**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C.  20549**

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** **

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                           | ** ** | ** **                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.**  |
| ** **                                                                                                                                               | ** ** | ** **                                                                                     |
| **For the  quarterly period ended June 30, 2006**                                                                                                        |
| ** **                                                                                                                                               | ** ** | ** **                                                                                     |
| **OR**                                                                                                                                                   |
| ** **                                                                                                                                               | ** ** | ** **                                                                                     |
| **o**                                                                                                                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| ** **                                                                                                                                               | ** ** | ** **                                                                                     |
| **For the  transition period  from          to         ** |

** **

**CommissionFile Number: 333-115186**

**RIVER ROCKENTERTAINMENT AUTHORITY**(Exact name of registrantas specified in its charter)

| **Not Applicable**               |   | **68-0490898**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**3250 Highway 128 EastGeyserville, California 95441(707) 857-2777**(Address,including zip code, and telephone number,including area code, of registrant’s principal executive offices)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x    No  o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes  o LargeAccelerated - Filer      o Accelerated - Filer      x Non Accelerated Filer

Indicateby check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o    No  x

 

 

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**RIVER ROCK ENTERTAINMENTAUTHORITY**

**INDEX TO FORM 10-Q**

 
| Item           | ** ** | **Description**                                                                                                                                                               | ** ** | **Page** | ** ** |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|           |       |                                                                                                                                                                          |       |     |       |
|           | ** ** | **PART I—FINANCIAL  INFORMATION**                                                                                                                                        |       |     |       |
|           |       |                                                                                                                                                                          |       |     |       |
| 1.             |       | Financial Statements (unaudited)                                                                                                                                              |       |     |       |
|           |       | Balance  Sheets—June 30, 2006 and December 31, 2005                                                                                                                 |       | 1        |       |
|           |       | Statements of Revenues, Expenses and Changes in Fund  Deficit—Three-Months ended June 30, 2006 and 2005 and Six-Months  ended June 30, 2006 and 2005 |       | 2        |       |
|           |       | Statements  of Cash Flows—Six-Months ended June 30, 2006 and 2005                                                                                              |       | 3        |       |
|           |       | Notes to unaudited Financial Statements                                                                                                                                       |       | 4        |       |
| 2.             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                                   |       | 11       |       |
| 3.             |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                                   |       | 19       |       |
| 4.             |       | Controls and Procedures                                                                                                                                                       |       | 19       |       |
|           |       |                                                                                                                                                                          |       |     |       |
|           | ** ** | **PART  II—OTHER INFORMATION**                                                                                                                                           |       |     |       |
|           | ** ** | ** **                                                                                                                                                                    |       |     |       |
| 1.             |       | Legal  Proceedings                                                                                                                                                            |       | 20       |       |
| 1A.            |       | Risk  Factors                                                                                                                                                                 |       | 20       |       |
| 6.             |       | Exhibits  and Reports on Form 8-K                                                                                                                                        |       | 20       |       |
|           |       |                                                                                                                                                                          |       |     |       |
| Signatures     |       | 21                                                                                                                                                                            |       |
|           |       |                                                                                                                                                                          |       |
| Exhibit  Index |       | 22                                                                                                                                                                            |       |

 

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** **

**CAUTIONARYSTATEMENT**

*Except for thehistorical financial information contained herein, the matters discussed inthis report on Form 10-Q (as well as documents incorporated herein byreference) may be considered forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Suchforward-looking statements are based upon current expectations that involverisks and uncertainties and include declarations regarding the intent, beliefor current expectations of us and our management and may be signified by the words“believes,” “anticipates,” “plan,” “expects,” “intends” and similarexpressions. Our actual results and the timing of certain events may differsignificantly from the results discussed in the forward-looking statements. Allforward-looking statements in this document are based on information availableto us as of the date hereof, and we assume no obligation to update any suchforward-looking statements, whether as a result of new information, futureevents, or otherwise. All discussion in this report should be read inconjunction with our financial statements and the accompanying notes containedin this report.*

*References in thisForm 10-Q to the “Authority” and the “Tribe” are to the River RockEntertainment Authority and the Dry Creek Rancheria Band of Pomo Indians,respectively. The terms “we,” “us” and “our” refer to the Authority.*

*Our key risks aredescribed in our annual report on Form 10-K filed with the Securities andExchange Commission.*

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**PART I. FINANCIALINFORMATION**

**ITEM 1. FINANCIALSTATEMENTS (UNAUDITED )**

**RIVER ROCKENTERTAINMENT AUTHORITY(A Governmental Instrumentality of the Dry Creek Rancheria Band of PomoIndians)**

**BALANCE SHEETS(Unaudited )**
| ** **                                      | ** ** | **June 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| **ASSETS**                                      |       |                        |        |                            |       |
| ** **                                      |       |                        |        |                            |       |
| CURRENT ASSETS:                                 |       |                        |        |                            |       |
| Cash and cash  equivalents                      |       | $                           | 21,943,508  |                            | $          | 17,649,658 |   |
| Restricted cash-current                         |       | 466,517                     |        | 666,517                         |       |
| Accounts receivable                             |       | 165,392                     |        | 93,252                          |       |
| Inventories                                     |       | 153,095                     |        | 159,434                         |       |
| Prepaid expenses and  other current assets      |       | 1,222,524                   |        | 1,427,906                       |       |
|                                            |       |                        |        |                            |       |
| Total current assets                            |       | 23,951,036                  |        | 19,996,767                      |       |
|                                            |       |                        |        |                            |       |
| RESTRICTED CASH—Net of  Current            |       | 6,737,963                   |        | 6,706,964                       |       |
|                                            |       |                        |        |                            |       |
| PROPERTY AND EQUIPMENT :                        |       |                        |        |                            |       |
| Buildings and building  improvements            |       | 129,179,774                 |        | 128,858,771                     |       |
| Furniture, fixtures and  equipment              |       | 26,711,342                  |        | 26,015,944                      |       |
|                                            |       | 155,891,116                 |        | 154,874,715                     |       |
| Accumulated  depreciation                       |       | (27,412,578                 | )           | (21,801,767                     | )          |
| Construction in  progress                       |       | 3,563,265                   |        | 1,819,271                       |       |
|                                            |       |                        |        |                            |       |
| Property and equipment—net                 |       | 132,041,803                 |        | 134,892,219                     |       |
|                                            |       |                        |        |                            |       |
| DEPOSITS AND OTHER  ASSETS                      |       | 5,493,405                   |        | 6,081,955                       |       |
|                                            |       |                        |        |                            |       |
| TOTAL ASSETS                                    |       | $                           | 168,224,207 |                            | $          | 167,677,905 |   |
|                                            |       |                        |        |                            |       |
| **LIABILITIES AND FUND DEFICIT**                |       |                        |        |                            |       |
|                                            |       |                        |        |                            |       |
| CURRENT LIABILITIES :                           |       |                        |        |                            |       |
| Accounts payable :                              |       |                        |        |                            |       |
| Trade                                           |       | $                           | 1,607,306   |                            | $          | 2,178,031 |   |
| Construction                                    |       | 466,517                     |        | 1,114,618                       |       |
| Accrued liabilities                             |       | 6,687,779                   |        | 6,463,556                       |       |
| Current maturities of  long-term debt           |       | 123,855                     |        | 103,545                         |       |
|                                            |       |                        |        |                            |       |
| Total current  liabilities                      |       | 8,885,457                   |        | 9,859,750                       |       |
|                                            |       |                        |        |                            |       |
| Long-Term debt—net of  current maturities  |       | 198,525,121                 |        | 198,243,209                     |       |
|                                            |       |                        |        |                            |       |
| Total long-term  liabilities                    |       | 198,525,121                 |        | 198,243,209                     |       |
|                                            |       |                        |        |                            |       |
| FUND DEFICIT                                    |       |                        |        |                            |       |
| Invested in capital  assets-net of related debt |       | (66,607,173                 | )           | (63,454,535                     | )          |
| Restricted for capital  projects                |       | 7,204,480                   |        | 7,373,481                       |       |
| Unrestricted                                    |       | 20,216,322                  |        | 15,656,000                      |       |
|                                            |       |                        |        |                            |       |
| Total fund deficit                              |       | (39,186,371                 | )           | (40,425,054                     |       |
|                                            |       |                        |        |                            |       |
| TOTAL LIABILITIES AND FUND DEFICIT              |       | $                           | 168,224,207 |                            | $          | 167,677,905 |   |

 

The accompanying notes are an integral part of these unauditedfinancial statements.

1

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**RIVER ROCK ENTERTAINMENT AUTHORITY**

**(A GovernmentalInstrumentality of the Dry Creek Rancheria Band of Pomo Indians)**

**STATEMENTS OFREVENUES, EXPENSES AND CHANGES IN FUND DEFICIT (Unaudited)**

 
| ** **                                  | ** ** | **Three-Month Period Ended June 30,** | ** **  | **Six-Month Period Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                  | ** **  | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                   |       |                                                      |        |                                                    |       |   |   |   |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Casino                                      |       | $                                                         | 32,958,603  |                                                    | $          | 34,841,866 |   | $ | 66,095,028 |   | $ | 66,568,491 |   |
| Food, beverage &  retail                |       | 1,634,022                                                 |        | 1,838,121                                               |       | 3,237,232 |   | 3,404,361 |   |
| Other                                       |       | 144,882                                                   |        | 167,812                                                 |       | 297,737 |   | 349,132 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Gross revenues                              |       | 34,737,507                                                |        | 36,847,799                                              |       | 69,629,997 |   | 70,321,984 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Promotional allowances                      |       | (717,822                                                  | )           | (1,055,708                                              | )          | (1,634,122 | ) | (1,848,184 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Net revenues                                |       | 34,019,685                                                |        | 35,792,091                                              |       | 67,995,875 |   | 68,473,800 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| OPERATING EXPENSES:                         |       |                                                      |        |                                                    |       |   |   |   |   |
| Casino                                      |       | 5,518,357                                                 |        | 5,220,805                                               |       | 11,098,589 |   | 10,593,073 |   |
| Food, beverage  & retail                |       | 1,689,064                                                 |        | 1,617,370                                               |       | 3,278,954 |   | 3,063,980 |   |
| Selling, general  and administrative        |       | 11,797,946                                                |        | 13,623,298                                              |       | 24,926,130 |   | 24,133,166 |   |
| Depreciation                                |       | 2,871,417                                                 |        | 2,757,551                                               |       | 5,731,950 |   | 5,391,509 |   |
| Credit  enhancement fee                     |       | 1,859,210                                                 |        | 1,856,802                                               |       | 3,461,627 |   | 3,799,651 |   |
| Gaming  commission and surveillance expense |       | 725,991                                                   |        | 355,843                                                 |       | 1,448,732 |   | 892,456 |   |
| Compact revenue  sharing trust fund         |       | 333,750                                                   |        | 333,750                                                 |       | 667,500 |   | 667,500 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Total Operating  expenses                   |       | 24,795,735                                                |        | 25,765,419                                              |       | 50,613,482 |   | 48,541,335 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| INCOME FROM OPERATIONS                      |       | 9,223,950                                                 |        | 10,026,672                                              |       | 17,382,393 |   | 19,932,465 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| OTHER EXPENSE-Net                           |       |                                                      |        |                                                    |       |   |   |   |   |
| Interest expense                            |       | (5,220,851                                                | )           | (5,245,338                                              | )          | (10,445,483 | ) | (10,592,137 | ) |
| Interest income                             |       | 211,474                                                   |        | 51,530                                                  |       | 402,978 |   | 91,954 |   |
| Loss on sale of  assets                     |       | (37,709                                                   | )           | —                                                  |       | (41,093 | ) | (33,977 | ) |
| Other income  (expense)—net            |       | (125                                                      | )           | (508                                                    | )          | (112 | ) | (949 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| Other expense—net                      |       | (5,047,211                                                | )           | (5,194,316                                              | )          | (10,083,710 | ) | (10,535,109 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| INCOME BEFORE  DISTRIBUTIONS TO TRIBE       |       | 4,176,739                                                 |        | 4,832,356                                               |       | 7,298,683 |   | 9,397,356 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| DISTRIBUTIONS TO TRIBE                      |       | (3,060,000                                                | )           | (3,000,000                                              | )          | (6,060,000 | ) | (5,180,000 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| NET INCOME AFTER  DISTRIBUTIONS TO TRIBE    |       | 1,116,739                                                 |        | 1,832,356                                               |       | 1,238,683 |   | 4,217,356 |   |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| FUND DEFICIT—Beginning  of period      |       | (40,303,110                                               | )           | (45,136,242                                             | )          | (40,425,054 | ) | (47,521,242 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |
| FUND DEFICIT—End of  period            |       | $                                                         | (39,186,371 | )                                                       | $          | (43,303,886 | ) | $ | (39,186,371 | ) | $ | (43,303,886 | ) |
|                                        |       |                                                      |        |                                                    |       |   |   |   |   |

 

The accompanying notes are an integral part of theseunaudited financial statements. 

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**RIVER ROCKENTERTAINMENT AUTHORITY(A Governmental Instrumentality of the Dry Creek Rancheria Bandof Pomo Indians)**

**STATEMENTS OF CASHFLOWS**(Unaudited ) 
| ** **                                                                                             | ** ** | ** **                                                          | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                             | ** ** | ** **                                                          | ** ** | ** **  | ** ** |
| ** **                                                                                             | ** ** | **Six -Month Period Ended June 30 ,** | ** ** |
| ** **                                                                                             | ** ** | **2006**                                                            | ** ** | **2005**    | ** ** |
| **CASH FLOWS  FROM OPERATING ACTIVITIES:**                                                             | ** ** | ** **                                                          | ** ** | ** **  | ** ** |
| Cash received from gaming winnings and concessions                                                     |       | $                                                                   | 68,810,355 |        | $          | 68,485,416 |   |
| Cash paid for salaries and benefits                                                                    |       | (14,139,101                                                         | )          | (14,887,467 | )          |
| Cash paid to suppliers                                                                                 |       | (27,700,256                                                         | )          | (24,549,658 | )          |
| Cash paid for compact revenue sharing trust fund                                                       |       | (667,500                                                            | )          | (667,500    | )          |
|                                                                                                   |       |                                                                |       |        |       |
| Net cash provided by operating activities                                                              |       | 26,303,498                                                          |       | 28,380,791  |       |
|                                                                                                   |       |                                                                |       |        |       |
| CASH FLOWS FROM  CAPITAL AND RELATED FINANCING ACTIVITIES:                                             |       |                                                                |       |        |       |
| Proceeds from long-term financing                                                                      |       | 156,747                                                             |       |        |       |
| Payments of long-term debt                                                                             |       | —                                                              |       | (10,269,712 | )          |
| Purchases of property and equipment                                                                    |       | (2,928,227                                                          | )          | (15,715,958 | )          |
| Change in restricted cash                                                                              |       | 169,001                                                             |       | 8,820,038   |       |
| Interest paid                                                                                          |       | (9,766,011                                                          | )          | (9,987,668  | )          |
| Credit enhancement fee                                                                                 |       | (3,664,461                                                          | )          | (3,762,668  | )          |
| Proceeds from sale of assets                                                                           |       | 5,600                                                               |       | 2,000       |       |
| Other                                                                                                  |       | 77,703                                                              |       | 37,645      |       |
|                                                                                                   |       |                                                                |       |        |       |
| Net cash used in capital and related financing  activities                                             |       | (15,949,648                                                         | )          | (30,876,323 | )          |
|                                                                                                   |       |                                                                |       |        |       |
| CASH FLOW FROM  NON-CAPITAL FINANCING ACTIVITIES                                                       |       |                                                                |       |        |       |
| Distributions to the Tribe                                                                             |       | (6,060,000                                                          | )          | (5,180,000  | )          |
|                                                                                                   |       |                                                                |       |        |       |
| CHANGE IN CASH  AND CASH EQUIVALENTS                                                                   |       | 4,293,850                                                           |       | (7,675,532  | )          |
|                                                                                                   |       |                                                                |       |        |       |
| CASH AND CASH  EQUIVALENTS, Beginning of the period                                                    |       | 17,649,658                                                          |       | 18,618,826  |       |
|                                                                                                   |       |                                                                |       |        |       |
| CASH AND CASH  EQUIVALENTS, End of the period                                                          |       | $                                                                   | 21,943,508 |        | $          | 10,943,294 |   |
|                                                                                                   |       |                                                                |       |        |       |
| RECONCILIATION  OF INCOME BEFORE DISTRIBUTIONS TO TRIBE TO NET CASH PROVIDED BY OPERATING  ACTIVITIES: |       |                                                                |       |        |       |
| Income before  Distributions to Tribe                                                                  |       | $                                                                   | 7,298,683  |        | $          | 9,397,356 |   |
|                                                                                                   |       |                                                                |       |        |       |
| Adjustments to  reconcile operating income to net cash                                                 |       |                                                                |       |        |       |
| provided by operating activities:                                                                      |       |                                                                |       |        |       |
| Depreciation                                                                                           |       | 5,731,950                                                           |       | 5,391,509   |       |
| Interest expense                                                                                       |       | 10,445,483                                                          |       | 10,592,137  |       |
| Credit enhancement fee                                                                                 |       | 3,461,627                                                           |       | 3,799,651   |       |
| Loss on sale of assets                                                                                 |       | 41,093                                                              |       | 33,977      |       |
| Changes in operating assets and liabilities:                                                           |       |                                                                |       |        |       |
| Accounts receivable                                                                                    |       | (72,140                                                             | )          | 11,616      |       |
| Inventories                                                                                            |       | 6,339                                                               |       | (87,341     | )          |
| Prepaid expenses and other current assets                                                              |       | 205,382                                                             |       | (247,745    | )          |
| Accounts payable                                                                                       |       | (1,218,900                                                          | )          | (227,803    | )          |
| Accrued liabilities                                                                                    |       | 403,981                                                             |       | (282,566    | )          |
| Total adjustments                                                                                      |       | 19,004,815                                                          |       | 18,983,435  |       |
|                                                                                                   |       |                                                                |       |        |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                                             |       | $                                                                   | 26,303,498 |        | $          | 28,380,791 |   |
|                                                                                                   |       |                                                                |       |        |       |
| SUPPLEMENTARY  SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES:                           |       |                                                                |       |        |       |
| Acquisition of  property and equipment through third party financing                                   |       | $                                                                   | —     |        | $          | 29,256 |   |
| Acquisition of property  and equipment through accounts payable construction                           |       | —                                                              |       | 450,720     |       |

 

The accompanying notes are an integral part of theseunaudited financial statements. 

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**RIVER ROCKENTERTAINMENT AUTHORITY (A Governmental Instrumentality of the Dry Creek Rancheria Band of PomoIndians)**

**NOTES TO UNAUDITEDFINANCIAL STATEMENTS**

**1.**           DESCRIPTION OF BUSINESS

RiverRock Entertainment Authority (the “Authority”) is a governmental instrumentalityof the Dry Creek Rancheria Band of Pomo Indians (the “Tribe”), a federallyrecognized Indian tribe. River Rock Casino (the “Casino”) is a governmentaldevelopment project of the Authority. The Casino offers Class III gaming (asdefined by the Indian Gaming Regulatory Act) on tribal land located inGeyserville, California. The legal authority for slot machines and table gamesis provided by the Tribe’s gaming compact with the State of California (the “Compact”),which was entered into in September 1999 and became effective upon approval bythe Secretary of Interior on May 5, 2000. The Compact expires on December 31, 2020.

TheTribe opened a portion of the Casino on September 14, 2002. Followingcompletion of construction, the Casino was fully opened on April 1, 2003.

TheAuthority was formed as an unincorporated instrumentality of the Tribe onNovember 5, 2003 pursuant to a reorganization whereby the Tribe’s gamingbusiness became owned and operated by the Authority. This reorganization was accountedfor as a reorganization of entities under common control. Accordingly, afterthe reorganization, the assets and liabilities of the Casino’s operatingproperty were presented by the Authority on a historical-cost basis.

TheAuthority operates as a separate, wholly owned operating unit of the Tribe andis not a separate legal entity. These financial statements reflect thefinancial position and activity of only the Authority and do not purport torepresent the financial position and activity of the Tribe.

Incomebefore distributions to the Tribe was $4,176,738 and $4,832,356 for the threemonths ended June 30, 2006 and 2005, respectively.   A fund deficit of $39,186,371 exists as ofJune 30, 2006.   Income beforedistributions to the Tribe was $7,298,683 and $9,397,356 for the six monthsended June 30, 2006 and 2005, respectively. The Authority’s current assets exceeded its current liabilities by$15,065,579 as of June 30, 2006. On November 7, 2003, the Authority issued$200.0 million in its 93⁄4% Senior Notes, due 2011 (the “Notes”), and used aportion of the proceeds to reduce its current payables, accruals and debt. TheAuthority’s ability to fund future debt service payments is dependent upon thesuccess of the Casino. Management believes that the Casino will attractsufficient patronage levels to continue to provide sufficient cash flows and torepay its indebtedness. The Authority reached its substantial completion of theconstruction of the enhanced parking structure on December 29, 2004.

**2.**                        SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

*Accounting Standards*—The Authority prepares its financial statements in accordance withaccounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”). The financial statements presented areprepared on the accrual basis of accounting from the accounts and financialtransactions of the Authority. Generally accepted accounting principles requirethe Authority to apply all applicable pronouncements of the Governmental AccountingStandards Board (“GASB”). The Authority is also required to follow FinancialAccounting Standards Board (“FASB”) Statements and Interpretations, AccountingPrinciples Board Opinions and Accounting Research Bulletins issued on or beforeNovember 30, 1989, unless those pronouncements conflict with or contradict GASBpronouncements.  The Authority is giventhe option whether to apply all FASB Statements and Interpretations issuedafter November 30, 1989, except for those that conflict with or contradict GASBpronouncements. Accordingly, the Authority has elected to implement nonconflicting FASB Statements and Interpretations issued after November 30, 1989.

Thereare differences between financial statements prepared in accordance with GASBpronouncements and those prepared in accordance with FASB pronouncements. Thestatements of revenues, expenses and changes in fund deficit is a combinedstatement under GASB pronouncements, FASB pronouncements allow a statement ofincome or operations and a separate statement of owners’ or shareholders’(deficit) equity, which is where distributions to owners would be presentedunder FASB pronouncements.  The amountshown as income before distributions to Tribe would not be different if theAuthority followed all FASB pronouncements to determine net income and would bethe most comparable amount to net income computed under FASB pronouncements.The Authority is a separate fund of the Tribe, a governmental entity, and assuch there is no owners’ or shareholders’ 

4

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(deficit) equity astraditionally represented under FASB pronouncements.  The most comparable measure of owners’(deficit) equity is presented on the Authority’s balance sheet as fund(deficit) equity.

*New Accounting Pronouncements*—In March 2003, GASB issued Statement No. 40, *Deposit andInvestment Risk Disclosures***—an amendment of GASB Statement No. 3**,which became effective for the Authority at January 1, 2005. This statementrequires state and local governments to communicate key information aboutdeposit and investment risks. The adoption of this statement did not have amaterial impact on the financial statements of the Authority.

InNovember 2003, GASB issued Statement No. 42, *Accountingand Financial Reporting for Impairment of Capital Assets and for InsuranceRecoveries*, effective for periods beginning after December 15, 2004.This statement establishes accounting and financial reporting standards forimpairment of capital assets. This statement also clarifies and establishesaccounting requirements for insurance recoveries. The adoption of thisstatement did not have a material impact on the financial statements of theAuthority.

*Use of Estimates*—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

*Cash and Cash Equivalents*—The Authority considers all highly liquid investments with a maturityof three months or less at date of purchase as cash equivalents. The carryingamount of cash and cash equivalents approximates its fair value. Cash and cashequivalents include cash on hand, cash on deposit with banks and highly liquidinvestments.  The Federal DepositInsurance Corporation (“FDIC”) has insured $100,000 of the cash on deposit withthe banks. The Authority believes that there is little risk of loss regardingthe uninsured amounts of cash and cash equivalents on deposit with the banks.

*Inventories*—Inventories,consisting principally of gaming supplies and concession items, are stated atthe lower of cost (first-in, first-out) or market.

*Restricted Cash*—Restrictedcash consists of estimated construction expenses for three parking structures,related infrastructure improvements and construction contingencies. It alsoincludes funds that are reserved for additional construction contingencies andthe funds necessary to develop an approximately 18-acre parcel of land adjacentto the Tribe’s reservation. These funds are held in escrow accounts which arerestricted for authorized construction disbursements. These escrow accounts areinvested in CD markets, which generate interest on a monthly basis. The FDIChas insured $100,000 of this balance. The Authority believes that there islittle risk of loss regarding the uninsured amounts of restricted cash held inthe escrow account. Restricted cash was $7,204,480 and $7,373,481 at June 30,2006 and December 31, 2005, respectively. As of June 30, 2006, restricted cash includes amounts available forconstruction of $2,702,238 and land development funds of $4,502,242.

*Deposits and Other Assets*—As of June 30, 2006 and December 31, 2005, deposits and other assetsinclude $5,451,379 and $5,962,226 in unamortized bond spread, legal fees andother issuance costs related to the issuance of the Notes, $0 and $78,618 ofequipment deposits, $5,115 and $4,200 of performance deposits and $36,911 and$36,911 of rental deposits.  Deferredloan costs are amortized using the effective interest method to interestexpense over the term of the related financial arrangement.

*Casino Revenues*—Inaccordance with industry practice, the Authority recognizes as casino revenuethe net win from gaming activities, which is the difference between gaming winsand losses. Casino revenues are net of accruals for anticipated payouts ofprogressive slot jackpots.

*Food, Beverage and Retail*—The Authority recognizes as food, beverage and retail revenues theproceeds from its food, beverage and gift shop sales. The Authority continuesto distribute beverages freely in the gaming area for playing guests.

*Other Revenues*—Otherrevenues are comprised of commissions on ATM and vending machine transactions.

*Promotional Allowances*—The retail value of food and beverages provided to playing customerswithout charge is included in gross revenues and then deducted as promotionalallowances. The redemption of cash incentives earned by the Players Club membersis also recorded as promotional allowances. The estimated costs of providing complimentary services are recorded ascasino expenses.  The costs of suchservices were $717,822 and 

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$1,055,708 for the threemonths ended June 30, 2006 and 2005, respectively.  The costs of such services were $1,634,122and $1,848,184 for the six months ended June 30, 2006 and 2005, respectively.

*Food and Beverage Costs*—Food and beverage costs include costs associated with food andbeverage, excluding amounts classified as casino expenses.

*Advertising Costs*—Advertising costs are expensed the first time advertising takes place.Advertising costs included in selling, general and administrative expenses were$1,191,438 and $2,687,294 for the three months ended June 30, 2006 and 2005,respectively.  Advertising costs for thesix months ended June 30, 2006 and 2005, respectively, were $3,423,414 and$3,768,738, respectively.

*Gaming Commission & surveillance expenses*—The Authority pays for various expenses forthe Tribal Gaming Commission and surveillance. Tribal Gaming Commission expenses were reported as Gaming Commissionexpenses and surveillance costs were reported in selling, general andadministrative expenses on the Statement of Revenues, Expenses and Change inFund Balance prior to July 1, 2005. Effective July 1, 2005, the TribalGaming Commission adopted a regulation on payments of regulatory fees from theAuthority.  For fiscal year 2006, TribalGaming Commission and surveillance expenses are being recorded in GamingCommission and surveillance expenses on the Statement of Revenues, Expenses andChanges in Fund Balance.  GamingCommission and surveillance expenses for the three months ended June 30, 2006and 2005 were $725,991 and $670,500, respectively.  Gaming Commission and surveillance expensesfor the six months ended June 30, 2006 and 2005 were $1,448,732 and $1,368,150.Surveillance costs are included in the above amounts for the three and sixmonths ended June 30, 2006 and 2005 were $314,657 and $475,694, respectively.

*Income Taxes*—Asa governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians,a federally recognized Indian tribe, the Authority is a nontaxable entity forpurposes of federal and state income taxes.

*Distributions to Tribe*—Distributions to Tribe are made up of a stated draw amount andpermitted payments.  They are included inthe Statement of Revenues, Expenses and Changes in Fund Deficit asdistributions to Tribe. Permitted payments increased by $20,000 from $1,000,000to $1,020,000 per month for the three months ended June 30, 2006.  In 2005, the Tribal draw was $1,000,000 permonth for the three months ended June 30, 2005. Total distributions to the Tribe for the three months ended June 30,2006 and 2005 were $3,060,000 and $3,000,000, respectively.   Total distributions to the Tribe for the sixmonths ended June 30, 2006 and 2005 were $6,060,000 and $4,500,000,respectively, plus in 2005, another $680,000 in distributions as part ofreimbursements for construction costs incurred by the Tribe prior to the formationof the Authority.  As of June 30, 2006,the remaining balance to be reimbursed to the Tribe for construction costsincurred before the formation of the Authority was $1,960,000.

**3.**           CERTAIN RISKS AND UNCERTAINTIES

TheAuthority’s operations are dependent on the continued licensing andqualification of the Authority by the Tribal Gaming Commission. Such licensingand qualification are reviewed periodically by the Tribal Gaming Commission andregulatory agencies of the State of California. The Authority believes that noevents or circumstances have arisen that would have an adverse effect on theCasino’s ability to continue its licensing and qualification by the TribalGaming Commission or regulatory agencies of the State of California to operatethe Authority.

**4.**                        RELATEDPARTIES

TheAuthority has been constructed on federal land beneficially owned by the Tribe.The Authority does not pay the Tribe for the use of the land.

StartingJanuary 1, 2004, the Authority paid for various expenses for the followingdepartments operated by the Tribe: Tribal Gaming Commission, surveillance,plant operations, human resources, purchasing and warehousing.  On January 1, 2005, the Authority started tooperate purchasing and warehousing but continued to pay for expenses for theother departments operated by the Tribe. These departmental expenses include but are not limited to payroll andrelated expenses, legal and other operational expenses.  Under direction of the River RockEntertainment Authority Board and the Tribal Council, the Tribe assumedresponsibility of the Purchasing and Warehousing departments on May 8,2006.  The expenses associated with thePurchasing and Warehouse 

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departments incurred by theTribe are included in these amounts and will be reimbursed to the Tribe by theAuthority as with other Tribal departments.

Totalamounts billed by the Tribe for these departments, excluding Tribal GamingCommission and surveillance, were $693,575 and $554,040 for the three monthsended June 30, 2006 and 2005, respectively. They are recorded as a component ofselling, general and administrative expenses. Total amounts billed by the Tribefor these departments were $1,291,749 and $1,078,880 for the six months endedJune 30, 2006 and 2005, respectively.

 The Authority paid for various expenses forthe Tribal Gaming Commission and surveillance in 2006 and 2005.  Prior to July 1, 2005, Tribal GamingCommission expenses were reported as Gaming Commission expenses andsurveillance costs were reported in selling, general and administrativeexpenses on the Statement of Revenues, Expenses and Change in Fund Balance priorto July 1, 2005. Effective July 1, 2005, the Tribal Gaming Commissionadopted a regulation on payments of regulatory fees from the Authority.  Gaming Commission and surveillance expensesfor the three months ended June 30, 2006 and 2005 were $725,991 and $670,500,respectively.  Gaming Commission andsurveillance expenses for the six months ended June 30, 2006 and 2005 were$1,448,732 and $1,368,150, respectively.  Surveillance costs included in the above amounts for the three and sixmonths ended June 30, 2006 and 2005 were $314,657 and $475,694, respectively,and were previously recorded in selling, general and administrative expense.

**5.**                        DEVELOPMENTAND LOAN AGREEMENT

TheTribe entered into a Development and Loan Agreement with Dry Creek Casino, LLC(“DCC”) on August 26, 2001, which has been amended from time to time(as amended, the “Development Agreement”). In consideration of DCC providingcredit enhancement and other services under the Development Agreement, theTribe is obligated to pay DCC the Credit Enhancement Fee. The CreditEnhancement Fee is defined as 20% of the Authority’s net income beforedistributions to the Tribe plus depreciation and amortization plus annualinterest on $25.0 million principal amount of the Notes less revenues fromsales of alcoholic beverages. The Credit Enhancement Fee is required to be paidmonthly for a period of five years commencing on June 1, 2003. The CreditEnhancement Fee was $1,859,210 and $1,856,802 for the three months ended June30, 2006 and 2005, respectively.  TheCredit Enhancement Fee was $3,461,627 and $3,799,651 for the six months endedJune 30, 2006 and 2005, respectively.

TheAuthority has the right to terminate the Development Agreement by exercising abuy-out option (the “Buy-Out Option”). If exercised, the Authority is obligatedto pay all amounts outstanding with respect to financing, including outstandingdevelopment advances and accrued interest plus an amount determined bymultiplying the average monthly credit enhancement fee earned during the12-month period immediately preceding the month the buy-out option isexercised, by the number of months remaining in the five-year term. The buy-outfee is required to be paid in equal monthly installments of principal plusinterest at the rate of 12% per annum, on the 15th day of each month over aperiod equal to the remaining term of the Development Agreement.

**6.**                        CASH ANDCASH EQUIVALENTS AND RESTRICTED CASH

Cash and cash equivalentsand restricted cash consisted of the following as of June 30, 2006 and December31, 2005:
| ** **                                           | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Operating  accounts                                  |       | $                           | 6,773,618  |                            | $          | 5,241,644 |   |
| Money market  accounts                               |       | 37,671                      |       | 62,420                          |       |
| Short-term  investments                              |       | 11,788,466                  |       | 8,988,622                       |       |
| Cash on hand                                         |       | 3,343,753                   |       | 3,356,972                       |       |
|                                                 |       |                        |       |                            |       |
| Cash and cash  equivalents                           |       | 21,943,508                  |       | 17,649,658                      |       |
| Restricted cash                                      |       | 7,204,480                   |       | 7,373,481                       |       |
|                                                 |       |                        |       |                            |       |
| Total cash and cash  equivalents and restricted cash |       | $                           | 29,147,988 |                            | $          | 25,023,139 |   |

 

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The Authority’s cash inbanks and cash equivalents (the “Investments”) are categorized by level ofcredit risk assumed by the Authority. Category 1 includes investments thatare insured or registered or for which the investments are held by theAuthority or its agent in the Authority’s name. Category 2 includesuninsured and unregistered investments for which the investments are held bythe counterparty’s trust department or agent in the Authority’s name.Category 3 includes uninsured and unregistered investments for which theinvestments are held by the counterparty’s agent but not in the Authority’sname. At June 30, 2006, the Authority had $200,000 in Category 1investments, $6,573,618 cash in banks, $37,671 in money market accounts and$11,788,466 in short-term investments, which are Category 2 investments, and$7,204,480 restricted cash in bank over the FDIC insurance limits, which areCategory 3 investments.  Amounts inCategory 2 and Category 3 investments are invested in short-term, highly liquidcash equivalents and investments.  As ofJune 30, 2006 and December 31, 2005, these amounts are composed of money marketaccounts in the amount of $37,671 and $62,420, respectively, and A1/P1 bonds inthe amount of $11,788,466 and $8,988,622, respectively.

**7.**           PROPERTY AND EQUIPMENT

Property and equipment at January 1, 2006 and June 30, 2006 consistedof the following:
| ** **                         | ** ** | **Balance,**        | ** **  | ** **    | ** ** | ** **       | ** ** | **Balance,**      | ** ** |
|------------------------------------|------------|---------------------|-------------|---------------|------------|------------------|------------|-------------------|------------|
| ** **                         | ** ** | **January 1,** | ** **  | ** **    | ** ** | ** **       | ** ** | **June 30,** | ** ** |
| ** **                         | ** ** | **2006**            | ** **  | **Additions** | ** ** | **Dispositions** | ** ** | **2006**          | ** ** |
|                               |       |                |        |          |       |             |       |              |       |
| Buildings and improvements         |       | $                   | 128,858,771 |          | $          | 321,002          |       | $                 | —     |   | $ | 129,179,773 |   |
| Furniture,  fixtures and equipment |       | 26,015,944          |        | 871,984       |       | (169,858         | )          | 26,718,070        |       |
| Less accumulated  depreciation     |       | (21,801,767         | )           | (5,731,976    | )          | 121,165          |       | (27,412,578       | )          |
|                               |       | 133,072,948         |        | (4,538,990    | )          | (48,693          | )          | 128,485,265       |       |
|                               |       |                |        |          |       |             |       |              |       |
| Construction in progress           |       | 1,819,271           |        | 1,737,267     |       | —           |       | 3,556,538         |       |
|                               |       |                |        |          |       |             |       |              |       |
| Property and equipment—net    |       | $                   | 134,892,219 |          | $          | (2,801,723       | )          | $                 | (48,693    | ) | $ | 132,041,803 |   |

 

Construction in progressconsists of payments to various vendors related to the Authority’s master plandevelopment and land improvements. Substantially all of the Authority’spersonal property is pledged as collateral to secure its debt.  At June 30, 2006 and 2005, the Authority had$279,022 and $670,000 in capital lease assets with related accumulateddepreciation of $81,776 and $111,667, respectively.

**8.**                        ACCRUEDLIABILITIES

Accruedliabilities consisted of the following as of June 30, 2006 and December 31,2005:

|                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                        |       |              |       |                  |       |
| Accrued in-house  progressive slot jackpots |       | $                 | 688,922    |                  | $          | 495,588 |   |
| Accrued payroll  and related benefits       |       | 2,098,653         |       | 1,677,290             |       |
| Accrued interest                            |       | 3,250,000         |       | 3,250,000             |       |
| Accrued credit  enhancement fees            |       | 482,825           |       | 685,659               |       |
| Accrued other  expenses                     |       | 167,379           |       | 355,019               |       |
| Total accrued  liabilities                  |       | $                 | 6,687,779  |                  | $          | 6,463,556 |   |

 

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**9.**                           LONG-TERM DEBT

Long-term debt consisted of the following as of June 30, 2006 andDecember 31, 2005:
| ** **                                              | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                              | ** ** | **2006**          | ** **  | **2005**              | ** ** |
|                                                    |       |              |        |                  |       |
| 9 3/4% Senior Notes,  net of unamortized issue discount |       | $                 | 198,201,336 |                  | $          | 198,032,711 |   |
| of $1,798,664 and  $1,967,289 due 2011                  |       |              |        |                  |       |
| Vehicle and Slot Notes                                  |       | 168,618           |        | 51,937                |       |
| Capital lease  obligations                              |       | 279,022           |        | 262,106               |       |
| Total Long-Term Debt                                    |       | 198,648,976       |        | 198,346,754           |       |
| Less: current portion                                   |       | (123,855          | )           | (103,545              | )          |
| Total long-term debt - net of current maturities        |       | $                 | 198,525,121 |                  | $          | 198,243,209 |   |

 

OnNovember 7, 2003, the Authority issued the Notes. The proceeds were utilized tofund an expansion project, which includes three parking structures and relatedinfrastructure improvements, repayment of various debt and advances and fundpayment of various accruals and payables, as well as to increase cash on hand.The proceeds were also utilized to fund a land purchase and settlelitigation.  The Notes are secured by afirst priority pledge of the Authority’s revenue and substantially all of theexisting and future tangible and intangible personal property. Before November1, 2007, the Authority may redeem the Notes, in whole or in part, at aredemption price equal to 100% of their principal amount plus a make-whole premiumand accrued and unpaid interest. On or after November 1, 2007, the Authoritymay redeem the Notes, in whole or in part, at a redemption price that is at apremium to the principal amount of the Notes (expressed as percentages ofprincipal amount), plus accrued and unpaid interest.

**10.**                    LEASES

TheAuthority leases a Sprung structure, which is accounted for as an operatinglease. Such lease expense was $108,690 and $127,869 for the three months endedJune 30, 2006 and 2005, respectively.  This lease expense was $237,910 and $279,112 for the six months endedJune 30, 2006 and 2005, respectively. The Authority renewed the lease agreement on August 17, 2005 for twentyfour months ending August 17, 2007.

OnOctober 1, 2003, the Tribe entered into a five year operating leaseagreement for office and warehouse space to replace existing facilities.  The Authority uses a portion of the space andreimburses the Tribe lease fees allocated based on the square footage utilized.  The Authority reimbursed the Tribe for suchlease fees in the amount of $128,718 and $131,753 for the three months endedJune 30, 2006 and 2005, respectively, and $256,681 and $263,507 for the sixmonths ended June 30, 2006 and 2005, respectively.

OnSeptember 1, 2004, the Authority entered into a five year capital lease topurchase two licenses to operate three-card poker tables in the amount of$120,000.  The capital lease is at 7.25%interest with monthly lease fees of $2,390 and a $1 buyout at the end of thelease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 13 Multi-deck shufflers in the amount of $88,307.  The capital lease is at 7.09% interest withmonthly lease fees of $2,730 and a $1 buyout at the end of the lease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 6 King shufflers in the amount of $61,422.  The capital lease is at 7.09% interest withmonthly lease fees of $1,899 and a $1 buyout at the end of the lease term.

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OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 4 Ace shufflers in the amount of $45,283.  The capital lease is at 7.09% interest withmonthly lease fees of $1,400 and a $1 buyout at the end of the lease term.

OnApril 27, 2006 the Authority entered into a thirty six month capital lease topurchase 5 Deckmate shufflers in the amount of $67,828.  The capital lease is at 7.92% interest withmonthly lease fees of $2,387 and a $1 buyout at the end of the lease term.

Leaseexpenses were $251,620 and $266,576 for the three months ended June 30, 2006and 2005, respectively, and $499,186 and $532,813 for the six months ended June30, 2006 and 2005, respectively.  Leaseexpenses are included in general and administrative expenses in the accompanyingstatement of revenues, expenses and changes in fund deficit.

Expectedremaining payments under operating leases are $231,057, $267,666, $7,215,$2,910 and $1,213 for the years ending December 31, 2006, 2007, 2008, 2009 and2010, respectively. Expected remaining payments under capital leases are$52,873, $111,141, $88,762, $26,246 and $0 for the years ending December 31,2006, 2007, 2008, 2009 and 2010, respectively.

**11.****                    LEGAL MATTERS**

*SonomaCounty Fire Marshal Inspection Case*

OnOctober 7, 2002, the Sonoma County Fire Chief (the “County Fire Chief”) filedan *ex parte* application for aninspection warrant in the Superior Court of the State of California for theCounty of Sonoma, seeking to inspect the casino. The Tribe believes that thereis no basis for the County’s Fire Chief to assert jurisdiction over the Tribe’slands, which are governed by tribal and federal law and the Compact. On October9, 2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand, whichsuch motion was denied by the court and subsequently moved for summaryjudgment. The Tribe moved to dismiss under Federal Rules of Civil procedure12(b)(6) and 12(b)(7). On December 9, 2004, the Court issued an order grantingin part and denying in part the Tribe’s 12(b)(6) motion and denying the CountyFire Chief’s summary judgment motion. The order reaffirmed the Court’s priorruling denying the remand of that Public Law 280 does not authorize the CountyFire Chief to inspect the casino. On March 1, 2005, the Court issued an ordergranting in part and denying in part the Tribe’s 12(b)(7) motion. On March 4,2005, the Tribe moved for summary judgment, and on April 29, 2005, the Courtgranted the Tribe’s motion. The County Fire Chief filed a Notice of Appeal onMay 26, 2005, at the Ninth Circuit Court of Appeals. Briefing was completed atthe Ninth Circuit on November 8, 2005. The case has not yet been set for oralargument.

*California Department of Alcoholic Beverage Control*

OnSeptember 13, 2004, the Department of Alcoholic Beverage Control (“ABC”) deniedthe Tribe’s application for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, an Administrative LawJudge (“ALJ”) heard the Tribe’s appeal of the ABC’s denial and recommended thatthe ABC reverse itself and approve the license. On August 25, 2005, the ABCannounced effective October 11, 2005, it would adopt the ALJ decision toapprove the license transfer pending a hearing on protests filed by citizensand government officials. The ABC has received over 65 protests against thelicense from citizens and government officials. The ABC held a hearing on theprotests on March 9, 2006. Following the close of the hearing, a new Californiacourt decision, Coffin v. Alcoholic Beverage Control Appeals Board, 139 Cal.App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  The parties have until approximately August20, 2006, to inform the ALJ of their views in response to his tentativedecision to re-hear the protests.  Thedecision to approve or deny the license transfer application may be appealed byany parties to the proceeding so long as the appeal is filed within forty  days of the ABC’s decision. The first appealis to the ABC Appeals Board, and its decision may be appealed to the CaliforniaState court system.

Weare involved in other litigation and disputes from time to time in the ordinarycourse of business with vendors and patrons. We believe that the aggregateliability, if any, arising from such litigation or disputes will not have amaterial adverse effect on our results of operations, financial condition orcash flows.

**12.**                    COMPACT REVENUE SHARING TRUST FUND

TheCompact requires the Authority to pay a quarterly fee to the State ofCalifornia’s revenue sharing trust fund, based on the number of licensed gamingdevices operated by the Tribe. Revenue sharing trust fund fees 

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assessed were $333,750 forthe three months ended June 30, 2006 and 2005 and $667,500 for the six monthsended June 30, 2006 and 2005.

**13.****                   ****COMMITMENTS AND CONTINGENCIES**

TheAuthority is an unincorporated instrumentality of the Tribe formed pursuant toa law of the Tribe. While the Authority is not a separate corporation or otherlegal entity distinct from the Tribe, this tribal law allows the Authority toown and operate its business. This tribal law also provides that the Authority’sobligations and other liabilities are not those of the Tribe and that theobligations and liabilities of the Tribe are not the Authority’s. This law isuntested and generally has no direct counterpart in other areas of the law. Ifthis law should prove to be ineffective at limiting the Authority’s liability,the Authority’s business and assets could become subject to claims assertedagainst the Tribe or its assets. Similarly, the Authority would be liable forsuch claims if the Tribe waived its sovereign immunity to an extent thatallowed enforcement of such claims against the Authority’s business or assets.

TheAuthority renewed an employment agreement with Mr. Norman Runyan on November 8,2005 to continue to serve as the Chief Operations Officer of the Authority.This three year employment agreement commenced on October 14, 2005 and providesMr. Runyan an annual salary of $250,000 and a discretionary bonus, asdetermined by the Tribal Board, of not less than 7% and not more than 25% ofhis annual salary based on various criteria. If Mr. Runyan’s employment is terminated for other reasons set forth inthe employment agreement including death or disability, Mr. Runyan will beentitled to his salary for three months. Either party may terminate the agreement with a 90 day written notice.

TheAuthority entered into an employment agreement with Mr. Shawn Smyth on April13, 2006 to serve as the Chief Executive Officer of the Authority. This threeyear employment agreement commenced as of April 13, 2006, and provides Mr.Smyth an annual salary of $250,000 and a discretionary bonus, as determined bythe Tribal Board, of not more than 25% of his annual salary based on variouscriteria.  If Mr. Smyth’s employment isterminated for other reasons set forth in the employment agreement includingdeath or disability, Mr. Smyth will be entitled to his salary for threemonths.  Either party may terminate theagreement with a 90 day written notice.

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

     Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying financialstatements and related notes included in Item 1 of this report.

**Overview**

          *General*

     Wehave historically operated as a separate wholly-owned operating property of theTribe. We were formed as an unincorporated governmental instrumentality of theTribe to own and operate the River Rock Casino. Upon the issuance of our Notes,the Tribe reorganized so that its gaming business became owned and operated byus. This reorganization was accounted for as a reorganization of entities undercommon control. In accordance with Statement of Financial Accounting Standards “141,Business Combinations,” the assets and liabilities of the Casino are presentedby us on a historical cost basis.

     Weoffer Class III slot and video poker gaming machines, house banked table games(including Blackjack, Three card poker, Mini-baccarat and Pai Gow poker),Poker, featuring Texas Hold’em, comprehensive food and non-alcoholic beverageofferings, and goods for sale in our gift shop.

     Ourbusiness has increased since we commenced operations on September 14, 2002,primarily due to increases in the number of gaming positions, as we openedadditional portions of our facility. On April 1, 2003, we opened our food andbeverage facilities and on June 18, 2003, we reached full operation with 1,600slot machines. The history of our operations is as follows:

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·                  On September 14,2002, we commenced operations with approximately 66 gaming devices located in aportion of our current gaming facility.

·                  Between September 14, 2002 and June30, 2003, we periodically installed and removed a number of our gaming devicesin preparation for the opening of our entire gaming facility. During suchperiod, the number of gaming devices operated increased to 242.

·                  On April 1,2003, we opened the remainder of our 62,000 square-foot gaming facility,including our food and beverage facilities, our Players Club, 16 table gamesand an additional 302 gaming devices.

·                  Between April 1,2003 and June 18, 2003, we gradually increased the number of gaming devicesfrom 544 to our current total of 1,600.

·                  In February2005, we increased the number of our table games from 16 to 24.

·                  On December 2,2005, we removed 3 table games and added 5 Poker tables featuring Texas Hold’em.

     Wecommenced operations with one parking lot located directly adjacent to ourgaming facility, designed to accommodate 225 customer vehicles or up toapproximately 325 customer vehicles when operated by a valet service duringpeak demand periods. On March 23, 2003, we completed the construction of oursecond parking lot, designed to accommodate 80 customer vehicles or up toapproximately 100 customer vehicles when operated by a valet service. On April20, 2003, we completed the construction of our third parking lot, designed toaccommodate 70 customer vehicles or up to approximately 75 customer vehicleswhen operated by a valet service.

     OnNovember 7, 2003, we issued the Notes. A portion of the net proceeds from thesale of the Notes was used to fund our expansion project, which includes threenew parking structures and related infrastructure improvements, to repayvarious debts and accrued expenses of the Tribe, as well as to increase ourcash on hand. The balance of the net proceeds was used to fund a land purchaseby the Tribe and settle litigation of the Tribe. The Notes are secured by afirst priority pledge of our revenues and substantially all of our existing andfuture tangible and intangible personal property.

     Atthe beginning of 2003, we started our infrastructure projects, including theexcavation of a hillside and the construction of retaining walls. In April2003, we began the design process for the three new parking structures. Theparking structure portion of the expansion project was completed in two phasesand our existing gaming facility remained open during construction. On October29, 2004, we obtained a temporary certificate of occupancy to open the entirefirst parking structure for self and valet parking. On December 1, 2004, wereceived a certificate of substantial completion on the first parkingstructure. The second phase, which included our second and third parkingstructures with approximately 445 and approximately 470 spaces, respectively,opened on December 29, 2004. As of June 30, 2006, we have parking spacesavailable to accommodate a total of approximately 1,642 (decreasing from 1,735due to construction of a retention basin in lot B) customer parked vehicles and2,100 vehicles when operated by a valet service.

**CriticalAccounting Policies and Estimates**

     Wehave identified certain critical accounting policies and estimates that affectour more significant judgments and estimates used in the preparation of ourfinancial statements. The preparation of our financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires that we make estimates and judgments that affect the reported amountsof assets and liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities. On an on-going basis, we evaluate thoseestimates, including those related to asset impairment, accruals for ourpromotional slot club, compensation and related benefits, revenue recognition,allowance for doubtful accounts, contingencies and litigation. These estimatesare based on the information that is currently available to us and on variousother assumptions that we believe to be reasonable under the circumstances.Actual results could vary from those estimates under different assumptions orconditions. We believe that the following critical accounting policies affectsignificant judgments and estimates used in the preparation of our financialstatements:

·                  Casino Revenues —In accordance with industry practice, casino revenue is recognized as the netwin from gaming activities, which is the difference between gaming wins 

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and losses. Casinorevenues are net of accruals for anticipated payouts of progressive slotjackpots.

·                  Property and Equipment — Property andequipment are stated at cost. Depreciation and amortization are computed usingthe straight-line method over the estimated useful lives of the assets asfollows:

|        | Buildings and improvements        |   | 21 years |
|--------|-----------------------------------|--------|----------|
|   | Furniture, fixtures and equipment |   | 5 years  |

 

·                  We evaluate ourproperty and equipment for impairment in accordance with the FinancialAccounting Standards Board’s Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  When events or circumstances indicate that anasset should be reviewed for impairment, we compare the undiscounted cash flowderived from the asset or asset group to the net carrying value. If animpairment is indicated, the impairment loss is measured by the amount in whichthe carrying value of the asset or asset group exceeds its fair value. Fairvalue is measured by comparable sales, solicited offers or discounted cash flowmodels.

·                  AccruedProgressive Slot Jackpots — Accrued progressive slot jackpots consist ofestimates for prizes relating to various games that have accumulated jackpots.We have recorded the cost of these anticipated payouts as a reduction of casinorevenues and the cost is included as a component of accrued liabilities.

·                  Contingencies —We assess our exposure to loss contingencies, including legal matters, andprovide for an exposure if it is judged to be probable and estimable. If theactual loss from a contingency differs from management’s estimate, operatingresults could be materially impacted. As of June 30, 2006, we have determinedthat no accruals for claims and legal actions are required. If circumstancessurrounding claims and legal actions change, the addition of accruals for suchitems in future periods may be required, which accruals may be material.

There are differences between financial statementsprepared in accordance with Governmental Accounting Standards Board (“GASB”)pronouncements and those prepared in accordance with Financial AccountingStandards Board (“FASB”) pronouncements. The statement of revenues, expensesand fund deficit is a combined statement under GASB pronouncements. FASBpronouncements allow a statement of income or operations and a statement ofowners’ or shareholders’ (deficit) equity, which is where distributions toowners would be presented under FASB pronouncements. The amount shown on ourstatement of revenues, expenses and fund deficit as income before distributionsto the Tribe would not be different if we followed all FASB pronouncements todetermine net income and would be the most comparable amount to net incomecomputed under FASB pronouncements. We are an unincorporated instrumentalitycreated by tribal law and accounted for as a separate fund of the Tribe; assuch there is no owners’ or shareholders’ (deficit) equity as traditionallyrepresented under FASB pronouncements. The most comparable measure of owners’(deficit) equity presented on our balance sheet would be Fund Deficit.

**Results of Operations**

**Comparison of the three monthsended June 30, 2006 and 2005**

     *Net revenues*. Our net revenues for thethree months ended June 30, 2006 decreased by $1.8 million to $34.0 millionfrom $35.8 million for the three months ended June 30, 2005.  The decrease is attributed to the lack ofaccessibility to our Casino due to the damage and resulting closure of theGeyserville Bridge in Geyserville, California. Approximately 96.9% of our netrevenues were from our gaming activities in the second quarter 2006. Wegenerated $29.2 million, or 85.9% of our net revenues from gaming devices, and$3.8 million, or 11.2% of our net revenues from table games, for the threemonths ended June 30, 2006 compared to $31.0 million from gaming devices, or86.6% of our net revenues, and $3.8 million from table games, or 10.6% of ournet revenues, for three months ended June 30, 2005. Our win per slot machineper day was $201 in the second quarter 2006, which decreased by $14 from $215in the second quarter 2005.  The changein win per slot machine per day is attributed to reduced volume of play and thetiming of transitioning from older gaming devices to newer and more populargames.

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     Wegenerated $1.6 million and $1.8 million in food, beverage and retail sales forthe three months ended June 30, 2006 and 2005, respectively.  The retail value of our food and beverageprovided to customers without charge is included in gross revenues and thendeducted as promotional allowances. Such allowances were $0.7 million and $1.1million for the three months ended June 30, 2006 and 2005, respectively.  The decreases are attributable to the lowervolume of guests resulting from the interruptions caused by the flooding inGeyserville, California and the subsequent closure of the Geyserville Bridge.

     *Operating expenses*. Operating expenses forthe three months ended June 30, 2006 were $24.8 million, or 72.9% of netrevenues, compared to $25.8 million, or 72.0% of net revenues, for the secondquarter of 2005. The decrease in operating expenses is attributable toincreased efforts in the area of operational efficiencies, largely due to ahiring freeze and the subsequent evaluation of operational needs. Operatingexpense as a percentage of net revenues increased due to lack of revenues beinggenerated during the quarter.  Ourperformance for the three months ended June 30, 2006 has been negativelyaffected by the closure of the Casino on New Year’s Eve due to flooding in theGeyserville, California area and the traffic interruptions caused by theclosure of the Geyserville Bridge.

     Casinoexpense includes costs associated with our gaming operations only.  Casino expense also includes an allocation offood and beverage expense related to the costs of complimentary activities.Casino expense for three months ended June 30, 2006 increased to $5.5 million,or 16.7% of Casino revenues, from $5.2 million, or 15.0% of Casino revenues,for the second quarter 2005. The increase in Casino expense is attributable toincreased operational costs from the formation of the Poker room, which led toincreases in labor costs in gaming operations, and also increases inparticipation fees on slot machines from the increasing the number of machineson participatory fee arrangements.

     Food,beverage and retail expense for three months ended June 30, 2006 was $1.7million, or 103% of food, beverage and retail revenue, increasing from $1.6million, or 88.0% of food, beverage and retail revenue for the second quarterof 2005. We have increased our use of promotional food and beverage as part ofour marketing for repeat customers.  Ourfood, beverage and retail expense ratio is significantly higher than theindustry average because we have utilized these amenities as an opportunity tobuild customer loyalty rather than as a source of income.

     Selling,general and administrative expense for three months ended June 30, 2006decreased by $1.8 million to $11.8 million, or 34.7% of net revenues, from$13.6 million, or 38.1% of net revenues, for the second quarter of 2005. Thedecrease in selling, general and administrative expense is attributable toreductions in payroll from a hiring freeze during an evaluation of vacantpositions from attrition, higher legal fees in 2005 higher due to the timingdifferences in liquor licensing hearings, reduction in advertising costs aswell as restructuring the marketing department and other operational changes.

   Depreciation expense for three months endedJune 30, 2006 was $2.9 million, compared to $2.8 million, for the secondquarter of 2005. Depreciation expense was computed using the straight-linemethod over the useful lives of property, plant and equipment. The increase indepreciation expense is due to the addition of depreciable assets.

     We have beenpaying the credit enhancement fee since June 2003. The credit enhancement feewas $1.9 million, or 5.5% of net revenues, for three months ended June 30,2006, equal to $1.9 million, or 5.5% of net revenues, for the second quarter of2005.

     Priorto July 1, 2005, TGA and surveillance costs were reimbursed by the Authority asincurred. Tribal Gaming Commission expenses were reported as Gaming Commissionexpenses and surveillance costs were reported in selling, general andadministrative expenses on the Statement of Revenues, Expenses and Change inFund Balance.  Effective July 1, 2005,the TGA adopted a regulation on payments of regulatory fees from the Authority.Pursuant to the regulation, the TGA charges us a flat monthly fee of $235,000for the first quarter 2006 and April and May of second quarter 2006.  The flat monthly fee increased to $344,000 inJune of 2006 to cover any operating expenses incurred by the TGA andsurveillance, which are directly related and necessary to the regulation of theCasino. Following the end of each calendar quarter, the TGA must reconcile themonthly regulatory fee and actual operating expenses and make necessaryadjustments.  As of September 30, 2005,TGA and surveillance expenses are being recorded in Gaming Commission andsurveillance expenses on the Statement of Revenues, Expenses and Changes inFund Balance.  GamingCommission and surveillance expense for three months ended June 30, 2006increased by $0.3 million to $0.7 million, from $0.4 million, for the secondquarter 2005. This is attributable to increases in regulatory staffing.

 

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TheCompact requires the Authority to pay a quarterly fee to the State ofCalifornia’s revenue sharing trust fund, based on the number of licensed gamingdevices operated by the Tribe. Revenue sharing trust fund fees assessed were$333,750 for the three months ended June 30, 2006 and 2005; and $667,500 forthe six months ended June 30, 2006 and 2005.

     *Income from operations.* Income fromoperations for three months ended June 30, 2006 was $9.2 million, or 27.1% ofnet revenues, compared to $10.0 million, or 28.0% of net revenues, for thesecond quarter of 2005.  The decrease inincome from operations is attributable to the decrease in volume of play due tothe Geyserville bridge closure and the increased Casino, Gaming Commission andsurveillance operating expense.

     *Other expense, net.* Other expense, net forthree months ended June 30, 2006 decreased to $5.0 million, or 14.8% of netrevenues, from $5.2 million, or 14.5% of net revenues, for second quarter of2005.  Other expense, net included $0.2million of interest income for the three months ended June 30, 2006, comparedto $0.1 million of interest income for the second quarter of 2005.

     *Income before distributions to the Tribe*.Income before distributions to the Tribe for three months ended June 30, 2006decreased by $0.6 million to $4.2 million, or 12.3% of net revenues, from $4.8million, or 13.5% of net revenues, in the second quarter of 2005.

**Comparison of the six monthsended June 30, 2006 and 2005**

     *Net revenues*. Our net revenues for the sixmonths ended June 30, 2006 decreased by $0.5 million to $68.0 million from$68.5 million for the six months ended June 30, 2005.  The decrease is attributed to the lack ofaccessibility to our Casino due to the damage and resulting closure of theGeyserville Bridge in Geyserville, California. The bridge closure has resulted in the redirection of our marketingefforts that are still in transition. Approximately 97.2% of our net revenues were from our gaming activitiesin the first six months of 2006. We generated $58.3 million, or 85.8% of ournet revenues, from gaming devices, and $7.8 million, or 11.4% of our netrevenues from table games, for the six months ended June 30, 2006, compared to$59.4 million from gaming devices, or 88.3% of our net revenues, and $7.2million from table games, or 10.7% of our net revenues, for six months endedJune 30, 2005. Our win per slot machine per day was $202 in the first sixmonths of 2006, which decreased by $13 from $215, in the first six months of 2005.  The change in win per slot machine per day isattributed to reduced volume of play and the timing of transitioning from oldergaming devices to newer and more popular games.

     Wegenerated $3.2 million and $3.4 million in food, beverage and retail sales forthe six months ended June 30, 2006 and 2005, respectively.  The retail value of our food and beverageprovided to customers without charge is included in gross revenues and thendeducted as promotional allowances. Such allowances were $1.6 million and $1.8million for the six months ended June 30, 2006 and 2005, respectively.

     *Operating expenses*. Operating expenses forthe six months ended June 30, 2006 were $50.6 million, or 74.4% of netrevenues, compared to $48.5 million, or 70.9% of net revenues, for the secondquarter 2005. The increase in operating expenses is attributable to the Casino’sincreased operating activities during the first quarter of 2006 from theaddition of Poker as a gaming amenity. Operating expense as a percentage of net revenues increased due to anincreased marketing effort to promote the Casino following the closure of theCasino on New Year’s Eve due to flooding in the Geyserville, California areaand the traffic interruptions caused by the closure of the Geyserville Bridgesince the first quarter of 2006.

     Casinoexpense includes costs associated with our gaming operations only.  Casino expense also includes an allocation offood and beverage expense related to the costs of complimentary activities.Casino expense for six months ended June 30, 2006 increased to $11.1 million,or 16.8% of Casino revenues, from $10.6 million, or 15.9% of Casino revenues,for the first six months of 2005.  Theincrease in Casino expense is attributable to increased operational costs fromthe formation of the Poker room, increase in labor costs in gaming operationsand increase in participation fees on slot machines.

     Food, beverage and retail expense for sixmonths ended June 30, 2006 was $3.3 million, or 101.3% of food, beverage andretail revenue, increasing from $3.1 million, or 90.0% of food, beverage andretail revenue, for the first six months of 2005.  We have increased our use of promotional foodand beverage as part of our marketing for repeat customers.  Our food, beverage and retail expense ratiois significantly higher than the industry average because we have utilizedthese amenities as an opportunity to build customer loyalty rather than as asource of income.

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     Selling,general and administrative expense for six months ended June 30, 2006 increasedby $0.8 million to $24.9 million, or 36.7% of net revenues, from $24.1 million,or 35.2% of net revenues, for the first six months of 2005. The increase inselling, general and administrative expense is attributable to increasedmarketing efforts to promote the Casino following the closure of the Casino onNew Year’s Eve due to flooding in the Geyserville, California area and thetraffic interruptions caused by the closure of the Geyserville Bridge.

     Depreciationexpense for six months ended June 30, 2006 was $5.7 million, compared to $5.4million, for the first six months of 2005. Depreciation expense was computedusing the straight-line method over the useful lives of property, plant andequipment. The increase in depreciation expense is due to the addition ofdepreciable assets.

     The creditenhancement fee was $3.5 million, or 5.1% of net revenues, for six months endedJune 30, 2006, compared to $3.8 million, or 5.5% of net revenues, for the firstsix months of 2005. The decrease in credit enhancement fee is directlyattributable to lower net income.

     Priorto July 1, 2005, TGA and surveillance costs were reimbursed by the Authority asincurred. Tribal Gaming Commission expenses were reported as Gaming Commissionexpense and surveillance costs were reported in selling, general andadministrative expense on the Statement of Revenues, Expenses and Changes inFund Balance.  Effective July 1, 2005,the TGA adopted a regulation on payments of regulatory fees from the Authority.Pursuant to the regulation, the TGA charged us a flat monthly fee of $235,000for the first quarter 2006 and April and May of second quarter 2006.  The flat monthly fee increased to $344,000 inJune of 2006 to cover any operating expenses incurred by the TGA andsurveillance, which are directly related and necessary to the regulation of theCasino. Following the end of each calendar quarter, the TGA must reconcile themonthly regulatory fee and actual operating expenses and make necessary adjustments.  As of September 30, 2005, TGA andsurveillance expenses are being recorded in Gaming Commission and surveillanceexpense on the Statement of Revenues, Expenses and Changes in Fund Balance.  Gaming Commission and surveillanceexpense for six months ended June 30, 2006 increased by $0.5 million to $1.4million, from $0.9 million, for the second quarter 2005. This is attributableto increases in regulatory staffing. Gaming Commission and surveillance costsfor the six months ended June 30, 2006 and 2005 were $1,448,732 and $892,456,respectively.

     Compactrevenue sharing trust fund expense remained the same at $0.7 million for sixmonths ended June 30, 2006 and 2005.

     *Income from operations.* Income fromoperations for six months ended June 30, 2006 was $17.4 million, or 25.6% ofnet revenues, compared to $19.9 million, or 29.1% of net revenues, for thefirst six months of 2005.  The decreasein income from operations is attributable to the decrease in volume of play dueto the Geyserville Bridge closure and the increase in Casino, Gaming Commission and Surveillance operatingexpense.

     *Other expense, net.* Other expense, net forsix months ended June 30, 2006 decreased to $10.1 million, or 14.9% of netrevenues, from $10.5 million, or 15.4% of net revenues, for the first sixmonths of 2005.  Other expense, netincluded $0.4 million of interest income for the six months ended June 30,2006, compared to $0.1 million of interest income, for the six months endedJune 30, 2005.

     *Income before distributions to the Tribe*.Income before distributions to the Tribe for six months ended June 30, 2006decreased by $2.1 million to $7.3 million, or 10.7% of net revenues, from $9.4million, or 13.7% of net revenues, in the first six months of 2005.

**Liquidityand Capital Resources**

     Sinceour inception, we have funded our capital expenditures and working capitalrequirements primarily through debt financing, gaming equipment supplierfinancing, and other financing and operating cash flow.

    Construction of our Casino and infrastructureimprovements commenced on April 1, 2002. The first portion of our gamingfacility was completed in September 2002. As of June 30, 2006, we had spentapproximately $155.9 million on the planning, development and construction ofour gaming facility, infrastructure, furniture, fixtures and equipment,excluding the expansion project. We financed the development with borrowingsand development advances.

     Weoriginally expected completion of our expansion project to cost approximately$64.6 million, which we planned to fund with $61.4 million from the netproceeds of the offering of our Notes (the “Notes Offering”) and $3.2 millionfrom an advance from the Tribe. From the proceeds from the Notes Offering, wehad also placed an 

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additional $10.0 millionin a construction escrow account to be available to fund additionalconstruction contingencies. The original expansion budget included $35.4million for the three parking structures, $24.1 million for infrastructureimprovements and a $5.1 million construction contingency.

     During the spring of 2004, we revised ourbudget for the expansion project to approximately $73.7 million.  We have spent $75.8 million as of June 30,2005 on design and construction, which was funded through our restricted cashand cash from operations.  The excessexpenditure of $2.1 million is due to the out of scope work related to ourinfrastructure portion of the project, which was funded by our operating cashflow.  Our final budget estimate is comprisedof $39.4 million for the three parking structures, which is $0.5 million morethan our original budget, and $34.3 million for infrastructure improvements,which is $8.6 million more than our original estimate.  The total cost of the expansion project wasgreater than original estimates because in an effort to expedite construction,we commenced construction before all design documents were finalized, whichresulted in inefficiencies and modifications that caused actual constructioncosts to exceed budgeted amounts.  Inaddition, the infrastructure improvements portion of our expansion projectresulted in higher than expected costs due to weather delays and tounforeseeable soil conditions, which required us to substantially increase thescope of the work and quantity of the construction material.

     Asof June 30, 2006, we spent $0.8 million on the development of an approximately18-acre parcel of land adjacent to the Tribe’s reservation (referred to as the “DuganProperty”) which is expected to include an additional access road to ourCasino. We have $4.5 million remaining in a restricted account funded from theproceeds of our Notes Offering for the development of the Dugan Property.

     Ourcapital expenditures for six months ended June 30, 2006 and 2005 were $2.8million and $31.3 million, respectively. The decrease in 2006 is attributableto the completion of our expansion project in 2005 along with infrastructureimprovements in the first quarter of 2005.

     Asof June 30, 2006, we had cash and cash equivalents net of restricted cash of$21.9 million, as compared to $17.6 million, as of December 31, 2005. As ofJune 30, 2006, we had restricted cash of $7.2 million, as compared to $7.4million, as of December 31, 2005. Our principal source of liquidity during thesix months ended June 30, 2006 consisted of cash flow from operatingactivities. Net cash provided by operating activities for six months ended June30, 2006 was $26.1 million, a decrease of $2.3 million from $28.4 million in2005. The decrease in our net cash provided by operations is a result ofdecreased operating activities and lower casino revenues in 2006.

     Restrictedcash consists of net proceeds from the Notes Offering and investment earningsthereon set aside in construction financing accounts for construction costs forthe three parking structures, related infrastructure improvements andconstruction contingencies. It also includes funds that are reserved foradditional construction contingencies and the funds for the development of theDugan Property. Our restricted cash is held in escrow accounts that can only beused for authorized construction disbursements until the related projects arecompleted.

     Netcash used for capital and related financing activities for the six months endedJune 30, 2006 was $15.7 million, compared to $30.9 million, for six monthsended June 30, 2005.  Cash flow used incapital and related financing activities was primarily for payment of thecredit enhancement fee and interest payments. Cash flow used in non-capital financing activities for the six monthsended June 30, 2006 was $6.1 million, an increase of $0.9 million from $5.2million, for six months ended June 30, 2005. Cash flow used in non-capital financing activities consisted of distributionsto the Tribe.  The increase is due topermitted increase in distributions when comparing the first quarter of 2005and 2006.  In the first quarter 2005, theTribal distribution consisted of $500,000 per month, plus $680,000 forconstruction costs for a total of $2,180,000, as compared to $3,000,000 for thefirst quarter of 2005.  As permitted, onApril 1, 2006, our payments to the Tribe increased from $1.0 million per monthto $1.02 million under the Indenture.

     Webelieve that existing cash balances, cash from operations, as well as permitteddisbursements from our restricted cash escrow accounts will provide adequatefunds for our working capital needs, planned capital expenditures and debtservice requirements for the foreseeable future. However, our ability to fundour operations, make planned capital expenditures, make scheduled debt paymentsand refinance our indebtedness depends on our future operating performance andcash flow, which in turn, are subject to prevailing economic conditions and tofinancial, business and other factors, some of which are beyond our control.Additionally, the Indenture limits our ability to incur additionalindebtedness.

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**Contractual Obligations as ofJune 30, 2006**

     The followingtable summarizes our contractual obligations and commitments as of June 30,2006:
| ** **                      | ** ** | **Total** | ** **  | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **Thereafter** | ** ** |
|---------------------------------|------------|-----------|-------------|-----------------|------------|--------------------|------------|--------------------|------------|----------------|------------|
| Long-term debt  obligations (a) |       | $         | 200,077,641 |            | $          | 16,332             |       | $                  | 49,606     |           | $          | 11,703 |   | $ | 200,000,000 |   |
| Operating lease  obligations    |       | 510,060   |        | 457,481         |       | 49,911             |       | 2,668              |       | —         |       |
| Capital lease  obligations      |       | 279,021   |        | 107,523         |       | 166,758            |       | 4,740              |       | —         |       |
| Total obligations (b)           |       | $         | 200,866,722 |            | $          | 581,336            |       | $                  | 266,275    |           | $          | 19,111 |   | $ | 200,000,000 |   |

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(a)     Excluded from long-term debt obligations above are interest payments of$19.5 million in 1 year; $39.0 million in 2-3 years; $39.0 million in 4-5 yearsand $16.4 million in more than 5 years.

(b)     The Compact requires us to pay a quarterlyfee of $0.4 million to the RSTF based on the number of our licensed gamingdevices. Total obligations do not include the RSTF  payments.

**Regulationand Taxes**

     Weare subject to extensive regulation by the TGA, the CGCC and the NationalIndian Gaming Commission. Changes in applicable laws or regulations could havea significant impact on our operations.

Wehad initially applied for a liquor license for our Casino in 2002. On September 13, 2004, the Departmentof Alcoholic Beverage Control (“ABC”) denied the Tribe’s application for aliquor license based on the State Fire Marshal’s interpretation of the UniformBuilding Code. In May 2005, an Administrative Law Judge (“ALJ”) heard the Tribe’sappeal of the ABC’s denial and recommended that the ABC reverse itself andapprove the license. On August 25, 2005, the ABC announced effective October11, 2005, it would adopt the ALJ’s decision to approve the license transferpending a hearing on protests filed by citizens and government officials. TheABC has received over 65 protests against the license from citizens andgovernment officials. The ABC held a hearing on the protests on March 9, 2006.Following the close of the hearing, a new California court decision, Coffin v.Alcoholic Beverage Control Appeals Board, 139 Cal. App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  The parties have until approximately August20, 2006, to inform the ALJ of their views in response to his tentativedecision to re-hear the protests.  Thedecision to approve or deny the license transfer application may be appealed byany parties to the proceeding so long as the appeal is filed within forty daysof the ABC’s decision. The first appeal is to the ABC Appeals Board, and itsdecision may be appealed to the California State court system.

     Sincewe are an unincorporated governmental instrumentality of the Tribe located onreservation land held in trust by the United States of America, we are notsubject to federal or state income taxes. Various efforts have been made in Congressover the past several years to enact legislation that would subject the incomeof tribal governmental business entities, such as us, to federal income tax.Although no such legislation has been enacted, similar legislation could bepassed in the future. It is not possible to determine with certainty thelikelihood of possible changes in tax law or in the administration of such law.Such changes, if adopted, could have a material adverse effect on our operatingresults and cash flow from operations.

**Impactof Inflation**

     Absentchanges in competitive and economic conditions or in specific prices affectingthe casino industry, we do not expect that inflation will have a significantimpact on our gaming facility operations. Changes in specific prices, such asfuel and transportation prices, relative to the general rate of inflation mayhave a material adverse effect on the casino industry in general.

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**Seasonality**

     Activityat our gaming facility is modestly seasonal with stronger results expectedduring the summer due in part to the relatively higher levels of tourism duringsuch times of the year. In addition, our operations may be impacted by adverseweather conditions and fluctuations in the tourism business. Accordingly, ourresults may fluctuate from quarter to quarter and the results of one quartermay not be indicative of results expected from future quarters.

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Market risk is the risk ofloss arising from adverse changes in market rates and prices, such as interestrates, foreign currency exchange rates and commodity prices.

Through June 30, 2006, wehad not invested in derivative or foreign currency-based financialinstruments.  Additionally, we primarilyhave invested in short-term, fixed rate debt. As such, we do not believe we have material exposure to market risk.

**ITEM4.  CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

         We maintain disclosure controls andprocedures that are designed to ensure that the information required to bedisclosed in our reports filed with, or furnished to, the SEC, pursuant to theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules, regulations and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer, ChiefFinancial Officer and Chief Operations Officer, as appropriate, to allow timelydecisions regarding required disclosure based on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) and 15d-15(e) of the Exchange Act.

Our Chief ExecutiveOfficer and Acting Chief Financial Officer for the period covered by the report,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures (as defined in Exchange Act Rules 240.13a — 15(e) and 15d — 15(e))as of the end of the quarterly period ended June 30, 2006.  Based on that evaluation, they have concludedthat our disclosure controls and procedures as of the end of the period coveredby this report are effective in timely providing them with material informationrelating to us required to be disclosed in the reports we file or submit underthe Exchange Act.  Our disclosurecontrols and procedures are designed to provide reasonable assurances ofachieving its objectives and our Chief Executive Officer and Acting ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective in reaching that level of reasonable assurance.

 

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###### **PART II.                OTHER INFORMATION**

###### **ITEM 1.                  LEGALPROCEEDINGS**

*SonomaCounty Fire Marshal Inspection Case*

OnOctober 7, 2002, the Sonoma County Fire Chief (the “County Fire Chief”) filedan *ex parte* application for aninspection warrant in the Superior Court of the State of California for theCounty of Sonoma, seeking to inspect the casino. The Tribe believes that thereis no basis for the County’s Fire Chief to assert jurisdiction over the Tribe’slands, which are governed by tribal and federal law and the Compact. On October9, 2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand, whichsuch motion was denied by the court and subsequently moved for summaryjudgment. The Tribe moved to dismiss under Federal Rules of Civil procedure12(b)(6) and 12(b)(7). On December 9, 2004, the Court issued an order grantingin part and denying in part the Tribe’s 12(b)(6) motion and denying the CountyFire Chief’s summary judgment motion. The order reaffirmed the Court’s priorruling denying the remand of that Public Law 280 does not authorize the CountyFire Chief to inspect the casino. On March 1, 2005 the Court issued an ordergranting in part and denying in part the Tribe’s 12(b)(7) motion. On March 4,2005, the Tribe moved for summary judgment, and on April 29, 2005, the Courtgranted the Tribe’s motion. The County Fire Chief filed a Notice of Appeal onMay 26, 2005, at the Ninth Circuit Court of Appeals. Briefing was completed atthe Ninth Circuit on November 8, 2005. The case has not yet been set for oralargument.

*California Department of Alcoholic Beverage Control*

OnSeptember 13, 2004, the Department of Alcoholic Beverage Control (“ABC”) deniedthe Tribe’s application for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, an Administrative LawJudge (“ALJ”) heard the Tribe’s appeal of the ABC’s denial and recommended thatthe ABC reverse itself and approves the license. On August 25, 2005, the ABCannounced effective October 11, 2005, it would adopt the ALJ decision toapprove the license transfer pending a hearing on protests filed by citizensand government officials. The ABC has received over 65 protests against the licensefrom citizens and government officials. The ABC held a hearing on the protestson March 9, 2006. Following the close of the hearing, a new California courtdecision, Coffin v. Alcoholic Beverage Control Appeals Board, 139 Cal. App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  The parties have until approximately August20, 2006, to inform the ALJ of their views in response to his tentative decisionto re-hear the protests.  The decision toapprove or deny the license transfer application may be appealed by any partiesto the proceeding so long as the appeal is filed within forty days of the ABC’sdecision. The first appeal is to the ABC Appeals Board, and its decision may beappealed to the California State court system.

Weare involved in other litigation and disputes from time to time in the ordinarycourse of business with vendors and patrons. We believe that the aggregateliability, if any, arising from such litigation or disputes will not have amaterial adverse effect on our results of operations, financial condition orcash flows.

**ITEM 1A.               RISK FACTORS**

There have been nomaterial changes from the risk factors previously disclosed in our Form 10-K.

###### **ITEM 6.                  EXHIBITS**

(a)                       Exhibits

The Exhibit Index filed herewith is incorporatedherein by reference.

(b)                     Reports onForm 8-K

None

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**SIGNATURE**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
| Dated: August 14, 2006 |   | RIVER ROCK ENTERTAINMENT AUTHORITY  (Registrant) |
|------------------------|--------|--------------------------------------------------|
|                   |   |                                             |   |   |
|                   |   | By:                                              |   | /s/ Shawn S.  Smyth |
|                   |   |                                             |   | Shawn S. Smyth,  Chief Executive Officer |
|                   |   |                                             |   |   |
|                   |   |                                             |   |   |
|                   |   | By:                                              |   | /s/ Hans Winkler |
|                   |   |                                             |   | Hans Winkler,  Acting Chief Financial Officer |

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                    |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification by Shawn S. Smyth, Chief Executive  Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed  herewith)                                                                                                            |
|        |       |                                                                                                                                                                                                                                           |
| 31.2        |       | Certification by Hans Winkler, Acting Chief  Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)  (filed herewith)                                                                                                       |
|        |       |                                                                                                                                                                                                                                           |
| 32*         |       | Certification by Shawn S. Smyth, Chief Executive  Officer and by Hans Winkler, Acting Chief Financial Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (furnished herewith) |

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*                    Thiscertification is being furnished solely to accompany this annual reportpursuant to 18 U.S.C. Section 1350, and is not being filed for purposes ofSection 18 of the Securities Exchange Act of 1934 and is not to be incorporatedby reference into any filing of River Rock Entertainment Authority whether madebefore or after the date hereof, regardless of any general incorporationlanguage in such filing.

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