improve our facilities will insure continuedcustomer loyalty and will enable us to face the competitive challenges presentwithin our industry.

 

**PoliticalUncertainties:**

 

The casinoentertainment industry is subject to political and regulatory uncertainty. Fromtime to time, individual jurisdictions have considered legislation orreferendums that could adversely impact our operations.  The likelihood or outcome of similarlegislation and referendums in the future is difficult to predict.

 

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The casinoentertainment industry represents a significant source of tax revenues to thevarious jurisdictions in which casinos operate. From time to time, various state and federal legislators and officialshave proposed changes in tax laws, or in the administration of tax laws, thatwould affect the industry.  It is notpossible to determine with certainty the scope or likelihood of possible futurechanges in tax laws or in the administration of tax laws.  If adopted, changes in tax law could have amaterial adverse effect on our financial results.

 

**EconomicUncertainties:**

 

The recent economicdisruptions and resulting increases in energy costs caused by hurricanesKatrina and Rita have impacted our customers and our markets.  Since our properties are not located withinpopulation areas, our customers are required to drive to our location or betransported by bus.  The recent spike ingas prices directly affects both of these means of transportation.  In addition, many of our customers could beimpacted by increased heating costs this winter.  We have seen an easing of gas prices inrecent weeks, so we are hopeful that there will not be a long-term impact onthe ability of our customers to frequent our locations.

 

***Significant Accounting Policies andEstimates:***

 

We prepare our ConsolidatedFinancial Statements in conformity with accounting principles generallyaccepted in the United States.  Certainof our accounting policies, including, but not limited to, the estimated livesassigned to our assets, the determination of bad debt, asset impairment, fairvalue of guarantees, and the calculation of our income tax liabilities, requirethat we apply significant judgment in defining the appropriate assumptions forcalculating financial estimates.  Bytheir nature, these judgments are subject to an inherent degree ofuncertainty.  Our judgments are based onour historical experience, terms of existing contracts, our observance oftrends in the industry, information provided by our customers and informationavailable from other outside sources, as appropriate.  We cannot assure you that our actual resultswill not differ from our estimates.  Fora discussion of our significant accounting policies and estimates, please referto Management’s Discussion and Analysis or Plan of Operation and Notes toConsolidated Financial Statements presented in the 2004 Financial Statementsincluded in our Annual Report on Form 10-KSB.

 

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

 

Our executive officers consider“EBITDA” (earnings before interest, taxes, depreciation and amortization) auseful 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 United States.  Please be aware that other companies in ourindustry may calculate EBITDA differently than we do, which limits itsusefulness as a comparative measure.

 

***Forward-Looking Statements:***

 

This Quarterly Report onForm 10-QSB contains “forward-looking statements” intended to qualify forthe safe harbor from liability established by the Private Securities LitigationReform 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,”

 

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“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, newprojects, strategies, future performance, the outcome of contingencies such aslegal proceedings and future financial results. 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 risks and uncertainties include, butare not limited to, the following factors as well as other factors describedfrom time to time in our reports filed with the Securities and ExchangeCommission:

 

•                  changesin laws (including increased tax rates), regulations or accounting standards,third-party relations and approvals, and decisions of courts, regulators andgovernmental bodies applicable to us;

•                  theeffects of competition, including location of competitors and operating andmarket competition;

•                  ourability to build and maintain healthy personal and professional relationshipswith tribes and their officials;

•                  thepotential change of policies and personnel of tribal governments that couldadversely affect our relationships.

•                  abilityof our customer tracking and customer loyalty programs;

•                  abnormalgaming holds;

•                  accessto available and feasible financing;

•                  ourability to recoup costs of capital investments through higher revenues;

•                  litigationoutcomes and judicial actions;

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

•                  theeffect of economic, credit and capital market conditions on the economy ingeneral, and on gaming companies in particular;

•                  theeffects of environmental and structural building conditions relating to ourproperties; and

•                  actsof war or terrorist incidents.

 

Any forward-lookingstatements are made pursuant to the Private Securities Litigation Reform Act of1995 and, as such, speak only as of the date made. We undertake no obligationto publicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise.  We advise you, however, toconsult any further disclosures we make on related subjects in any annual,quarterly and current reports that we file with or furnish to the Securitiesand Exchange Commission.

 

***Risk Factors***

 

There are a number ofmaterial risks that could cause our actual results to differ materially fromthose anticipated by us or that are reflected in any of our forward-lookingstatements.  These factors, which may impact the success of our operationsand our ability to achieve our goals, include, but are not limited to, thefollowing:

 

**1.             Risksrelated to our financial condition:**

 

**We have substantial financial obligations related to ourrecently announced loan transactions.**  On October 20, 2005, we enteredinto a new loan agreement with Crown Bank of Minneapolis, Minnesota for a $2.5million term loan and a $450,000 revolving line of credit.  We borrowed the entire $2.5 million availableunder the term loan and approximately $446,000 under the revolving line of credit,which is due April 30, 2007.  The primarypurpose for the $2.5 million term loan was to make capital contributions toNorth Metro Harness Initiative, LLC, in which we own a 50 percent membershipinterest.  We will pay

 

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only the accrued interest onthe $2.5 million term note until we must repay the outstanding principal andinterest on the note in 12 equal installments of approximately $225,000 permonth beginning in April 2006.  Under theterms of the $2.5 million term loan, the repayment period will be extended ifwe meet certain performance requirements. However, if the repayment period is not extended or we are unable toraise additional capital from other sources, repayment of these obligationswill require substantially all of our operating cash flow and thus make it moredifficult to meet other financial obligations as they become due, reduce cashflow available for operations, limit our ability to pursue new gamingopportunities and expansion or improvement of our existing gaming facilities,expose us to risks inherent in interest rate fluctuations because these arevariable rate loans, and place us at a disadvantage compared to competitorsthat may have less debt.  If we fail tomeet any of our repayment obligations under the term loan or the revolving lineof credit, and Crown Bank elects to pursue its rights against us for thatfailure, our business, operating results and financial condition will beharmed.

 

**The restrictive covenants in our loan agreement with CrownBank limit our ability to conduct our business and respond to changing businessconditions and may place us at a competitive disadvantage relative to companiesthat are subject to fewer restrictions.**  Weare required to comply with several affirmative and negative covenants in ourloan agreements with Crown Bank, which, among other things, limit our abilityto incur additional debt, liens, loans and investments, dividends, dispositionof assets, consolidations or mergers, expenses incurred in pursuit ofadditional gaming opportunities and other matters customarily restricted inthese agreements.  Some of theselimitations are subject to thresholds and exceptions.  These restrictions could limit our ability toobtain future financing, make needed capital expenditures, withstand a businessdownturn or otherwise conduct necessary corporate activities.  These restrictions could also hamper ourability to respond to changing business or economic conditions.  Transactions that we view as importantbusiness opportunities may require the consent of Crown Bank under our loanagreement, which consent Crown Bank may withhold or grant subject to conditionsthat reduce the attractiveness of the transaction.

 

We cannot assure you that wewill be able to comply with all of these restrictions at all times.  A breach of any of the restrictions andcovenants in our loan agreement could lead to a default, notwithstanding ourability to meet our payment obligations. If a default occurs, Crown Bank will have a range of remedies available,including declaring all debt due and payable immediately and foreclosing onassets securing the loan, any of which could have a material adverse effect onus.

 

**The termination or expiration of our current Oklahoma managementagreement would have a material adverse effect on our business, operatingresults and financial condition**.  Our Gaming ManagementAgreement with the Cheyenne and Arapaho Tribes of Oklahoma will expire on May19, 2007.  The management fees we receiveunder this agreement are the primary source of our operating revenue and areexpected to be the primary source of revenue from which we will service the$2.5 million term loan and the revolving line of credit from Crown Bank.  Any extension of the Gaming ManagementAgreement beyond May 19, 2007 can only occur with the consent of the Tribes andthe approval of the National Indian Gaming Commission.  We cannot provide any assurance that theTribes will grant an extension of the Gaming Management Agreement or ifgranted, that an extension would be approved by the NIGC.  In addition, even if granted and approved,the NIGC and the Tribes have the power to unilaterally terminate or void theGaming Management Agreement under certain circumstances, without any recourseby us.  If the Gaming ManagementAgreement is not extended beyond May 19, 2007, or if it is unilaterallyterminated, it would eliminate the primary source of our operating revenue andhave a material adverse effect on our ability to repay our outstandingindebtedness and on our business, operating results and financial condition.

 

**We have incurred substantial operating losses and areuncertain with respect to achieving future profitability**.  Wehave incurred substantial operating losses since inception and had anaccumulated deficit of $10,632,175 as of September 30, 2005. These losses areprimarily the result of expenses related to our ongoing pursuit of new gamingopportunities.  There can be no assurancethat we will be able to achieve or maintain profitability on a quarterly orannual basis in future periods.  Ourfuture operating results will depend upon a number of factors, including (a)the continuation and future profitability of our Oklahoma and Colorado Operations;(b) our ability to maintain our current gaming licenses and to obtainadditional

 

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gaming licenses for new orexpanded gaming facilities; (c) our ability to continue to maintain ourcontractual and working relationships with the Cheyenne and Arapaho Tribes ofOklahoma and to establish working relationships with other Native Americantribes involved in gaming; and (d) our ability to successfully identify, securelicensing and maintain all necessary approvals and funding related to any additionalfuture gaming opportunities.

 

**We will need to raise substantial additional capital in thefuture and we may not be able to raise these funds when needed and onacceptable terms**. Weanticipate that we will need substantial additional funding to meet ourfinancial obligations and effectuate our plans to develop a harness racingtrack and card room in Minnesota, provide working capital to meet current andfuture obligations, and fund additional gaming projects we may choose topursue, including expansion of our gaming facilities in Colorado and thefacilities we manage for the Cheyenne and Arapaho Tribes of Oklahoma. Failure to meet our capital commitments related to the harness racetrack andcard room could lead to a dilution of our ownership interest in thatproject.  Moreover, our operating plans and financing needs are subject tochange depending on, among other things, market conditions and opportunities;land, equipment or other asset-based financing that may be available inconnection with our development of gaming facilities; cash flow fromoperations, if any; and the number of new gaming projects that we pursue. Whileadditional funds may be provided through borrowings from institutionalinvestors or project partners, equipment leasing or other forms of debt orequity financing, we do not have any unconditional commitments relating toadditional financing and we cannot assure you that additional financing will beavailable when needed. Even if financing is available when required, we cannotassure you that it will be on terms favorable to us and our security holders interms of cost or dilution.

 

**We face several litigation threats related to our June andJuly 2004 sale of convertible promissory notes that could be costly to defendand harm our business**.  In June and July 2004, Southwest Casino andHotel Corp. sold an aggregate of $2,634,000 of convertible promissory notes toaccredited investors.  These notesconverted into shares of Southwest Casino Corporation common stock inconnection with our reverse merger into Lone Moose Adventures, Inc. on July 22,2004.  A group of loosely affiliatedinvestors who participated in that offering, each of whom represented to usthat they were “accredited” as defined by Rule 510(a) of the Securities Act of1933, as amended, have demanded rescission of their investments and threatenedto bring a lawsuit against us and our directors based on what they allege wereinadequate disclosures by us at the time of the offering.  We believe these demands for rescission are withoutmerit and have been working with these investors to reach a resolution withoutlitigation that is not unduly burdensome on the Company or our othershareholders.  While we have hadsettlement discussions, we cannot assure you that we will be able to resolvethese claims on a reasonable basis, if at all. While we believe these claims are without merit, defending any lawsuitthat involves alleged violations of securities laws would be expensive andrequire significant time and attention from our management.  If we were unsuccessful in defending thesethreatened claims, it could result in large damage awards that we would berequired to pay.  The costs of defendingthese claims, as well as any damages we may be required to pay, couldultimately harm our business, operating results and financial condition by,among other things, adversely affect future gaming license applications andrenewals and our ability to raise additional financing in the future.  In addition, a former investment adviser whoassisted us with that 2004 offering has filed a demand for arbitrationregarding fees and indemnification rights alleged to be owed by us under anadvisory agreement the former advisor terminated. We are now responding to thearbitration demand, which we intend to defend vigorously.  If unsuccessful in this defense, anarbitration award against us could adversely affect our business and finances.

 

**2.             Additionalrisks related to Our Native American gaming projects:**

 

**The National Indian Gaming Commission has expressed concernabout the distribution of gaming proceeds by the Cheyenne and Arapaho Tribes ofOklahoma, for whom we manage casinos, which could have a material adverseeffect on our business. **In December 2004, the NIGC notified theCheyenne and Arapaho Tribes of Oklahoma that the NIGC is concerned the Tribesare not distributing properly the net revenue they receive from gamingoperations.  The NIGC’s concerns relateto the use of gaming revenue after we have distributed it to the Tribes and arenot related to our management of the Tribes’ casinos.  However, if the NIGC determines that theTribes have committed a substantial violation

 

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of the Indian GamingRegulatory Act, NIGC rules, or the Tribes’ gaming ordinance, it could bring anenforcement action against the Tribes.  If an enforcement action weresuccessful, potential penalties range from fines to, in extreme cases, an orderclosing the Tribes’ gaming operations.  Even though the NIGC’s concernsare not related to our management of the Tribes’ casinos, closure of thesefacilities would eliminate the primary source of our operating revenue and havean immediate and material adverse impact on our business, operating results andfinancial condition.

 

**We have limited recourse against Indian Tribes, including theCheyenne and Arapaho Tribes of Oklahoma**. Indian tribes are sovereign nations that are generally immune from legalproceedings commenced in state or federal courts, and congressional policy hasmandated the limited liability of Indian tribes. In addition, becauseregulatory authorities have broad discretion when granting, renewing orrevoking licenses, approvals and other clearances related to the development,management or operation of gaming facilities, an Indian tribe that desires toterminate a management contract with a third party management company maysimply elect to refuse to renew a tribal gaming license based upon a minortechnical default.  As a result,repayment of any funds advanced by us to, or on behalf of, tribes in connectionwith the development or expansion of a gaming facility, and any additionalreturn from participation in payments made under gaming management agreements,will depend upon (a) our ability to enter into, and obtain requisite regulatoryapproval with respect to, effective management agreements; (b) the successfuldevelopment and operation of the gaming facility; and (c) in light of ourlimited recourse against any tribe for breach of any agreement, the willingnessof the tribe to comply with its obligations under the applicable agreement.

 

For the foregoing reasons,if a tribe were to breach a management agreement with us, our sole recourse tocollect amounts owed to us under our agreements with that tribe may be to attachundistributed or future proceeds, if any, from the operation of the tribe’sgaming facilities. If gaming operations fail to develop or, if developed, ceaseto operate for any reason, our prospects for payment of amounts owed to us areminimal.  Accordingly, if we advance orguarantee an advance of significant funds to tribes for the development,construction and furnishing of gaming facilities, we may not be able to recoverthose funds or have a viable source for repayment of any funds we are requiredto expend under a guarantee agreement.

 

**We face special risks related to investments in Indian gamingfacilities**. Investment in Indian gaming facilities involves numerous special risks inaddition to those usually associated with contractual arrangements or realestate development. Advances made by us to develop, construct and equip Indiangaming facilities will not result in our ownership of, or any security interestin, the gaming facilities located on Indian land or in the Indian landitself.  Our ability to build and maintain healthy personal andprofessional relationships with tribes and their officials is critical to thesuccess and longevity of our current and proposed gaming activities and ourability to successfully obtain, develop, effectuate, retain and renewmanagement or other types of service agreements.  As sovereign nations,tribes establish their own governmental systems under which tribal officials aswell as tribal boards, commissions, committees and other bodies are subject toreplacement by appointment or election and to policy changes.  Ourrelationship with a tribe could deteriorate for various reasons, including achange in tribal government or tribal policies.  Deterioration in therelationships between us and individual officials or collective bodies of anytribes with whom we deal could have a material adverse effect on our businessand operations.  Similarly, our business relationships with Indian tribes,and revenues generated through service agreements with Indian tribes, could be adverselyaffected or even eliminated as the result of regulatory or judicial actionstaken against the tribe itself, or against a tribe’s leaders or members asindividuals. In addition, any investigation of an Indian tribe or tribal memberthat we work with could lead to an investigation of our relationship with thattribe or tribal member.  Each of thesespecial risks applies to our continuing relationship with the Cheyenne andArapaho Tribes of Oklahoma.

 

**Our facilities, and operations, as well as our key personneland some of our security holders, are subject to government and tribalbackground investigations and the failure to satisfactorily complete theseinvestigations could harm our business**.  Our facilities and businessoperations on Indian land are subject to approval, regulation and oversight by,among others, the National Indian Gaming Commission, the Bureau of IndianAffairs, the Secretary of the Interior and various tribal authorities. Forexample, all management agreements (and extensions or renewals of suchagreements) for Class II or Class III gaming

 

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facilities on Indian landmust be approved by the NIGC and the terms of these management agreements mustconform to various NIGC requirements. The NIGC will not approve managementagreements for Class II Indian gaming facilities (such as our Oklahomaoperations) unless federally conducted background checks of our directors andofficers, some of our security holders, and other parties interested in ourmanagement agreements have been completed satisfactorily. States entering intotribal-state compacts under which we may manage Class III gaming facilities mayhave similar (or more stringent) requirements for background checks.  Failure to complete these investigationssatisfactorily could adversely affect our business and operations.  Although the NIGC has approved our currentmanagement agreement with the Cheyenne and Arapaho Tribes of Oklahoma andextensions to that agreement, as we pursue additional Indian and non-Indianopportunities (or as new directors or management personnel are added), wecannot assure you that the necessary background investigations will becompleted satisfactorily.

 

**3.****                                     ****Risks related to Ourdevelopment of the North Metro Harness Initiative racetrack and card room:**

 

**North Metro’s racing licenses are subject to two legalchallenges.**  An anti-gambling citizens group has filed twolawsuits in efforts to overturn the Class A and B racing licenses granted toNorth Metro by the Minnesota Racing Commission. The first lawsuit, filed in Ramsey County District Court, asserted thatmembers of the Minnesota Racing Commission had violated Minnesota’s “OpenMeeting Law” in the course of its consideration of North Metro’s licenseapplication.  The Court granted theRacing Commission’s motion for summary judgment and dismissed this case in itsentirety on June 23, 2005.  Theanti-gambling group filed an appeal of the dismissal of its claims with theMinnesota Court of Appeals on August 27, 2005 and we are in the process ofdefending that appeal.

 

In addition, on March 10,2005, the anti-gambling group filed a petition with the Minnesota Court ofAppeals appealing the Minnesota Racing Commission’s grant of Class A and ClassB licenses to North Metro.  Theanti-gambling group challenges the validity of the Commission’s actions andseeks to have North Metro’s racing licenses overturned.  The parties to this appeal have filed all ofthe briefs in this case and are now waiting for the appellate court to schedulea hearing on the matter.

 

We cannot predict theoutcome of either of these cases.  If theanti-gambling group should prevail and North Metro’s licenses are overturned,North Metro would be unable to develop the harness track.  If North Metro is unable to develop theharness track and card room, we will not realize any revenue or profit from theoperation of the proposed facility.  Inaddition, we would experience a substantial loss on our investment in NorthMetro that would have a material adverse effect on our business, operatingresults and financial condition.

 

**North Metro is unlikely to complete the debt financing neededto fund development of the North Metro racetrack and card room until thepending litigation is resolved.**  North Metro originally intendedto fund the development of its racetrack and card room with capitalcontributions from us and MTR-Harness totaling $10 million and a debt financingof approximately $37 million.  Because ofthe pending legal challenges to North Metro’s Class A and B racing licenses,North Metro is not currently able to complete that debt financing.  Because North Metro cannot complete the debtfinancing, we and MTR have funded and will likely continue to fund all of NorthMetro’s operations through capital contributions until the legal challengeshave been resolved.  Due to theunpredictable nature of litigation, we cannot predict if or when North Metrowill complete its debt financing.  IfNorth Metro is unable to complete its debt financing on a timely basis, we maybe required to make additional capital contributions to North Metro in excessof the capital contributions described elsewhere in this report in order tomaintain our 50 percent ownership interest in North Metro.  In addition, we cannot assure you thatfinancing on the terms originally available to North Metro will be available ifand when the litigation is ultimately resolved in North Metro’s favor.  If North Metro is unable to secure financingon acceptable terms at such time, North Metro may be prevented from developingits racetrack and card room.  If NorthMetro is prevented from developing its racetrack and card room, this willlikely have a material adverse effect on our business, operating results andfinancial condition.

 

**North Metro has purchased the real property on which itintends to develop the racetrack and card room even though the litigationchallenging North Metro’ racing licenses is not resolved, which**

 

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**investment could result in a loss to North Metro if thelitigation is successful.**  Because the option agreementsunder which North Metro purchased the real property on which it intends tobuild its racetrack and card room could not be extended on terms favorable toNorth Metro, Southwest and MTR-Harness, Inc., the other 50 percent owner ofNorth Metro, elected to exercise those options and purchase the real property,even though legal challenges to North Metro’s racing licenses have not beenresolved.  The total purchase price paid byNorth Metro for the land was approximately $10 million, including prior optionpayments.  If the racing licenses areultimately overturned as a result of the pending litigation, North Metro willown the real property but will not be able to develop the racetrack and cardroom on it.  While we believe the realproperty will have significant value for uses other than a racetrack and cardroom, we cannot assure you that North Metro will be able to recoup the purchaseprice of the property in a sale or sell the property in a timely manner.  If North Metro is unable to recoup itsinvestment in the real property, the value of our investment in North Metrowill be materially adversely affected.

 

**North Metro may havedifficulty receiving required approvals from the Township of Columbus in thefuture. **On August 24, 2005, the ColumbusTownship Board approved an extension of North Metro’s zoning approval for itsracetrack and card room project until August 25, 2006.  North Metro now has until August 25, 2006 tobegin construction of the harness track or receive an additional extension ofits zoning approval.  The Town Boardapproved the extension by a 3-2 vote. Two board members who were elected after running campaigns in which theyopposed the North Metro development voted against the extension and threemembers who have supported our project in the past voted for it.  Elections for Town Board members will be heldin March 2006 and we expect, among others, additional opponents of the NorthMetro project to seek election at that time. While we cannot predict whether an opponent of the North Metro projectwould win such an election, there is a risk that after March 2006 we will beforced to work with a Town Board on which the majority of members oppose theNorth Metro development.  If that occurs,it may be difficult, or even impossible, for us to receive approvals foranother extension of our zoning approval, if required, or to make other changesto the project that require the consent of the Town Board.  If we are unable to begin construction of theracetrack or secure an extension of the zoning approval before August 25, 2006,we may be prevented from developing the harness track and card room.

 

**Delays in developing North Metro’s racetrack and card roomcaused by the pending legal challenges to North Metro’s racing licenses haveand will continue to increase the cost of the project.** Because the racetrack and card room facility that North Metro intends todevelop will be built for that specific purpose and will have little or novalue for other uses, North Metro cannot proceed to construct the facilityuntil we are confident that its racing licenses will not be overturned inconnection with the pending legal challenges. Thus, the legal challenges have caused and will continue to causesignificant delays in developing the North Metro project.  These delays have caused and are likely tocontinue to cause the costs of developing the facility to increase due to,among other things, rising interest rates and borrowing costs, risingconstruction and labor costs, rising energy prices, and general inflation.  If North Metro’s racing licenses are upheld,these rising costs will increase the ultimate development costs for the NorthMetro facility which will, in turn, delay and reduce the amount of revenue andprofit generated by North Metro and available for distribution to us.

 

**Actions by the Minnesota state legislature may reduce thevalue of Our investment in North Metro.** During the most recent Minnesota legislative session, legislativeinitiatives were introduced to expand the scope of gaming to permit slotmachines (commonly referred to as a “racino”) at Canterbury Park, the otherClass A licensed pari-mutuel wagering racetrack in the state, without affordingNorth Metro the same expansion in its scope of gaming.  While these initiatives were unsuccessful, ifany legislation should pass in the future that excludes North Metro from anygaming expansions afforded to Canterbury Park or Native American tribes, itwould have a material adverse effect on North Metro’s proposed operations.  Similarly, any expansion of gaming inMinnesota, whether Native American gaming or otherwise, that excludes NorthMetro could also have a material adverse effect on North Metro and its business.  In addition, the legislature considered, butdid not adopt, a significant tax on card room revenue that, if passed, wouldsignificantly reduce net revenue generated by North Metro.

 

To date, North Metro hasbeen unsuccessful in its efforts to secure legislative authorization to offersimulcast wagering on all breeds of horse racing (under current law, NorthMetro may only simulcast

 

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harness races).  North Metro has also been unsuccessful todate in its efforts to eliminate the requirement that we hold 50 days of liveharness racing before we begin card room operations.  These proposed changes (especially withregard to all-breed simulcasting) would have a significant positive impact onNorth Metro’s operating results. However, we cannot assure that we will ever be successful in achievingeither of these legislative changes.

 

**4.             Regulatoryrisks related to our participation in the gaming industry:**

 

**We, and the gaming industry as a whole, are heavily regulatedand any change in the regulatory environment could have a material adverseeffect on our business and operations**.  The gaming industry is highly regulated at the federal andstate levels and gaming on tribal land is further regulated by the NationalIndian Gaming Commission and the Bureau of Indian Affairs. The process ofcomplying with all applicable government and tribal regulations is complex andrequires us to expend substantial time and resources. We cannot assure you thatwe will be able to comply on a continuous or timely basis with all applicableregulations.  Further, delays incompliance, or failure to comply, could have a material adverse effect on ourbusiness, financial condition, results of operations and our ability tomaintain and obtain needed licenses. Changes in existing regulations or theadoption of new regulations at the federal level or in the states in which weoperate or pursue new opportunities could delay or prevent our compliance withthose regulations. Our failure to comply with applicable laws or regulations,whether federal, state or tribal, could result in, among other things, thetermination of management agreements to which we are a party or the suspensionof some of our operations, both of which would have a material adverse effecton our business.

 

**We face risks in connection with obtaining, maintaining andrenewing gaming licenses required for the conduct of our business**.  The development and management ofgaming facilities are subject to extensive licensing requirements and we cannotassure you that we will be able to obtain or maintain all necessary licenses,approvals and other clearances from regulatory authorities having jurisdictionover our gaming facilities.  Although we, and our affiliates, haveobtained the governmental licenses, permits and approvals we believe arenecessary for the development and continued management of the Oklahoma andColorado operations and development of a harness racing track in Minnesota, wecannot assure you that we will be able to maintain or renew the necessarylicenses, approvals and other clearances required for our operations.

 

**All licenses that have been or may be obtained by us or ouraffiliates are subject to various conditions and in many cases will be subjectto renewal**. Notwithstanding the fact that we have earned a good reputation at federal,state and tribal levels relative to compliance and licensing ability, there isalways the possibility that a failure to comply with gaming regulations or theconditions of any license we hold could have an adverse effect upon our abilityto secure, maintain or renew our gaming licenses.  We were fined $50,000by the Colorado Division of Gaming in June 2004 for failure to properlymaintain and review statistical data on slot machine performance afterreceiving a warning letter regarding this deficiency and failing to comply withits recommended action for correction of the deficiency. We entered into aStipulation and Agreement with the Colorado Limited Gaming Control Commissionin which we admitted that we failed to comply with the applicable gamingregulations and agreed to take corrective action immediately. As part of theseproceedings, James Druck, in his capacity as Manager of the facility inquestion, without any admission of guilt, agreed to take the steps required toinsure our compliance in this matter and, further, agreed to pay the sum of$5,000 to Colorado’s Limited Gaming Fund as reimbursement for expenses incurredby Colorado in this investigation.  It is difficult to predict with anycertainty whether, and to what extent, this occurrence may have a materialadverse effect on our business or adversely affect our ability and the abilityof our key personnel to obtain or retain required licenses in Colorado. Inaddition, we must disclose this violation to other jurisdictions in which wehold or apply for gaming licenses. It is difficult to predict what impact, ifany, that disclosure may have on our licensability in those jurisdictions.

 

**5.             Risksrelated to the gaming industry generally:**

 

**We face intense competition in the gaming industry**.  Thegaming industry, including the development, operation and management ofracetracks and other types of facilities, is highly competitive, especiallygiven the rapid rate at which the industry is expanding. For example, a numberof management companies

 

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may make proposals to aparticular tribe for the development and management of a single Indian gamingfacility, and any gaming facilities developed or managed by us will competewith a rapidly expanding number of other gaming facilities of varying qualityand size, including gaming facilities that are part of national or regionalchains, and other forms of gaming and entertainment. Many of our competitorshave substantially greater financial and personnel resources than we do.Competition in the future may also be affected by overbuilding which canadversely affect patronage levels. Given the current regulatory climate andlimited number of lucrative gaming opportunities available, competition islikely to become more intense in the future.

 

**We face risks associated with our pursuit of new gamingprojects**.  We have pursued, are pursuing, and willcontinue to pursue new gaming projects that involve substantial pre-developmentcommitments of time and money with no assurance we will receive the approvalsneeded to develop and operate the proposed gaming facility. A number of theseprojects require legislation or voter approval, which not only increases thecost of such projects but also increases the risk the project will not beapproved and extends the time required to obtain licenses, complete developmentand begin operations.  In addition,gaming projects may be controversial in some areas and face significantopposition from competitors or individuals and groups opposed to gaming onmoral grounds.  In addition to increasingthe costs and difficulties in obtaining required approvals for gaming projects,these opponents may also use litigation to try to delay or block newprojects.  For example, we have receivedall required approvals to develop a harness racetrack in Anoka County,Minnesota, but a group opposed to gaming on moral grounds has filed twoseparate lawsuits in attempts to block the project.

 

**We will continue to face legislative and judicial hurdles andadverse legislative and judicial changes**.  The legislative and judicialenvironments related to Indian and non-Indian gaming are dynamic and changerapidly. Any federal, state or tribal action, adverse legislation, or judicialor regulatory ruling that limits gaming or constricts the scope of our gamingoperations could have a material adverse effect on the gaming industry or ouroperations and financial condition. For example, in 2002 we had a profitableconsulting arrangement with the Alabama-Coushatta Tribes of Texas that wasterminated due to an adverse federal district court ruling in favor of theState of Texas.

 

**We face risks related to the nature of the gaming industry,including adverse economic and political conditions and changes in thelegislative and land use regulatory climate**.  Similar to investment in otherentertainment enterprises, adverse changes in general and local economicconditions may adversely impact investments in the gaming industry. Examples of economic conditions subject to change include, among others, (a)competition in the form of other gaming facilities and entertainmentopportunities; (b) changes in regional and local population and disposableincome; (c) unanticipated increases in operating costs; (d) restrictive changesin zoning and similar land use laws and regulations, or in health, safety andenvironmental laws, rules and regulations; (e) risks inherent in owning,financing and developing real estate as part of our casino operations; (f) theinability to secure property and liability insurance to fully protect againstall losses, or to obtain such insurance at reasonable costs; (g) seasonality;(h) changes or cancellations in local tourist, recreational or cultural events;and (i) changes in travel patterns or preferences (which may be affected byincreases in gasoline prices, changes in airline schedules and fares, strikes,weather patterns or relocation or construction of highways, among otherfactors).

 

**6.             Additionalmiscellaneous risks relating to our business:**

 

**The success of our current operations and our future growthpotential are dependent upon key personnel and will, in the future, beincreasingly dependent on our ability to attract and retain additionalqualified managers and personnel**.  Our success depends to a significant extent upon the effortsand abilities of our executive officers, James B. Druck, Thomas E. Fox, JeffreyS. Halpern and Brian L. Foster.  We haveentered into employment agreements with Messrs. Druck, Fox and Halpern. Each ofthese individuals has developed relationships and experience in the gamingindustry that are integral to our success. We do not maintain key man life insurance on any of theseindividuals.  The loss of the services ofone or more of these individuals could have a material adverse effect on ourbusiness and current and proposed operations.

 

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We will also be required torecruit and retain a significant number of management, administrative and otheremployees for any of our proposed gaming facilities that may come tofruition.  We anticipate that we will be required to develop and undertakea major training program at each new facility that we may develop or manage. In addition, with regard to facilities on Indian land, we will generally berequired to recruit and give preference to individuals of Native Americanheritage in order to comply with various tribal employment rights ordinancesthat have been adopted by most tribes, including the Cheyenne and ArapahoTribes of Oklahoma. While we believe that we will be able to attract and retaina sufficient number of employees to satisfy our current and futurerequirements, the competition for such employees, particularly at themanagement level, will increase significantly in the future if the gamingindustry expands throughout the United States.  There can be no assurancethat we will be able to attract and retain the personnel required tosuccessfully operate our business.

 

In addition, now that we areconducting our gaming operations as a publicly owned corporation, we aresubject to regulations under state and federal securities laws such as theSecurities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-OxleyAct of 2002. Compliance with these laws and regulations will require that weadd personnel and recruit independent members for the Board of Directors. Allof these directors and some new personnel must complete backgroundinvestigations before joining our company or performing services for us.Requiring potential directors and employees to complete these investigationsmay make it more difficult to recruit qualified candidates and delays incompleting background investigations could adversely impact our business and,in the case of director candidates, our ability to comply with Sarbanes-OxleyAct requirements regarding director independence on a timely basis.

 

**The success of our current operations and our future growthpotential are dependent upon our relationship with and the performance ofcertain third parties**. The successful operation of our various proposed gaming facilities will bedependent to a significant extent on the efforts of third parties.  Forexample, (a) with respect to any facility located on Indian land, we will notown the facility and will depend on the performance by a tribe of itsobligations under the applicable management agreement; (b) with respect to theharness racing track and card room proposed for Minnesota, the success of thatproject will depend to a great extent on the expertise of our 50 percentpartner in that venture, MTR-Harness, Inc., an affiliate of MTR Gaming Group,Inc., in managing racing facilities as well as the ability of our financingsources to meet their commitments to us; and (c) with respect to any otherproject pursued by us, we may need to form partnerships or secure third partyfunding in order to meet the financial requirements that will likely transcendour own financial resources. The failure of any third party to perform itscontractual obligations to us could have a material adverse effect on ourbusiness and operations.  In addition, depending upon the structure of anyparticular joint venture, we may be held responsible for the acts or omissionsof our co-venturers.

 

**The requirements ofbeing a public company strain our resources and distract management*.***As a public company, we are subjectto the reporting requirements of the Securities Exchange Act of 1934, asamended, and the Sarbanes-Oxley Act of 2002. These requirements place a strain on our personnel, systems andresources.  The Exchange Act requires,among other things, that we file annual, quarterly and current reports withrespect to our business and financial condition.  The Sarbanes-Oxley Act requires, among otherthings, that we maintain effective disclosure controls and procedures andinternal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosurecontrols and procedures and internal controls over financial reporting,significant resources and management oversight is required.  This diverts management’s attention fromother business concerns, which could have a material adverse effect on ourbusiness, operating results and financial condition.

 

**We will be exposed torisks relating to evaluations of controls required by Section 404 of theSarbanes-Oxley Act. * ***Changing laws, regulations andstandards relating to corporate governance and public disclosure, including theSarbanes-Oxley Act and related regulations implemented by the SEC, are creatinguncertainty for public companies, increasing legal and financial compliancecosts and making some activities more time consuming.  We will evaluate our internal controlssystems to allow management to report on, and our independent auditors toattest to, our internal control over financial reporting.  We will perform the system and processevaluation and testing (and any necessary remediation) required to comply withthe management certification and auditor attestation requirements ofSection 404 of the Sarbanes-

 

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Oxley Act. While we anticipate fully implementing the requirements relating tointernal controls and all other aspects of Section 404 by ourDecember 31, 2007 deadline, we cannot be certain as to the timing ofcompletion of our evaluation, testing and remediation actions or the impact ofthe same on our operations since there is presently no precedent available bywhich to measure compliance adequacy.  Ifwe are not able to implement the requirements of Section 404 in a timelymanner or with adequate compliance, we may be subject to sanctions orinvestigation by regulatory authorities, including the SEC.  This type of action could adversely affectour financial results or investors’ confidence in our company and our abilityto access capital markets, and could cause our stock price to decline.  In addition, the controls and procedures thatwe will implement may not comply with all of the relevant rules and regulationsof the SEC.  If we fail to develop andmaintain effective controls and procedures, we may be unable to provide therequired financial information in a timely and reliable manner.

 

**7.             Risksrelating to our common stock:**

 

**We have the ability to issue shares of preferred stock, whichmay reduce the value of our common shares and the rights of common shareholders**.  Ourshareholders have authorized the issuance of up to 30 million shares ofpreferred stock with rights and preferences to be determined by our Board ofDirectors.  No shares of preferred stockare outstanding and we do not have a current intent to issue any shares ofpreferred stock, although we reserve the right to do so in the future.  It is not possible to determine the actualeffect of the authorization and issuance of the preferred stock on the rightsof our shareholders until our Board determines the rights of the holders of aseries of preferred stock.  However, sucheffects might include, among other effects:

 

•                  restrictions on the payment of dividends toholders of common stock;

•                  dilution of voting power to the extent thatholders of preferred stock are given voting rights;

•                  dilution of equity interest and voting powerif the preferred stock is convertible into common stock;

•                  restrictions upon any distribution of assetsto the holders of common stock upon liquidation or dissolution, andrestrictions upon the amounts of merger consideration payable to the holders ofcommon stock upon a merger or acquisition of Southwest, until the satisfactionof any liquidation preference granted to the holders of preferred stock;

•                  redemption rights for holders of preferredstock that may restrict the availability of revenue for other corporate uses,including the payment of dividends; and

•                  special voting rights for holders ofpreferred stock in connection with major corporate actions such as mergers,acquisitions or other transactions.

 

In addition, any particularissuance or series of preferred stock could, depending on the terms, make itmore difficult or discourage any attempt to obtain control of our company bymeans of a merger, tender offer, proxy contest or other means.  Issuance of preferred stock could have theeffect of diluting the stock ownership of persons seeking control of ourcompany, and the possibility of such dilution could have a deterrent effect onpersons seeking to acquire control. The Board also could, although it has nopresent intention of so doing, authorize the issuance of preferred stock to aholder who might thereby obtain sufficient voting power to assure that anyproposal to effect certain business combinations or amend our Articles ofIncorporation or Bylaws would not receive the required shareholder approval.Accordingly, the power to issue shares of preferred stock could enable theBoard to make it more difficult to replace incumbent directors and toaccomplish business combinations opposed by the incumbent Board.

 

**Because our common stock is traded on the OTC Bulletin Board,your ability to sell shares in the secondary trading market may be limited**.  Our common stock is traded currentlyon the over-the-counter market on the OTC Bulletin Board.  Consequently,the liquidity of our common stock is impaired, not only in the number of sharesthat are bought and sold, but also through delays in the timing oftransactions, and limited coverage by security analysts and the news media, ifany, of our company.  As a result, prices for shares of our common stockmay be lower and more volatile than might otherwise prevail if our common stockwas quoted on the Nasdaq Stock Market or traded on a national securitiesexchange like The New York Stock Exchange or American Stock Exchange.

 

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**Because our shares are “penny stocks,” it may be difficult tosell them in the secondary trading market**.  Federal regulations under theSecurities Exchange Act of 1934 regulate the trading of so-called “pennystocks,” which are generally defined as any security not listed on a nationalsecurities exchange or Nasdaq, priced at less than $5.00 per share and offeredby an issuer with limited net tangible assets and revenues.  Since ourcommon stock currently trades on the OTC Bulletin Board at less than $5.00 pershare, our common stock is a “penny stock” and may not be traded unless adisclosure schedule explaining the penny stock market and associated risks isdelivered to a potential purchaser before any trade.

 

In addition, because ourcommon stock is not listed on Nasdaq or any national securities exchange andcurrently trades at less than $5.00 per share, trading in our common stock issubject to Rule 15g-9 under the Exchange Act.  Under this rule,broker-dealers must take certain steps prior to selling a “penny stock,” whichsteps include:

 

•                  obtaining financial and investmentinformation from the investor;

•                  obtaining a written suitability questionnaireand purchase agreement signed by the investor; and

•                  providing the investor a writtenidentification of the shares being offered and the quantity of the shares.

 

If thebroker-dealer does not follow these penny stock rules, the investor has noobligation to purchase the shares.  The application of these comprehensiverules will make it more difficult for broker-dealers to sell our common stockand our shareholders, therefore, may have more difficulty selling their sharesin the secondary trading market.

 

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**Item 3.  Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosurecontrols and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) designed to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded, processed,summarized, and reported within the time periods specified in the Securitiesand Exchange Commission’s rules and forms and that this information isaccumulated and communicated to our management, including our principal executiveand principal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.  Ourmanagement evaluated, with the participation of our Chief Executive Officer andChief Financial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures as of September 30, 2005.  Based on that evaluation, and after review ofpolicies and procedures adopted in response to material weaknesses in ourinternal controls identified by our external auditors, and described under “Changesin Internal Controls” below, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof that date.

 

**Changes in Internal Controls**

 

We made the followingchanges in our internal control over financial reporting during the nine monthsended September 30, 2005 in response to material weaknesses identified by ourexternal auditors related to their audit of our financial statements for 2004:

 

•                  We have established procedures under whichmanagement will review organizational and startup costs related to our newventures as incurred and record those items to the appropriate expense or assetclassification.

 

•                  We have established internal policiesdesigned to insure that all business units discuss in a timely manner withmanagement and our accounting function agreements and transactions that mayhave qualitative or quantitative importance to our business and our financialstatements in order to assure that necessary accounting entries are recordedand disclosure issues are considered.

 

•                  We have adopted a policy to assure properapproval of all journal entries.  Alljournal entries will be approved by our Chief Financial Officer, corporatecontroller, or other designated individual and must be initialed by thepreparer and individual approving the journal entry.  All journal entries are accompanied by a fullexplanation and adequate supporting data.

 

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**PART II- OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

See Items 3 and 9 of ourAnnual Report on Form 10-KSB, filed March 31, 2005, for a descriptionof Our pending legal proceedings.

 

On September 1, 2005, ananti-gambling group filed an appeal with the Minnesota Court of Appeals of anOrder for Summary Judgment granted by the Second District Court of RamseyCounty, Minnesota.  In this appeal, theanti-gambling group seeks to overturn an order in favor of the Minnesota RacingCommission that dismissed with prejudice all claims that members of theMinnesota Racing Commission had violated the state’s “Open Meeting Law” whileconsidering whether to grant Class A and B racing licenses to North MetroHarness Initiative, LLC.  North MetroHarness Initiative, LLC, in which Southwest holds a 50 percent membershipinterest, intervened in this case.  NorthMetro does not believe the Racing Commission violated the Open Meeting Law andbelieves that even if it a violation of the Open Meeting Law occurred theremedies for that violation do not include invalidation of its racinglicenses.  However, if the court finds aviolation of the open meeting law and holds that the violation can invalidateNorth Metro’s licenses, the invalidation of the licenses would prevent NorthMetro from developing the racetrack and card room and prevent us from realizingany revenue or profit from this project.

 

On September 23, 2005, MBCGlobal, LLC filed a demand for arbitration of claims that MBC Global isentitled to additional compensation and indemnification under the terms of aletter agreement regarding advisory services between Southwest Casino and HotelCorp. and MBC Global, LLC dated July 1, 2004. MBC Global terminated the letter agreement on April 26, 2005 and seekspayment of fees and reimbursement of expenses alleged to be owed under theletter agreement, as well as indemnification for legal expenses incurred by MBCGlobal in disputes with third parties. Southwest has asserted counterclaims for all amounts previously paid toMBC Global under the letter agreement, for amounts paid to third parties inconnection with disputes alleged to have been caused by MBC Global, and forindemnification against certain claims that may arise in connection with a 2004offering by Southwest in which MBC Global participated.

 

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

 

We held our annual meeting of shareholders at ourcorporate offices on July 14, 2005. At that meeting our shareholders electedthree directors, all of whom had previously served as Southwest directors,approved three amendments to our articles of incorporation, and confirmed theselection of EideBailly LLP as our independent registered public accountingfirm and auditors for the fiscal year ending December 31, 2005.  The votes on each of these matters were as**** ****follows:

 

Election of Directors:

 
| ** **              | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| **James B.  Druck**     |       | 11,933,086 |       | 975,914     |       | 45,471      |       | 0                    |       |
| **Thomas  E. Fox**      |       | 11,586,836 |       | 1,322,164   |       | 45,471      |       | 0                    |       |
| **Jeffrey  S. Halpern** |       | 11,933,086 |       | 975,914     |       | 45,471      |       | 0                    |       |

 

Proposal #2, to amend the Articles of Incorporation toauthorize the issuance of 30 million shares of “blank check” preferred stock,par value $0.001, with rights, preferences and designations to be determined bythe Board of Directors.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 11,297,963 |       | 1,611,037   |       | 103,651     |       | 166,738              |       |

 

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Proposal #3, to amend the Articles of Incorporation toincrease the number of authorized shares of common stock from 50 million to 75million.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 11,686,954 |       | 1,222,064   |       | 61,081      |       | 0                    |       |

 

Proposal #4, to add a provision to the Articles ofIncorporation that gives the company the right to redeem outstanding shares ofcapital stock from any shareholder if continued ownership of those shares bythat shareholder would jeopardize any gaming license, approval, franchise,consent or management contract held by the company.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 11,524,164 |       | 1,384,836   |       | 69,975      |       | 166,738              |       |

 

Proposal #5, to confirm the selection of EideBaillyLLP as public accountants and independent auditors for the fiscal year endingDecember 31, 2005.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 11,649,328 |       | 1,259,672   |       | 207,703     |       | 0                    |       |

 

A copy of our Articles ofIncorporation, as amended at the annual meeting of shareholders, is attached tothis report as Exhibit 3.1.

 

**Item6.  Exhibits**

 

The following exhibits areattached to this Quarterly Report on Form 10-QSB:

 
| 3.1    |   | Articles  of Incorporation                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to SEC Rule 13a-14.                                                                                    |
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification  of Chief Financial 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 Chief Financial Officer Pursuant to 18.U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Securities and Exchange Act of 1934,the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| November  14, 2005 | **SOUTHWEST CASINO CORPORATION** |
|--------------------|----------------------------------|
|               |                             |   |
|               |                             |   |
|               | By:                              | /s/ James B. Druck |
|               |                             | James B. Druck |
|               |                             | Chief Executive Officer  and Secretary |
|               |                             | (principal executive  officer) |
|               |                             |   |
|               |                             |   |
|               | By:                              | /s/ Thomas E. Fox |
|               |                             | Thomas E. Fox |
|               |                             | President and Chief  Financial Officer |
|               |                             | (principal financial and  accounting officer) |

 

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