| **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**        |

 

**(MarkOne)**

 

| ý     | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                         |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                     |
| ** ** | **For the quarterly period ended March 31, 2006**                                                                                                                                                                   |
|       |                                                                                                                                                                                                                     |
| **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**

(Exactname 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, Minnesota55425**

(Addressof principal executive offices)

 

**(952) 853-9990**

(Issuer’stelephone number)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period 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 ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date:  19,688,656 as of May 10, 2006.

 

Transitional SmallBusiness Disclosure Format (check one):    YES  o   NO  ý

 

 

----

 

**SOUTHWEST CASINO CORPORATION**

 

**FORM 10-QSB**

**MARCH 31, 2006**

 

**TABLE OF CONTENTS**

 
| **Description** | ** ** | ** **                                                                                                  | ** ** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
|            |       |                                                                                                        |       |
| PART I.    |       | FINANCIAL INFORMATION                                                                                       |       |
| ITEM 1.         |       | Financial Statements                                                                                        |       |
|            |       | Consolidated  Balance Sheet (Unaudited March 31, 2006)                                                 |       |
|            |       | Consolidated  Statements of Operations (Unaudited for the Three Months ended March 31,  2006 and 2005) |       |
|            |       | Consolidated Statements  of Cash Flows (Unaudited for the Three Months ended March 31, 2006 and  2005) |       |
|            |       | Notes to Unaudited Consolidated  Financial Statements                                                       |       |
| ITEM 2.         |       | Management’s  Discussion and Analysis or Plan of Operation                                             |       |
| ITEM 3.         |       | Controls and Procedures                                                                                     |       |
|            |       |                                                                                                        |       |
| PART II.   |       | OTHER INFORMATION                                                                                           |       |
| ITEM 1.         |       | Legal Proceedings                                                                                           |       |
| ITEM 2.         |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |       |
| ITEM 6.         |       | Exhibits                                                                                                    |       |
| SIGNATURE PAGE  |       |

 

*Inthis Form 10-QSB, references to “Southwest,” “the company,” “we,” “our” or“us,” unless the context otherwise requires, refer to Southwest CasinoCorporation and its consolidated subsidiaries.*

 

i

----

 

**PART I – FINANCIALINFORMATION**

 

**Item 1.****          ****Financial Statements.**

 
| **FINANCIAL  STATEMENTS**                                                                                  |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| Consolidated Balance Sheet (Unaudited), March 31,  2006                                               |   |
| Consolidated Statements of Operations (Unaudited) for the  Three Months ended March 31, 2006 and 2005 |   |
| Consolidated Statement of Cash Flows (Unaudited) for the  Three Months ended March 31, 2006 and 2005  |   |
| Notes to Unaudited Consolidated Financial Statements                                                       |   |

 

1

----

 

**SOUTHWESTCASINO CORPORATION**

**ConsolidatedBalance Sheets (Unaudited)**

**March 31,2006**

 
| ** **                                                                                              | ** ** | **2006**    | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ASSETS                                                                                                  | ** ** | ** **  | ** ** |
| CURRENT  ASSETS                                                                                         |       |        |       |
| Cash and  Cash Equivalents                                                                              |       | $           | 1,382,215  |   |
| Accounts  Receivable                                                                                    |       | 117,408     |       |
| Management  Fees Receivable                                                                             |       | 707,758     |       |
| Inventories                                                                                             |       | 145,608     |       |
| Prepaid  Expenses                                                                                       |       | 409,530     |       |
| Total  Current Assets                                                                                   |       | $           | 2,762,519  |   |
|                                                                                                    |       |        |       |
| PROPERTY AND  EQUIPMENT                                                                                 |       |        |       |
| Capitalized  Lease and Leasehold Improvements                                                           |       | $           | 15,696,958 |   |
| Furniture  and Equipment                                                                                |       | 6,017,141   |       |
| Accumulated  Depreciation                                                                               |       | (9,962,694  | )          |
| Net Property  and Equipment                                                                             |       | $           | 11,751,405 |   |
|                                                                                                    |       |        |       |
| OTHER ASSETS                                                                                            |       |        |       |
| Intangible  Assets                                                                                      |       | $           | 776,000    |   |
| Deposits                                                                                                |       | 101,150     |       |
| Investment  in Unconsolidated Subsidiary                                                                |       | 4,401,608   |       |
| Deferred Tax  Asset                                                                                     |       | 410,653     |       |
| Total Other  Assets                                                                                     |       | $           | 5,689,411  |   |
|                                                                                                    |       |        |       |
| TOTAL ASSETS                                                                                            |       | $           | 20,203,335 |   |
|                                                                                                    |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                              |       |        |       |
|                                                                                                    |       |        |       |
| CURRENT  LIABILITIES                                                                                    |       |        |       |
| Accounts  Payable                                                                                       |       | $           | 606,489    |   |
| Accrued  Expenses                                                                                       |       | 979,424     |       |
| Accrued  Liabilities - Related Parties                                                                  |       | 232,467     |       |
| Notes  Payable                                                                                          |       | 146,292     |       |
| Current  Portion of Long-Term Liabilities                                                               |       | 3,443,719   |       |
| Accrued  Interest Payable                                                                               |       | 18,299      |       |
| Total  Current Liabilities                                                                              |       | $           | 5,426,690  |   |
|                                                                                                    |       |        |       |
| LONG-TERM  LIABILITIES                                                                                  |       |        |       |
| Long-Term  Liabilities Net of Current Portion                                                           |       | $           | 8,230,835  |   |
|                                                                                                    |       |        |       |
| STOCKHOLDERS’  EQUITY                                                                              |       |        |       |
| Preferred  Stock, $.001 Par Value; 30,000,000 Shares Authorized                                         |       | $           | —     |   |
| Common  Stock, $.001 Par Value, 50,000,000 Shares Authorized, 19,688,656 Shares  Issued and Outstanding |       | 19,689      |       |
| Additional  Paid-in Capital                                                                             |       | 17,088,523  |       |
| Accumulated  Deficit                                                                                    |       | (10,562,402 | )          |
| Total  Stockholders’ Equity                                                                        |       | 6,545,810   |       |
|                                                                                                    |       |        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                        |       | $           | 20,203,335 |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

2

----

 

**SOUTHWESTCASINO CORPORATION**

**ConsolidatedStatements of Operations (Unaudited)**

**For theThree Months Ended March 31, 2006 and 2005**

 
| ** **                                                                                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **REVENUES**                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                                                                                                           |       | $          | 3,501,335  |       | $          | 3,563,356 |   |
| Food &  Beverage/Hotel                                                                                  |       | 115,264    |       | 94,121     |       |
| Management  and Consulting                                                                                       |       | 1,702,618  |       | 1,024,458  |       |
| Entertainment                                                                                                    |       | —     |       | —     |       |
| Other                                                                                                            |       | 55,295     |       | 33,663     |       |
| Total  Revenue                                                                                                   |       | $          | 5,374,512  |       | $          | 4,715,598 |   |
|                                                                                                             |       |       |       |       |       |
| **EXPENSES**                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                                                                                                           |       | $          | 2,909,171  |       | $          | 2,897,261 |   |
| Food &  Beverage/Hotel                                                                                  |       | 352,879    |       | 359,915    |       |
| Corporate  Expense                                                                                               |       | 624,975    |       | 691,406    |       |
| Project  Development Costs                                                                                       |       | 96,368     |       | 318,649    |       |
| Entertainment                                                                                                    |       | 14,831     |       | 10,873     |       |
| Depreciation  and Amortization                                                                                   |       | 542,307    |       | 595,139    |       |
| Total  Expenses                                                                                                  |       | $          | 4,540,531  |       | $          | 4,873,243 |   |
|                                                                                                             |       |       |       |       |       |
| Income  (Loss) from Operations                                                                                   |       | $          | 833,981    |       | $          | (157,645 | ) |
|                                                                                                             |       |       |       |       |       |
| **OTHER INCOME (EXPENSE)**                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  Income                                                                                                 |       | $          | 617        |       | $          | 2,745 |   |
| Interest  Expense                                                                                                |       | (322,346   | )          | (286,268   | )          |
| Loss on  Disposition of Property and Equipment                                                                   |       | —     |       | (155       | )          |
| Total Other  Income (Expense)                                                                                    |       | $          | (321,729   | )          | $          | (283,678 | ) |
|                                                                                                             |       |       |       |       |       |
| Income (Loss)  from Continuing Operations                                                                        |       |       |       |       |       |
| Before  Income Taxes                                                                                             |       | $          | 512,252    |       | $          | (441,323 | ) |
|                                                                                                             |       |       |       |       |       |
| Income Tax  Benefit (Expense)                                                                                    |       | (174,666   | )          | —     |       |
| Minority  Interest in Loss of Consolidated Subsidiary                                                            |       | —     |       | 34,435     |       |
| (Loss) of  Unconsolidated Subsidiaries, Net of Tax Benefit                                                       |       | (39,942    | )          | —     |       |
|                                                                                                             |       |       |       |       |       |
| **NET INCOME (LOSS)**                                                                                            |       | $          | 297,644    |       | $          | (406,888 | ) |
|                                                                                                             |       |       |       |       |       |
| Earnings  (Loss) per common share and common equivalent share, Basic:  Income (Loss) from continuing operations  |       | $          | 0.02       |       | $          | (0.02 | ) |
|                                                                                                             |       |       |       |       |       |
| Common  Equivalent Shares Outstanding                                                                            |       | 19,637,545 |       | 19,385,625 |       |
|                                                                                                             |       |       |       |       |       |
| Earnings per  common share and common equivalent share, Fully-diluted:  Income (Loss) from continuing operations |       | $          | 0.01       |       | $          | (0.02 | ) |
|                                                                                                             |       |       |       |       |       |
| Common  Equivalent Shares Outstanding                                                                            |       | 22,005,045 |       | 19,385,625 |       |

 

See Notes to UnauditedConsolidated Financial Statements

 

3

----

 

**SOUTHWESTCASINO CORPORATION**

**ConsolidatedStatements of Cash Flows (Unaudited)**

**For theThree Months Ended March 31, 2006 and 2005**

 
| ** **                                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                  |       |       |       |       |       |
| Net Income  (Loss)                                                      |       | $          | 297,644    |       | $          | (406,888 | ) |
| Adjustments  to Reconcile Net Income (Loss) to                          |       |       |       |       |       |
| Net Cash  Provided by Operating Activities:                             |       |       |       |       |       |
| Minority  Interest in Loss of Consolidated Subsidiary                   |       | —     |       | (34,435    | )          |
| Depreciation  and Amortization                                          |       | 542,307    |       | 595,139    |       |
| Amortization  of Loan Costs                                             |       | 41,279     |       | —     |       |
| Loss on  Disposition of Property and Equipment                          |       | —     |       | 155        |       |
| Write off of  Land Option - Cost Incurred in Prior Years                |       |       |       | 249,778    |       |
| Impairment  Loss on Gaming Equipment                                    |       | —     |       | —     |       |
| Common Stock  Issued for Non-Cash Compensation                          |       | 23,707     |       | 5,625      |       |
| Loss of  Unconsolidated Subsidiaries                                    |       | 51,761     |       | —     |       |
|                                                                    |       |       |       |       |       |
| Change in  Current Assets and Liabilities,                              |       |       |       |       |       |
| (Increase)  Decrease in Restricted Cash                                 |       | 2,656      |       | 50,052     |       |
| (Increase)  Decrease in Receivables                                     |       | (256,372   | )          | (155,064   | )          |
| (Increase)  Decrease in Inventories                                     |       | 2,675      |       | 7,347      |       |
| (Increase)  Decrease in Prepaid Expenses                                |       | 164,841    |       | 333,592    |       |
| (Increase)  Decrease in Deferred Tax Asset                              |       | 162,347    |       | —     |       |
| Increase  (Decrease) in Accounts Payable                                |       | (6,617     | )          | (86,509    | )          |
| Increase  (Decrease) in Accrued Expenses                                |       | (96,814    | )          | 52,285     |       |
| Increase  (Decrease) in Accrued Interest Payable                        |       | 747        |       | (33,463    | )          |
| Net Cash  Provided By Operating Activities                              |       | $          | 930,161    |       | $          | 577,614 |   |
|                                                                    |       |       |       |       |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                   |       |       |       |       |       |
| Purchase of  Property and Equipment                                     |       | $          | (83,402    | )          | $          | (140,101 | ) |
| (Increase)  Decrease in Deposits                                        |       | —     |       | 15,874     |       |
| Investment  in Unconsolidated subsidiary                                |       | (155,000   | )          | —     |       |
| Net Cash  (Used In) Investing Activities                                |       | $          | (238,402   | )          | $          | (124,227 | ) |
|                                                                    |       |       |       |       |       |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                   |       |       |       |       |       |
| Net Payments  on Short-Term Notes Payable                               |       | $          | (300,000   | )          | $          | (136,542 | ) |
| Principal  Payments on Long-Term Borrowings                             |       | (216,689   | )          | (175,955   | )          |
| Proceeds  from Investors in Consolidated Subsidiary - Minority Interest |       | —     |       | 616,324    |       |
| Proceeds  from Issuance of Common Stock                                 |       | 12,000     |       | 15,000     |       |
| Net Cash  Provided (Used) by Financing Activities                       |       | $          | (504,689   | )          | $          | 318,827 |   |
|                                                                    |       |       |       |       |       |
| Net Increase  in Cash and Cash Equivalents                              |       | 187,070    |       | 772,214    |       |
|                                                                    |       |       |       |       |       |
| CASH AND  CASH EQUIVALENTS                                              |       |       |       |       |       |
| Beginning of  Period                                                    |       | 1,195,145  |       | 750,556    |       |
| End of  Period                                                          |       | $          | 1,382,215  |       | $          | 1,522,770 |   |
|                                                                    |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                       |       |       |       |       |       |
| Interest  Paid                                                          |       | $          | 280,320    |       | $          | 267,254 |   |
| Income Taxes  Paid                                                      |       | $          | 22,500     |       | $          | — |   |
|                                                                    |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH                                    |       |       |       |       |       |
| INVESTING  AND FINANCING ACTIVITIES                                     |       |       |       |       |       |
| Common Stock  Issued in Exchange for Compensation                       |       | $          | 23,707     |       | $          | 5,625 |   |
| Equipment  Purchased through Financing                                  |       | $          | —     |       | $          | — |   |
| Capital  Assets Acquired with Acounts Payable                           |       |       |       | $          | 111,194    |   |

 

See Notes to Unaudited Consolidated FinancialStatements

 

4

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

**NOTE 1 –ORGANIZATION AND NATURE OF OPERATIONS**

 

Southwest Casino Corporation

 

Southwest Casino Corporation, through itswholly-owned subsidiaries, operates three casinos in Cripple Creek, Colorado,manages Native American gaming facilities under contractual agreements, andoffers and has provided consulting services for casinos. Southwest Casino andHotel Corp. is the primary, wholly-owned operating subsidiary of SouthwestCasino Corporation and was our parent company until the July 2004reorganization that resulted in our current structure. Southwest Casino andHotel Corp. was organized under the laws of the State of Minnesota in 1992under the name “Southwest Casino and Hotel Ventures, Inc.” and we haveoperated in the gaming industry since formation.

 

On July 22,2004, Southwest Casino and Hotel Corp. completed a reverse merger in which itbecame a wholly-owned subsidiary of Lone Moose Adventures, Inc., a Nevadacorporation, and the former Southwest Casino and Hotel Corp. equity securityholders acquired approximately 92% of the outstanding securities of Lone MooseAdventures, Inc. Lone Moose then changed its name to Southwest CasinoCorporation, which is the surviving reporting entity today.

 

Southwest Casino Corporation’s operations include the followingconsolidated and unconsolidated subsidiaries:

 

Southwest Casino and HotelCorp.

 

Southwest Casino and HotelCorp. provides management and consulting services for casinos under contractualagreements and operates Uncle Sam’s Casino in Cripple Creek, Colorado under a5-year lease that has been extended for an 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.

 

Southwest Entertainment. Inc.

 

Southwest Entertainment, Inc.was formed on November 4, 1998. The company operates an outdooramphitheatre for entertainment events in Cripple Creek, Colorado.

 

Southwest Casino Deadwood,LLC

 

Southwest Casino Deadwood,LLC was formed on December 7, 1999 to operate B.B. Cody’s Casino inDeadwood, South Dakota, which closed on February 28, 2004. SouthwestCasino Deadwood currently has no operations.

 

Southwest CharitableEnterprises, LLC

 

Southwest CharitableEnterprises, LLC was formed February 28, 2006 to pursue opportunities inthe charitable gaming market. The Company will pursue opportunities to provideequipment and consulting services to charities that operate gaming venues tosupport their charitable endeavors.

 

North Metro HarnessInitiative, LLC (Unconsolidated)

 

The Company owns a 50percent membership interest in North Metro Harness Initiative, LLC (NorthMetro) a development stage Minnesota limited liability company that was formedon June 16, 2003 for the purpose of developing, owning, and operating aharness racetrack and card room north of Minneapolis, Minnesota, in AnokaCounty.

 

5

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

North Metro was issuedlicenses to own and operate the racetrack by the Minnesota Racing Commission onFebruary 16, 2005. An anti-gambling citizens group has filed two lawsuitschallenging the issuance of the racing licenses. On March 28, 2006, theMinnesota Court of Appeals issued a ruling upholding the grant of racinglicenses by the Minnesota Racing Commission to North Metro in one of thosecases. The citizens group has appealed that decision to the Minnesota SupremeCourt. The appellate court heard oral arguments in the second lawsuit on April 20,2006. North Metro’s activities are described more fully in Note 7.

 

SW Missouri, LLC

 

SW Missouri, LLC was formedon May 25, 2004. Its sole asset is a 30% membership interest in SouthwestMissouri Gaming, LLC.

 

SW Missouri Gaming, LLC(Unconsolidated)

 

Southwest Missouri, LLC ownsa 30% membership interest in Southwest Missouri Gaming, LLC, which was formed March 29,2004. Southwest Missouri Gaming, LLC pursued state and local regulatoryapproval and property acquisition for a riverboat casino in Rockaway Beach,Missouri, which required an amendment to the state constitution. The ballotinitiative to amend the constitution was defeated in a statewide primaryelection on August 3, 2004. All costs associated with this initiative werecharged to expense in 2004. Southwest Missouri Gaming, LLC spent no monies onRockaway Beach in 2005 and in the first quarter of 2006. While the Companyretains its rights in this entity, it has no plans to revive this initiative atthis time.

 

**NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The unaudited financialstatements of the Company have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States 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 three months ended March 31, 2006 and 2005 are notnecessarily indicative of the results to be expected for a full year.

 

These financial statementsshould be read in conjunction with the financial statements and notes includedin the Company’s financial statements for the year ended December 31,2005.

 

Principles of Consolidation

 

The accompanying consolidatedfinancial statements include the accounts of Southwest Casino Corporation, itswholly-owned subsidiaries, and North Metro Harness Initiative, LLC which istreated as a variable interest entity (“VIE”) subject to consolidation for thethree months ended March 31, 2005, but not for the three months ended March 31,2006. See Note 7.

 

Basis of Accounting

 

The consolidated financialstatements of the Company are prepared using the accrual basis of accountingwhereby revenues are recognized when earned and expenses are recognized whenincurred. This basis of accounting conforms to generally accepted accountingprinciples in the United States of America.

 

Use of Estimates

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the period. Actual results could differ from thoseestimates.

 

6

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

Revenue Recognition

 

Casino revenue is the netwin from gaming activities, which is the difference between gaming wins andlosses. Revenue from food and beverage and hotel operations is recorded upondelivery of goods or services, and excludes promotional allowances. Revenue fromcasino management and consulting contracts with outside parties is recognizedover the term of the agreements. Consideration given in exchange for enteringinto long-term contracts is amortized over the life of the agreement.

 

Operating Segments

 

The Company has segregatedits activities into three operating segments based on operating and managementcharacteristics related to its sources of revenue or basis for accumulatingassets or expenses. The segments are casino operations, casino management forunrelated parties, and project development activities. Separate operations areaggregated based on the above general segment descriptions.

 

Investments

 

Investments in entitieswhere the Company has more than a 20% but less than a 50% financial and votinginterest are recorded on the equity method of accounting. When the Company hasan investment of greater than 50% but less than 100%, the Company consolidatesthe entity and adjusts the investment by minority interest holder for theportion of the income or loss allocable to the minority owner.

 

Net Income Per Share - Basicand Diluted

 

Net income per share iscomputed by dividing the net income for the period by the weighted averagenumber of common shares outstanding during the period presented. Basic earningsper share exclude the dilutive effect of options, warrants and convertiblesecurities, while diluted earnings per share include such effects only duringyears when the Company reports net income.

 

Income taxes

 

Provisions for income taxesare based on taxes payable or refundable for the current year and deferredtaxes on temporary differences between the amount of taxable income and pretaxfinancial income and between the tax bases of assets and liabilities and theirreported amounts in the financial statements. Deferred tax assets andliabilities are included in the financial statements at currently enactedincome tax rates applicable to the period in which the deferred tax assets andliabilities are expected to be realized or settled as prescribed in FASBStatement No. 109, Accounting for Income Taxes. As changes in tax laws orrate are enacted, deferred tax assets and liabilities are adjusted through theprovision for income taxes.

 

**NOTE 3 –STOCK-BASED COMPENSATION**

 

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“FAS 123(R)”) using themodified-prospective-transition method. Under this transition method,compensation cost in 2006 includes estimated fair value for options grantedbefore, but not vested as of, December 31, 2005, and options issued andvested in 2006. Therefore, the results for prior periods have not been revisedfor comparative purposes. Under SFAS 123(R), share-based compensation cost ismeasured at the grant date, based on the estimated fair value of the optionsawarded, and is recognized as expense over the requisite service period.

 

The adoption of SFAS 123(R)lowered net income by approximately $19,331 for the three months ended March 31,2006, compared to if we had continued to account for share-based compensationunder APB No. 25, Accounting For Stock Issued to Employees.

 

7

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

The following tableillustrates the effect on net income and earnings per share if we had appliedthe fair value recognition provisions of SFAS No. 123(R) during the periodended March 31, 2005. For the purpose of this pro forma disclosure, thevalue of the options is estimated using Black-Scholes option-pricing model andamortized to expense over the options vesting periods.

 
| ** **                | ** **                                                                                                                 | **March 31, 2005** | ** ** |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------|------------------------------|------------|
|                      |                                                                                                                       |                         |       |
| Net (loss)  as reported   |                                                                                                                       | $                            | (406,888   | ) |
|                      |                                                                                                                       |                         |       |
| Deduct:                   | Total stock-based compensation expense determined  under fair value based method for all awards, net of related tax effect |                         | 53,288     |   |
|                      |                                                                                                                       |                         |       |
| Pro forma  net (loss)     |                                                                                                                       | $                            | (460,176   | ) |
|                      |                                                                                                                       |                         |       |
| (Loss) per  share:        |                                                                                                                       |                         |       |
|                      |                                                                                                                       |                         |       |
| Basic – as  reported |                                                                                                                       | $                            | (0.02      | ) |
|                      |                                                                                                                       |                         |       |
| Basic – pro  forma   |                                                                                                                       | $                            | (0.02      | ) |
|                           |                                                                                                                            |                              |            |  |  |

 

As of March 31, 2006,there was approximately $147,000 of unrecognized compensation cost related tounvested share-based compensation awards granted. The Company expects torecognize this cost over the next three years.

 

On November 10, 2005,the FASB issued FASB Staff Position No. FAS 123(R)-3 (“FSP 123(R)”),Transition Election Related to Accounting for the Tax Effects of Share-BasedPayment Awards. FSP 123(R)-3 permits the Company to elect from alternativetransition methods for calculating the pool of tax benefits available to absorbtax deficiencies recognized subsequent to the adoption of FAS 123(R). Companiesmay take up to one year from the effective date of FSP 123(R)-3 toevaluate the available transition alternatives and make a one-time election asto which method to adopt. We are currently in the process of evaluating thealternative methods.

 

Options are granted tocertain employees and directors at prices equal to the market value of thestock on the dates the options were granted. The options granted have terms of5 to 10 years from the grant date and granted options typically vest quarterlyover a two to three year period. The fair value of each option is amortizedinto compensation expense on the basis of the date vested to the term of grant.We have estimated fair value of all stock options as of the date of grantapplying the Black-Scholes pricing valuation model. The application of thisvaluation model involves assumptions that are judgmental and sensitive in thedetermination of compensation expense. The weighted average for key assumptionsused in determining the fair value of options during the three months ended March 31,2006 follows:

 

| Expected  price volatility              |   | 124.00 | %      |
|-----------------------------------------|--------|--------|--------|
| Risk-free interest rate                 |   | 4.42   | %      |
| Weighted average expected life in years |   | 7.5    |   |
| Dividend yield                          |   | 0.00   | %      |
| Pre-vesting forfeiture rate             |   | 0.00   | %      |

 

Historical information wasthe primary basis for the selection of the expected volatility, expecteddividend yield, and the expected lives of the options. The risk-free interestrate was selected based upon yields of U.S. Treasury issues with a term equalto the expected life of the option being valued. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Pre-vesting forfeitures were estimated to be approximately 0.0% in the threemonths ended March 31, 2006 based primarily on historical experience. Ifpre-vesting forfeitures occur in the future, the Company will record thebenefit related to such forfeitures as the forfeitures occur. In the Company’spro forma information required under SFAS 123(R) for the periods prior to March 31,2006, the Company also accounted for forfeitures as they occurred.

 

8

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

##### **NOTE4 –**PROMOTIONAL ALLOWANCES

##### ** **

Revenue does not include theretail amount of rooms, food, and beverages provided gratuitously to customers,which was $291,000 and $296,000 for the three months ended March 31, 2006and 2005, respectively.

 

**NOTE5** – **RE****CLASSIFICATIONS**

 

The previous year financialstatements have been reclassified to conform to the current year presentation.Such reclassification had no effect on net income.

 

**NOTE 6 –INTANGIBLE ASSETS AND CASINO MANAGEMENT AGREEMENT**

 

IntangibleAssets consisted of the following at March 31:

 
| ** **                              | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|
|                                    |       |     |       |
| Casino management contract rights       |       | $        | 594,773    |   |
| Loan costs – long-term obligations |       | 181,227  |       |
| Total                                   |       | $        | 776,000    |   |

 

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

 

| **Twelve Months Ended March 31,** | ** ** |
|----------------------------------------|------------|
|                                   |       |   |   |
| 2007                                   |       | $ | 691,032 |   |
| 2008                                   |       | $ | 84,968 |   |
|                                        |            |  |  |  |  |

 

The Company entered into anagreement with the Cheyenne and Arapaho Tribes of Oklahoma (CATO) formanagement of its casinos located in Oklahoma that was to expire on May 19,2004. In exchange for extending the contract through May 19, 2007, theCompany has transferred title of a tract of land to CATO. The exchange tookplace in 2003. Since the asset transfer is related to the extension agreementfor management services, the cost of the land is being amortized over the termof the agreement.

 

The Company earnedmanagement revenues of $1,702,618 and $1,024,458 under the agreement with CATOfor the three months ended March 31, 2006 and 2005, respectively.

 

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

 

**NOTE 7 —NORTH METRO HARNESS INITIATIVE, LLC**

 

The Company evaluatedwhether North Metro should be treated as a variable interest entity (“VIE”)subject to consolidation during the applicable reporting periods under FIN46(R). The Company determined that North Metro should be treated as a VIE andthat North Metro should be consolidated within the Company’s financialstatements for the three months ended March 31, 2005 for the followingreason: The Company lacked the ability through voting or similar rights to makedecisions regarding North Metro’s activities because the Company’s votingrights were not proportionate to the Company’s obligation to absorb expectedlosses of the entity. As of March 31, 2005, the Company had providedapproximately 75 percent of North Metro’s financial support, but held only 50percent of North Metro’s voting power. Because the Company would absorbfinancial losses of North Metro that were disproportionate to its 50 percentdecision making power, we determined that North Metro was a VIE subject toconsolidation for the three months ended March 31, 2005.

 

9

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

Due to contributions tocapital made by MTR-Harness, Inc. (“MTR”) as of October 20, 2005, inaccordance with the North Metro Harness Initiative, LLC Member ControlAgreement dated June 8, 2004, the Company no longer provides financialsupport in excess of its 50 percent decision making power. In fact, as of March 31,2006, the Company has provided 38 percent of the financial support, but stillretains its 50 percent decision making power. Therefore, since October 20,2005, the Company has accounted for its investment in North Metro on the equitymethod.

 

For the three months ended March 31,2006, the Company has recorded a loss from this unconsolidated subsidiary, netof tax benefit of $39,942, as follows:

 
| Revenues                                                |   | $       | —   |   |
|---------------------------------------------------------|--------|---------|----------|--------|
|                                                    |   |    |     |
| Lobbying expenses                                       |   | $       | 34,000   |   |
| License fees – Minnesota Racing Commission         |   | 63,285  |     |
| Other expenses                                          |   | 6,236   |     |
| Total  expenses                                         |   | $       | 103,521  |   |
|                                                    |   |    |     |
| Net (loss)                                              |   | $       | (103,521 | )      |
|                                                    |   |    |     |
| 50% share of net (loss)                                 |   | (51,761 | )        |
| Net tax benefit                                         |   | 11,819  |     |
| (Loss) of unconsolidated subsidiary net of  tax benefit |   | $       | (39,942  | )      |
|                                                         |        |         |          |        |  |

 

For the three months ended March 31,2005, the Company consolidated the results of operations of North Metro,recording development expenses of $68,871 net of minority interest in the lossfrom consolidated subsidiary of $34,435.

 

**NOTE 8 -LINE OF CREDIT**

 

On October 20, 2005,the Company entered into an agreement to borrow up to $450,000 under arevolving line of credit due April 30, 2007. The interest rate is Prime+1%, and not less than 7.5%. Currently the interest rate is 8.75%. At March 31,2006, $303,708 was available to borrow. The loan is guaranteed to the extent of$300,000 by three principal officers of the Company. The line of credit isincluded in notes payable on the accompanying balance sheet.

 

##### **NOTE 9 – LONG-TERM OBLIGATIONS**

##### ** **

**Capital Lease**

 

On April 9, 1999, theCompany entered into a 20-year capital lease, under which the Companyagreed to make payments on certain related debts of the Lessors, with Cripple Creek Development Co., BlueBuilding Development, Inc. and Mark and Annesse Brockley (the Lessors) forthe land and buildings relating to The Gold Rush Hotel and Casino and GoldDigger’s Casino. The related amount capitalized is based upon:

 
| Present  value of $53,437 monthly payments for 20 years |   | $         | 5,799,170  |   |
|---------------------------------------------------------|--------|-----------|------------|--------|
| Principal payments on related debts of  Lessors         |   | 8,707,661 |       |
|                                                    |   | $         | 14,506,831 |   |

 

Under this capital lease,the Company is required to make additional rent payments if the combined netincome from the Gold Rush and Gold Digger’s casinos, after allocation of directoverhead expenses, exceeds certain thresholds stated in the lease. To date, theCompany has not been required to make additional rent payments.

 

10

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

As of March 31, 2006,future minimum lease payments required under the capital leases for the12-month period ending each March 31st, are:

 
| 2007                                    |   | $          | 1,588,335  |   |
|-----------------------------------------|--------|------------|------------|--------|
| 2008                                    |   | 1,567,375  |       |
| 2009                                    |   | 1,506,474  |       |
| 2010                                    |   | 1,163,714  |       |
| 2011                                    |   | 1,109,461  |       |
| Thereafter                              |   | 6,719,760  |       |
| Total minimum lease payments            |   | $          | 13,655,119 |   |
| Less-amount representing interest       |   | (4,924,414 | )          |
| Present value of minimum lease payments |   | 8,730,705  |       |
| Less-current portion                    |   | (840,288   | )          |
| Long-term portion                       |   | $          | 7,890,417  |   |
|                                         |        |            |            |        |  |

 

**Crown Bank Term Loan andIGT Note**

 

On October 20, 2005,the Company entered into a term loan to borrow $2.5 million. The interest rateis Prime +1%, not less than 7.5%, and the loan is due April 30, 2007.Currently the interest rate on this loan is 8.75%. The repayment period will beextended to May 31, 2008, if the Company achieves certain business goals.Twelve shareholders of the Company, including three principal officers, haveguaranteed the loan.

 

On December 29, 2005,the Company entered into a loan agreement with IGT, for $460,324 to pay offoutstanding payables in connection with the installation of a player trackingsystem at our three casinos in Cripple Creek, Colorado. The loan is for a termof 48 months with interest equal to the prime rate, which is 7.75% as of March 31,2006.

 

As of March 31, 2006,the future loan payments required for the 12-month period ending each March 31stare:

 

| 2007   |   | $       | 2,603,431 |   |
|--------|--------|---------|-----------|--------|
| 2008   |   | 111,738 |      |
| 2009   |   | 120,712 |      |
| 2010   |   | 107,967 |      |
| Total: |   | $       | 2,943,849 |   |

 

**NOTE 10 –RELATED PARTY TRANSACTIONS**

 

The Company has a liabilityto certain officers and stockholders for unpaid compensation and expenses of$261,328 and $232,467 as of March 31, 2006 and 2005, respectively.

 

During the three monthsended March 31, 2006 and 2005, the Company paid Berc & Fox Limited$0 and $788 for tax and accounting services, respectively. Thomas Fox is ashareholder and officer in Berc & Fox, Limited.

 

**NOTE 11 –PROJECT DEVELOPMENT COSTS**

 

The Company continues topursue additional gaming opportunities and as a result continues to incurproject development expenses. For the three months ended March 31, 2006,development expenses were $74,070. For the three months ended March 31,2005, development expenses were $318,649, including a $249,778 write off of anoption to acquire the Gold Rush real estate and costs incurred by North MetroHarness Initiative, LLC, which was included in the Company’s consolidatedfinancial statements for the three months ended March 31, 2005. See Note7.

 

11

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

##### **NOTE 12 – SEGMENT INFORMATION**

##### ** **

Segment information relatedto the three months ended March 31, 2006 follows:

 
| ** **                                 | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling**    | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                 | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)** | ** ** | **Total**  | ** ** |
| Revenues                                   |       | $              | 3,671,894  |           | $          | 1,702,618       |       | $                  | —     |       | $          | — |   | $ | 5,374,512 |   |
| Interest  revenue                          |       | 2              |       | 615            |       |            |       | —             |       | 617        |       |
| Interest  expense                          |       | 221,026        |       | 101,320        |       | —          |       | —             |       | 322,346    |       |
| Depreciation  and amortization             |       | 411,746        |       | 130,561        |       | —          |       | —             |       | 542,307    |       |
| Segment  profit (loss) before income taxes |       | (237,757       | )          | 846,377        |       | (148,129        | )          | —             |       | 460,491    |       |
| Income tax  (expense) benefit              |       | 80,837         |       | (288,268       | )          | 45,084          |       | —             |       | (162,347   | )          |
| Segment  assets                            |       | 13,586,182     |       | 2,215,545      |       | 4,401,608       |       | —             |       | 20,203,335 |       |
| Expenditures  for segment assets           |       | 5,606          |       | 77,796         |       | 103,239         |       | (103,239           | )          | 83,402     |       |
|                                            |            |                |            |                |            |                 |            |                    |            |            |            |  |  |  |  |  |

 

Segment information relatedto the three months ended March 31, 2005 follows:

 
| ** **                                | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (2)**   | ** ** | **Total**  | ** ** |
| Revenues                                  |       | $              | 3,691,140  |           | $          | 1,024,458       |       | $               | —     |       | $          | — |   | $ | 4,715,598 |   |
| Interest revenue                          |       | —         |       | 2,745          |       | —          |       | —          |       | 2,745      |       |
| Interest expense                          |       | 265,702        |       | 20,566         |       |            |       | —          |       | 286,268    |       |
| Depreciation and amortization             |       | 462,633        |       | 132,506        |       | —          |       |            |       | 595,139    |       |
| Segment profit (loss) before income taxes |       | (305,244       | )          | 182,570        |       | (318,649        | )          | 34,435          |       | (406,888   | )          |
| Income tax (expense) benefit              |       | —         |       | —         |       | —          |       | —          |       | —     |       |
| Segment assets                            |       | 15,425,964     |       | 2,582,151      |       | 2,527,092       |       | —          |       | 20,535,207 |       |
| Expenditures for segment assets           |       | 1,809          |       | 24,781         |       | 113,511         |       | —          |       | 140,101    |       |
|                                           |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |  |

 

----

(1)          Included in investment in unconsolidatedsubsidiary.

(2)          Loss on subsidiary allocated to minorityinterest.

 

**NOTE 13 –FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes it isnot practical to estimate the fair value of its investment in North Metrobecause there is no established market for these securities and it isinappropriate to estimate future cash flows because they are dependent on theability of North Metro to develop and then generate earnings from the operationof its proposed harness track and card room. There were no other financialinstruments with significant differences between the carrying amount and thefair value due to the short maturity of the instruments.

 

##### **NOTE 14 – EARNINGS PER SHARE**

##### ** **

##### **The following is a reconciliation ofbasic and diluted earnings per share for the three months ended March 31,2006:**

##### ** **

| ** **                        | ** ** | **Net Earnings (Numerator)** | ** ** | **Weighted Average Equity  (Denominator)** | ** ** | **Earnings  per Share** | ** ** |
|-----------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|-------------------------|------------|
| Basic Earnings per Share          |       | $                            | 297,644    |                                       | 19,637,545 |                    | $          | 0.02 |   |
| Effect of Dilutive Securities:    |       |                         |       |                                       |       |                    |       |
| Outstanding  Options and Warrants |       |                         |       | 2,367,500                                  |       |                    |       |
|                              |       | $                            | 297,644    |                                       | 22,005,045 |                    | $          | 0.01 |   |

##### ** **

##### **12**

##### ****

##### ** **

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

##### ** **

##### **The Company had a net loss for the threemonths ended March 31, 2005; therefore a calculation of earnings per shareon a fully diluted basis would be anti-dilutive.**

##### ** **

##### **Options and warrants to purchase1,395,000 shares of common stock at a price of $1.00 per share and options topurchase 675,000 shares of common stock at a price of $0.65 per share were notincluded in the computation of diluted earnings per share because the exerciseprice was greater than the average market price of common shares during thefirst three months of 2006. All of these options were outstanding as of March 31,2006.**

##### ** **

**NOTE 15 -COMMITMENTS AND CONTINGENCIES**

 

As discussed in Note 6, theCompany has an agreement with the Cheyenne and Arapaho Tribes of Oklahoma(CATO) for management of CATO’s casinos located in Oklahoma that will expire onMay 19, 2007. The management fees received from this contract aresignificant to the Company’s cash flow from operations. We are currentlynegotiating an extension of this contract. However, if we are unsuccessful inextending this contract it will have a material adverse impact on our cash flowfrom operations.

 

On March 24, 2006,Southwest entered into a Gaming Management Agreement with the Otoe-MissouriaTribe of Indians. Under the terms of the Gaming Management Agreement, whichmust be approved by the NIGC before it becomes effective, Southwest will haveexclusive management responsibility for the Tribe’s Seven Clans Paradise Casinonear Ponca City, Oklahoma. Southwest will receive management fees equal to 20percent of the net revenue from gaming and non-gaming activity at the facility.Southwest will also assist the Tribe in its efforts to refurbish and expand thecasino. The management agreement runs for 5 years beginning on the firstday that Southwest begins management of the facility.

 

In 2004, the Companypurchased player tracking software and slot accounting software from IGT. On December 29,2005, the Company reached an agreement with IGT to finance $460,324 of thepurchase price for this system over 48 months with an interest rate equal tothe prime rate, which is currently 7.75%. In addition, the Company agreed topurchase additional software for $200,000, which will allow the Company tooffer bonusing to its customers. The agreement to purchase that software iscontingent upon IGT receiving necessary approvals for the bonusing system fromthe Colorado Division of Gaming. We anticipate that IGT will finance thisadditional software purchase on similar terms.

 

Under the Company’semployment agreements with James B. Druck, CEO, Thomas E. Fox, President andCFO, and Jeffrey S. Halpern, Vice President of Government Affairs, which wereeffective July 1, 2004, the Company has agreed to allow these executivesto elect to continue their employment in a reduced capacity, with continuingmedical benefits and a salary equal to their base pay at the time oftermination for 18 months, and not less than $25,000 after 18 months, if theCompany terminates the executive’s employment without cause or in connectionwith a change in control of the Company (as defined in the employmentagreement) or if the executive terminates his employment with the Company forgood cause (as defined in the employment agreement). The initial term of theseagreements expires July 1, 2006, after which each agreement renewsautomatically for additional one-year terms unless terminated.

 

North Metro HarnessInitiative, LLC, in which the Company owns a 50 percent membership interest,has entered into an agreement to monitor legislation and perform lobbyingactivities related to its racetrack and card room development. Theseagreements are generally on a month-to-month basis, and may be terminatedby either party to the agreement. North Metro pays the monthly commitments ofapproximately $20,000 per month.

 

North Metro has also enteredinto an agreement for the development of the land, building and relatedproperty to operate a racetrack and card room. Fees related to the agreementtotal 3% of the project cost, which is defined as the total development costless the cost to purchase the land. The agreement began on May 1, 2003,and continues until the completion of the project, unless earlier terminated. NorthMetro currently pays fees of $6,000 per month, plus applicable out of pocketexpenses. Upon the start of construction, two thirds of the total expected fee(less previous monthly payments) is due. If the agreement is terminated beforecompletion of the project, any unpaid fees are determined based on the completedstatus of the project at the time of termination, as defined in the agreement.

 

13

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006 and 2005**

 

# **NOTE16 - SUBSEQUENT EVENTS**

# ** **

At its meeting on April 26, 2006, the independent members of theCompany’s Board of Directors approved one-time payments to James Druck, CEO,Thomas Fox, President and CFO, and Jeffrey Halpern, Vice President ofGovernment Affairs, as partial repayments of the Company’s outstandingliabilities for their unpaid salaries from prior years. The aggregate amount ofthese liabilities as of March 31, 2006 was $232,467. The Board approvedpayments of $50,000 to Mr. Druck and Mr. Halpern and $10,000 to Mr. Fox.The company made these payments to Mr. Halpern on April 28, 2006 and Mr. Druckand Mr. Fox on May 15, 2006.

 

14

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

 

The following is a discussionand analysis of the financial position and operating results of SouthwestCasino Corporation (referred to in this discussion, together with itsconsolidated subsidiaries where appropriate, as “Southwest Casino”, the “Company”,“we”, “our” and “us”) for the three months ended March 31, 2006 and 2005.

 

***Summary of Consolidated Operating Results:***

 

For the quarter ended March 31,2006, Southwest had net earnings of $297,644 on revenues of $5,374,512, ascompared to a net loss of $(406,888) on revenues of $4,715,598 for the firstquarter of 2005. This amounts to earnings per outstanding share during thefirst quarter of 2006 of $0.02 ($0.01 on a fully-diluted basis) as compared toa loss of $(0.02) per outstanding share in the same period of 2005. We attributethis improvement in operating results primarily to the increased managementfees generated at the casinos we manage for the Cheyenne and Arapaho Tribes ofOklahoma and the absence in 2006 of an almost $250,000 expense related to theexpiration during the first quarter of 2005 of an option to acquire the realproperty that houses our Gold Rush and Gold Digger’s casinos in Cripple Creek,Colorado.

 

***Overview:***

 

Our principal business isthe management, operation and development of gaming facilities in emerging andestablished gaming jurisdictions. Currently, we operate three casinos inCripple Creek, Colorado — Gold Rush Hotel and Casino, Gold Digger’s and UncleSam’s. We also manage two Native American gaming operations in Oklahoma for theCheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star -Clinton. Lucky Star - Concho is located on U.S. Highway 81, just north of theOklahoma community of El Reno. Lucky Star - Clinton is located 60 mileswest of Lucky Star - Concho in the community of Clinton, Oklahoma on Old Route66 near Interstate I-40.

 

We continually evaluateother management, consulting, development and acquisition opportunities relatedto gaming that have the potential to generate new revenue streams for us. Newopportunities we are pursuing include:

 

•                  In January 2005, the Minnesota RacingCommission voted to grant class A and B licenses to own and operate aharness racetrack and card room to North Metro Harness Initiative, LLC, inwhich we own a 50% membership interest. These licenses will enable North Metroto develop and run a harness racetrack and a 50-table card room inColumbus Township, Anoka County, Minnesota. A local anti-gambling group has twolawsuits pending against the Minnesota Racing Commission in attempts to revokethese licenses. To date, district and appellate courts have issued severaldecisions against the anti-gambling group and in favor of the Racing Commissionand North Metro’s licenses. The courts have not issued any decisions in favorof the anti-gambling group. We believe that these attempts to revoke NorthMetro’s licenses will ultimately be unsuccessful, but they have delayedconstruction. We cannot predict when the litigation will be resolved or theextent to which the delay will lead to increased construction or financingcosts for this project.

 

•                  On March 24, 2006 we entered into aGaming Management Agreement with the Otoe-Missouria Tribe of Indians in northcentral Oklahoma. Under this agreement, we will manage the Tribe’s Seven ClansParadise Casino near Ponca City, Oklahoma. Southwest will receive managementfees equal to 20 percent of the net revenue from gaming and non-gaming activityat the facility. This agreement has been submitted to the National IndianGaming Commission (“NIGC”) for approval. The agreement is not effective, and wecannot provide any services or receive any compensation under the agreement,until we receive that approval. We cannot predict when the NIGC will approvethe agreement. The Gaming Management Agreement has a five-year term beginningon the date Southwest assumes management of the facility.

 

15

----

 

***Operating segments:***

 

Our executive officersreview operating results, assess performance and make decisions related to theallocation of resources on a property-by-property basis. We, therefore, believethat each property is an operating segment. In order to provide more detail ina more understandable manner than would be possible on a consolidated basis,and to facilitate discussion of operating revenue, we have grouped ourproperties as follows:

 

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

 

**CasinoManagement*:***

 

Southwest Casino and HotelCorp. manages two casinos for the Cheyenne and Arapaho Tribes of Oklahoma underthe Third Amended and Restated Gaming Management Agreement dated June 16,1995. This Agreement has been extended twice and currently expires on May 19,2007. Southwest is seeking anextension of this agreement beyond May 19, 2007, but is uncertain whethersuch an extension can be secured. If this agreement is not extended, theCompany will lose this revenue source in May 2007, which would have amaterial adverse effect on our operating results.

 

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

###### ** **

Weearned management fees of $1,070,755 from Lucky Star - Concho during the firstthree months of 2006 and $583,429 during the first three months of 2005, anincrease of 83.5%. The dramatic increase in management fees is the directresult of the Tribes signing a gaming compact with the state of Oklahoma in April 2005and the subsequent addition and effective management of the new gamingopportunities permitted under that compact. The compact allows Lucky Star – Conchoto offer card games and poker, as well as certain Class III electronicgames permitted under the compact, to its patrons, all of which have resultedin a significant increase in revenue. We anticipate increased management feesin the second and third quarter of 2006, as compared to 2005, although not asdramatic as the results from the first quarter, as we continue to refine theelectronic game mix on the floor and we improve our offerings to our poker andcard room players. We also anticipate greater competition from othertribal gaming operations closer to Oklahoma City and from Remington Park, aracetrack in Oklahoma City that began offering electronic gaming near the endof 2005.

 

**Lucky Star- Clinton**

 

Weearned management fees from Lucky Star - Clinton of $631,863 in the first threemonths of 2006 and $441,029 in the first three months of 2005, an increase of43.2%. The increase in management fees is the result of an improved mix ofgames on the floor, including the introduction of slim line gaming machines,and the successful renegotiation of machine vendor fees on a number of our morepopular electronic games. Lucky Star – Clinton is at capacity in terms of howmany customers the facility can accommodate, especially on weekends. As aresult, we do not anticipate a significant increase in revenues during thesecond or third quarter of 2006.

 

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

 

On March 4, 2006, theTribes rescinded their prior approval of an amendment to the Gaming ManagementAgreement under which we were to assist them in developing an additional gamingfacility at Canton Lakes, Oklahoma. This amendment had been submitted to theNIGC for approval in September 2003, but that approval had not beenreceived.

 

In conjunction with seekingan extension of the Gaming Management Agreement beyond May 2007, we arealso discussing with the Tribes the possibilities of expanding both the Conchoand Clinton facilities, which would have a significant impact on revenues for2007.

 

16

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**Casinooperations**:

 

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

 
| **First Quarter** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-------------------|------------|------------|------------|------------|------------|--------------------------------------|------------|
|              |       |       |       |       |       |                                 |       |
| Casino revenues   |       | $3,293,463 |       | $3,333,104 |       | (1.2                                 | )%         |
| Total revenues    |       | 3,462,784  |       | 3,460,279  |       | —                               | %          |
| EBITDA            |       | 549,588    |       | 587,749    |       | (6.5                                 | )%         |
| Operating margin  |       | 15.9       | %          | 17.0       | %          |                                 |       |

 

GoldRush/Gold Digger’s recorded slightly lower revenues in the first quarter of2006, particularly in February, than in the first quarter of 2005 as a resultof bad weather on key weekends. Because Cripple Creek, Colorado sits high inthe Rocky Mountains and draws the majority of its business from cities andtowns at lower elevations, weekend snowstorms discourage many patrons fromdriving the mountain pass to our casinos. This has a significant impact on ouroperating results, particularly in the first and fourth quarter of the year. Thesnowy weekend weather in February 2006 caused a decrease in revenues forthe entire Cripple Creek market as compared to February 2005. We alsocontinued to experience higher operating expenses in the first quarter due toincreased costs associated with our player tracking and slot accounting system,which had not been approved by the Colorado Division of Gaming and, therefore,required additional manpower to meet reporting requirements. In April 2006we completed testing and self-approval of the new system in accordance withColorado Division of Gaming procedures. We anticipate that beginning in thesecond quarter of 2006 we will reduce operating expenses and improve customerservice as a result of being able to utilize the automated slot accountingsystem.

 

**Uncle Sam’s Casino**

 
| **First  Quarter** | ** ** | **2006** | ** ** | **2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|--------------------|------------|----------|------------|----------|------------|--------------------------------------|------------|
|               |       |     |       |     |       |                                 |       |
| Casino revenues    |       | $        | 207,872    |     | $          | 230,252                              |       | (9.7 | )% |
| Total revenues     |       | 209,110  |       | 230,861  |       | (9.4                                 | )%         |
| EBITDA             |       | (139,744 | )          | (153,785 | )          | 10.0                                 | %          |
| Operating margin   |       | (66.8    | )%         | (66.6    | )%         |                                 |       |
|                    |            |          |            |          |            |                                      |            |  |  |

 

Uncle Sam’s Casino is afacility with only 67 slot machines that serves primarily the local residentsmarket in Cripple Creek. The local resident market is the most vulnerable toincreased competition. Since the third quarter of 2004, when a new casino thatalso caters to the local residents opened for business, we have seen a steadydecline in revenues quarter over quarter at this facility. In addition, acasino adjacent to our location has expanded into a storefront right next doorthat had been a tee shirt shop, further reducing customer traffic. In thesecond quarter of 2006, we have planned initiatives that we hope will reversethis ongoing trend. In addition, we have completed the testing andself-approval of our automated slot accounting system, which should allow us toreduce operating expenses and improve client service.

 

***Project Development Costs:***

 

Project development costsfor the first three months of 2006 were $96,368 as compared to $318,649 for thefirst three months of 2005. During the first three months of 2005, we wrote offan option to purchase the Gold Rush real estate that expired February 28,2005. The cost of this option was $249,778, which represented costs incurredbefore 2005 to settle a dispute with the lessor. In addition, during the firstthree months of 2005, North Metro Harness Initiative, LLC expenses of $68,871were consolidated with our operating results. For the first three months of2006, the expenses of this entity, net of tax benefit $38,122, are reported asa loss from an unconsolidated subsidiary.

 

In the first three months of2006, we continued to pursue other gaming opportunities. The pursuit of thesenew initiatives has resulted in signing a five-year management contract withthe Otoe-Missouria Tribe of Oklahoma. We have submitted the agreement to theNational Indian Gaming Commission for approval. We cannot begin to 

 

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perform work under thiscontract until it is approved. At this time, we cannot predict when thiscontract may be approved.

 

In February 2006, weformed a new subsidiary to pursue opportunities in the charitable gamingmarket, Southwest Charitable Enterprise, LLC. In the first month of operations,this entity incurred $22,298 in expenses, which are included in projectdevelopment costs.

 

**OtherFactors Affecting Net Income:**

 
| **First Quarter**       | ** ** | **2006**            | ** ** | **2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-------------------------|------------|---------------------|------------|----------|------------|--------------------------------------|------------|
| (Income) Expense        |       |                |       |     |       |                                 |       |
| Southwest Entertainment |       | $                   | (17,862    | )        | $          | (23,175                              | )          | (23.1 | )% |
| Corporate Expenses      |       | 624,975             |       | 691,406  |       | (9.6                                 | )%         |
| Interest Expense (net)  |       | (322,346            | )          | (283,523 | )          | 13.7                                 | %          |
| Other (income) Loss     |       | (617                | )          | (2,900   | )          | N/M                                  |       |
| Effective Tax Rate      |       | 34                  | %          | 0        | %          | NA                                   |       |
| Minority Interests      |       | —              |       | 34,435   |       | NA                                   |       |
| N/M = Not material      |       | NA = Not applicable |       |     |       |
|                         |            |                     |            |          |            |                                      |            |  |  |

 

***Southwest Entertainment, Inc.*** is a wholly owned subsidiary of SouthwestCasino and Hotel Corp. that conducts concerts and other entertainment events atthe Gold Rush Palladium, a 1,200 seat outdoor amphitheater adjacent to the GoldRush Casino. We conduct these events for the purpose of attracting peopleto Cripple Creek and our casino properties. During the first three months ofthe year we do not host any events. Expenses were lower in the first quarter of2006 than the first quarter of 2005 due to a $9,307 decrease in depreciationoffset by a $3,958 increase in rent and expenses to maintain the facility andequipment.

 

***Corporate expenses*** were 9.6% lower in the first quarter of 2006 than the first quarter of2005, primarily due to the elimination of advisory fees, lower payroll costsand reduced licensing fees. During the first quarter of 2005 we incurredadvisory fees of $30,000 in connection with a contract entered into in July 2004.The contract was terminated in April 2005 and a settlement was reached topay off all remaining obligations under this contract on February 16, 2006.In the first quarter of 2005, we eliminated four positions due in part toour unsuccessful bid to develop a riverboat casino in Rockaway Beach, Missouri.We intend to add two new positions during the second quarter of 2006, whichwill result in an increase in payroll costs. We also incurred one-timelicensing fees of approximately $18,000 in the first quarter of 2005 in connectionwith filings with the Colorado Division of Gaming and the National IndianGaming Commission for approval of a potential additional member of our Board ofDirectors.

 

***Interest Expense*** increased 13.7% in the first quarter of 2006, when compared to the firstquarter of 2005, as a result of interest paid in connection with the $2,500,000loan we secured in order to meet our obligations to fund capital contributionsto North Metro Harness Initiative, LLC.

 

***Minority interest*** represents our minority ownership share of the expenses related toNorth Metro Harness Initiative, LLC. This entity became an unconsolidatedsubsidiary on October 20, 2005.

 

***Effective tax rate*** for the first three months of 2006 was 34%. No benefit for the lossesin the first three months of 2005 has been recorded, primarily due to thevaluation allowance for deferred tax assets and lack of certainty that netoperating loss carryforwards available to offset future income would not belimited under Section 382 of the Internal Revenue Code of 1986.

 

***Liquidity and Capital Resources:***

 

We generate cash flow fromour Oklahoma management activities and casino operations in Colorado. We usethe cash flows generated to fund reinvestment in existing properties for bothrefurbishment and replacement of assets, 

 

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and to pursue additionalgrowth opportunities. To balance our cash requirements we supplement the cashflows generated by our operations with funds provided by financing activities.

 

Our cash flows fromoperations will be sufficient to meet our normal operating requirements duringthe next twelve months. However, North Metro will need additional debtfinancing to fund the development of the racetrack and card room inMinnesota.

 

We continue to reviewadditional opportunities to acquire or invest in companies, properties andother investments that meet our strategic and return on investment criteria. Ifwe complete a material acquisition or investment, our operating results andfinancial condition could change significantly in future periods. In addition,any new opportunity would in all likelihood require new equity and/or debtfinancing.

 

Netcash provided by operating activities during the first three months of 2006 was$930,161 compared to $577,614 during the first three months of 2005, anincrease of $352,547. The increase between periods is due primarily to anincrease in management fees of $678,160, offset by an increase in the change inaccounts receivable of $101,308, a decrease in the change in accrued expensesof $160,480, and a decrease in the change in accounts payable of $79,892.

 

Net cash used in investingactivities for the first three months of 2006 was $238,402 compared to net cashused in investing activities of $124,227 during the first three months of 2005,an increase of $114,175. The increase in use of cash between the periods wasdue primarily to the investment of $155,000 in North Metro, now anunconsolidated subsidiary, offset by a reduction in assets purchased of$56,699, which included assets purchased by North Metro when it was included inthe consolidated financial statements.

 

Net cash (used in) financingactivities for the three months ended March 31, 2006 was $(504,689)compared to net cash provided by financing activities for the three monthsended March 31, 2005 of $318,827, a difference of $823,516. The differencein financing activities was due primarily to $616,324 of contributions to NorthMetro by MTR-Harness, Inc., the other 50 percent owner of North Metro,during the first quarter of 2005. At that time, North Metro was a consolidatedsubsidiary of Southwest and those contributions were reported as cash providedby financing activities. North Metro, now an unconsolidated subsidiary,received capital contributions from MTR-Harness, Inc. of $155,000 in thefirst quarter of 2006. Because we no longer consolidate North Metro, thesecapital contributions are no longer reported as cash provided by financingactivities. In addition, we made payments on short-term borrowings of $300,000in the first three months of 2006 as compared to payments on short-termborrowings of $136,542 in the first three months of 2005.

 

***Line of Credit.*** On October 20, 2005, weestablished a $450,000 line of credit with Crown Bank of Minneapolis, Minnesotathat replaced a $450,000 line of credit with Associated Bank of Minneapolis. Theline of credit is due April 30, 2007 with a variable interest rate at onepercent above prime but not less than 7.5% (currently 8.75%). At March 31,2006, $146,292 had been drawn on the line of credit. Our three principalofficers have guaranteed up to $300,000 of this line of credit.

 

***Term Note*****.**On October 20,2005, the Company entered into a term loan to borrow $2.5 million. The interestrate is Prime +1%, not less than 7.5%, and the loan is due April 30, 2007.Currently the interest rate on this loan is 8.75%. The repayment period will beextended to May 31, 2008, if the Company achieves certain business goals.Twelve shareholders of the Company, including our three principal officers,guarantee the loan. The term note provided for interest only until April 1,2006 at which time we began making principal payments of $208,333 per monthplus interest.

 

***Equipment Loan.***On December 23, 2005, the Company negotiated a loan of $460,324 topay off outstanding payables in connection with the installation of a playertracking system at our three casinos in Cripple Creek, Colorado. The loan isfor a term of 48 months with interest equal to the prime rate, which is 7.75%as of March 31, 2006***.***The outstanding balance as of March 31, 2006 was $443,683.

 

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

 

**CompetitivePressures:**

 

Many casino operators areeither entering or expanding in our markets — Colorado and Oklahoma — therebyincreasing competition. As companies have completed new or expanded projects,supply has sometimes grown at a faster pace than demand, and competition hasincreased significantly. Furthermore, several operators, including Southwest,have plans for additional developments or expansions.

 

Although, the short-termeffect on Southwest of these 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 casino entertainmentindustry is subject to political and regulatory uncertainty. From time to time,individual jurisdictions have considered legislation or referendums that couldadversely impact our operations. The likelihood or outcome of similarlegislation and referendums in the future is difficult to predict.

 

The casino entertainmentindustry represents a significant source of tax revenues to the variousjurisdictions in which casinos operate. From time to time, various state andfederal legislators and officials have proposed changes in tax laws, or in theadministration of tax laws, that would affect the industry. It is not possibleto determine with certainty the scope or likelihood of possible future changesin tax laws or in the administration of tax laws. If adopted, changes in taxlaw could have a material adverse effect on our financial results.

 

***Significant Accounting Policies and Estimates:***

 

We prepare our ConsolidatedFinancial Statements in conformity with accounting principles generallyaccepted in the United States. Certain of our accounting policies, including,but not limited to, the estimated lives assigned to our assets, thedetermination of bad debt, asset impairment, fair value of guarantees, and thecalculation of our income tax liabilities, require that we apply significantjudgment in defining the appropriate assumptions for calculating financialestimates. By their nature, these judgments are subject to an inherent degreeof uncertainty. Our judgments are based on our historical experience, terms ofexisting contracts, our observance of trends in the industry, informationprovided by our customers and information available from other outside sources,as appropriate. We cannot assure you that our actual results will not differfrom our estimates. For a discussion of our significant accounting policies andestimates, please refer to Management’s Discussion and Analysis or Plan ofOperation and Notes to Consolidated Financial Statements presented in the 2005Financial Statements included in our Annual Report on Form 10-KSB.

 

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

 

Our executive officers consider “EBITDA”(earnings before interest, taxes, depreciation and amortization) a useful toolfor measuring the operating performance of Southwest. EBITDA is also a widelyused measure of operating performance in the gaming industry and a principalbasis for valuation of gaming companies. We use EBITDA to establish budgets,analyze results as compared to our budgets, and as a basis for incentivecompensation 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 our liquidity. Southwesthas significant uses of cash flows, including capital expenditures, interestpayments and debt principal repayments that are not reflected in our EBITDAcalculations. Our management uses EBITDA, and we present it in this discussionand analysis, only as a supplement to measures prepared in accordance withaccounting principles generally accepted in 

 

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the United States. Please be aware that othercompanies in our industry may calculate EBITDA differently than we do,which limits its usefulness as a comparative measure.

 

***Forward-Looking Statements:***

 

This Quarterly Report on Form 10-QSBcontains “forward-looking statements” intended to qualify for the safe harborfrom liability established by the Private Securities Litigation Reform Actof 1995. You can identify these statements by the fact that they do not relatestrictly to historical or current facts. These statements often contain wordssuch as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,”“could,” “would,” “estimate,” “continue” or “pursue,” or the negative or othervariations of those words or comparable terminology. In particular, theyinclude 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-lookingstatements on our current expectations and projections about future events.

 

We caution the reader that forward-lookingstatements involve risks and uncertainties that cannot be predicted orquantified and, consequently, actual results may differ materially fromthose expressed or implied in the forward-looking statements. These risks anduncertainties include, but are not limited to, the following factors as well asother factors described from time to time in our reports filed with the Securitiesand Exchange Commission:

 

•                  our ability to build and maintain healthypersonal and professional relationships with tribes and their officials;

•                  the potential change of policies andpersonnel of tribal governments, which could adversely affect our relationships;

•                  the effects of competition, includinglocation of competitors and operating and market competition;

•                  access to available and feasible financing;

•                  our ability to recoup costs of capitalinvestments through higher revenues;

•                  success of our customer tracking and customerloyalty programs;

•                  abnormal gaming holds;

•                  litigation outcomes and judicial actions,including gaming legislation, referenda and taxation;

•                  the effect of economic, credit and capitalmarket conditions on the economy in general, and on gaming companies inparticular;

•                  construction factors, including delays,zoning issues, environmental restrictions, soil and water conditions, weatherand other hazards, site access matters and building permit issues;

•                  the effects of environmental and structuralbuilding conditions relating to the Company’s properties;

•                  changes in laws (including increased taxrates), regulations or accounting standards, third-party relationships andapprovals, and decisions of courts, regulators and governmental bodies; and

•                  acts of war or terrorist incidents.

 

Any forward-lookingstatements are made pursuant to the Private Securities Litigation Reform Actof 1995 and, as such, speak only as of the date made. We undertake noobligation to publicly update any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

## ***RiskFactors***

## *** ***

In reviewing this quarterlyreport on Form 10-QSB, you should carefully consider the mattersconcerning Southwest Casino Corporation described under the heading “RiskFactors” in the annual report on Form 10-KSB filed by the Corporation on March 31,2006, which are incorporated in this document by reference.

 

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**Item 3.****          ****Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) designed to ensure that information required to be disclosed by usin the reports we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and that this information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions 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 March 31, 2006. Based on thatevaluation and the similar evaluation of our disclosure controls and proceduresas of December 31, 2005, our Chief Executive Officer and Chief FinancialOfficer concluded that as of those dates our disclosure controls and procedureswere ineffective because of the material weakness in our internal control overfinancial reporting described below. Notwithstanding the existence of thismaterial weakness in our internal control over financial reporting, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,believes that the consolidated financial statements included in this reportfairly present in all material respects our financial condition, results ofoperations and cash flows for the periods presented.

 

A material weakness is a significantdeficiency that, by itself or in combination with other control deficiencies,results in more than a remote likelihood that a material financial misstatementwill not be prevented or detected. In connection with their audit of ourfinancial statements for the year ended December 31, 2005, our independentauditors determined that a material adjustment to our consolidated financialstatements was necessary due to errors in items on those financial statementsrelated to the transition of North Metro Harness Initiative, LLC from aconsolidated to an unconsolidated subsidiary.

 

We continue to design and implement improvements inour internal control over financial reporting to address the material weaknessdescribed above. Our management has determined that this material weakness isthe result of the relatively small size of our accounting department. Toaddress this issue, we intend to acquire additional accounting resources withthe expertise needed to assist us in preparation of our financial statements,including addressing issues related to accounting for matters that are outsidethe ordinary course of our business. We have not determined at this timewhether to hire additional accounting staff or engage outside advisors separatefrom our independent auditors to provide us with the needed assistance inpreparing our financial statements.

 

**Changesin Internal Controls over Financial Reporting**

 

Therewas no change in our internal control over financial reporting during thequarter ended March 31, 2006 that has materially affected, or isreasonably likely to affect materially, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.****          ****Legal Proceedings.**

 

See Items 3 and 9 ofour Annual Report on Form 10-KSB, filed March 31, 2006, for adescription of our pending legal proceedings.

 

NorthMetro Harness Initiative, LLC, in which Southwest Casino and Hotel Corp. owns a50 percent membership interest, has intervened in litigation between ananti-gambling citizens group and the Minnesota Racing Commission. Thislitigation began on December 15, 2004 in the Second District Court, RamseyCounty, Minnesota and alleges that members of the Minnesota Racing Commissionviolated Minnesota’s “open meeting” law while considering North Metro’sapplication for licenses to build and operate a harness racetrack and card room inColumbus Township, Anoka County, Minnesota. In June 2005, the DistrictCourt issued a summary judgment order dismissing plaintiff’s claims and infavor of the Minnesota Racing Commission and North Metro. Plaintiffssubsequently appealed that decision to the Minnesota Court of Appeals. Finalbriefs in that appeal were submitted to the court in December 2005 andoral argument in that appeal was held on April 20, 2006.

 

Inaddition, on March 10, 2005, the anti-gambling group filed a petition withMinnesota Court of Appeals appealing the Minnesota Racing Commission’s grant ofclass A and class B licenses to North Metro to develop and operatethe harness racetrack and card club. On March 28, 2006, the AppellateCourt affirmed the decision of the Minnesota Racing Commission to grantlicenses to North Metro. On April 27, 2006, the anti-gambling group fileda request for review of the appeals court decision with the Supreme Court ofthe State of Minnesota, which has discretion to determine whether or not to hearthe case.

 

On February 15,2006, Southwest entered into a Settlement and Release Agreement with MBCGlobal, LLC. Under the terms of the Settlement and Release Agreement, Southwestpaid MBC $66,000 that Southwest had previously agreed was due under the terminatedadvisory services agreement and Southwest and MBC released each other from allclaims raised in an arbitration proceeding initiated by MBC in September 2005.Southwest did not release MBC from any potential liability related to itsactions on behalf of Southwest in its 2004 sale of convertible notes andcorporate reorganization, and MBC did not release any rights to indemnificationit may have under the terminated advisory agreement.

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds.**

 

During the firstquarter of fiscal 2006, we did not issue any equity securities withoutregistration under the Securities Act of 1933, except as described below:

 

On February 16,2006, we issued 100,000 shares of common stock upon exercise of two outstandingwarrants to purchase those shares at a price of $0.12 per share. The warrantswere issued to unrelated third parties in connection with services theyprovided to the North Metro Harness Initiative racetrack project.

 

No underwritingcommission or discounts were paid with respect to the sales of theseunregistered securities. All of the sales were made in reliance on either Section 4(2) ofthe Securities Act of 1933 as transactions by an issuer not involving anypublic offering or Regulation D of the Securities Act. In all of thesetransactions, we made inquiries to establish that the sales qualified for theseexemptions from the registration requirements. In particular, we confirmed thatwith respect to the exemption claimed under Section 4(2) of theSecurities Act that (i) all sales were made by personal contact fromofficers and directors of Southwest or other persons closely associated withSouthwest, (ii) each investor made representations that he or she wassophisticated in relation to his or her investment (and gave us no reason tobelieve that this representation was incorrect), (iii) each purchaser gaveassurance of investment intent and the certificates for the shares bear alegend accordingly, and (iv) offers and sales within any offering weremade to a limited number of persons.

 

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

 

The following exhibitsare attached to this Quarterly Report on Form 10-QSB:

 
| 31.1 |   | Certification  of Chief Executive Officer Pursuant to SEC Rule 13a-14.                                                                                    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification  of 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, asamended, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| May 15, 2006 | **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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