**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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** **

**FORM 10-KSB**

 

**(Mark one)**
| ý                                                                                                                                                                                     | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                                                                                                                                                       | ** **                                                                              |
| **For the fiscal year ended  December 31, 2005**                                                                                                                                           |
| ** **                                                                                                                                                                                 |
| o                                                                                                                                                                                          | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                       | ** **                                                                              |
| **For the transition period from               to              .** |
|                                                                                                                                                                                       |
| **Commission file number  000-50572**                                                                                                                                                      |

** **

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** **

**SOUTHWEST CASINO CORPORATION**

(Name of small business issuer in its charter)

 

| **Nevada**                                                      |       | **87-0686721**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) | ** ** | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **2001 Killebrew Drive, Suite 350**                             |       |                                 |
| **Minneapolis, Minnesota**                                      |       | **55425**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |
|                                                            |       |                                 |
| **(952) 853-9990**                                              |
| (Issuer’s telephone number, including area  code)          |
|                                                            |
| Securities registered under Section 12(b) of  the Exchange Act: |
| **None.**                                                       |
| ** **                                                      |
| Securities registered under Section 12(g) of  the Exchange Act: |
| **Common Stock, par value $0.001 per share**                    |

 

Checkwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES  ý NO  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained herein, and no disclosure will be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. ý

 

TheRegistrant’s revenues for the fiscal year ended December 31, 2004 were$20,713,018.

 

Asof March 28, 2006, 19,588,656 shares of common stock of the Registrant wereoutstanding, and the aggregate market value of the common stock of theRegistrant as of that date (based upon the $0.60 per share closing price of thecommon stock at that date as reported on the Over-The-Counter Bulletin Board),excluding 4,916,427 outstanding shares beneficially owned by directors andexecutive officers, was $8,803,337.

 

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

 

 

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**Table of Contents**
|     |   |                                                                                                                       |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------|
| Part I   |   |                                                                                                                       |
|     |   | Item 1.  Description of Business                                                                                           |
|     |   | Risk Factors                                                                                                               |
|     |   | Item 2.  Description of Property                                                                                           |
|     |   | Item 3. Legal  Proceedings                                                                                                 |
|     |   | Item 4.  Submission of Matters to a Vote of Security Holders                                                               |
| Part II  |   |                                                                                                                       |
|     |   | Item 5. Market  for Common Equity and Related Stockholder Matters                                                          |
|     |   | Item 6.  Management’s Discussion and Analysis or Plan of Operation                                                    |
|     |   | Item 7. Financial  Statements                                                                                              |
|     |   |                                                                                                                       | Notes to Consolidated Financial Statements |
|     |   | Item 8. Changes In and Disagreements With  Accountants and Financial Disclosure                                            |
|     |   | Item 8A. Controls and Proceedures                                                                                          |
|     |   | Item 8B. Other Information                                                                                                 |
| Part III |   |                                                                                                                       |
|     |   | Item 9. Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(A) of the Exchange  Act. |
|     |   | Item 10.  Executive Compensation                                                                                           |
|     |   | Item 11. Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |
|     |   | Item 12. Certain  Relationships and Related Transactions                                                                   |
|     |   | Item 13. Exhibits                                                                                                          |
|     |   | Item 14.  Principal Accountant Fees and Services                                                                           |

 

 

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**PART I**

# * *

# ***As used in this report, references to “Southwest”,“the company”, “we”, “our”, or “us”, unless the context indicates otherwise,refer to Southwest Casino Corporation and its subsidiaries and do not refer tothe predecessor corporation, Lone Moose Adventures, Inc.  References in this report to “Lone Moose”refer to Lone Moose Adventures, Inc. before our reorganization on July 22,2004.***

# ** **

*This Annual Report onForm 10-KSB contains or incorporates by reference not only historicalinformation, but also forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Inaddition, Southwest or others on Southwest’s behalf may make forward-lookingstatements from time to time in oral presentations, including telephone conferences,in press releases or reports, or elsewhere. Statements that are not historical are forward-looking and reflectexpectations and assumptions.  We try toidentify forward-looking statements in this report and elsewhere by using wordssuch as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,”“believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or thenegative of these or similar terms.*

 

*Forward-looking statementsinvolve risks and uncertainties.  Theseuncertainties include factors that affect all businesses as well as mattersspecific to Southwest.  We cautionreaders not to place undue reliance on any forward-looking statement thatspeaks only as of the date made and to recognize that forward-looking statementsare predictions of future results, which may not occur as anticipated.  Actual results could differ materially fromthose anticipated in the forward-looking statements and from historicalresults, due to the risks and uncertainties described below under the heading “RiskFactors,” as well as others that we may consider immaterial or do notanticipate at this time.  The followingrisks and uncertainties identified in this report are not exclusive and furtherinformation concerning our business, including factors that potentially couldmaterially affect our financial results or condition, may emerge from time totime.  We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting the forward-looking statements.  We advise you, however, to consult anyfurther disclosures we may make on related subjects in our quarterly reports onForm 10-QSB and current reports on Form 8-K we file with or furnishto the Securities and Exchange Commission.*

 

# **ITEM 1.**                        DESCRIPTIONOF BUSINESS.

# ** **

**(a)****                                 ****Business Development****.**

 

*Corporate Reorganization*

 

Southwest Casino and Hotel Corp. is theprimary, wholly-owned operating subsidiary of Southwest Casino Corporation andwas our parent company until the July 2004 reorganization that resulted in ourcurrent structure.  Southwest Casino andHotel Corp. was organized under the laws of the State of Minnesota in 1992under the name “Southwest Casino and Hotel Ventures, Inc.” and has operated inthe gaming industry since formation.

 

On July 22, 2004, Southwest Casino and HotelCorp. merged with Lone Moose Acquisition Corporation, a wholly-owned subsidiaryof Lone Moose Adventures, Inc., a Nevada corporation.  Lone Moose Acquisition Corporation was formedsolely for the purpose of completing our reorganization.  Southwest Casino and Hotel Corp. was thesurviving corporation in that merger and became a wholly-owned subsidiary ofLone Moose Adventures, Inc., which changed its name to Southwest CasinoCorporation.  Under the terms of thereorganization agreement among Southwest Casino and Hotel Corp., Lone MooseAdventures, Inc. and certain shareholders of Lone Moose Adventures, Inc.,Southwest Casino Corporation acquired 100% of the issued and outstanding sharesof Southwest Casino and Hotel Corp. common and preferred stock in exchange formore than 16 million shares of Lone Moose common stock issued to theshareholders of Southwest Casino and Hotel Corp.  Including shares of Lone Moose common stockacquired by principal shareholders of Southwest Casino and Hotel Corp. beforethe reorganization, the former Southwest Casino and Hotel Corp. equity securityholders acquired approximately 92% of the outstanding securities of SouthwestCasino Corporation in the reorganization.

 

Lone Moose Adventures, Inc. was formed onJanuary 2, 2002 and, before closing the reorganization described above,conducted only minimal operations and received only minimal revenue.  Lone Moose was organized to take

 

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clients on adventure tours in the Wasatchmountain range of Utah.  Lone Mooseconducted fewer than two dozen adventure tours before our reorganization.  Upon closing the reorganization, we soldsubstantially all of the assets and liabilities of Lone Moose’s adventure tourbusiness to Lone Moose’s founding shareholders. Since the reorganization and sale of the adventure tour business,Southwest has not engaged in any aspect of the business conducted by Lone Moosebefore the reorganization.

 

*Casino Management*

 

Initially, Southwest pursued managementcontracts for gaming facilities with Native American tribes. In 1993, SouthwestCasino and Hotel Corp. was the first company approved by the National IndianGaming Commission (NIGC) as a management contractor in connection with ourmanagement contract with the Cheyenne and Arapaho Tribes of Oklahoma for agaming facility in Concho, Oklahoma.

 

The original term of our agreement with theCheyenne and Arapaho Tribes was seven years. In 1999, we extended the agreement for an additional three years.  In 2001, we amended the agreement to add asecond gaming facility in Clinton, Oklahoma. We amended the management agreement again in 2003 to extend ourrelationship until May 2007.  On January22, 2005, the Tribes entered into a gaming compact with the State of Oklahomathat permits the Tribes to offer an expanded scope of gaming, includingpermitted card games, at their casinos. In April 2005, the tribal gaming commission authorized us to offer thisexpanded scope of gaming at the Lucky Star Concho casino we manage.  At this time, we are uncertain whether wewill be able to continue our management relationship with the Cheyenne andArapaho Tribes beyond May 19, 2007.

 

In December 2004, the NIGC notified the Tribesthat the NIGC is concerned the Tribes are not distributing properly the netrevenue they receive from gaming operations. The NIGC’s concerns relate to the use of gaming revenue after we havedistributed it to the Tribes and are not related to our management of theTribes’ casinos.  However, if the NIGCdetermines that the Tribes have committed a substantial violation it couldbring an enforcement action with potential penalties that include, in extremecases, closing the Tribes’ gaming facilities.

 

*Casino Operations*

 

Our subsidiaries, Southwest Casino and HotelCorp. and Gold Rush I, LLC, a Colorado limited liability company, hold threegaming licenses to operate the Gold Rush, Gold Digger’s and Uncle Sam’s casinosin Cripple Creek, Colorado.  Cripple Creekis one of three historic mining towns in Colorado permitted to engage inlimited stakes ($5.00 limit) gaming.  Allthree properties were either closed or near closing when we acquired themduring 1998 and 1999.

 

In 2002 and 2003, we identified two additionalbusiness opportunities.  We entered intoa development contract with the city of Rockaway Beach, Missouri to assist themin the development of a downtown redevelopment and riverboat casino.  Rockaway Beach is located on the WhiteRiver.  We launched an initiative toamend the Missouri Constitution to enable riverboat gaming on the White Riverat Rockaway Beach.  That initiative wentto popular vote in the state on August 3, 2004 and was unsuccessful.  We spent no monies on this project during2005 and have no plans to revive the initiative at this time.

 

In December 2003, North Metro HarnessInitiative, LLC, (North Metro) then a wholly owned subsidiary of SouthwestCasino and Hotel Corp., filed an application with the Minnesota RacingCommission to develop a harness racetrack in Columbus Township, Anoka County,Minnesota, approximately 30 miles north of downtown Minneapolis.  In June 2004, we sold a 50 percent membershipinterest in North Metro to MTR-Harness, Inc., a subsidiary of MTR Gaming Group,Inc.  On January 19, 2005, the MinnesotaRacing Commission voted to grant the licenses required for development andoperation of this facility.  Minnesotalaw permits licensed racetracks to operate card rooms with up to 50 tablesafter approval of a card club plan of operation and completion of the first50-day live race meet at the track. North Metro anticipates that it will derive revenues from charges forhosting the “unbanked” or “player pool” games at the card room, generally as apercentage of accumulated wagers or a “rake” from certain wagers.  North Metro will not have a stake in theoutcome of any card game.

 

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North Metro will construct its harness trackand entertainment facility on approximately 180-acres located just north of theconfluence of Interstates 35W and 35E north of the Minneapolis-St. Paulmetropolitan area.  The facility willinclude a harness track and approximately 60,000 square feet of associatedgrandstand, card club and restaurant space, and approximately 50,000 squarefeet of horse barns and maintenance buildings. It will also include construction of internal roadways, surface parking,wetland mitigation and storm water treatment, as well as improvements to accessroads.   An organization opposed togambling has filed two lawsuits in attempts to block development of thisfacility and overturn the licenses granted to North Metro.

 

*Consulting*

 

In addition to managing Native Americangaming facilities and owning and operating our own casinos, we also provideconsulting services for gaming operations. In May 2001, we entered into aconsulting agreement with the Alabama-Coushatta Tribe of Texas to assist themin opening a Tribal casino in Livingston, Texas. The operation was profitable foreight months. However, when the facility opened there was a dispute between theTribe and the State of Texas regarding the Tribe’s authority to operate acasino and the types of gaming that were permitted there. The Tribe commenced aDeclaratory Judgment Action against the State of Texas seeking to clarify thescope of gaming issues.  The FederalDistrict Court for the State of Texas permitted the Tribe to open and operatethe enterprise in November 2001 pending resolution of this litigation. In June2002, the Court ruled that the Tribe was not entitled to engage in casinogaming and directed them to close the facility. The facility closed inaccordance with the Court’s order in July 2002. The Tribe continues to seeklegislation or other authorization to permit them to reopen. If the Tribereceives legislative authorization to reopen, we anticipate that the Tribe willengage in a competitive process to select a manager for its operations.  We do not know whether we will be included inthe Tribe’s selection process, if one occurs, or whether we would be selectedat the conclusion of that process.

 

*Prior Bankruptcy*

 

Gold Rush I, LLC, a wholly-owned subsidiaryof Southwest Casino and Hotel Corp., filed a voluntary petition for Chapter 11protection under the United States Bankruptcy Act as a result of a dispute overrent with the landlord of the Gold Rush and Gold Digger’s Casinos in CrippleCreek, Colorado. Gold Rush I was successful in its litigation against thelandlord regarding the rent dispute and emerged from bankruptcy on January 10,2003 when the Bankruptcy Court confirmed its reorganization plan, whichprovided for full payment to all creditors with interest.

 

**(b)           Business of Company.**

 

**Principal Products or Servicesand Markets and Status of Publicly-Announced New Products or Services**

 

Southwest develops, owns, operates andmanages casinos, gaming facilities and related amenities in various marketsacross the United States. Based in Minneapolis, Minnesota, Southwest currentlyowns gaming operations in Colorado.  Wealso manage 312 employees of the tribal enterprises of the Cheyenne and ArapahoTribes of Oklahoma under our management contract for those facilities.  We have approximately 150 full and part-timeemployees.  Our growth plans include thediversification and expansion of existing operations, project development andthe pursuit of new gaming opportunities.

 

*Casino Management*

 

Southwest Casino provides management servicesin connection with two Lucky Star casino facilities, one located in Concho, Oklahomaand the other located in Clinton, Oklahoma, under the terms of a managementagreement with the Cheyenne and Arapaho Tribes of Oklahoma.  On January 22, 2005, the Tribes entered intoa gaming compact with the State of Oklahoma that permits the Tribes to offer anexpanded scope of gaming, including permitted card games, at the casinos wemanage.  In April 2005, the Tribes’gaming commission authorized us to offer this expanded scope of gaming at theLucky Star Concho casino.  Our gamingmanagement agreement with the Cheyenne and Arapaho Tribes has been extendedtwice and currently will expire on May 19, 2007.  At this time, changes in the members of theTribal Business Committee make us uncertain whether we will be able to continueour management relationship with the Cheyenne and Arapaho Tribes beyond May 19,2007.

 

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On March 24, 2006, Southwest entered into a Gaming Management Agreementwith the Otoe-Missouria Tribe of Indians under which Southwest will manage theTribe’s Seven Clans Paradise Casino in Red Rock, Oklahoma, just south of PoncaCity and north of Stillwater.  The GamingManagement Agreement must be approved by the National Indian Gaming Commissionbefore it becomes effective.  Theagreement has a five-year term that begins the day Southwest takes overmanagement of the casino.

 

*Casino Operations*

 

Southwest Casino owns and operates threegaming facilities in Cripple Creek, Colorado. Cripple Creek is a small,historic mining town near Colorado Springs that is permitted to engage inlimited stakes ($5.00 limit) gaming. Eighteen casinos operate currently inCripple Creek. The combined Gold Rush and Gold Digger’s facilities offerapproximately 408 slot machines and a 4-table game area, while Uncle Sam’sCasino features approximately 67 slot machines. We also own and operate the Palladium, an outdoor amphitheater adjacentto the Gold Rush and Gold Digger’s facilities that offers live entertainmentand other special events.

 

In the past, Southwest Casino leased andoperated B.B. Cody’s Casino in Deadwood, South Dakota. We successfullynegotiated a termination of that lease effective March 10, 2004.  We completed the withdrawal, storage andtransfer of our South Dakota equipment, and the other tasks related to the winddown of our South Dakota operations, in April 2004.

 

Through North Metro Harness Initiative, LLC,Southwest and its 50 percent partner MTR-Harness, Inc., an affiliate of MTRGaming Group, Inc. were granted Class A and Class B licenses from the MinnesotaRacing Commission on January 19, 2005 to develop and operate a harness racingtrack and card room facility on approximately 180 acres of land in ColumbusTownship, Anoka County, Minnesota.  Ananti-gambling organization has filed two lawsuits in attempts to overturn thelicense grants.  We cannot predict theultimate outcome of this litigation. Assuming the licenses survive these lawsuits and North Metro receivesall requisite approvals and project financing, we will share the ownership andoperation of this project with our 50/50 partner, MTR-Harness, Inc.

 

If implemented successfully, this racingfacility would offer pari-mutuel wagering on a 5/8-mile track with combinedseating for over 2,000 track, restaurant and card room patrons.  In addition, the facility would accommodatesimulcast wagering on live harness racing events broadcast into thefacility.  As part of this harnessinitiative, we will seek authority from the Minnesota Racing Commission tooperate a card room with approximately 50 gaming tables.  Under current law, before we can open thiscard room, we must conduct at least 50 days of live racing at the track and weare only permitted to simulcast harness races. We intend to seek legislative authorization to begin card room operationsbefore completing 50 days of racing and to simulcast races by all horse breeds.

 

On August 3, 2004, voters in the State ofMissouri defeated a proposed amendment to the state constitution that wouldhave permitted construction and operation of a riverboat gaming facility on theWhite River. Approval of this amendment was needed in order to continuedevelopment of a riverboat casino in Rockaway Beach, Missouri in which we own a30 percent interest.  We spent no monieson this project during 2005 and have no plans to revive this initiative at thistime.

 

*Prior Business of LoneMoose Adventures, Inc.*

 

Prior to the July 2004 reorganization, LoneMoose engaged in limited operations primarily related to the provision ofadventure tours in the State of Utah. Immediately after closing thereorganization in which Lone Moose Adventures became Southwest CasinoCorporation and Southwest Casino and Hotel Corp. became a wholly-ownedsubsidiary of Southwest Casino Corporation, we sold substantially all of theassets and liabilities of Lone Moose’s adventure tour business to the foundingshareholders of Lone Moose. Since closing the reorganization and sale ofassets, Southwest has not engaged in any aspect of the business Lone Mooseconducted before the reorganization.

 

**Competition.**

 

The gaming industry, including thedevelopment, operation and management of casinos, racetracks and other types ofgaming facilities, is highly competitive, especially given the rapid rate atwhich the industry is expanding.  For

 

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example, a number of management companies maymake proposals to a particular tribe for the development and management of asingle Indian gaming facility, and any gaming facilities developed or managedby us will compete with a rapidly expanding number of other gaming facilitiesof varying quality and size, including gaming facilities that are part ofnational or regional chains, along with other forms of gaming andentertainment.  Similarly, with respectto projects we are pursuing or may pursue in the future, new competitors couldsurface at any time and present alternative proposals for consideration. Manycompetitors have available to them substantially greater financial andpersonnel resources than us. Competition in the future may also be affected byoverbuilding which can adversely affect patronage levels. Given the currentregulatory climate and limited number of new gaming opportunities, it is likelythat competition in our industry will intensify in the future.

 

The approval of a law permitting Oklahoma toenter into gaming compacts with Native American tribes in the state permitsexpansion of Native American gaming opportunities in Oklahoma.  Even before the Oklahoma voters approved thismeasure in November 2004, it caused an increase in competition in the Oklahomagaming market. Now that the law is in place, we expect increased competition inthis market, in which we currently manage two facilities for the Cheyenne andArapaho Tribes of Oklahoma, and have recently entered into an agreement tomanage an additional facility for the Otoe-Missouria Tribe of Indians (whichmust be approved by the NIGC before it becomes effective).

 

The Cripple Creek, Colorado market in whichwe operate the Gold Rush, Gold Digger’s and Uncle Sam’s casinos consists ofeighteen gaming facilities with approximately 4,786 machines, of which weoperate 475.  The Cripple Creek marketgenerated total gaming revenues of approximately $148.6 million in calendaryear 2004.  This is a very competitivemarket that has shown relatively slow revenue growth in recent years even asthe number of gaming devices continues to grow. For that reason, our ability to maintain and grow our Coloradooperations is largely dependent on our ability to increase our market share ina highly competitive environment. Cripple Creek is approximately 40 miles westof Colorado Springs, Colorado in the shadows of Pike’s Peak.  We believe that the Gold Rush and Gold Digger’sCasinos attract customers primarily from Colorado Springs, Pueblo andsurrounding areas; while Uncle Sam’s Casino attracts customers primarily fromthe local Cripple Creek area.

 

Southwest owns a 50 percent membershipinterest in North Metro Harness Initiative, LLC, which was granted licensesfrom the Minnesota Racing Commission to build and operate a harness racingtrack and card room north of the Twin Cities of Minneapolis and St. Paul,Minnesota on January 19, 2005.  Thisfacility, if completed, will compete with an existing thoroughbred racetrack andcard room on the south side of the Twin Cities metropolitan area as well asseveral Indian gaming facilities located outside of the Twin Cities areas.

 

For more information regarding thecompetitive environment in which we operate, please see the “Risk Factors”below under *Item 1. Description of Business* of thisreport.

 

**Dependence on One or a Few MajorCustomers.**

 

Our current gaming activities areconcentrated in our Oklahoma and Colorado operations. The loss of any of theseopportunities or constriction in the scope or types of gaming permitted inthese facilities would have a material adverse effect on our business.

 

We generate a significant portion of ourrevenue through our management agreement with the Cheyenne and Arapaho Tribesof Oklahoma for the Lucky Star casinos in Concho, Oklahoma and Clinton,Oklahoma. Our current management agreement runs through May 20, 2007.  The loss of this contract and the managementfees we receive under it would have a material adverse effect on our financialcondition. A copy of the management agreement, as amended, is attached to theCurrent Report on Form 8-K we filed on October 5, 2004. See Exhibits 10.5 to10.9 of that report.

 

**Patents, Trademarks, Licenses,Franchises and Concessions, Royalty Agreements and Labor Contracts.**

 

In addition to the gaming licenses describedbelow, Southwest owns a federally-registered trademark in the name “Lucky Star”for its gaming-related businesses. Southwest does not own any other registered trademarks or patents orother significant intellectual property.

 

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**Need for Governmental Approvalsof Principal Services.**

 

The gaming industry ishighly regulated at the federal and state levels and gaming on tribal land isfurther regulated by the National Indian Gaming Commission and the Bureau ofIndian Affairs. We must maintain the gaming licenses applicable to each of ouroperations in order to continue our current business and, in most instances,must obtain new or amended gaming licenses in connection with any expansion ofour current operations or development of new gaming facilities. At this time,we have a management contract with the Cheyenne and Arapaho Tribes of Oklahomathat has been approved by the National Indian Gaming Commission. Anymodification of this contract must also be approved by the NIGC.  We have also entered into a Gaming ManagementAgreement with the Otoe-Missouria Tribe of Indians in Oklahoma and thiscontract must be approved by the NIGC before it becomes effective.  In Colorado, we hold licenses issued byColorado Division of Gaming for our Gold Rush, Gold Digger’s and Uncle Sam’scasinos in Cripple Creek.  On January 19,2005, the Minnesota Racing Commission voted to grant North Metro HarnessInitiative, LLC, in which we own a 50 percent membership interest, licenses todevelop and operate a harness racetrack and card club.  In connection with these licenses, theColorado Division of Gaming, the NIGC and the Minnesota Racing Commission mustapprove any addition of a director, officer or five percent or greatershareholder.  In addition, any affiliateof ours, such as the joint venturers we have worked with in pursuit of some ofour new gaming opportunities, is subject to review by and the rules andregulations of any jurisdiction in which we hold a gaming license, and we aresubject to review by and the rules of jurisdictions in which they holdlicenses.

 

**Effect of Existing or ProbableGovernmental Regulations on Business.**

 

The gaming industry and our operations withinthat industry are regulated extensively. The services we provide to the Cheyenne and Arapaho Tribes of Oklahomaat the Lucky Star Casinos, and intend to provide to the Otoe-Missouria Tribe ofIndians at their Seven Clans Paradise Casino, are regulated under the federalIndian Gaming Regulatory Act, the rules and regulations of the National IndianGaming Commission, the rules and regulations of the Cheyenne and Arapaho Tribesand the Otoe-Missouria Tribe, respectively, and of the Oklahoma Gaming Commission.  The Gold Rush, Gold Digger’s and Uncle Sam’scasinos in Cripple Creek, Colorado are subject to the Colorado Limited GamingAct and related rules and regulations that are enforced by the ColoradoDivision of Gaming.  In addition, theMinnesota Racing Commission regulates the activities of North Metro HarnessInitiative, LLC, in which Southwest Casino and Hotel Corp. owns a 50 percentmembership interest, under its Class A and Class B licenses to develop andoperate a harness racetrack and card club on the north side of theMinneapolis-St. Paul metropolitan area.

 

*Regulation of Indian Gaming*

 

The terms and conditions of managementcontracts for the operation of Indian-owned casinos, and of all gaming onIndian land in the United States, are subject to the Indian Gaming RegulatoryAct (“IGRA”), which is administered by NIGC, and also are subject to theprovisions of statutes relating to contracts with Indian tribes, which areadministered by the Secretary of the Interior (the “Secretary”) and the Bureauof Indian Affairs (BIA). The regulations and guidelines under which NIGC willadminister IGRA are evolving. The IGRA and those regulations and guidelines aresubject to interpretation by the Secretary and NIGC and may be subject tojudicial and legislative clarification or amendment.

 

We are required to provide the NIGC withbackground information on each of our directors and each shareholder who holdsfive percent or more of our outstanding securities, including a completefinancial statement, a description of that person’s gaming experience, and alist of jurisdictions in which that person holds gaming licenses. Backgroundinvestigations of key employees also may be required.  Our four new independent directors joined ourBoard of Directors before we submitted their background information to the NIGC. Thus, those directors have agreed not totake any action in connection with our NIGC-approved management agreement withthe Cheyenne and Arapaho Tribes of Oklahoma until the NIGC approves theirservice on our board.  These directorsalso will not take action with regard to our Gaming Management Agreement withthe Otoe-Missouria Tribe of Indians if that contract receives NIGC approval untilthe NIGC approves their service on our board. We submitted the required backgroundinformation for each of these directors to the NIGC on December 7, 2005, thesame day that they joined our board.

 

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Under IGRA, the NIGC must approve ourmanagement contracts as well as any amendments to our management contracts andcertain related agreements.  Our GamingManagement Agreement with the Cheyenne and Arapaho Tribes of Oklahoma has beenapproved by the NIGC and our performance under it remains subject to NIGCregulation. The NIGC may review any management contracts and related agreementsof ours for compliance with IGRA at any time in the future. The NIGC will notapprove a management contract if any of our directors or a 5% shareholders (i)is an elected member of the Indian tribal government that owns the facility wecontract with; (ii) has been or is convicted of a felony gaming offense; (iii)has knowingly and willfully provided materially false information to the NIGCor the tribe; (iv) has refused to respond to questions from the NIGC; or (v) isa person whose prior history, reputation and associations pose a threat to thepublic interest or to effective gaming regulation and control, or create orenhance the chance of unsuitable activities in gaming or the business andfinancial arrangements incidental thereto.

 

In addition, the NIGC will not approve amanagement contract if we or any of our agents have attempted to undulyinfluence any decision or process of tribal government relating to gaming, orif the management company has breached materially the terms of the managementcontract or the tribe’s gaming ordinance, or a trustee, exercising duediligence, would not approve such management contract.

 

The NIGC also will not approve a managementcontract unless the NIGC determines that the contract provides, among otherthings, for (i) adequate accounting procedures and verifiable financial reportsto be furnished to the tribe; (ii) tribal access to the daily operations of thegaming enterprise, including the right to verify daily gross revenues andincome; (iii) minimum guaranteed payments to the tribe, which must havepriority over the retirement of development and construction costs; (iv) aceiling on the repayment of development and construction costs; and (v) acontract term not exceeding five years and a management fee not exceeding 30%of profits; provided that the NIGC may approve up to a seven year term and amanagement fee not to exceed 40% of profits if NIGC is satisfied that thecapital investment required, the risk exposure, and the income projections forthe particular gaming activity justify the larger profit allocation and longerterm.

 

Three separate classes of tribal gaming wereestablished under IGRA – Class I, Class II, and Class III. Class I gamingincludes all traditional or social games played by a tribe in connection withcelebrations or ceremonies. Class II gaming includes games such as bingo,pulltabs, punch boards, instant bingo and card games that are not playedagainst the house. Class III gaming includes casino-style gaming includingtable games such as blackjack, craps and roulette, as well as gaming machinessuch as slots, video poker, lotteries, and pari-mutuel wagering.

 

IGRA prohibits substantially all forms ofClass III gaming unless the tribe has entered into a written agreement with thestate in which the casino is located that specifically authorizes the types ofcommercial gaming the tribe may offer (a “tribal-state compact”). IGRA requiresstates to negotiate in good faith with tribes that seek tribal-state compacts,and grants Indian tribes the right to seek a federal court order to compel suchnegotiations. Many states have refused to enter into such negotiations. Tribesin several states have sought federal court orders to compel such negotiationsunder IGRA; however, the Supreme Court of the United States held in 1996 thatthe Eleventh Amendment to the United States Constitution immunizes states fromsuit by Indian tribes in federal court without the states’ consent.

 

In addition to IGRA, tribal-owned gamingfacilities on Indian land are subject to a number of other federal statutes.The operation of gaming on Indian land is also dependent upon whether the lawof the state in which the casino is located permits gaming by non-Indianentities, which may change over time. Any changes in state law regarding Indianor non-Indian may have a material adverse effect on the casinos we manage andour business.

 

Indian tribes are sovereign nations withtheir own governmental systems, which have primary regulatory authority overgaming on land within the tribe’s jurisdiction. Because of their sovereignstatus, Indian tribes possess immunity from lawsuits to which the tribes havenot otherwise consented or otherwise waived their sovereign immunity defense.Therefore, we are not able to enforce our contracts with Indian tribes unlessthe tribe has expressly waived its sovereign immunity as to the tribe’scontractual obligations. Courts strictly construe such waivers. We haveobtained immunity waivers from the Cheyenne and Arapaho Tribes to enforce theterms of our management agreement with them; however, the scope of thosewaivers has never been tested in court, and may be subject to dispute.

 

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In addition to NIGC regulation, the Cheyenneand Arapaho Tribes of Oklahoma Gaming Commission has primary jurisdiction overthe Lucky Star casinos we manage for the Cheyenne and Arapaho Tribes ofOklahoma.  This Gaming Commissionenforces the provisions of the Tribes’ gaming ordinance, which are subject toreview by NIGC under standards established by IGRA and have received NIGCapproval.  The Gaming Commission approvesgames played at the casinos, performs background checks and issues licenses toall employees of the casinos and to Southwest Casino and Hotel Corp. as managerof the casinos.  In addition, the GamingCommission approves our internal control systems and insures that they meet theminimum internal control standards required by the NIGC, reviews reportsrequired under our Gaming Management Agreement, the tribal gaming ordinance andas part of our internal controls, as well as conducts internal audits of ouroperations.  The Gaming Commission isalso charged with regulating the expanded gaming permitted under the Tribes’gaming compact with the State of Oklahoma.

 

Under the gaming compact between the Tribesand Oklahoma, the state also has regulatory authority over the Lucky Starcasino operations.  The state regulatoryrole is secondary to that of the Tribes’ Gaming Commission, and we anticipatethat it will consist mostly of monitoring our financial reporting and the workof the Gaming Commission.

 

*Gaming Regulation in Colorado*

 

The Colorado Division ofGaming has broad power to ensure compliance with the Colorado gaming laws andregulations (collectively, the “Colorado Regulations”).  The Division mayinspect without notice, impound or remove any gaming device. The ColoradoDirector may examine and copy any licensee’s records, may investigate thebackground and conduct of licensees and their employees, and may bringdisciplinary actions against licensees and their employees.  The Division of Gaming may also conductdetailed background investigations of persons who loan money to, or otherwiseprovide financing to, a licensee.

 

Colorado issues five typesof gaming and gaming-related licenses. These licenses are revocable and non-transferable.  All persons employed at our Colorado casinos,and involved in gaming operations must obtain a Colorado gaming license.  All licenses must be renewed annually, exceptthose for key and support employees, which must be renewed every twoyears.  Failure to maintain any of thelicenses or approvals required to operate the Gold Rush, Gold Digger’s or UncleSam’s casinos would have a material adverse effect on our operations.

 

As a general rule, no personmay have an “ownership interest” in more than three retail gaming licenses inColorado.  In addition, ColoradoRegulations restrict the ability of any person with a substantial interest in amanufacturer or distributor of slot machines to also hold a substantialinterest in a casino operator.  TheDivision of Gaming has ruled that a person does not have a “substantialinterest” if that person’s sole ownership interest in a licensee is through theownership of less than 5% of the outstanding voting securities of a publiclytraded licensee or publicly traded affiliated company of a licensee.

 

Under the ColoradoRegulations, any person or entity having any direct or indirect interest inSouthwest may be required to supply the Colorado Commission with substantialinformation, including, but not limited to, background information, source offunding information, a sworn statement that such person or entity is notholding his or her interest for any other party, and fingerprints.  This information, investigation and licensingas an “associated person” will be required automatically of all persons (otherthan certain institutional investors) that directly or indirectly ownbeneficially 10 percent or more of our outstanding voting securities. Personsthat own more than 10 percent of our outstanding securities must report theirinterest within 10 days and file appropriate applications within 45 days afteracquiring that interest. Persons who directly or indirectly own beneficially 5%or more (but less than 10%) of a direct or indirect beneficial ownership orinterest in our voting securities, must report their interest to the ColoradoCommission within 10 days after acquiring that interest and may be required toprovide additional information and to be found suitable.  All licensing and investigation fees willhave to be paid by the person in question.

 

The Colorado Commission alsohas the right to request information from any person directly or indirectly interestedin, or employed by, a licensee, and to investigate the moral character,honesty, integrity, prior activities, criminal record, reputation, habits andassociations of: (1) all persons licensed pursuant to the Colorado LimitedGaming Act; (2) all officers, directors and stockholders of a licensedprivately held corporation; (3) all officers, directors and stockholdersholding either a 5% or greater interest or a controlling interest in a licensedpublicly traded corporation; (4) all general partners and all limited partnersof a licensed partnership; (5) all persons that have a relationship similar tothat of an officer, director or stockholder of a corporation (such as membersand managers of a limited

 

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liability company); (6) allpersons supplying financing or loaning money to any licensee connected with theestablishment or operation of limited gaming; (7) all persons having acontract, lease or ongoing financial or business arrangement with any licensee,where such contract, lease or arrangement relates to limited gaming operations,equipment devices or premises; and (8) all persons contracting with orsupplying any goods and services to the gaming regulators.

 

The Division of Gaminginterprets the Colorado Regulations to permit investigations of persons orentities providing financing to or acquiring securities from us or our Coloradocasinos.  While the Colorado Regulationsdo not require prior approval for credit facilities or debt securities, theDivision reserves the right to approve, require changes to or require thetermination of any financing.  In anyevent, lenders, note holders, and others providing financing will not be ableto exercise certain rights and remedies without the prior approval of theColorado gaming authorities.  Information regarding lenders and holders ofsecurities will be periodically reported to the Colorado gaming authorities.

 

An application for licensureor suitability may be denied for any cause deemed reasonable by the ColoradoCommission or the Colorado Director, as appropriate. Specifically, the ColoradoCommission and the Colorado Director must deny a license to any applicant who,among other things: (1) fails to prove by clear and convincing evidence thatthe applicant is qualified; (2) fails to provide information and documentationrequested; (3) fails to reveal any fact material to qualification, or suppliesinformation which is untrue or misleading as to a material fact pertaining toqualification; (4) has been convicted of, or has a director, officer, generalpartner, stockholder, limited partner or other person who has a financial orequity interest in the applicant who has been convicted of specified crimes; or(5) has refused to cooperate with any state or federal body investigatingorganized crime, official corruption or gaming offenses.

 

If the Colorado Commissiondetermines that a person or entity is unsuitable to directly or indirectly owninterests in our company, one or more of our Colorado casinos may besanctioned, which may include the loss of our approvals and licenses.

 

In addition, the ColoradoRegulations prohibit us from paying any unsuitable person any dividends orinterest upon any voting securities or any payments or distributions of anykind (except as set forth below), paying any unsuitable person any remunerationfor services, or recognizing the exercise of any voting rights by anyunsuitable person. Further, under the Colorado Regulations, we may repurchasevoting securities from anyone found unsuitable at the lesser of the cashequivalent to the original investment or the current market price as of thedate of the finding of unsuitability unless such voting securities aretransferred to a suitable person (as determined by the Colorado Commission)within sixty (60) days after the finding of unsuitability.

 

Because of their authorityto deny an application for a license or suitability, the Colorado Commissionand the Colorado Director effectively can disapprove a change in corporateposition of a licensee and can cause us to suspend or dismiss managers,officers, directors and other key employees or sever relationships with otherpersons who refuse to file appropriate applications or who the authorities findunsuitable to act in such capacities.

 

The sale, lease, purchaseand conveyance or acquisition of a controlling interest in a Colorado casino issubject to the approval of the Colorado Commission. Under some circumstances,we may not sell any interest in our Colorado gaming operations without theprior approval of the Colorado Commission.

 

Weare required to provide information and file periodic reports with the ColoradoDivision identifying those who have a 5% or greater ownership, financial orequity interest in us, or who have the ability to control us or exercisesignificant influence over us, or who loan money or other things of value tous, or who have the right to share in our limited gaming revenues, or to whomany interest or share in profits of limited gaming has been pledged as securityfor a debt or performance of an act.  Anyperson licensed by the Division of Gaming and any associated person of alicensee must report criminal convictions and criminal charges to the ColoradoDivision.

 

The Colorado Commission hasbroad authority to sanction, fine, suspend and revoke a license for violationsof the Colorado Regulations. Violations of many provisions of the ColoradoRegulations also can result in criminal penalties.

 

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We have been fined for failure to comply withColorado gaming regulations related to maintenance and review of statisticalinformation regarding slot machine performance and have entered into anagreement with the Colorado Division of Gaming under which we agreed to bring ourpractices into compliance. Failure to do so could lead to suspension orrevocation of our license. For more information, see the risk factor regardingrisks we face in connection with obtaining, maintaining and renewing our gaminglicenses under the heading *“Risk Factors”*below in Item 1 of this Report.

 

*Regulation of Horse Racing andCard Clubs in Minnesota*

 

In December 2003, North Metro HarnessInitiative, LLC and Southwest Casino and Hotel Corp. filed applications forClass A and Class B licenses, respectively, to develop and operate a harnessracing track and card club in Anoka County, Minnesota.  The Class B license application wassubsequently amended and, on January 19, 2005, the Minnesota Racing Commission votedto grant Class A and Class B licenses to North Metro.  The Class A License is effective untilrevoked or suspended by the Racing Commission, or relinquished by thelicensee.  The Class B License isrenewable each year by the Racing Commission after a public hearing (ifrequired by the Racing Commission).

 

Minnesota established the Minnesota RacingCommission to regulate horse racing and card playing in the state under itspari-mutuel horse racing statute.  NorthMetro and Southwest, as a 50 percent owner of North Metro, have been subject tothe horse racing statute and rules and regulations promulgated under it (the “RacingAct”) since we filed the Class A and Class B license application.  Our horse racing operations will also besubject to the federal Interstate Horse Racing Act of 1978.

 

The Racing Commission has broad authority toenforce the Racing Act and regulate substantially all aspects of horse racingin Minnesota.  The Racing Commissiongranted and will oversee North Metro’s ownership and operating licenses, will:license all employees of North Metro’s racetrack as well as jockeys, trainers,veterinarians and other participants; regulate the transfer of ownershipinterests in licenses; allocate live race days and simulcast-only race days;approve race programs; regulate the conduct of races; set specifications forthe racing ovals, animal facilities, employee quarters and public areas ofNorth Metro’s racetrack; and regulate the types of wagers on horse races andapprove significant contractual arrangements with North Metro, includingmanagement agreements, simulcast arrangements, totalizator contracts andconcessionaire agreements.  Decisions bythe Racing Commission in regard to any one or more of these matters couldadversely affect the Company’s operations.

 

The Racing Act requires prior approval by theRacing Commission of all officers, directors, 5% shareholders, or other personshaving a present or future direct or indirect financial or management interestin any person applying for a Class A and Class B license, and if a change ofownership of more than 5% of the licensee’s shares is made after an applicationis filed or the license issued, the applicant or licensee must notify theRacing Commission of the changes within five days of this occurrence andprovide the information required by the Racing Act.

 

North Metro submitted a card club plan ofoperation for approval by the Racing Commission in connection with North Metro’sClass B license.  To date, the RacingCommission has not acted on the plan of operation pending resolution of thelitigation challenging its grant of licenses to North Metro.  If the card club plan of operation isapproved, the Racing Commission will regulate the playing of “unbanked” or “playerpool” card games at North Metro’s card club, as well as harness racing.  North Metro must reimburse the RacingCommission for its actual costs, including personnel costs, of regulating thecard club.  North Metro must have theClass B license and card club authorization renewed annually by the RacingCommission after a public hearing (if required by the Racing Commission).

 

*Securities Law Regulation*

 

We are also subject to certain aspects of theSarbanes-Oxley Act of 2002.  This Actrequires creation of a strong and independent accounting oversight board tooversee the conduct of auditors of public companies and strengthens auditorindependence.  It also requires us totake steps to enhance the direct responsibility of senior members of managementfor financial reporting and for the quality of financial disclosures we make;establishes clear statutory rules to limit, and to expose to public view,possible conflicts of interest affecting securities analysts; createsguidelines for audit committee members’ appointment, compensation and oversightof the work of our auditors;

 

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prohibits certain insider trading duringpension fund blackout periods; and establishes a federal crime of securitiesfraud, among other provisions.

 

The process of complying with all applicablestate and federal governmental and tribal regulations is lengthy and hasrequired and will continue to require the expenditure of substantial time andresources.  There can be no assurancethat we will be able to comply on a continuous or timely basis with all applicableregulations, and delays in compliance, or failure to comply, could have amaterial adverse effect on our business, financial condition, results ofoperations and continuing licensability. Changes in existing regulations or the adoption of new regulations atthe federal level or in the states in which we currently operate or arepursuing new opportunities could delay or prevent our compliance with suchregulations.  Our failure to comply withapplicable laws or regulations, whether federal, state or tribal, could resultin, among other things, the termination of management agreements to which weare a party, or the suspension of one or more of our operations, either ofwhich would have a material adverse effect on our business.

 

**Costs and Effects of Compliancewith Environmental Laws****.**

 

Gold Rush I, LLC, a wholly owned subsidiaryof Southwest, leases real property in Cripple Creek, Colorado, a portion ofwhich included a gas station and convenience store.  The gas station and related storage tanks wereremoved in October 1998, before Gold Rush I leased the property. We participatein a Corrective Action Plan approved by the Colorado Department of Labor andEmployment, Division of Oil and Public Safety related to groundwater monitoringand remediation at the site. We have spent approximately $137,000 monitoringand remediating this site since we leased it in March 1999 and estimate thetotal cost of remediation at approximately $170,000. We have applied forreimbursement of some or all of these expenses from the Colorado PetroleumStorage Tank Fund and have received a total of $62,765 in reimbursement to date.We have additional requests for reimbursement pending and will continue torequest reimbursement of any additional expenses incurred in connection withmonitoring and remediation.  We typicallyreceive reimbursement of about two-thirds of our expenses incurred from thePetroleum Tank Storage Fund, but are uncertain whether we will continue toreceive some or all of that reimbursement.

 

**Number of Employees****.**

 

We currently employ approximately 150 fulland part-time employees and we manage approximately an additional 312 full and30 part-time employees of the Cheyenne and Arapaho Tribes of Oklahoma under ourmanagement agreement with the Tribes.

 

**Risk Factors**

 

In addition to the influences identifiedelsewhere in this report, there are several important factors that could causeour actual results to differ materially from those anticipated by us or thatare reflected in any of our forward-looking statements.  These factors, which may impact the successof our operations and our ability to achieve our goals, include the following:

 

**1.                   Risks related to Southwest’s financial condition**

 

**We face specific risks under our management agreementwith the Cheyenne and Arapaho Tribes of Oklahoma**.  OurGaming Management Agreement with the Cheyenne and Arapaho Tribes of Oklahomawill expire on May 19, 2007.  Themanagement fees we receive under this agreement are currently the primarysource of Southwest’s operating revenue. Any extension of the management agreement beyond May 19, 2007 can onlyoccur with the consent of the Cheyenne and Arapaho Tribes of Oklahoma and theapproval of the National Indian Gaming Commission.  We cannot assure you that any furtherextension will be granted and approved.  In addition, even if granted andapproved, the NIGC and the Tribes have the power to unilaterally terminate orvoid the Oklahoma Agreement under certain circumstances, without any recourseby us.  If the Gaming Management Agreementis not extended beyond May 19, 2007, or if it is unilaterally terminated, itwould eliminate the primary source of our operating revenue and have a materialadverse impact on our business results.

 

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**We have an accumulated deficit and uncertainty withrespect to achieving future profitability**.  Wehave incurred substantial operating losses since inception and had anaccumulated deficit of $9,736,506 as of December 31, 2005. These losses areprimarily the result of expenses related to our ongoing pursuit of new gamingopportunities.  There can be no assurancethat we will be able to achieve profitability on a quarterly or annual basis infuture periods.  Our future operatingresults will depend upon a number of factors, including (a) the continuationand future profitability of our Oklahoma and Colorado Operations; (b) ourability to maintain our current gaming licenses and to obtain additional gaminglicenses for new or expanded gaming facilities; (c) our ability to continue tomaintain our contractual and working relationships with the Cheyenne andArapaho Tribes of Oklahoma and to establish working relationships with otherNative American tribes involved in gaming; and (d) our ability to successfullyidentify, secure licensing and maintain all necessary approvals and fundingrelated to any additional future gaming opportunities.

 

**We have a continuing need for additional capital**. We anticipate that we will need substantialadditional funding to effectuate our plans to develop a harness racing trackand card room in Minnesota, to provide working capital to meet current andfuture obligations, and to fund additional gaming projects we may choose topursue.  Our operating plans and financing needs are subject to changedepending on, among other things, market conditions and opportunities; land,equipment or other asset-based financing that may be available in connectionwith our development of gaming facilities; cash flow from operations, if any;and the number of new gaming projects that we pursue. While additional fundsmay be provided through borrowings from institutional investors or projectpartners, equipment leasing or other forms of debt or equity financing, we donot have any unconditional commitments relating to additional financing and wecannot assure you that additional financing will be available when needed. Evenif financing is available when required, we cannot assure you that it will beon terms favorable to us and our security holders in terms of cost or dilution.

 

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

 

**We face litigation threats related to our June andJuly 2004 sale of convertible promissory notes**.  InJune and July 2004, Southwest Casino and Hotel Corp. sold an aggregate of$2,634,000 of convertible promissory notes to accredited investors.  The notes converted into Southwest CasinoCorporation common stock in connection with our reorganization on July 22,2004.  A group of loosely affiliatedinvestors who participated in that offering, each of whom represented toSouthwest that they were “accredited” as defined by Rule 510(a) of theSecurities Act of 1933, as amended, have demanded rescission of theirinvestments and threatened to bring a lawsuit against Southwest and itsdirectors based on what they allege were inadequate disclosures by Southwest atthe time of the offering.  Southwestbelieves these demands for rescission are without merit and has worked withthese investors to reach a resolution without litigation that is not undulyburdensome on the Company or our other shareholders.  While we have had settlement discussions inthe past, we cannot assure you that we will be able to resolve these claims ona reasonable basis, if at all.  If we areunsuccessful in defending this threatened litigation, it could result in largedamage awards.  The costs of defendingthese claims, as well as any damages Southwest may be required to pay, wouldultimately harm our business results and adversely affect future gaming licenseapplications and renewals.

 

**2.                   Additional risks related to Southwest’s NativeAmerican gaming projects:**

 

**The National Indian Gaming Commission has expressedconcern about the distribution of gaming proceeds by the Cheyenne and ArapahoTribes of Oklahoma, for whom we manage casinos. **In December2004, the NIGC notified the Tribes that the NIGC is concerned the Tribes arenot distributing properly the net revenue they receive from gamingoperations.  The NIGC’s concerns relateto the use of gaming revenue after we have distributed

 

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it to the Tribes and are not related to our management of the Tribes’casinos.  However, if the NIGC determinesthat the Tribes have committed a substantial violation of the Indian GamingRegulatory Act, NIGC rules, or the Tribes’ gaming ordinance, it could bring anenforcement action against the Tribes.  If an enforcement action were successful,potential penalties range from fines to, in extreme cases, an order closing theTribes’ gaming operations.  Even though the NIGC’s concerns are notrelated to our management of the Tribes’ casinos, closure of these facilitieswould eliminate the primary source of our operating revenue and have a materialadverse impact on our business results.

 

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

 

For the foregoing reasons, if a tribe were to breach a managementagreement with us, our sole recourse to collect amounts owed to us under ouragreements with that tribe may be to attach undistributed or future proceeds,if any, from the operation of the tribe’s gaming facilities. If gamingoperations fail to develop or, if developed, cease to operate for any reason,our prospects for payment of amounts owed to us are minimal.  Accordingly, if we advance or guarantee anadvance of significant funds to tribes for the development, construction andfurnishing of gaming facilities, we may not be able to recover those funds orhave a viable source for repayment of any funds we are required to expend aguarantee agreement.

 

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

 

**Our facilities and operations, as well as our keypersonnel and some of our security holders, are subject to government andtribal background investigations**.  Failure to complete theseinvestigations satisfactorily could adversely affect our business andoperations.  Our facilities and businessoperations on Indian land are subject to approval, regulation and oversight by,among others, the National Indian Gaming Commission, the Bureau of IndianAffairs, the Secretary of the Interior and various tribal authorities.  For example, all management agreements (andextensions or renewals of such agreements) for Class II or Class III gamingfacilities on Indian land must be approved by the NIGC and the terms of thesemanagement agreements must conform to various NIGC requirements.  The NIGC will not approve management agreementsfor Class II Indian gaming facilities (such as our Oklahoma operations) unlessfederally conducted background checks of our directors and officers, some ofour security holders, and other parties interested in our management agreementshave been completed satisfactorily. States

 

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entering into tribal-state compacts under which we may manage Class IIIgaming facilities may have similar (or more stringent) requirements forbackground checks.

 

**Successful Native American gaming opportunitiestypically depend upon securing and maintaining Tribal-State gaming compactsthat are subject to substantial uncertainty**.  TheIndian Gaming Regulatory Act of 1988 (“IGRA”) provides the framework for theregulation of Class II and Class III gaming on Indian land.  Before ClassIII gaming (video games including video slots and video blackjack; table gameslike blackjack, craps and roulette; and other gaming events like pari-mutuelwagering) may be conducted on Indian land, the IGRA requires that theapplicable tribe and host state negotiate a tribal-state compact authorizinggaming on the tribe’s land. Tribal-state compacts specify how Class III gamingis to be conducted and allocates oversight responsibilities between the tribeand the state.  A tribal-state compact isnot currently required to conduct Class II gaming for Native American tribessubject to the IGRA.

 

We believe that the management and operation of Class III casinosgenerally present significantly greater revenue opportunities than Class IIgaming facilities.  However, our abilityto enter into Class III casino management agreements is dependent upon statesentering into tribal-state compacts that permit Class III gaming, such as thecompact recently approved in the State of Oklahoma. The majority of states havenot entered into tribal-state compacts that permit Class III gaming.  Wecannot predict with any certainty (a) which additional states, if any, willapprove Class III gaming on Indian land; (b) the timing of any such approval;(c) the types of gaming that may be permitted by any tribal-state compact; or(d) whether any state will attempt to renegotiate or take other steps that mayadversely affect existing tribal-compacts.

 

**3.                   Risksrelated to Southwest’s development of the North Metro Harness Initiativeracetrack and card room:**

 

**North Metro’s racing licenses are subject to two legalchallenges.**  An anti-gambling citizens group has filed twolawsuits in efforts to overturn the Class A and B racing licenses granted toNorth Metro by the Minnesota Racing Commission. The first lawsuit, filed in Ramsey County District Court, asserted thatmembers of the Minnesota Racing Commission had violated Minnesota’s “OpenMeeting Law” in the course of its consideration of North Metro’s licenseapplication.  The Court granted theRacing Commission’s motion for summary judgment and dismissed this case in itsentirety on June 23, 2005.  Theanti-gambling group filed an appeal of the dismissal of its claims with theMinnesota Court of Appeals on August 28, 2005. The parties completed briefing this case for the Appellate Court inDecember 2005 and a hearing is schedule for April 20, 2006.

 

In addition, on March 10, 2005, the anti-gambling group filed aseparate petition with the Minnesota Court of Appeals challenging the MinnesotaRacing Commission’s grant of Class A and Class B licenses to North Metro.  The anti-gambling group challenges thevalidity of the Commission’s actions and seeks to have North Metro’s racinglicenses overturned.  On March 28, 2006,the Court of Appeals affirmed the decision of the Racing Commission to grantlicenses to North Metro.  Theanti-gambling group may appeal this decision to the Minnesota Supreme Court,which would then have discretion to decide whether or not to take the case.

 

Southwest cannot predict the final outcome of either of thesecases.  If the anti-gambling group shouldprevail and North Metro’s licenses are overturned, North Metro would be unableto develop the harness track and card club. If North Metro is unable to develop the harness track and card club,Southwest will not realize any revenue or profit from the operation of thefacility.  In addition, Southwest couldexperience a substantial loss on its investment in North Metro.

 

**North Metro cannot complete the debt financing neededto fund development of the North Metro racetrack and card room until thepending litigation is resolved.**  North Metro originally intendedto fund the development of its racetrack and card room with capitalcontributions from Southwest and MTR-Harness totaling $10 million and a debtfinancing of approximately $37 million. Because of the pending legal challenges to North Metro’s Class A and Bracing licenses, North Metro is not able to complete that debt financing.  Because North Metro cannot complete the debtfinancing, Southwest and MTR will likely be required to fund all of North Metro’soperations through capital contributions until the legal challenges have beenresolved.  Due to the unpredictable natureof litigation, Southwest cannot predict if or when North Metro will completeits debt financing.  If North Metro isunable to complete its debt financing on a timely basis, Southwest may berequired to make additional capital contributions to North Metro in excess ofthe capital contributions described elsewhere in this memorandum in order

 

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to maintain its 50 percent ownership interest in North Metro.  In addition, we cannot assure you thatfinancing on the terms originally available to North Metro will be available ifand when the litigation is ultimately resolved in North Metro’s favor.  If North Metro is unable to secure financingon acceptable terms at such time, North Metro may be prevented from developingits racetrack and card room.  If NorthMetro is prevented from developing its racetrack and card room, this willlikely have a material adverse effect on Southwest.

 

**North Metro was required to purchase the real propertyon which it intends to develop the racetrack and card room before thelitigation challenging its racing licenses was resolved.** Because the option agreements under which North Metro purchased the realproperty on which it will build its racetrack and card room could not be extendedon terms favorable to North Metro, Southwest and MTR-Harness, the other 50percent owner of North Metro, determined that North Metro should exercise itsoptions and purchase the real property under the terms of the prior optionagreements.  North Metro has exercisedthose options and closed the purchase of more than 200 acres of land (including24 acres of land not on the North Metro site that will be used for wetlandmitigation) during October 2005.  Thetotal purchase price for land North Metro was approximately $10 million.  If the racing licenses are ultimatelyoverturned as a result of the pending litigation, or North Metro is otherwiseprevented from developing the harness track and card room, North Metro will ownthe real property but will not be able to develop the racetrack and card roomon it.  While we believe the realproperty will have significant value for uses other than a racetrack and cardroom, we cannot assure you that North Metro will be able to recoup the purchaseprice of the property in a sale or sell the property in a timely manner.  If North Metro is unable to recoup itsinvestment in the real property, the value of Southwest’s investment in NorthMetro will be materially adversely affected.

 

**North Metro may havedifficulty receiving required approvals from the Township of Columbus in thefuture. **Under the Conditional Use Permit granted toNorth Metro by the Columbus Township Board, North Metro must receive severalapprovals from the five-member Town Board to proceed with its project.  Two of the five board members, who wereelected after running campaigns in which they opposed the North Metrodevelopment, have consistently voted against approvals sought by North Metro inconnection with this project.  Townshipelections occur each March and, if the township succeeds with a pendingpetition to be incorporated as a city, a new city council could be elected asearly as November 2006.  If opponents ofour project should obtain a majority on the township board or city council, itmay be difficult, or even impossible, for us to receive approvals needed tocomplete or make desirable changes to the project.  If North Metro is prevented from developingits racetrack and card room, this will likely have a material adverse effect onSouthwest.

 

**Southwest and North Metro are dependent onMTR-Harness, Inc., the other 50 percent member of North Metro HarnessInitiative, LLC, for a portion of the funds needed to continue development ofthe North Metro racetrack and card room.**  Underthe North Metro Harness Initiative, LLC Member Control Agreement, Southwest andMTR-Harness, Inc. now provide, in equal amounts, financial support for theongoing operations of North Metro.  IfSouthwest is unable to make any needed capital contribution to those ongoing operations,MTR is the most likely alternative source of those funds.  If Southwest or MTR were to fail to make anyagreed upon capital contributions to North Metro’s operations, North Metro maynot have the financial resources required to develop its racetrack and cardroom.  If North Metro is unable todevelop its racetrack and card room, Southwest will not receive any revenue orprofit from the operation of the facility and the value of Southwest’sinvestment in North Metro will be materially adversely affected.

 

**Delays in developing North Metro’s racetrack and cardroom caused by the pending legal challenges to North Metro’s racing licenseshave and will continue to increase the cost of the project.** Because the racetrack and card room facility that North Metro intends todevelop will be built for that specific purpose and will have little or novalue for other uses, North Metro cannot proceed to construct the facilityuntil we are confident that its racing licenses will not be overturned inconnection with the pending legal challenges. Thus, the legal challenges have caused and will continue to causesignificant delays in developing the North Metro project.  These delays have caused and are likely tocontinue to cause the costs of developing the facility to increasesignificantly due to, among other things, rising interest rates and borrowingcosts, rising construction and labor costs, rising energy prices, and generalinflation.  If North Metro’s racinglicenses are upheld, these rising costs will increase the ultimate developmentcosts for the North Metro facility which will, in turn, delay and reduce theamount of revenue and profit generated by North Metro and available fordistribution to Southwest.

 

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**Actions by the Minnesota state legislature may reducethe value of Southwest’s investment in North Metro.** During the 2005 and 2006 Minnesota legislative sessions, bills have beenintroduced to permit slot machines (commonly referred to as a “racino”) at CanterburyPark, the other Class A licensed pari-mutuel wagering racetrack in the state,without affording North Metro the same expansion in its scope of gaming.  While these initiatives have beenunsuccessful to date, if any legislation should pass in the future thatexcludes North Metro from any expanded gaming opportunities afforded toCanterbury Park or Native American tribes, it would have a material adverseeffect on North Metro’s proposed operations. Similarly, any expansion of gaming generally in Minnesota, whetherNative American gaming or otherwise, that excludes North Metro could also havea material adverse effect on North Metro and its business.  In addition, the legislature has in the pastconsidered, but not adopted, a significant tax on card room revenue that, ifpassed, would reduce significantly net revenue generated by North Metro.

 

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

 

**4.                   Regulatoryrisks related to Southwest’s participation in the gaming industry:**

 

**We, and the gaming industry as a whole, are heavilyregulated and any change in the regulatory environment could have a materialadverse effect on our business and operations**.  The gaming industry is highlyregulated at the federal and state levels and gaming on tribal land is furtherregulated by the National Indian Gaming Commission and the Bureau of IndianAffairs. The process of complying with all applicable government and tribalregulations is complex and requires us to expend substantial time andresources. We cannot assure you that we will be able to comply on a continuousor timely basis with all applicable regulations, and delays in compliance, orfailure to comply, could have a material adverse effect on our business,financial condition, results of operations and our ability to maintain andobtain needed licenses. Changes in existing regulations or the adoption of newregulations at the federal level or in the states in which we operate or pursuenew opportunities could delay or prevent our compliance with those regulations.Our failure to comply with applicable laws or regulations, whether federal,state or tribal, could result in, among other things, the termination ofmanagement agreements to which we are a party or the suspension of some of ouroperations, both of which would have a material adverse effect on our business.

 

**We face risks in connection with obtaining,maintaining and renewing gaming licenses required for the conduct of ourbusiness**.  Thedevelopment and management of gaming facilities are subject to extensivelicensing requirements and we cannot assure you that we will be able to obtainor maintain all necessary licenses, approvals and other clearances fromregulatory authorities having jurisdiction over our gaming facilities. Although we, and our affiliates, have obtained the governmental licenses,permits and approvals we believe are necessary for the development andcontinued management of the Oklahoma and Colorado operations and development ofa harness racing track in Minnesota, we cannot assure you that we will be ableto maintain or renew the necessary licenses, approvals and other clearancesrequired for our operations.

 

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

 

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the ability of our key personnel to obtain or retain required licensesin Colorado. In addition, we must disclose this violation to otherjurisdictions in which we hold or apply for gaming licenses. It is difficult topredict what impact, if any, that disclosure may have on our licensability inthose jurisdictions.

 

**Our facilities and operations, as well as our keypersonnel and some of our security holders, are subject to governmentbackground investigations**.  Failure to complete theseinvestigations satisfactorily could adversely affect our business andoperations.  For example, the State ofColorado currently requires extensive background checks in connection with anapplication for gaming licenses.  Background checks and related approvalsmay take many months to complete.  Wecannot assure you that the necessary background investigations will becompleted satisfactorily.

 

**5.                   Risks related to the gamingindustry generally:**

 

**We face intense competition in the gaming industry**.  Thegaming industry, including the development, operation and management ofracetracks and other types of facilities, is highly competitive, especiallygiven the rapid rate at which the industry is expanding. For example, a numberof management companies may make proposals to a particular Native Americantribe for the development and management of a single gaming facility, and anygaming facilities developed or managed by us will compete with a rapidlyexpanding number of other gaming facilities of varying quality and size,including gaming facilities that are part of national or regional chains, andother forms of gaming and entertainment. Many of our competitors havesubstantially greater financial and personnel resources than we do. Competitionin the future may also be affected by overbuilding, which can adversely affectpatronage levels. Given the current regulatory climate and limited number oflucrative gaming opportunities available, competition is likely to become moreintense in the future.

 

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

 

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

 

**6.                   Additional Risks:**

 

**The success of our current operations and our futuregrowth potential are dependent upon key personnel and will, in the future, beincreasingly dependent on our ability to attract and retain additionalqualified managers and personnel**.  Our success depends to a significant extent upon the effortsand abilities of our executive officers, James B. Druck, Thomas E. Fox, andBrian L. Foster.  We have entered intoemployment agreements with Messrs. Druck and Fox. Each of these individuals hasdeveloped relationships and experience in the gaming industry that are integralto our success.  We do not maintain keyman life insurance on any of these individuals. The loss of the services of one or more of these individuals could havea material adverse effect on our business and current and proposed operations.

 

We will also be required to recruit and retain a significant number ofmanagement, administrative and other employees for any of our proposed gamingfacilities that may come to fruition.  We anticipate that we will be

 

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required to develop and undertake a major training program at each newfacility that we may develop or manage.  In addition, with regard tofacilities on Indian land, we will generally be required to recruit and givepreference to individuals of Native American heritage in order to comply withvarious tribal employment rights ordinances that have been adopted by mosttribes, including the Cheyenne and Arapaho Tribes. While we believe that wewill be able to attract and retain a sufficient number of employees to satisfyour current and future requirements, the competition for such employees,particularly at the management level, will increase significantly in the futureif the gaming industry expands throughout the United States.  There can beno assurance that we will be able to attract and retain the personnel requiredto successfully operate our business.

 

In addition, now that we are conducting our gaming operations as apublic corporation, we are subject to regulations under state and federalsecurities laws such as the Securities Act of 1933, the Securities Exchange Actof 1934, and the Sarbanes-Oxley Act of 2002. Compliance with these laws andregulations will require that we add personnel, including four new independentmembers of our Board of Directors who joined Southwest in December 2005.  All of these directors and some new personnelmust complete background investigations before joining our company orperforming any services for us. Requiring potential directors and employees tocomplete these investigations may make it more difficult to recruit qualifiedcandidates and delays in completing background investigations could adverselyimpact our business and, in the case of director candidates, our ability tocomply with Sarbanes-Oxley Act requirements regarding director independence ona timely basis.

 

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

 

**We have the ability to issue shares of preferredstock, which may reduce the value of our common shares and your rights as acommon shareholder**.  Southwest’s shareholders have authorized theissuance of up to 30 million shares of preferred stock with rights andpreferences to be determined by our Board of Directors.  No shares of preferred stock are outstandingand we do not have a current intent to issue any shares of preferred stock,although we reserve the right to do so in the future.  It is not possible to determine the actualeffect of the authorization and issuance of the preferred stock on the rightsof Southwest shareholders until our Board determines the rights of the holdersof a series of preferred stock.  However,such effects might include, among other effects:

 

•                  restrictionson the payment of dividends to holders of common stock;

•                  dilutionof voting power to the extent that holders of preferred stock are given votingrights;

•                  dilutionof equity interest and voting power if the preferred stock is convertible intocommon stock;

•                  restrictionsupon any distribution of assets to the holders of common stock upon liquidationor dissolution, and restrictions upon the amounts of merger considerationpayable to the holders of common stock upon a merger or acquisition ofSouthwest, until the satisfaction of any liquidation preference granted to theholders of preferred stock;

•                  redemptionrights for holders of preferred stock that may restrict the availability ofrevenue for other corporate uses, including the payment of dividends; and

•                  specialvoting rights for holders of preferred stock in connection with major corporateactions such as mergers, acquisitions or other transactions.

 

In addition, any particular issuance or series of preferred stockcould, depending on the terms, make it more difficult or discourage any attemptto obtain control of Southwest by means of a merger, tender offer, proxycontest or other means.  Issuance ofpreferred stock could have the effect of diluting the stock ownership ofpersons seeking control

 

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of our company, and the possibility of such dilution could have adeterrent effect on persons seeking to acquire control. The Board also could,although it has no present intention of so doing, authorize the issuance ofpreferred stock to a holder who might thereby obtain sufficient voting power toassure that any proposal to effect certain business combinations or amend ourArticles of Incorporation or Bylaws would not receive the required shareholderapproval. Accordingly, the power to issue shares of preferred stock couldenable the Board to make it more difficult to replace incumbent directors andto accomplish business combinations opposed by the incumbent Board.

 

**Because our common stock is traded on the OTC BulletinBoard, your ability to sell shares in the secondary trading market may belimited**.  Ourcommon stock is traded currently in the over-the-counter market on the OTCBulletin Board.  Consequently, the liquidity of our common stock isimpaired, not only in the number of shares that are bought and sold, but alsothrough delays in the timing of transactions, and limited coverage by securityanalysts and the news media, if any, of our company.  As a result, pricesfor shares of our common stock may be lower and more volatile than mightotherwise prevail if our common stock was quoted on the Nasdaq Stock Market ortraded on a national securities exchange like The New York Stock Exchange orAmerican Stock Exchange.

 

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

 

In addition, because our common stock is not listed on Nasdaq or anynational securities exchange and currently trades at less than $5.00 per share,trading in our common stock is subject to Rule 15g-9 under the ExchangeAct.  Under this rule, broker-dealers must take certain steps prior toselling a “penny stock,” which steps include:

 

•                  obtainingfinancial and investment information from the investor;

•                  obtaininga written suitability questionnaire and purchase agreement signed by theinvestor; and

•                  providingthe investor a written identification of the shares being offered and thequantity of the shares.

 

If the broker-dealer does not follow these penny stock rules, theinvestor has no obligation to purchase the shares.  The application ofthese comprehensive rules will make it more difficult for broker-dealers tosell our common stock and our shareholders, therefore, may have difficultyselling their shares in the secondary trading market.

 

# **Item 2.**                              DESCRIPTIONOF PROPERTY

# ** **

We own, lease or manage the following realproperty:

 

Gold Rush I, LLC, a wholly owned subsidiaryof Southwest Casino and Hotel Corp., operates the Gold Rush Casino with 323slot machines, four table games, a bar/restaurant and 13 hotel rooms, and theGold Digger’s Casino with 86 slot machines and a bar.  These properties are physically connected,but operate under separate Colorado gaming licenses.  We lease the casino buildings, anotherbuilding that houses our marketing and accounting offices, the Gold RushPalladium site, two additional storefronts and related parking lots under a20-year lease from Mark and Annesse Brockley, Cripple Creek DevelopmentCorporation and Blue Building Corporation that expires in June 2019.  Gold Rush I pays base rent in the amount of$40,000 per month for this property, plus an additional payment based on thecombined net income of the Gold Rush and Gold Digger’s casinos. Through 2005,we have not been required to make any additional payments based on combined netincome. In addition, Gold Rush I assumed obligations to make numerous paymentsto third parties for outstanding accounts payable and debt obligations relatedto acquisition and operation of the Gold Rush and Gold Digger’s before weentered into this lease.  Theseadditional payments are capped at $125,000 per month. If the payments exceedthat amount, the excess amount is deducted from the base rent due.  In 2005, these assumed obligations averagedapproximately $97,000 per month.  Gold RushI also held an option to purchase this real estate that expired on February 28,2005.

 

Southwest Casino and Hotel Corp., a whollyowned subsidiary of Southwest, operates Uncle Sam’s Casino, which operates 65 slot machines and a bar.  The building is leased under a 5-year leasefrom Lois Woods that was extended

 

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for an additional five years during 2004 andexpires in April 2009.  Southwest paysrent in the amount of $14,000 per month for this facility.

 

Southwest Entertainment, Inc., a wholly ownedsubsidiary of Southwest Casino and Hotel Corp., operates the Gold RushPalladium, an outdoor music amphitheatre with 1,200 seats. The Palladium islocated behind the Gold Rush and Gold Digger’s casinos on a portion of theproperty leased by Gold Rush I, LLC from Mark and Annesse Brockley, CrippleCreek Development Corporation and Blue Building Corporation under the leasedescribed above that expires in June 2019. Southwest Entertainment hosts music events at the Palladium intended toincrease traffic at the Gold Rush and Gold Digger’s casinos. Under the subleasebetween Southwest Entertainment and Gold Rush I for this site, SouthwestEntertainment is required to pay rent of $1,000 per month.

 

In addition to the Gold Rush and Gold Digger’scasinos, the lease with Mark and Annesse Brockley, Cripple Creek Developmentand Blue Building Corporation includes two additional storefronts that wesublease to a third party.  The monthly rent for these properties is$2,000.

 

North Metro Harness Initiative, LLC, in whichSouthwest Casino and Hotel Corp. owns a 50 percent membership interest,purchased approximately 180 acres of real property in Columbus Township, AnokaCounty, Minnesota during October 2005. North Metro intends to build a harnessracetrack and card room on this site. North Metro also acquired a separate 24-acre parcel in the city of Hugoin Washington County, Minnesota that will be used for wetland mitigationrequired in connection with the development of the harness racetrack and cardroom.  North Metro owns all of theseproperties and there are no material liens or encumbrances against them.  We estimate the total cost of thisdevelopment to be $50 million. North Metro has provided about $12 million ofthat amount and, except for expenses related to ongoing operations prior tocommencing construction, intends to borrow the remainder.

 

Lucky Star Concho and Lucky Star Clinton areenterprises of the Cheyenne and Arapaho Tribes of Oklahoma. Southwest Casinoand Hotel Corp. manages these facilities under a NIGC-approved managementagreement that terminates in May 2007. As of December 31, 2005, Lucky Star Concho operated more than 900 gamingmachines, both Class II machines as defined by the NIGC and Class III machinespermitted under the compact between the Tribes and the State of Oklahoma.  Lucky Star Clinton offers more than 370gaming machines, all of which qualify as Class II machines, and adelicatessen.  In January 2005, theCheyenne and Arapaho Tribes entered into a gaming compact with the State ofOklahoma that permits the Tribes to offer certain types of Class III gamingmachines and specified card games.  InApril 2005, the tribal gaming commission authorized us to offer these machinesand games in Lucky Star Concho casino that we manage for the Tribes.  During 2005 we removed the bingo seats atLucky Star Concho and created a new restaurant and bar and added 22 card games,including 13 tables of blackjack and 9 poker tables.

 

Southwest Casino Corporation leases 4,780square feet of office space at 2001 Killebrew Drive, Suite 350 in Minneapolis,Minnesota with a base rent of $8,784 per month plus certain operating costs forits corporate offices under a five-year lease that expires in December 2009.

 

Southwest does not own any interest in realproperty solely for investment purposes. Southwest does not invest in real estate mortgages or in the securitiesof persons primarily engaged in real estate activities.

 

Our management considers our leasedproperties suitable and adequate for our current operations.  In the opinion of our management, all ofthese properties are adequately covered by insurance.

 

# **Item 3.**                              LEGALPROCEEDINGS.

# ** **

North Metro Harness Initiative, LLC, in whichSouthwest Casino and Hotel Corp. owns a 50 percent membership interest, hasintervened in litigation between an anti-gambling group and the MinnesotaRacing Commission.  This litigation beganon December 15, 2004 in the Second District Court, Ramsey County, Minnesota andalleges that members of the Minnesota Racing Commission violated Minnesota’s “openmeeting” law while considering North Metro’s application for licenses to buildand operate a harness racetrack and card room in Columbus Township, AnokaCounty, Minnesota.  On December 29, 2004,the District Court denied plaintiff’s initial motion to enjoin the

 

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Racing Commission from reconsidering anOctober 2004 decision to deny North Metro’s license applications.  An appellate court subsequently denied anemergency petition seeking the same relief. The anti-gambling group continues to pursue this case in an effort toinvalidate the licenses granted to North Metro by the Racing Commission onJanuary 19, 2005.  In June 2005, theDistrict Court issued a summary judgment order dismissing plaintiff’s claimsand in favor of the Minnesota Racing Commission and North Metro.  Plaintiffs subsequently appealed thatdecision to the Minnesota Court of Appeals. Final briefs in that appeal weresubmitted to the court in December 2005 and a hearing in the case is scheduledfor April 20, 2006.  North Metro does notbelieve the Racing Commission violated the Open Meeting Law and that even if aviolation of the Open Meeting Law occurred the remedies for that violation donot include invalidation of its licenses. However, if the Court finds aviolation of the Open Meeting Law and holds that the violation can invalidateNorth Metro’s licenses, the invalidation of the licenses would prevent NorthMetro from developing the racetrack and card room and prevent us from realizingany revenue or profit from this project.

 

In addition, on March 10, 2005, theanti-gambling group filed a petition with Minnesota Court of Appeals appealingthe Minnesota Racing Commission’s grant of Class A and Class B licenses toNorth Metro to develop and operate the harness racetrack and card club.  North Metro and the Minnesota RacingCommission are the relator and the respondent, respectively, in thisproceeding. The anti-gambling group seeks to have the licenses invalidated throughthis appeal.  On March 28, 2006, theAppellate Court affirmed the decision of the Minnesota Racing Commission togrant licenses to North Metro.  Theanti-gambling group can appeal this decision to the Minnesota Supreme Court,which would then have discretion to determine whether or not to hear the case.

 

On June 15, 2005, the Horsemen’s Benevolent and Protective Association(“HBPA”) filed Stipulation of Voluntary Dismissal of its petition requestingthe Minnesota Court of Appeals to review the decision of the Minnesota RacingCommission to grant Class A and B racing licenses to North Metro HarnessInitiative, LLC.  The appellate court issued an order dismissing theappeal on June 20, 2005.  The HBPA’s challenge to the licenses had beenconsolidated with a similar challenge from an anti-gambling group that seeks tohave the North Metro licenses invalidated.  The dismissal of the HBPA’sappeal did not affect the anti-gambling group’s challenge. 

 

On February 15, 2006, Southwest entered intoa Settlement and Release Agreement with MBC Global, LLC.  Under the terms of the Settlement and ReleaseAgreement, Southwest paid MBC $66,000 that Southwest had previously agreed topay under the terminated advisory services agreement and Southwest and MBCreleased each other from all claims raised in an arbitration proceedinginitiated by MBC in September 2005. Southwest did not release MBC from any potential liability related toits actions on behalf of Southwest in its 2004 sale of convertible notes andcorporate reorganization, and MBC did not release any rights to indemnificationit may have under the terminated advisory agreement.

 

During2003 and 2002, an employee issued and cashed company checks and deposited theamounts to the employee’s personal accounts. Our insurance coverage paid a portion of the loss and we have alsowritten off losses of $100,000 in 2004 and $267,000 in 2003.  The employee was terminated in January 2004and was convicted of theft and sentenced to prison during 2005.  In addition, the employee is required to payrestitution but, at this time, we believe it is doubtful that we will receiveany significant restitution payments.

 

Weare involved in other various claims, legal actions and other complaintsarising in the ordinary course of business. In the opinion of management, any losses that may occur from thesematters are adequately covered by insurance or are provided for in ourfinancial statements and the ultimate outcome of these other matters will nothave a material effect on our financial position or results of operations.

 

# **Item 4.**                              SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

# ** **

No matter was submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report.

 

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**PART II**

** **

# **Item 5.**                              MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

# ** **

**Market Information**

** **

Our common stock is quoted on theOver-the-Counter Bulletin Board (OTCBB) of the National Association ofSecurities Dealers, Inc. under the symbol “SWCC.”  Quotation on the OTCBB began February 26,2004.  Before February 26, 2004, ourcommon stock was not quoted on the OTCBB or listed on any exchange. FromFebruary 26, 2004 until completion of our reorganization on July 22, 2004, ourcommon stock was quoted under the symbol “LMAV.”  The market for shares in our common stock islimited because only a small number of our outstanding shares are available fortrading in the public market. The following table sets forth the high and lowbid prices for our common stock, as reported by the OTCBB, for the fiscalquarters indicated:

 
| ** **                               | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------|------------|----------|------------|---------|------------|
| **Fiscal Year ended December 31, 2005:** |       |     |       |    |       |
| Quarter ended Dec. 31, 2005              |       | $        | 0.84       |    | $          | 0.50 |   |
| Quarter ended Sept. 30, 2005             |       | $        | 0.65       |    | $          | 0.22 |   |
| Quarter ended June 30, 2005              |       | $        | 1.80       |    | $          | 0.55 |   |
| Quarter ended March 31, 2005             |       | $        | 4.15       |    | $          | 1.15 |   |
| **Fiscal Year ended December 31, 2004:** |       |     |       |    |       |
| Quarter ended Dec. 31, 2004              |       | $        | 1.50       |    | $          | 0.60 |   |
| Quarter ended Sept. 30, 2004             |       | $        | 2.00       |    | $          | 1.50 |   |
| Quarter ended June 30, 2004              |       | $        | 0.00       |    | $          | 0.00 |   |
| February 26 to March 31, 2004            |       | $        | 0.00       |    | $          | 0.00 |   |

 

Thesebid quotations reflect inter-dealer prices, without retail mark-up, mark-downor commission and may not represent actual transactions.

 

**Number of Record Holders**

** **

As of December 31, 2005 there were 422 recordholders of our common stock.

 

**Dividends**

** **

We have not declared or paid any cashdividend on our common stock.

 

**Sales of Unregistered EquitySecurities during Fourth Fiscal Quarter**

 

On October 20, 2005, Southwest CasinoCorporation issued warrants to purchase 1,100,000 shares of common stock at aprice of $0.50 per share and 150,000 shares of common stock at a price of $0.58per share in connection with a $2.5 million term loan and $450,000 revolvingline of credit provided to Southwest Casino and Hotel Corp. by Crown Bank.  The $2.5 million term loan is secured, inpart, by the guaranties of 12 Southwest Casino Corporation shareholders.  As a condition to entering into the LoanAgreement, James Druck, Chief Executive Officer, Thomas Fox, President andChief Financial Officer, and Jeffrey Halpern, Vice President of GovernmentAffairs of Southwest Casino Corporation, were required by Crown Bank to becomethree of the 12 shareholder guarantors. Mr. Druck, Mr. Fox and Mr. Halpern each personally guaranteed $100,000of this borrowing.  Under the shareholderguaranties, each guarantor is individually liable for a portion of the $2.5million term loan and the aggregate amount guaranteed by all of the shareholderguarantors equals $2.5 million.  Asfurther required by Crown Bank, the guaranties of Mr. Druck, Mr. Fox and Mr.Halpern also apply to the revolving line of credit, while the guaranties ofother shareholders do not.

 

In consideration for these shareholderguaranties, Southwest issued five-year fully exercisable warrants to purchasean aggregate of 1,250,000 shares of its common stock at an exercise price of$0.50 per share to the non-affiliate shareholders and $0.58 per share to Mr.Druck, Mr. Fox and Mr. Halpern.  Eachguarantor received a warrant to

 

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purchase one share of Southwest CasinoCorporation common stock for each $2.00 of term loan guaranteed by thatshareholder.  In consideration of theirrespective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern each received warrantsto purchase 50,000 shares of Southwest Casino Corporation common stock.  The $0.58 per share exercise price of theWarrants held by Mr. Druck, Mr. Fox and Mr. Halpern represented the averageclosing market price of one share of Southwest Casino Corporation’s commonstock over the 10 trading days immediately preceding the closing of the loantransaction.  Warrant holders alsoreceived the right to have the shares of Southwest Casino Corporation commonstock purchasable upon exercise of their warrants included in any registrationstatement that Southwest Casino Corporation may file in the future under theterms of a separate registration rights agreement.

 

Southwest Casino & Hotel Corp. used thenet proceeds from the revolving line of credit to refinance certainindebtedness and for ordinary working capital purposes and used the netproceeds from the $2.5 million term loan to make capital contributions to NorthMetro Harness Initiative, LLC, which in turn used the cash to purchase realproperty for its proposed harness track and card room, and for ordinary workingcapital purposes.

 

The descriptions of the personal guarantiesof Mr. Druck, Mr. Fox and Mr. Halpern, the personal Guaranties of non-affiliateshareholders, the guaranty by trust, the warrants and the registration rightsagreement described above are qualified in their entirety by reference to theform of personal guaranty by Mr. Druck, Mr. Fox and Mr. Halpern, form ofpersonal guaranty by non-affiliates, form of guaranty by trust, form of warrantand form of registration rights Agreement filed as Exhibits 10.9, 10.10, 10.11,4.1 and 4.2 respectively, to the Current Report on Form 8-K Southwest filed onOctober 25, 2005.

 

The warrants were issued by Southwest CasinoCorporation in reliance upon exemptions from the registration requirementsunder the Securities Act of 1933, as amended, including Regulation D andSection 4(2), and applicable state securities laws.  With regard to the reliance upon theexemptions under Regulation D and Section 4(2) under the Securities Act,Southwest Casino Corporation made certain inquiries of the shareholderguarantors to establish that the issuance of the warrants qualified for theseexemptions from the registration requirements. No underwriting commissions ordiscounts were paid with respect to the issuance of the Warrants.

 

**Purchases of EquitySecurities**

** **

We did not purchase any shares of our commonstock or other equity securities during fourth quarter of fiscal 2005.

 

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# **Item 6.**                              MANAGEMENT’S DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION.

# ** **

The following is a discussion and analysis of the financial positionand operating results of Southwest Casino Corporation. (referred to in thisdiscussion, together with its consolidated subsidiaries where appropriate, as “SouthwestCasino”, the “Company”, “we”, “our” and “us”) for the years ended December 31,2005 and 2004.

 

***Summary of Consolidated OperatingResults:***

 

For the year ended December 31, 2005, Southwest had net earnings of$566,350 on revenues of $20,713,018 as compared to a net loss of $(4,358,016)on revenues of $20,208,617 for the year ended December 31, 2004.  Thisamounts to earnings during 2005 of $0.03 per outstanding share ($0.03 per shareon a fully-diluted basis) as compared to a loss of $(0.38) per outstandingshare in 2004, an improvement of $0.41 per share.

 

We attribute this significant improvement in operating resultsprimarily to the following:

 

•                  during2004 we wrote-off our investment in the unsuccessful pursuit of a riverboatcasino in Rockaway Beach, Missouri;

 

•                  during2004 we also incurred significant one-time expenses in connection with ourcorporate reorganization with Lone Moose Adventures, Inc. and, in 2005, wefurther reduced corporate expenses by eliminating staff positions that becameunnecessary when we were unable to proceed with the Rockaway Beach casino; and

 

•                  during2005, we increased revenue from our Gaming Management Agreement with theCheyenne and Arapaho Tribes of Oklahoma as a result of expanded gamingpermitted under a gaming compact the Cheyenne and Arapaho Tribes entered intowith the State of Oklahoma in April 2005, and improved management of the Tribes’gaming facilities.

 

**Overview:**

 

Our principal business is the management, operation, development andprovision of consulting services to gaming facilities in emerging andestablished gaming jurisdictions.  Currently, we operate three casinos inCripple Creek, Colorado — Gold Rush, Gold Digger’s and Uncle Sam’s.  We also manage two Native American gamingoperations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma - LuckyStar Concho and Lucky Star Clinton. Lucky Star Concho is located on U.S. Highway 81, just north of theOklahoma community of El Reno.  LuckyStar Clinton is located 60 miles west of Lucky Star Concho in the community ofClinton, Oklahoma on Old Route 66 near Interstate I-40.  On March 4, 2006, the Cheyenne and ArapahoTribes rescinded their prior approval of an amendment to this agreement underwhich we were to assist them in developing an additional facility at CantonLakes, Oklahoma.  This amendment had beensubmitted to the National Indian Gaming Commission for approval in September2003, but approval was not received.

 

We continually evaluate other management, consulting, development andacquisition opportunities related to gaming that have the potential to generatenew revenue streams for the Company.

 

***Project Development Costs:***

 

*North Metro Harness Initiative, LLC*- In December 2003, we filed a license application with the Minnesota RacingCommission.  This license application wasamended to add a subsidiary of MTR Gaming Group, Inc. (MTR-Harness, Inc.) asour 50% partner.  On January 19, 2005,the Minnesota Racing Commission approved North Metro’s racing licenses, whichwill enable us to develop and operate a harness race track and a 50-table cardroom in Columbus Township, Anoka County, Minnesota.  A local citizens group has filed two lawsuitsagainst the Minnesota Racing Commission in an attempt to get our licenserevoked.  The Ramsey County, Minnesota,District Court granted the Minnesota Racing Commission’s motion for summaryjudgment and dismissed the first lawsuit on June 23, 2005.  Representatives of the citizens group filedan appeal of this decision on September 1, 2005 and oral argument in thisappeal is scheduled for April 20, 2006. On March 28, 2006, in the second lawsuit filed by the same citizensgroup, the Minnesota Court of Appeals affirmed the Minnesota Racing Commission’sdecision to grant racing licenses to North Metro.  This decision may be appealed to theMinnesota Supreme Court, which would then have discretion whether or not totake the case.  We believe that theseattempts to overturn North Metro’s racing

 

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licenses will be unsuccessful, however, if either of these lawsuits isresolved against us, it could prevent completion of this project.  The ongoing litigation has delayed financingand construction until the lawsuits are resolved.  At this time, we cannot predict whenconstruction can begin on this project.

 

On October 20, 2005, we made capital contributions of $2,330,130 toNorth Metro Harness.  Of these capitalcontributions, $1,250,000 was required to fulfill Southwest Casino and HotelCorp.’s capital commitments to North Metro under the North Metro HarnessInitiative, LLC Member Control Agreement dated June 8, 2004.  The remaining $1,080,130 of these capitalcontributions was an additional contribution agreed upon by Southwest Casinoand Hotel Corp. and MTR-Harness, Inc. as managing members of North MetroHarness Initiative, LLC.  MTR-Harness,Inc. made capital contributions of $5,760,043 to North Metro HarnessInitiative, LLC on October 20, 2005.  Ofthese contributions, $4,679,913 was required to fulfill MTR-Harness, Inc.’scapital commitments to North Metro under the North Metro Harness Initiative,LLC Member Control Agreement dated June 8, 2004.  The remaining $1,080,130 of these capitalcontributions was an additional contribution agreed upon by Southwest Casinoand Hotel Corp. and MTR-Harness, Inc. as managing members of North MetroHarness Initiative, LLC.  These capitalcontributions by MTR-Harness, Inc. resulted in MTR-Harness, Inc.’s aggregatecapital contributions to North Metro Harness Initiative, LLC exceedingfinancial contributions from Southwest Casino and Hotel Corp. to North MetroHarness Initiative, LLC and the percentage of funding provided by Southwest nolonger exceeds its 50 percent voting power in North Metro.  For this reason, as of October 20, 2005,North Metro is no longer consolidated with Southwest Casino Corporation andfinancial results are reported as income (loss) from an unconsolidatedsubsidiary under the equity method of accounting.

 

Ourproject cost expenses for the years ended December 31, 2005 and 2004 were$486,242 and $473,578 respectively offset by project costs allocated to MTR(minority interest) for 2005 and 2004 of $204,173 and $108,446, respectively,therefore the net project expenses paid by Southwest were $282,069 and$365,132.  In addition, our loss fromthis unconsolidated subsidiary for the period from October 20, 2005 to December31, 2005 was $39,430.

 

We also have a receivable from North Metro for $1,656,051.  This receivable, together with interest, willonly be paid if cash becomes available from North Metro’s operations (and thenonly after distributions to the members of North Metro for income taxes).  Because North Metro is only obligated torepay this loan out of operating revenue, the existing assets of North Metrowould not be available for repayment if North Metro does not develop andoperated its proposed facilities.

 

*Rockaway Beach* – In September 2002 we responded to arequest for a proposal from the City of Rockaway Beach, Missouri (approximately11 miles from Branson, Missouri) to build a riverboat and redevelop theirdowntown.  In order to obtain a gaminglicense to build a riverboat on the White River at Rockaway Beach, it was firstnecessary to amend the Missouri Constitution, which permitted riverboats onlyon the Mississippi and Missouri rivers. We were awarded the contract by theCity and began incurring costs associated with pursuing this opportunity.  In June 2004, we established a separateentity (Southwest Missouri Gaming, LLC or SMG) to hold the developmentrights.  We transferred our rights andinterests in this project to SMG in exchange for a 30% ownership interest.  Missouri businessman Robert Low acquired 70%of SMG. As of September 30, 2004, SMG had expended $13,978,766, includingexpenditures by us before the formation of SMG. Southwest paid total expenses related to this project of $4,232,181(which includes some expenses for which Southwest did not receive credit whenSMG was formed).  In 2004, our allocableshare of net loss from SMG was $2,361,334 and project costs incurred prior tothe formation of SMG were $361,874.  Theprimary use of the funds was to secure an amendment to the State Constitutionto allow riverboat gaming on the White River at Rockaway Beach.  This initiative was defeated in the primaryelection held August 3, 2004.  While weretain our rights in this entity, we have spent no monies on Rockaway Beach in2005 and have no plans to revive this initiative at this time.

 

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***Operating segments:***

 

The executive officers of the Company review operating results, assessperformance and make decisions related to the allocation of resources on aproperty-by-property basis. We, therefore, believe that each property is anoperating segment.  In order to providemore detail in a more understandable manner than would be possible on aconsolidated basis, and to facilitate discussion of operating revenue, we havegrouped our properties as follows:

 

**Casino Management:**

Lucky Star – Concho

Lucky Star – Clinton

 

**Casino Operations:**

Gold Rush/ Gold Diggers Casino

Uncle Sam’s Casino

 

**Casino Management*:***

 

Southwest Casino and HotelCorp. manages two casinos for the Cheyenne and Arapaho Tribes of Oklahoma underthe Third Amended and Restated Gaming Management Agreement dated June 16,1995.  This Agreement has been extendedtwice and currently expires on May 19, 2007. Southwest is seeking anextension of this agreement beyond May 19, 2007, but is uncertain whether suchan extension can be secured.  If thisagreement is not extended, the Company will lose this revenue source in May2007.

 

On March 24, 2006, Southwest entered into a Gaming Management Agreementwith the Otoe-Missouria Tribe of Indians under which Southwest will manage theTribe’s Seven Clans Paradise Casino in Red Rock, Oklahoma, just south of PoncaCity and North of Stillwater.  The GamingManagement Agreement must be approved by the National Indian Gaming Commissionbefore it becomes effective.  The agreementhas a five-year term that begins the day Southwest takes over management of thecasino.

 

**Lucky Star Concho**

 

Management fees from LuckyStar – Concho were $3,187,836 in 2005 and $2,478,603 in 2004, an increase of29%. Our increase in management fees was driven by expanded gaming and improvedcasino management.  In January 2005, theTribes approved a compact with the state of Oklahoma that permitted the Tribesto offer additional electronic games as well as the ability to offer playerbanked card games.  In April 2005, thetribal gaming commission authorized us to begin offering these additionalgaming opportunities at the Lucky Star - Concho casino.  We anticipate that Lucky Star – Concho willcontinue to realize the benefits of increased revenues over the prior year fromthis expanding gaming in the first quarter of 2006. To date, the advantage fromexpanded gaming at the Lucky Star facilities has not been affected bycompetition from Remington Park, a racetrack in Oklahoma City, that waspermitted to offer the same type of gaming machines as the tribal locations,but is not allowed to offer player-banked card games.  Also, their hours of operations are limitedwhereas we continue to operate 24 hours per day and 7 days per week.  We do expect competition from other Tribes inthe Oklahoma market to increase, but to date the increased competition has nothad a significant impact on our operations.

 

**Lucky Star Clinton**

 

Management fees from LuckyStar Clinton were $1,723,272 in 2005 and $1,604,586 in 2004, an increase of7%.  Our increase in management fees wasdriven by increased awareness of our location, customer service and improvedmachine selection.   The Tribes approvalof a compact with the state of Oklahoma has not had a significant impact on theClinton location primarily because Clinton currently does not have the abilityto expand its facility due to lack of parking. We anticipate that Lucky Star – Clinton will continue to improveoperating results during the first quarter of 2006 as a result of improvedmachine selection. However, in order to increase revenues dramatically, thefacility will have to be expanded, which would require the approval of theCheyenne and Arapaho Tribes and the National Indian Gaming Commission (NIGC).We anticipate that additional competition will come into our market area withinthe next 9 months, but we believe that we will be competitive due to ourcustomer service and machine selection.

 

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**Casino operations:**

 

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

 
| ** **      | ** ** | **Calendar Year** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-----------------|------------|-------------------|------------|--------------------------------------|------------|
| **2005**        | ** ** | **2004**          |
| Casino Revenues |       | $                 | 14,029,918 |                                 | $          | 14,221,835 |   | -1.3 | % |
| Total Revenues  |       | 14,811,603        |       | 14,744,565                           |       | 0.5 | % |
| EBITDA          |       | 3,096,275         |       | 2,738,317                            |       | 13.1 | % |
| EBITDA margin   |       | 20.9              | %          | 18.6                                 | %          |   |   |
|                 |            |                   |            |                                      |            |  |  |  |  |

 

GoldRush/ Gold Digger’s total revenues were slightly higher in 2005 and casinorevenues were slightly lower.  Therevenues remain relatively flat as a result of competition in the market andour inability to add more games to the facility. In 2003 and 2004, we were ableto add more games each year. In order to increase the number of gamingpositions, it will be necessary to do a major renovation of the facility. Wehave been able to improve the EBITDA by improved utilization of our employees,an improvement in our restaurant operations and more productive use of playerincentives.  In the first quarter of2006, we have begun to test our player tracking system and we plan to have itfully operational by the start of the second quarter of 2006.  This will allow us to improve our customerservice and reduce payroll costs.

 

**Uncle Sam’s Casino Results**

 
| ** **      | ** ** | **Calendar Year** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-----------------|------------|-------------------|------------|--------------------------------------|------------|
| **2005**        | ** ** | **2004**          |
| Casino Revenues |       | $                 | 952,067    |                                 | $          | 1,274,877 |   | -25.3 | % |
| Total Revenues  |       | 955,497           |       | 1,278,433                            |       | -25.3 | % |
| EBITDA          |       | (643,016          | )          | (318,177                             | )          | 102.1 | % |
| EBITDA margin   |       | -67.3             | %          | -24.9                                | %          |   |   |
|                 |            |                   |            |                                      |            |  |  |  |  |

 

UncleSam’s Casino is a facility with only 67 slot machines that primarily serves thelocal residents market in Cripple Creek. In 2004, the number of slot machines in the Cripple Creek marketincreased by 628 and, more importantly, a new casino that also caters to thelocal residents entered the market.  As aresult, Uncle Sam’s continues to lose market share.  We have evaluated whether to continueoperation of this facility.  Consideringexpenses related to our lease obligation, which runs until April 2009, and theability to allocate a portion of our overall Colorado operating costs to UncleSam’s operations, it continues to be in our best interest to operate thisfacility.  We believe our revenues atthis location have stabilized and that a number of initiatives planned for2006, along with completion of testing on our player tracking system, willallow us to improve revenues and decrease costs beginning in the second quarterof 2006.

 

**Other Factors Affecting Net Income**:

 
| **Income (Expense)**                          | ** ** | **Calendar Year** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|
| **2005**                                      | ** ** | **2004**          |
| Southwest  Entertainment, Inc.                |       | $                 | (154,265   | )                                    | $          | (146,536 | ) | 5.3 | % |
| Corporate Expense                             |       | 2,407,076         |       | 3,513,230                            |       | (31.5 | )% |
| Interest  Expense (Net)                       |       | (899,743          | )          | (1,122,635                           | )          | (19.9 | )% |
| Other  (income) loss                          |       | (41,465           | )          | (4,992                               | )          | N/M |   |
| Effective  tax rate                           |       | 34                | %          | 0                                    | %          | N/M |   |
| Discontinued  Operations, net of income taxes |       | 0                 |       | (256,582                             | )          | (100 | )% |
|                                               |            |                   |            |                                      |            |  |  |  |  |

 

***Southwest Entertainment, Inc*** is a wholly owned subsidiary of SouthwestCasino and Hotel Corp. that conducts concerts at the Gold Rush Palladium, a1,200 seat outdoor amphitheater adjacent to the Gold Rush Casino.   We conduct musical events for the purpose ofattracting people to Cripple Creek and our casino properties.  The increased loss in 2005 is due primarilyto additional rent paid to Gold Rush.

 

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***Corporate expenses*** decreased 31.5% primarily due to a decrease in legal and accountingexpenses of $667,000 and a decrease in payroll of $382,000 compared to the sameperiod for the prior year. The additional legal and accounting expenses for2004 were incurred in connection with the merger with Lone Moose Adventures,Inc. and additional costs in connection with the filing requirements for theSecurities and Exchange Commission.  Thedecrease in payroll cost was a result of eliminating a number of employees thatwe had added in anticipation of a successful bid to develop a new gamingfacility in Rockaway Beach, Missouri.

 

***Interest Expense*** decreased 19.9% as a result of retirement of outstanding loans andrenegotiation of the financing for the player tracking and slot accountingsystem installed at the Colorado casinos in January 2004.

* *

***Effective tax rates*** for 2005 reflect the federal statutory rate.  However, we are not required to make asignificant cash payment for federal or state income taxes due to theutilization of net operating loss carryforwards.  For 2004, we had a net operating loss forwhich we provided no tax benefit because of a lack of certainty that the netoperating loss carryforward would be available to offset future income.

 

***Discontinued Operations*** reflect the results of operations for Southwest Casino Deadwood, LLCthat we closed February 28, 2004, and thus includes only two months ofoperations that year.  For calendar year2005, there is no loss from discontinued operations in Deadwood, SD.

 

***Liquidity and Capital Resources***

 

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

 

Net cash provided by operatingactivities during the year ended December 31, 2005 was $2,172,172 compared to$1,565,560 during the year ended December 31, 2004 an increase of $606,612 or38.7%. The increase between years is due primarily to our efforts to decreasecorporate expenses, in particular legal and accounting expenses, and animprovement in operating income at Gold Rush/Gold Digger’s.

 

Netcash used in investing activities for the year ended December 31, 2005 was$4,056,164 compared to net cash used in investing activities of $3,911,095during the year ended December 31, 2004, an increase of $145,069 or 3.7%.  During 2005, we invested an additional$2,975,364 in North Metro Harness Initiative, LLC, $606,751 in property andequipment.  In 2004, we had invested$2,242,166 in the Rockaway Beach initiative and we also purchased a playertracking system for the casinos we own and operate in Colorado.

 

Netcash provided by financing activities for the year ended December 31, 2005 was$2,328,581 compared to net cash provided by financing activities of$2,367,801during the year ended December 31, 2004, a decrease of $39,430 or1.7%.  In 2005, we borrowed $2,500,000and repaid $433,839 of debt.  During2004, we issued $2,449,760 of Convertible Demand Notes (net of issuance costs)and borrowed an additional $940,672.

 

On October 20, 2005, we entered into a new $2.5 million term loanagreement with Crown Bank of Minneapolis, Minnesota.  This loan accrues interest at a floating rateequal to prime plus 1 percent with a minimum interest rate of 7.5 percent peryear and a current interest rate of 8 percent. We are required to pay interest only until April 2006, after which wewill be required to repay the outstanding principal balance and accruedinterest over 12 months, with final payment due April 30, 2007.  The repayment period may be extended if wemeet certain business goals.  Thisobligation is guaranteed by us and secured by substantially all of ourassets.  In addition, 12 shareholders ofthe Company have each guaranteed a portion of the principal amount of thisloan.  As required by Crown Bank, theshareholder guarantors of this loan include Jim Druck, CEO, Tom Fox, Presidentand CFO, and Jeff Halpern, Vice President of Government Affairs, who have eachguaranteed repayment of up to $100,000 of principal and accrued interest.  In addition, Gus Chafoulias, who subsequentlyjoined our Board of Directors, guaranteed $300,000.  As discussed above, the proceeds of this loanwere used primarily to fund our capital requirements to NMHI under the membercontrol agreement entered into in June 2004. Our current cash flows from operations should be sufficient tomeet our normal operating requirements during the next twelve months, includingthe terms of repayment for the $2.5 million loan.  Southwest may need additional equity or debtfinancing to meet its capital commitments to North

 

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Metro and pay for additions to the playertracking and slot accounting system installed in Colorado.  North Metro will need additional debt orequity financing to fund the development of its racetrack and card room inMinnesota.

 

In consideration of the agreement of 12 ofour shareholders to guarantee portions of the $2.5 million term loan from CrownBank that we entered into on October 20, 2005, we issued 5-yearfully-exercisable warrants to purchase 1,250,000 shares of our common stock tothese shareholders.  Each shareholderguarantor received a warrant to purchase one share of common stock for each$2.00 of the term loan guaranteed by that shareholder.  Of these, warrants to purchase 1,100,000shares of common stock have an exercise price of $.50 per share.  This includes a warrant to purchase 150,000shares of our common stock issued to Gus Chafoulias, who was not an affiliateof Southwest at that time, but subsequently joined our Board of Directors.  In consideration of the respective guaranteesof $100,000 of loan proceeds, Jim Druck, CEO, Tom Fox, President and CFO, andJeff Halpern, Vice President of Government Affairs, each received a warrant topurchase 50,000 shares of common stock at a price of $.58 per share.  The $.58 per share exercise price representedthe average closing market price of one share of Southwest Casino Corporationcommon stock over the 10 trading days immediately preceding the closing of theloan transaction.

 

***Line of Credit.***  We refinanced our $450,000 line of credit asof October 20, 2005 with Crown Bank and it is now due on April 30, 2007 with avariable interest rate (currently 8.5%). At December 31, 2005, approximately$446,000 had been drawn on the line of credit. The credit line is guaranteed byus and secured by substantially all of our assets.  In addition, Jim Druck, CEO, Tom Fox,President and CFO, and Jeff Halpern, Vice President of Government Affairs, haveeach guaranteed repayment of up to $100,000 of principal and accrued interest,which guarantee applies to both the $2.5 million term loan and the revolvingline of credit.

 

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

 

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

 

**Competitive Pressures:**

 

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

 

Although, the short-term effect on the Company of such competitivedevelopments generally has been negative, we are not able to determine thelong-term impact, whether favorable or unfavorable, that development andexpansion trends and events will have on current or future markets. We believethat the geographic diversity of our operations, our service training, ourrewards and customer loyalty programs, and our continuing efforts to improveour facilities will insure continued customer loyalty and will enable us toface the competitive challenges present within our industry.

 

**PoliticalUncertainties:**

 

The casino entertainment industry is subject to political andregulatory uncertainty. From time to time, individual jurisdictions haveconsidered legislation or referendums that could adversely impact ouroperations. The likelihood or outcome of similar legislation and referendums inthe future is difficult to predict.

 

The casino entertainment industry represents a significant source oftax revenues to the various jurisdictions in which casinos operate. From timeto time, various state and federal legislators and officials have proposedchanges in tax laws, or in the administration of tax laws, that would affectthe industry. It is not possible to determine with certainty the scope or likelihoodof possible future changes in tax laws or in the administration of tax laws. Ifadopted, changes in tax law could have a material adverse effect on ourfinancial results.

 

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In addition, the development of the harness racetrack and card room byNorth Metro Harness Initiative has faced significant political opposition.  The same citizens group that has attempted tooverturn North Metro’s racing licenses through lawsuits has supportedcandidates for the Columbus Township Board of Supervisors who would vote toblock the project if given the opportunity. The next elections will be held in March of 2007, unless the township’spending efforts to be incorporated as a city succeed before then, in which casenew elections for city council members could occur as early as November2006.  If opponents of our project wereto win a majority of seats in any of these elections, it could make completionof the North Metro project more difficult, more expensive, or , while unlikely,stop the project completely.

 

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

 

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

 

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

 

Our executive officers consider “EBITDA” (earnings before interest,taxes, depreciation and amortization) a useful tool for measuring the operatingperformance of Southwest.  EBITDA is alsoa widely used measure of operating performance in the gaming industry and aprincipal basis for valuation of gaming companies.  We use EBITDA to establish budgets, analyzeresults as compared to our budgets, and as a basis for incentive compensationfor some personnel.  However, EBITDA isnot a measurement of financial performance under accounting principlesgenerally accepted in the United States and should not be considered analternative to net income, cash flows from operating activities, or otherperformance measures derived in accordance with accounting principles generallyaccepted in the United States as indicators of our operating performance or asmeasures of our liquidity.  Southwest hassignificant uses of cash flows, including capital expenditures, interestpayments and debt principal repayments that are not reflected in our EBITDAcalculations.  Our management usesEBITDA, and we present it in this discussion and analysis, only as a supplementto measures prepared in accordance with accounting principles generallyaccepted in the United States.  Please beaware that other companies in our industry may calculate EBITDA differentlythan we do, which limits its usefulness as a comparative measure.

 

***Private Securities Litigation Reform Act*:**

 

This Annual Report on Form10-KSB contains “forward-looking statements” intended to qualify for the safeharbor from liability established by the Private Securities Litigation ReformAct of 1995. You can identify these statements by the fact that they do notrelate strictly to historical or current facts. These statements often containwords such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,”“intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negativeor other variations of those words or comparable terminology. In particular,they include statements relating to, among other things, future actions, newprojects, strategies, future performance, the outcome of contingencies such aslegal proceedings and future financial results. We have based theseforward-looking statements on our current expectations and projections aboutfuture events.

 

Wecaution the reader that forward-looking statements involve risks anduncertainties that cannot be predicted or quantified and, consequently, actualresults may differ materially from those expressed or implied in theforward-looking statements. These risks and uncertainties include, but are notlimited to, the following factors as well as other factors described from timeto time in our reports filed with the Securities and Exchange Commission:

 

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

 

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•                  thepotential change of policies and personnel of tribal governments, which couldadversely affect our relationships;

 

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

 

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

 

•                  accessto available and feasible financing;

 

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

 

•                  successof our customer-tracking and customer loyalty programs;

 

•                  abnormalgaming holds;

 

•                  litigationoutcomes and judicial actions, including gaming legislative action, referendaand taxation;

 

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

 

•                  Theeffects of environmental and structural building conditions relating to the Company’sproperties;

 

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

 

•                  actsof war or terrorist incidents.

 

Any forward-lookingstatements are made pursuant to the Private Securities Litigation Reform Act of1995 and, as such, speak only as of the date made. We undertake no obligationto publicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

31

----

# ** **

# **Item 7.          FINANCIALSTATEMENTS.**

 

**SOUTHWESTCASINO CORPORATION**

Table ofContents

 
| Report of Independent Registered Public  Accounting Firm                                                        |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets December 31,  2005 and 2004                                                         |   |
| Consolidated Statements  of Operations for the Years Ended December 31, 2005 and 2004                           |   |
| Consolidated Statements of Cash Flows for the Years Ended December  31, 2005 and 2004                           |   |
| Consolidated Statements of Changes in Stockholders’ Equity for the  Years Ended December 31, 2005 and 2004 |   |
| Notes to Financial Statements                                                                                   |   |

# ** **

F-1

----

 

[Letterhead of Eide Bailly LLP]

##  

##  

## **REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors

**Southwest Casino Corporation**

Minneapolis, Minnesota

 

We have audited theaccompanying consolidated balance sheets of **SouthwestCasino Corporation** (the Company) as of December 31, 2005 and 2004,and the related consolidated statements of operations, stockholders’ equity andcash flows for the years then ended. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based upon ouraudits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we do not express such an opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates by management, as well asevaluating the overall financial statement presentation. We believe our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of **SouthwestCasino Corporation** as of December 31, 2005 and 2004 and the resultsof its operations and its cash flows for the years then ended, in conformitywith accounting principles generally accepted in the United States of America.

 
|   | /s/ Eide Bailly LLP |
|--------|---------------------|

 

Minneapolis, Minnesota

February 24, 2006, except for the fifth paragraph of Note 21, for whichthe date is March 24, 2006

 

F-2

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Balance Sheets**

**December 31, 2005 and 2004**

 
| ** **                                                                                                                         | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                                                                               |       |        |       |        |       |
| ASSETS                                                                                                                             |       |        |       |        |       |
|                                                                                                                               |       |        |       |        |       |
| CURRENT  ASSETS                                                                                                                    |       |        |       |        |       |
| Cash and  Cash Equivalents                                                                                                         |       | $           | 1,195,145  |        | $          | 750,556 |   |
| Cash -  Restricted                                                                                                                 |       | 2,656       |       | 202,147     |       |
| Accounts  Receivable                                                                                                               |       | 125,341     |       | 136,247     |       |
| Management  Fees Receivable                                                                                                        |       | 443,453     |       | 241,227     |       |
| Inventories                                                                                                                        |       | 148,283     |       | 154,724     |       |
| Prepaid Expenses                                                                                                                   |       | 574,371     |       | 640,610     |       |
| Total  Current Assets                                                                                                              |       | $           | 2,489,249  |        | $          | 2,125,511 |   |
|                                                                                                                               |       |        |       |        |       |
| PROPERTY AND  EQUIPMENT                                                                                                            |       |        |       |        |       |
| Real Estate  Options                                                                                                               |       | $           | —     |        | $          | 657,034 |   |
| Construction  in Progress                                                                                                          |       | —      |       | 1,208,762   |       |
| Leasehold  Improvements                                                                                                            |       | 15,671,888  |       | 15,668,826  |       |
| Furniture  and Equipment                                                                                                           |       | 5,984,114   |       | 6,387,001   |       |
| Accumulated  Depreciation                                                                                                          |       | (9,547,838  | )          | (7,819,758  | )          |
| Net Property  and Equipment                                                                                                        |       | $           | 12,108,164 |        | $          | 16,101,865 |   |
|                                                                                                                               |       |        |       |        |       |
| OTHER ASSETS                                                                                                                       |       |        |       |        |       |
| Intangible  Assets                                                                                                                 |       | $           | 944,730    |        | $          | 1,439,165 |   |
| Deposits                                                                                                                           |       | 101,150     |       | 100,024     |       |
| Investment  in unconsolidated subsidiary                                                                                           |       | 4,298,367   |       | —      |       |
| Deferred Tax  Asset                                                                                                                |       | 573,000     |       | 842,000     |       |
| Total Other  Assets                                                                                                                |       | $           | 5,917,247  |        | $          | 2,381,189 |   |
|                                                                                                                               |       |        |       |        |       |
| TOTAL ASSETS                                                                                                                       |       | $           | 20,514,660 |        | $          | 20,608,565 |   |
|                                                                                                                               |       |        |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                         |       |        |       |        |       |
|                                                                                                                               |       |        |       |        |       |
| CURRENT  LIABILITIES                                                                                                               |       |        |       |        |       |
| Accounts  Payable                                                                                                                  |       | $           | 638,409    |        | $          | 2,468,807 |   |
| Accounts  Payable - Construction in Progress                                                                                       |       | —      |       | 316,442     |       |
| Accrued  Expenses                                                                                                                  |       | 1,058,758   |       | 869,579     |       |
| Accrued  Liabilities - Related Parties                                                                                             |       | 249,947     |       | 707,763     |       |
| Notes  Payable                                                                                                                     |       | 446,292     |       | 883,101     |       |
| Current  Portion of Long-Term Liabilities                                                                                          |       | 2,778,571   |       | 767,436     |       |
| Convertible  Subordinated Series A Debentures                                                                                      |       | —      |       | 100,000     |       |
| Accrued  Interest Payable                                                                                                          |       | 17,552      |       | 109,775     |       |
| Total  Current Liabilities                                                                                                         |       | $           | 5,189,529  |        | $          | 6,222,903 |   |
|                                                                                                                               |       |        |       |        |       |
| LONG-TERM  LIABILITIES                                                                                                             |       |        |       |        |       |
| Long-Term  Liabilities Net of Current Portion                                                                                      |       | $           | 9,112,672  |        | $          | 9,017,472 |   |
|                                                                                                                               |       |        |       |        |       |
| STOCKHOLDERS’  EQUITY                                                                                                         |       |        |       |        |       |
| Preferred  Stock, $.001 Par Value; 30,000,000 shares authorized                                                                    |       | $           | —     |        | $          | — |   |
| Common  Stock, $.001 Par Value 50,000,000 Shares Authorized, 19,588,656 and 5,256,786  Shares Issued and Outstanding, Respectively |       | 19,589      |       | 19,366      |       |
| Additional  Paid-in Capital                                                                                                        |       | 17,052,916  |       | 16,775,220  |       |
| Accumulated  Deficit                                                                                                               |       | (10,860,046 | )          | (11,426,396 | )          |
| Total  Stockholders’ Equity                                                                                                   |       | 6,212,459   |       | 5,368,190   |       |
|                                                                                                                               |       |        |       |        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                   |       | $           | 20,514,660 |        | $          | 20,608,565 |   |

 

See Notes to Consolidated Financial Statements

 

F-3

----

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Operations**

**For the Years Ended December 31, 2005 and2004**

 
| ** **                                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **REVENUES**                                                           |       |       |       |       |       |
| Casino                                                                 |       | $          | 14,981,985 |       | $          | 15,496,712 |   |
| Food &  Beverage/Hotel                                             |       | 582,546    |       | 433,119    |       |
| Management  and Consulting                                             |       | 4,911,105  |       | 4,083,189  |       |
| Entertainment                                                          |       | 26,178     |       | 102,430    |       |
| Other                                                                  |       | 211,204    |       | 93,167     |       |
| Total  Revenue                                                         |       | 20,713,018 |       | 20,208,617 |       |
|                                                                   |       |       |       |       |       |
| **EXPENSES**                                                           |       |       |       |       |       |
| Casino                                                                 |       | $          | 11,839,907 |       | $          | 12,018,880 |   |
| Food &  Beverage/Hotel                                             |       | 1,474,223  |       | 1,583,978  |       |
| Corporate  Expense                                                     |       | 2,480,942  |       | 3,861,962  |       |
| Project  Development Costs                                             |       | 736,739    |       | 835,452    |       |
| Entertainment                                                          |       | 158,204    |       | 199,867    |       |
| Depreciation  and Amortization                                         |       | 2,358,065  |       | 2,433,699  |       |
| Total  Expenses                                                        |       | 19,048,080 |       | 20,933,838 |       |
|                                                                   |       |       |       |       |       |
| Income from  Operations                                                |       | $          | 1,664,938  |       | $          | (725,221 | ) |
|                                                                   |       |       |       |       |       |
| **OTHER  INCOME (EXPENSE)**                                            |       |       |       |       |       |
| Interest  Income                                                       |       | $          | 6,899      |       | $          | 8,459 |   |
| Interest  Expense                                                      |       | (934,417   | )          | (1,131,094 | )          |
| Loss on  Disposition of Property and Equipment                         |       | (44,813    | )          | (9,909     | )          |
| Income from  Debt Forgiveness                                          |       | —     |       | 9,219      |       |
| Total Other  Income (Expense)                                          |       | (972,331   | )          | (1,123,325 | )          |
|                                                                   |       |       |       |       |       |
| Loss from  Continuing Operations                                       |       |       |       |       |       |
| Before  Income Taxes                                                   |       | 692,607    |       | (1,848,546 | )          |
|                                                                   |       |       |       |       |       |
| Income Tax  Benefit (Expense)                                          |       | (291,000   | )          | —     |       |
| Minority  Interest in Loss of Consolidated Subsidiary                  |       | 204,173    |       | 108,446    |       |
| (Loss) of  Unconsolidated Subsidiaries, Net of Tax Benefit             |       | (39,430    | )          | (2,361,334 | )          |
|                                                                   |       |       |       |       |       |
| Income  (Loss) from Continuing Operations                              |       | 566,350    |       | (4,101,434 | )          |
|                                                                   |       |       |       |       |       |
| **DISCONTINUED  OPERATIONS**                                           |       |       |       |       |       |
| Loss from  Discontinued Operations                                     |       | $          | —     |       | $          | (256,582 | ) |
| Income Tax  Benefit                                                    |       | —     |       | —     |       |
| Total  Discontinued Operations                                         |       | —     |       | (256,582   | )          |
|                                                                   |       |       |       |       |       |
| **NET  INCOME (LOSS)**                                                 |       | $          | 566,350    |       | $          | (4,358,016 | ) |
|                                                                   |       |       |       |       |       |
| Earnings per  common share and common equivalent share, Basic:         |       |       |       |       |       |
| Loss from  continuing operations                                       |       | 0.03       |       | (0.36      | )          |
| Discontinued  operations                                               |       | —     |       | (0.02      | )          |
| Net Income  (Loss)                                                     |       | $          | 0.03       |       | $          | (0.38 | ) |
|                                                                   |       |       |       |       |       |
| Common  Equivalent Shares Outstanding                                  |       | 19,531,402 |       | 11,460,771 |       |
|                                                                   |       |       |       |       |       |
| Earnings per  common share and common equivalent share, Fully-diluted: |       |       |       |       |       |
| Loss from  continuing operations                                       |       | 0.03       |       | (0.36      | )          |
| Discontinued  Operations                                               |       | —     |       | (0.02      | )          |
| Net Income  (Loss)                                                     |       | $          | 0.03       |       | $          | (0.38 | ) |
|                                                                   |       |       |       |       |       |
| Common  Equivalent Shares Outstanding                                  |       | 22,463,724 |       | 11,460,771 |       |

 

See Notes to Consolidated Financial Statements

 

F-4

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Cash Flows**

**For the Years Ended December 31, 2005 and2004**

 
| ** **                                                                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows  from Operating Activities:                                                    |       |       |       |       |       |
| Net Income  (Loss)                                                                        |       | $          | 566,350    |       | $          | (4,358,016 | ) |
| Adjustments  to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: |       |       |       |       |       |
| Minority  Interest in Loss of Consolidated Subsidiary                                     |       | (204,173   | )          | (108,446   | )          |
| Depreciation  and Amortization                                                            |       | 2,358,065  |       | 2,468,021  |       |
| Amortization  of loan costs                                                               |       | 28,770     |       | —     |       |
| Loss on  Disposition of Property and Equipment                                            |       | 44,813     |       | 9,909      |       |
| Impairment  Loss on gaming equipment                                                      |       | 69,290     |       | —     |       |
| Common Stock  Issued for Non-Cash Compensation                                            |       | 20,625     |       | 325,375    |       |
| Loss of  Unconsolidated Subsidiaries                                                      |       | 39,430     |       | 2,361,334  |       |
|                                                                                      |       |       |       |       |       |
| Change in  Current Assets and Liabilities,                                                |       |       |       |       |       |
| (Increase)  Decrease in Restricted Cash                                                   |       | 199,491    |       | (202,147   | )          |
| (Increase)  Decrease in Receivables                                                       |       | (191,320   | )          | 243,714    |       |
| (Increase)  Decrease in Inventories                                                       |       | 6,441      |       | 14,706     |       |
| (Increase)  Decrease in Prepaid Expenses                                                  |       | (127,060   | )          | (70,610    | )          |
| (Increase)  decrease in deferred tax asset                                                |       | 269,000    |       | —     |       |
| Increase  (Decrease) in Accounts Payable                                                  |       | (1,004,506 | )          | 797,672    |       |
| Increase  (Decrease) in Accrued Expenses                                                  |       | 189,179    |       | 309,767    |       |
| Increase  (Decrease) in Accrued Interest Payable                                          |       | (92,223    | )          | (225,719   | )          |
| Net Cash  Provided By Operating Activities                                                |       | $          | 2,172,172  |       | $          | 1,565,560 |   |
|                                                                                      |       |       |       |       |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                     |       |       |       |       |       |
| Proceeds  from Sale of Property and Equipment                                             |       | $          | —     |       | $          | 5,725 |   |
| Purchase of  Property and Equipment                                                       |       | (606,751   | )          | (1,918,543 | )          |
| Proceeds  from Principal Received on Long-Term Notes Receivable                           |       | —     |       | 402,686    |       |
| (Increase)  Decrease in Deposits                                                          |       | (1,126     | )          | 57,940     |       |
| Payment of  Capitalized License                                                           |       | (196,542   | )          | (207,136   | )          |
| Payments to  related parties                                                              |       | (457,816   | )          | —     |       |
| Conversion  of Consolidated to Uncosolidated Subsidiary                                   |       | (19,185    | )          | —     |       |
| Investment  in Unconsolidated subsidiary                                                  |       | (2,774,744 | )          | (2,251,767 | )          |
| Net Cash  (Used In) Investing Activities                                                  |       | $          | (4,056,164 | )          | $          | (3,911,095 | ) |
|                                                                                      |       |       |       |       |       |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                     |       |       |       |       |       |
| Net Advances  on Short-Term Notes Payable                                                 |       | $          | (433,839   | )          | $          | 590,672 |   |
| Proceeds  from Line of Credit                                                             |       | —     |       | 350,000    |       |
| Proceeds  from Convertible Demand Notes, Net of Issuance Costs of $182,240                |       | —     |       | 2,449,760  |       |
| Proceeds  from Long-Term Borrowings                                                       |       | 2,500,000  |       | —     |       |
| Principal  Payments on Long-Term Borrowings                                               |       | (853,989   | )          | (948,577   | )          |
| Proceeds  from Investor in Consolidated Subsidiary - Minority Interest                    |       | 1,167,408  |       | 108,446    |       |
| Proceeds  from Issuance of Common Stock                                                   |       | 24,001     |       | 75,000     |       |
| Proceeds  from Issuance of Preferred Stock & Warrants                                 |       | —     |       | 5,000      |       |
| Settlement  of Convertible Subordinated Debentures                                        |       | (75,000    | )          | (262,500   | )          |
| Net Cash  Provided by Financing Activities                                                |       | $          | 2,328,581  |       | $          | 2,367,801 |   |
|                                                                                      |       |       |       |       |       |
| Net Increase  in Cash and Cash Equivalents                                                |       | 444,589    |       | 22,266     |       |
|                                                                                      |       |       |       |       |       |
| CASH AND  CASH EQUIVALENTS                                                                |       |       |       |       |       |
| Beginning of  Year                                                                        |       | 750,556    |       | 728,290    |       |
| End of Year                                                                               |       | $          | 1,195,145  |       | $          | 750,556 |   |
|                                                                                      |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                                         |       |       |       |       |       |
| Interest  paid                                                                            |       | $          | 886,135    |       | $          | 1,364,671 |   |
| Income taxes  paid                                                                        |       | $          | 197        |       | $          | 1,138 |   |
|                                                                                      |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                   |       |       |       |       |       |
| Common stock  issued in exchange for compensation                                         |       | $          | 20,625     |       | $          | 325,375 |   |
| Equipment  purchased through financing                                                    |       | $          | 25,303     |       | $          | 986,929 |   |
| Conversion  of Accounts Payable to Long-Term Debt                                         |       | $          | 460,324    |       |       |   |

 

See Notes to Consolidated Financial Statements

 

F-5

----

 

**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Changes inStockholders’ Equity**

**For the Years Ended December 31, 2005 and2004**

 
| ** **                                        | ** ** | **Series A  Convertible  Preferred Stock** | ** **             | **Common  Stock** | ** ** | **Additional  Paid-in Capital** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------------------|-------------------|------------|---------------------------------|------------|------------------------|------------|-----------|------------|
| **Number  of  Shares**                            | ** ** | **Amount**                                 | **Number  of  Shares** | ** **        | **Amount** |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| **BALANCE December 31, 2003**                     |       | 8,067,506                                  |                   | $                 | 161,350    |                            | 5,256,786  |                   | $          | 105,136   |       | $ | 13,311,968 |   | $ | (6,989,617 | ) | $ | 6,588,837 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for Services             |       | —                                     |                   | —            |       | 187,500                         |       | 3,750                  |       | 18,750    |       | — |   | 22,500 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for Debt                 |       | —                                     |                   | —            |       | 2,649,551                       |       | 52,991                 |       | 2,596,560 |       | — |   | 2,649,551 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Conversion to New Common Stock $.001 par          |       | (8,067,506                                 | )                      | (161,350          | )          | 8,067,593                       |       | (145,715               | )          | 307,065   |       | — |   | — |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Reverse Merger - Lone Moose                       |       | —                                     |                   | —            |       | 3,208,550                       |       | 3,208                  |       | 75,555    |       | (78,763 | ) | — |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Common Stock Purchased                            |       | —                                     |                   | —            |       | 1,500,000                       |       | 1,500                  |       | 73,500    |       | — |   | 75,000 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Cancellation of Stock - Lone Moose                |       | —                                     |                   | —            |       | (2,489,192                      | )          | (2,489                 | )          | (15,068   | )          | — |   | (17,557 | ) |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for Services             |       | —                                     |                   | —            |       | 939,685                         |       | 940                    |       | 339,060   |       |   |   | 340,000 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for Debt                 |       | —                                     |                   | —            |       | 45,455                          |       | 45                     |       | 49,955    |       | — |   | 50,000 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Warrants                              |       | —                                     |                   | —            |       | —                          |       | —                 |       | 17,875    |       | — |   | 17,875 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Net Loss                                          |       | —                                     |                   | —            |       | —                          |       | —                 |       | —    |       | (4,358,016 | ) | (4,358,016 | ) |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| **BALANCE December 31, 2004**                     |       | —                                     |                   | $                 | —     |                            | 19,365,928 |                   | $          | 19,366    |       | $ | 16,775,220 |   | $ | (11,426,396 | ) | $ | 5,368,190 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for Debt                 |       |                                       |                   |              |       | 22,728                          |       | 23                     |       | 24,978    |       |   |   | 25,001 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Common Stock for exercise of warrants |       |                                       |                   |              |       | 200,000                         |       | 200                    |       | 23,800    |       |   |   | 24,000 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Warrants for Services                 |       |                                       |                   |              |       |                            |       |                   |       | 20,625    |       |   |   | 20,625 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Issuance of Warrants for Loan Guarantee           |       |                                       |                   |              |       |                            |       |                   |       | 208,293   |       |   |   | 208,293 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| Net Income                                        |       |                                       |                   |              |       |                            |       |                   |       |      |       | 566,350 |   | 566,350 |   |
|                                              |       |                                       |                   |              |       |                            |       |                   |       |      |       |   |   |   |   |
| **BALANCE December 31, 2005**                     |       | —                                     |                   | $                 | —     |                            | 19,588,656 |                   | 19,589     |      | 17,052,916 |   | (10,860,046 | ) | 6,212,459 |   |

 

F-6

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

####  

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

 

Southwest Casino Corporation

 

Southwest Casino and HotelCorp. is the primary, wholly-owned operating subsidiary of Southwest CasinoCorporation and was our parent company until the July 2004 reorganization thatresulted in our current structure. Southwest Casino and Hotel Corp. was organized under the laws of theState of Minnesota in 1992 under the name “Southwest Casino and Hotel Ventures,Inc.” and we have operated in the gaming industry since formation.

 

On July 22, 2004, Southwest Casino and HotelCorp. merged with Lone Moose Acquisition Corporation, a wholly-owned subsidiaryof Lone Moose Adventures, Inc., a Nevada corporation.  Lone Moose Acquisition Corporation was formedsolely for the purpose of completing our reorganization.  Southwest Casino and Hotel Corp. was thesurviving corporation in that merger and became a wholly-owned subsidiary ofLone Moose Adventures, Inc., which changed its name to Southwest Casino Corporation.  Under the terms of the reorganizationagreement among Southwest Casino and Hotel Corp., Lone Moose Adventures, Inc.and certain shareholders of Lone Moose Adventures, Inc., Southwest CasinoCorporation acquired 100% of the issued and outstanding shares of SouthwestCasino and Hotel Corp. common and preferred stock in exchange for 16,161,343shares of its common stock issued to the shareholders of Southwest Casino andHotel Corp.  Including shares of LoneMoose common stock acquired by principal shareholders of Southwest Casino andHotel Corp. before the reorganization, the former Southwest Casino and HotelCorp. equity security holders acquired approximately 92% of the outstandingsecurities of Southwest Casino Corporation in the reorganization.

 

The reorganization represents arecapitalization of Southwest Casino Corporation with accounting treatmentsimilar to that used in a reverse acquisition, except that no goodwill orintangible is recorded.  Arecapitalization is characterized by the merger of a private operating companyinto a non-operating public shell corporation with nominal net assets andtypically results in the owners and managers of the private company havingeffective operating control after the transaction.  Southwest Casino Corporation emerged as thesurviving reporting entity after the reorganization.

 

Southwest Casino Corporation,through its wholly-owned subsidiaries, operates three casinos in Cripple Creek,Colorado, manages Native American gaming facilities under contractualagreements, and offers and has provided consulting services for casinos.  Southwest Casino Corporation’s operationsinclude the following consolidated and unconsolidated subsidiaries:

 

Southwest Casino andHotel Corp.

 

SouthwestCasino and Hotel Corp. was formed in 1992 and provides management and consultingservices for casinos under contractual agreements and operates Uncle Sam’sCasino in Cripple Creek, Colorado.

 

Gold Rush I, LLC

 

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

 

Southwest Entertainment.Inc.

 

Southwest Entertainment,Inc., located in Minneapolis, Minnesota, was formed on November 4, 1998. Thecompany operates an outdoor amphitheatre for entertainment events in CrippleCreek, Colorado.

 

F-7

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2005 AND 2004**

 

North Metro Harness Initiative, LLC (Unconsolidated)

 

North Metro Harness Initiative, LLC (North Metro) (a development stageMinnesota limited liability company) was formed on June 16, 2003 for thepurpose of developing, owning, and operating a harness racetrack and card roomnorth of Minneapolis, Minnesota, in Anoka County.  North Metro was issued licenses to own andoperate the racetrack by the Minnesota Racing Commission on February 16,2005.  As a result of the MinnesotaRacing Commission’s decision, the Commission is being sued by a group opposedto the racetrack.  North Metro cannotmove forward with its development until this matter is resolved.  North Metro’s activities are described morefully in Note 6.

 

SW Missouri, LLC 

 

SW Missouri,LLC was formed on May 25, 2004.  Its soleasset is a 30% membership interest in Southwest Missouri Gaming, LLC.

 

### Southwest Missouri Gaming, LLC (unconsolidated)

 

SouthwestMissouri, LLC owns a 30% membership interest in Southwest Missouri Gaming, LLC,which was formed March 29, 2004. Southwest Missouri Gaming, LLC pursued state and local regulatoryapproval and property acquisition for a riverboat casino in Rockaway Beach,Missouri, which required an amendment to the state constitution.  The ballot initiative to amend theconstitution was defeated in a statewide primary election on August 3,2004.  All costs associated with thisinitiative were charged to expense in 2004. Southwest Missouri Gaming, LLC spent no monies on Rockaway Beach in2005.  While the Company retains itsrights in this entity, it has no plans to revive this initiative at thistime.  See Note 6.

###  

### **NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

# ** **

# **Principlesof Consolidation**

# ** **

# **Theaccompanying consolidated financial statements include the accounts of SouthwestCasino Corporation, its wholly-owned subsidiaries, and North Metro Harness Initiative,LLC which is treated as a variable interest entity (“VIE”) subject toconsolidation for the year ended December 31, 2004, but not for the year endedDecember 31, 2005.  See note 6.  All material inter-company transactions andbalances have been eliminated in consolidation.**

 

# **Basis ofAccounting**

# ** **

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

 

Use of Estimates

 

The preparation of financial statements inconformity with generally accepted accounting principles in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the period.  Actual results could differ from thoseestimates.

 

Cash Equivalents

 

The Company considers all highly liquid debtinstruments purchased with a maturity of three months or less when purchased tobe cash equivalents.

 

F-8

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

Revenue Recognition

 

Casino revenue is the net win from gamingactivities, which is the difference between gaming wins and losses.  Revenue from food, beverage and hoteloperations is recorded upon delivery of goods or services, and excludespromotional allowances.  Revenue from casinomanagement and consulting contracts with outside parties is recognized over theterm of the agreements.  Considerationgiven in exchange for entering into long-term contracts is amortized over thelife of the agreement.

 

Receivables and Credit Policies

 

Accounts receivable are uncollateralizedobligations under normal trade terms requiring payment within 20 days frominvoice date, and do not accrue interest. Accounts receivable are stated at the amount billed to thecustomer.  Payments of accounts receivableare allocated to the specific invoices identified on the customer’s remittanceadvice or, if unspecified, are applied to the earliest unpaid invoices.

 

The carrying amount of receivables is reducedby a valuation allowance that reflects management’s best estimate of theamounts that will be collected. Management reviews all trade receivable balances that exceed 30 daysfrom the invoice date and, based on an assessment of the currentcreditworthiness, estimates the portion, if any, of the balance that will notbe collected.

 

# **Net IncomePer Share – Basic and Diluted**

# ** **

# **Net incomeper share is computed by dividing the net income for the period by the weightedaverage number of common shares outstanding during the period presented.  Basic earnings per share exclude the dilutiveeffect of options, warrants and convertible securities, while diluted earningsper share include such effects only during years when the Company reports netincome.**

 

### Inventories

 

Inventories consist principally of food and beverage products and giftshop merchandise.  Inventories arecarried at cost, determined under the first-in, first-out (FIFO) method.

###  

Concentrations of Credit Risk

 

The Company’s cash balances maintained in bank depositoriesperiodically exceed federally insured limits.

 

Advertising Costs

 

The Company expenses advertising costs as incurred.  Advertising expense for the years endedDecember 31, 2005 and 2004 was approximately $393,000 and $395,000,respectively.

 

### Employee Benefit Plan

 

The Company has established a defined contribution profit sharing planfor its eligible employees.  To be eligible,an employee must be 21 years of age and have completed one year ofservice.  Contributions to the plan aremade at the discretion of management, based on results of operations from yearto year.  No discretionary contributionswere made during 2005 or 2004.

 

The Company has adopted a 401(k) retirement plan.  The plan provides for employee pre-tax salarydeferrals of up to 10% of a participant’s compensation (not to exceed federallimits) and a matching contribution by the Company — dollar for dollar up to 3%and fifty cents per dollar up to 5% of the participant’s compensation.Employees are eligible for the plan if they have completed one year of service,as defined in the plan, and are at least 21 years old.

 

F-9

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

A participant is fully-vested after one year of service, as defined inthe plan.  The Company’s matchingcontribution for the years 2005 and 2004 was $93,889 and $97,279, respectively.

###  

### Property and Equipment

 

Real estate options include costs related to agreements for options topurchase land.

 

Construction in progress consists of amounts incurred for thearchitectural, engineering and other construction planning costs that meetcapitalization criteria.  As of December31, 2005 and 2004, construction in progress consisted of architectural, zoning,engineering and construction permit application costs.

 

Property and equipment are carried on the books at cost.  Depreciation on property and equipment iscalculated using the straight-line method over their estimated useful lives,which range from 3 to 10 years.  Uponsale or retirement, the cost and related accumulated depreciation areeliminated from the respective accounts, and the resulting gain or loss isincluded in the income statement.

 

Repair and maintenance charges, which do not increase the useful livesof the assets, are charged to expense as incurred.

 

Depreciation expense was$1,122,920 and $1,228,733 for the years ended December 31, 2005 and 2004,respectively.

 

Leaseholds attributable to thelease in Note 11**have beencapitalized in accordance with generallyaccepted accounting principles and are being amortized over 20 yearsusing the straight-line method.

 

Amortization expense for theseleaseholds was $725,340 for each of the years ended December 31, 2005 and 2004.

 

Long-lived assets to be held and used are tested for recoverabilitywhenever events or changes in circumstances indicate that the related carryingamount may not be recoverable. When required, impairment losses on assets to beheld and used are recognized based on the fair value of the asset. Certainlong-lived assets to be disposed of by sale are reported at the lower of carryingamount or fair value less cost to sell.

 

Income taxes

 

Provisions for income taxes are based on taxes payable or refundablefor the current year and deferred taxes on temporary differences between theamount of taxable income and pretax financial income and between the tax basesof assets and liabilities and their reported amounts in the financialstatements. Deferred tax assets and liabilities are included in the financialstatements at currently enacted income tax rates applicable to the period in whichthe deferred tax assets and liabilities are expected to be realized or settledas prescribed in FASB Statement No. 109, Accounting for Income Taxes. Aschanges in tax laws or rate are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes.

 

Organization and start-up costs

 

Organization and start-up costs are expensed as incurred.  Organization costs consist of amounts relatedto the formation of a company.  Start-upcosts consist of amounts incurred during the development stage related to theoperation, management and development of a company, which do not qualify as acapitalized cost.  For federal and stateincome tax purposes the Company elected to capitalize and amortize start-upcosts pursuant to Internal Revenue Code (IRC) Section 195(B).

 

F-10

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

Stock based compensation

 

The Company uses the intrinsic value method of accounting forcompensation costs for stock based awards. Under the intrinsic value method, the fair value of the shares less theamount the employee is required to pay for the shares is recorded as compensationexpense over the applicable period of service related to the award.

 

Operating segments

 

The Company has segregated its activities into three operating segmentsbased on operating and management characteristics related to its sources ofrevenue or basis for accumulating assets or expenses.  The segments are defined as casinooperations, casino management for unrelated parties, and casino developmentactivities.  Separate operations areaggregated based on the above general segment descriptions.

 

**NOTE 3 – RESTRICTED CASH**

 

Restricted Cash at December 31, 2005 and 2004 represents a bank escrowaccount set up to repurchase Series A convertible subordinated debentures thatwere outstanding as of July 14, 2004 (See Note 9).

 

# **NOTE 4 –PROMOTIONALALLOWANCES**

 

# **Revenue doesnot include the retail amount of rooms, food, and beverage providedgratuitously to customers, which was $1,115,953 and $1,263,506 in 2005 and2004, respectively.**

 

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

** **
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Casino  management contract rights               |       | $        | 722,229    |     | $          | 1,232,029 |   |
| Minnesota  Class A and B Racing License          |       | —   |       | 207,136  |       |
| Loan Costs -  Note Payable - Crown Bank (Note 7) |       | 222,501  |       | —   |       |
| Total                                            |       | $        | 944,730    |     | $          | 1,439,165 |   |

 

TheCompany entered into an agreement with the Cheyenne and Arapaho Tribes ofOklahoma (CATO) for management of its casinos located in Oklahoma, which was toexpire on May 19, 2004.  In exchange forextending the contract through May 19, 2007, the Company has transferred titleof a tract of land to CATO.  The exchangetook place in 2003.  Since the assettransfer is related to the extension agreement for management services, thecost of the land is being amortized over the term of the agreement.

 

Managementrevenues of $4,911,105 and $4,083,189 were earned related to the agreement withCATO for the years ended December 31, 2005 and 2004, respectively.  The Company is seeking an extension of thisagreement beyond May 19, 2007, but is uncertain whether such an extension canbe secured.  If this agreement is notextended, the Company will lose this revenue source in May 2007.

 

Amortizationexpense of the contract rights for the years ended December 31, 2005 and 2004was $508,805 and $297,386, respectively. Amortization expense on the loan costs associated with the Crown BankNote for the years ended December 31, 2005 and 2004 was $28,770 and $0,respectively.  See Note 11 for adiscussion of this loan.

 

Amortizationexpense for future years is estimated as follows:

 

| **Year  Ended December 31,** | ** ** | **Contract Rights** | ** ** | **Loan Costs** | ** ** |
|------------------------------|------------|---------------------|------------|----------------|------------|
| 2006                         |       | $                   | 509,800    |           | $          | 167,215 |   |
| 2007                         |       | $                   | 212,414    |           | $          | 54,989 |   |

 

F-11

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2005 AND 2004**

 

TheCompany has also expended funds to acquire Class A and Class B racing licensesfrom the Minnesota Racing Commission. Although these licenses are renewed on an annual basis, the costs ofobtaining the initial licenses are considered to have an indefinite useful lifebecause it is expected to generate cash flows indefinitely.  The license costs are no longer included inthe consolidated balance sheet as of October 20, 2005.  See the discussion in Note 6.

 

###### **NOTE 6 — VARIABLE INTERESTENTITY AND UNCONSOLIDATED SUBSIDIARIES**

 

**NorthMetro Harness Initiative, LLC**

 

The Company evaluated whether North Metro should be treated as avariable interest entity (“VIE”) subject to consolidation during the applicablereporting periods under FIN 46(R).  TheCompany determined that North Metro should be treated as a VIE and that NorthMetro should be consolidated within the Company’s financial statements for theyear ended December 31, 2004 and until October 20, 2005, for the followingreason:

 

The Company lacked the ability through voting or similar rights to makedecisions regarding North Metro’s activities because the Company’s votingrights were not proportionate to the Company’s obligation to absorb expectedlosses of the entity.  Until October 20,2005, the Company had provided approximately 67 percent of North Metro’sfinancial support, but held only 50 percent of the North Metro votingpower.  Because the Company would absorbfinancial losses of North Metro that were disproportionate to its 50 percentdecision making power, we determined that North Metro is a VIE subject toconsolidation for the year ended December 31, 2004 and until October 20, 2005.

 

On October 20, 2005, MTR-Harness, Inc. (“MTR”) made capitalcontributions of $5,760,043 to North Metro Harness Initiative, LLC.  Of these contributions, $4,679,913 wasrequired to fulfill MTR’s capital commitments to North Metro under the NorthMetro Harness Initiative, LLC Member Control Agreement dated June 8, 2004.  The remaining $1,080,130 of these capitalcontributions was an additional contribution agreed upon by Southwest Casinoand Hotel Corp. and MTR as managing members of North Metro Harness Initiative,LLC.  These capital contributions by MTRresulted in MTR’s aggregate capital contributions to North Metro HarnessInitiative, LLC exceeding financial contributions from Southwest Casino andHotel Corp. to North Metro Harness Initiative, LLC.  Because it is no longer true that the Companywould absorb financial losses in excess of its decision making power, NorthMetro is no longer consolidated with Southwest Casino Corporation and in thefuture, financial results will be reported as income (loss) from anunconsolidated subsidiary by the Company under the equity method of accounting.

 

On October 20, 2005, the Company also made capital contributions of$2,330,130 to North Metro Harness Initiative, LLC.  Of these capital contributions, $1,250,000was required to fulfill Southwest Casino and Hotel Corp.’s capital commitmentsto North Metro under the North Metro Harness Initiative, LLC Member ControlAgreement dated June 8, 2004.  The remaining$1,080,130 of these capital contributions was an additional contribution agreedupon by Southwest Casino and Hotel Corp. and MTR as managing members of NorthMetro Harness Initiative, LLC.

 

North Metro Harness Initiative, LLC used these capital contributions tocomplete the purchase of approximately 165 acres of land in Columbus Township,Anoka County, Minnesota.  The purchasewas completed in accordance with the terms of an option agreement thatcommenced on March 1, 2003.  North MetroHarness Initiative, LLC notified the seller of its intent to purchase the realestate under the terms of the option agreement on July 27, 2005.  The purchase price for the land was$8,450,000 plus real estate commissions and closing costs.  The price paid at closing was reduced by$630,000, the amount of option payments made by North Metro under the optionagreement.  North Metro intends todevelop a harness racetrack and card room on the site. As of December 31, 2004,North Metro had made payment under the option agreement of $350,000.

 

North Metro also purchased two additional parcels of land.  On October 7, 2005, North Metro purchasedapproximately 24 acres of land for $600,000 in the city of Hugo in AnokaCounty, Minnesota.  North Metro intendsto use the property for wetland mitigation work in connection with itsdevelopment of a harness track and card room

 

F-12

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

in Columbus Township, Minnesota. On October 14, 2005, North Metrocompleted the purchase of approximately 13.4 acres of land in ColumbusTownship, Anoka County, Minnesota.  Thepurchase was completed in accordance with the terms of an option agreement thatcommenced on July 17, 2003.  The purchaseprice for the land was $700,000 plus real estate commissions and closingcosts.  The price paid at closing wasreduced by $32,000, the amount of option payments made by North Metro under theoption agreement.  The site adjoins realestate on which North Metro intends to develop a harness racetrack and cardroom.  As of December 31, 2004, NorthMetro had made payments under the option agreement of $21,000.

 

As of December 31, 2005, the Company has contributed $3,719,455 inconsideration of its membership interests in North Metro.  In addition, the Company has advanced$1,656,051 for costs related to North Metro that the Company paid, and whichexceeded the Company’s agreed pre-license capital contribution of $1,000,000, beforethe Minnesota Racing Commission granted racing licenses to North Metro.  These advances, together with interest, willonly be paid out of first available cash from operations (and then aftercertain distributions to the members for income tax purposes).  Although the pre-licensing advances to NorthMetro are characterized as a payable to the Company under the North MetroHarness Initiative, LLC Member Control Agreement dated June 8, 2004, theCompany treats these payments as an additional investment in North Metro andtherefore does not account for these payments as a receivable.  The Company has combined the advances and itscapital contributions into an investment in an unconsolidated subsidiary on itsfinancial statements and has accounted for this investment and all North Metroactivity since October 20, 2005 under the equity method of accounting.

 

For the year ended December 31, 2005, the Company recorded $486,242 inNorth Metro project expense in its financial statements.  The Company has not included the assets ofNorth Metro in its consolidated financial statements, but rather has recordedits capital contributions and the Company’s receivable from North Metro as aninvestment in an unconsolidated subsidiary and is accounting for all activitysince October 20, 2005 on the equity method. This receivable is included in the investment in unconsolidatedsubsidiary on the December 31, 2005 consolidated balance sheet.  The receivable, together with interest, willonly be paid if cash becomes available from North Metro’s operations (and thenonly after distributions to the members of North Metro for payment of incometaxes).  Because North Metro is onlyobligated to repay this loan out of operating revenue, the existing assets of NorthMetro would not be available for repayment if North Metro does not develop andoperate its proposed facilities.

 

The balance sheet of North Metro on October 20, 2005 is no longerincluded in the Company’s consolidated balance sheet for the year endedDecember 31, 2005.  For the year endedDecember 31, 2004, North Metro was included in the Company’s consolidatedbalance sheet. The balance sheets of North Metro as of October 20, 2005 andDecember 31, 2004, are as follows:

 

| ** **                                | ** ** | **October 20, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ASSETS                                    |       |                 |       |                  |       |
| Cash and  Cash Equivalents                |       | $                    | 19,185     |                  | $          | 5,929 |   |
| Prepaid  Expenses                         |       | 193,298              |       | —                |       |
| Real Estate  Options                      |       | 739,257              |       | 407,257               |       |
| Construction  in progress                 |       | 1,349,798            |       | 1,208,762             |       |
| Capitalized  Licenses                     |       | 418,211              |       | 207,136               |       |
| Total Assets                              |       | $                    | 2,719,749  |                  | $          | 1,829,084 |   |
|                                      |       |                 |       |                  |       |
| LIABILITIES  AND EQUITY                   |       |                 |       |                  |       |
| Accounts  Payable                         |       | $                    | 150,477    |                  | $          | 504,840 |   |
| Due to  Affiliates                        |       | 1,550,337            |       | 1,156,782             |       |
| Southwest  Casino and Hotel Corp. Capital |       | 1,093,408            |       | 1,000,000             |       |
| MTR-Harness,  Inc. Capital                |       | 1,275,854            |       | 108,446               |       |
| Retained  Earnings                        |       | (1,350,327           | )          | (940,984              | )          |
| Total  Liabilities and Equity             |       | $                    | 2,719,749  |                  | $          | 1,829,084 |   |

 

F-13

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

North Metro has received a letter of commitment to provide debtfinancing for approximately 79% of the expected total project cost of the racetrack and card room, with the remaining 21% to be provided in the form ofequity by North Metro.  Terms of thiscommitment include a $33,000,000 loan amortized over 10 years with interest ata variable rate (1.74% above prime rate) and a 7% interest rate floor, and anadditional $4,250,000 loan, amortized over 5 years with interest at a fixedrate of 20%, is available if needed, but North Metro is not obligated to borrowthis money to obtain the $33,000,000 primary loan.  In addition, 50% of net available cash flow(after scheduled debt service and income taxes) would be required to be held inan account to redeem the debt. Redemption under this provision occurs when the account equals theprincipal amount of the loan outstanding. Security for the loan will include a first mortgage, corporate guaranteeof the Company, and security interests in other assets of the Company.  The closing of the loan is expected to occurafter various court challenges to North Metro’s Class A and B racing licensesare resolved.  Funding the loan willoccur as needed for the construction project.

 

North Metro, has entered intoan agreement for the development of the land, building and related property tooperate a racetrack and card room.  Feesrelated to the agreement total 3% of the project cost not to exceed $750,000,which is defined as the total development cost less the cost to purchase theland.  The agreement began on May 1,2003, and continues until the completion of the project, unless earlierterminated.  Fees are payable at a rateof $6,000 per month, plus applicable out of pocket expenses, beginning on May1, 2003.  Upon the start of construction,two thirds of the expected fee (less previous monthly payments) is due.  If the agreement is terminated prior to thecompletion of the project, any unpaid fees are determined based on thecompleted status of the project at the time of termination, as defined in theagreement.

 

North Metro has entered intoconsulting agreements with non-related parties to monitor legislation andperform lobbying activities related to establishing and developing theracetrack and card room.  The agreementsare generally on a month-to-month basis, and may be terminated by either partyto the agreement.  North Metro hasmonthly obligations related to these agreements of approximately $20,000 permonth for the first six months of 2005. This monthly obligation was reduced to $12,000 each month for thebalance of 2005.

 

**Southwest Missouri Gaming, LLC**

 

During 2004,the Company established a separate entity (SW Missouri, LLC) that invested inSouthwest Missouri Gaming, LLC (SMG).  SMG was established to own andoperate a riverboat casino in Rockaway Beach, Missouri.  SW Missouri owns30% of SMG and contributed $3,835,960 to SMG.  SMG is 70% owned by anunrelated party who has contributed $10,142,806. Amounts expended by theCompany before formation of SMG were counted as part of SW Missouri’scontribution to SMG.  As of December 31,2004, the Company has written off its entire investment due to the failure of aproposed amendment to the Missouri constitution on August 3, 2004 that wasrequired for this project to proceed.

 

The Companyowed its partner, Prime Inc., $367,000 as of December 31, 2004 for its share ofexpenses in connection with the unsuccessful initiative.  As of December 31, 2005, the Company has paidoff a one year promissory note under which it was required to pay Prime Inc.$5,000 per month, a principal payment of $100,000 on July 1, 2005, and thebalance of the note on December 31, 2005. The interest rate on this note was the prime rate plus 2 points andadjusted monthly.  The note was securedby slot machines owned by Gold Rush I, LLC. That collateral was released as of December 31, 2005.  All costs associated with this initiativewere charged to expense in 2004.  Whilethe Company retains its rights in this entity, it spent no monies on theRockaway Beach project in 2005 and has no plans to revive this initiative atthis time.

 

Upon establishmentof SMG, the Company adopted the equity method of accounting for its investmentin SMG.  Accordingly, the Company’s allocable portion of net income (loss)has been identified as equity earnings (loss) of unconsolidated subsidiaries onthe accompanying consolidated income statement.  For the calendar yearsended December 31, 2005 and 2004, the total loss related to the Rockaway Beach,Missouri development activities was $0 and $2,723,208, respectively.

 

F-14

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2005 AND 2004**

 

**NOTE7 – SHORT-TERM NOTES PAYABLE**

** **
| **Short-term  notes consisted of the following at December 31:**                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |       |     |       |
| Associated  Bank Line of Credit                                                                                                                                                                                                                                                                                                                                                                                                           |       |     |       |     |       |
| The Company  borrowed up to $450,000 under this line of credit. Interest rate was Prime  +1%. This line of credit was repaid, in full, October 20, 2005.                                                                                                                                                                                                                                                                                  |       | $        | —     |     | $          | 446,292 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |       |     |       |
| Associated  Bank Loan                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| On October  12, 2004, the Company borrowed $500,000 amortized over one year at $42,934  per month interest rate of 5.75%, guaranteed by the directors of the Company  and an investor. Last payment made October 12, 2005.                                                                                                                                                                                                                |       | $        | —     |     | $          | 418,569 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |       |     |       |
| Crown Bank  Revolving Credit                                                                                                                                                                                                                                                                                                                                                                                                              |       |     |       |     |       |
| On October  20, 2005, the Company entered into an agreement to borrow up to $450,000  under a revolving line of credit. Interest rate is Prime +1%, not less than  7.5%, due April 30, 2007. Currently the interest rate is 8.5%. At December  31, 2005, $3,708 was available to borrow. The loan is guaranteed to the  extent of $300,000 by three principal officers of the Company. See Discussion  of Warrants Issued – Note 12. |       | $        | 446,292    |     | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |       |     |       |
| AICCO, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                               |       |     |       |     |       |
| The Company  financed various insurance policies at an interest rate of 7.42% per year.  Monthly payments of $4,552 were due until maturity in April 2005.                                                                                                                                                                                                                                                                                |       | $        | —     |     | $          | 18,210 |   |
| Total Notes  Payable                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $        | 446,292    |     | $          | 883,071 |   |

 

**NOTE 8 – SUBORDINATED DEBENTURES**

 

During 1993, the Company sold $8,250,000 of Series A convertiblesubordinated debentures paying interest at a rate of 9.25% per year and due andpayable on July 15, 1998.  On July 8,2004, the Company offered to redeem all remaining outstanding Series Adebentures, principal amount of $362,500, which were then in default, inexchange for payment of all principal plus interest accrued through July 14,2004, or conversion of the principal to common stock plus payment of accruedinterest through July 14, 2004.  Thecompany paid all amounts necessary to redeem the remaining Series A convertiblesubordinated debentures in accordance with this offer into an escrow accountestablished for this purpose.  As ofDecember 31, 2005, all of the Series A convertible subordinated debentures hadbeen redeemed.  In accordance with theJuly 8, 2004 redemption offer, after that date, we no longer accrued intereston the outstanding Series A debentures.

 

| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Subordinated debentures payable |       | $        | 0          |     | $          | 100,000 |   |
| Accrued interest payable        |       | $        | 0          |     | $          | 101,750 |   |

 

F-15

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

**NOTE 9 – STOCKHOLDERS’ EQUITY**

 

The Company has authorized the issuance of up to 75,000,000 shares ofcommon stock with a par value of $.001 and up to 30,000,000 shares ofundesignated preferred stock with a par value of $0.001 per share withpreferences and designations determined by the Board of Directors.  As of December 31, 2005, there were no sharesof preferred stock designated or outstanding. Each share of common stock is entitled to one vote on all matters submittedto shareholders.  Under the terms of agaming license held by a subsidiary of the Company, the Company has amended itsArticles of Incorporation to provide that all shares of common stock aresubject to redemption, at the discretion of the Board of Directors, at fairmarket value if an owner is determined to be a disqualified holder.  A disqualified holder is a stockholder whoseownership of Company stock or refusal to provide information to the Company orany applicable gaming authorities may result in the disapproval, modification ornon-renewal of any contract, license or franchise related to the Company’sgaming operations.

 

During the years ended December 31, 2005 and 2004, the company issuedthe following shares of common stock:

 

**Year EndedDecember 31, 2005**

 

On February 14, 2005, the Company issued 22,728 shares in connectionwith the redemption of an outstanding $75,000 Series A debenture.

 

On March 25, 2005, the Company issued 125,000 shares upon exercise of awarrant to purchase 125,000 shares of common stock and the receipt of $15,000in cash.

 

On May 2, 2005, the Company issued 75,000 shares upon exercise of awarrant to purchase 75,000 shares of common stock and the receipt of $9,000 incash.

 

On October 14, 2005, the Company issued warrants to purchase 40,000shares to Corporate Capital Management, LLC and 10,000 shares to DMSRInvestments at $1.00 per share in settlement of claims against the Companyrelated to the Convertible Debt offering and proposed equity transaction.

 

**Year EndedDecember 31, 2004**

 

On June 28, 2004, the company completed a 3-for-2 split of its sharesthat reduced the number of shares outstanding from 644,400 to 429,680.

 

On July 13, 2004, the Company completed a 1-for-7.4672 split of itsshares that increased the number of shares outstanding from 429,680 to3,208,550.

 

On July 14, 2004, the Company issued 1,500,000 shares of its commonstock under the terms of stock purchase agreements entered into on June 29,2004.

 

On July 22, 2004, in connection with the Company’s reorganization, theCompany issued 16,161,343 shares of its common stock to the former holders ofSouthwest Casino and Hotel Corp. common stock, series C preferred stock, andconvertible securities.  The SouthwestCasino and Hotel Corp. securities acquired by the Company included the followingsecurities issued by Southwest Casino and Hotel Corp. during the first 9 monthsof 2004:

 

•                  OnJuly 15, 2004, 375,000 shares of common stock issued in exchange for personalguarantees of promissory note (see Note 7).

 

•                  OnJuly 22, 2004, 5,299,102 shares of common stock issued to the holders ofSouthwest Casino and Hotel Corp. 8% convertible debentures upon consummation ofthe Company’s reorganization.

 

Also in connection with the Company’s July 22, 2004 reorganization, theCompany issued 150,000 shares of common stock in connection with an indemnificationagreement for the Company, and 719,865 shares of common stock under the termsof an introduction agreement with the Company.

 

F-16

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

In addition, on July 22, 2004 the Company cancelled 2,489,372 shares ofcommon stock held by the founding shareholders of Lone Moose Adventures,Inc.  In consideration of (a) thecancellation of these shares, (b) the agreement of the founding shareholders toindemnify the Company against any liabilities arising from the operation ofLone Moose Adventures, Inc. before the reorganization, and (c) the assumptionby the founding shareholders of all of the liabilities of the Company’s formeradventure tour business, the Company sold to the founding shareholderssubstantially all of the assets of the Company’s former adventure tourbusiness.

 

On December 8, 2004, the Company issued 50,000 shares to CorporateCapital Management LLC in settlement of claims against the Company related tothe Convertible Debt offering and proposed equity transaction; 20,000 shares toIsle Capital LLC for services; and 45,455 to a Series A Convertible bondholderin redemption of a $50,000 bond.

 

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

 

Year ended December 31, 2005:

 
| ** **                        | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted  Average  Equity  (Denominator)** | ** ** | **Earnings  Per Share** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|
|                              |       |                          |       |                                         |       |                    |       |
| Basic Earnings per Share          |       | $                             | 566,350    |                                         | 19,531,402 |                    | $          | .03 |   |
| Effect of Dilutive Securities:    |       |                          |       |                                         |       |                    |       |
| Outstanding  Options and Warrants |       | —                        |       | 2,932,322                                    |       |                    |       |
|                              |       | $                             | 566,350    |                                         | 22,463,724 |                    | $          | .03 |   |

 

The Company had a net loss for the year ended December 31, 2004;therefore, a calculation of earnings per share on a fully diluted basis wouldbe anti-dilutive.

 

**NOTE 10 – OPERATING LEASES**

 

On May 1, 1998, the Company entered into afive-year agreement with Lois Woods to lease property located at 251 EastBennett Avenue in Cripple Creek, Colorado. The lease started the first day of the month that Uncle Sam’s beganoperations, April 9, 1999, and terminated on March 31, 2004.  The lease required payments of $12,000 permonth.  During February 2004, the Companyextended the lease for an additional five years. The new lease payments are$14,000 per month, expiring March 2009.

 

The lease agreement includes provisionswhereby the Company has the option to purchase the property for $2,000,000 plus50% of the increase in the fair market value of the building as of theexpiration of the initial term.  In theevent of termination by the tenant, the landlord may assess a penalty of$144,000.

 

The Company also leases office space forcorporate offices.  The lease expiresDecember 31, 2009.

 

Rent expense was approximately $284,400 and $197,300for the years ended December 31, 2005 and 2004, respectively.

 

Future operating lease payments required asof December 31, 2005 are as follows:

 
| 2006  |   | $       | 284,400   |   |
|-------|--------|---------|-----------|--------|
| 2007  |   | 284,400 |      |
| 2008  |   | 284,400 |      |
| 2009  |   | 158,400 |      |
| Total |   | $       | 1,011,600 |   |
|       |        |         |           |        |  |

 

F-17

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

**NOTE 11 – LONG-TERM OBLIGATIONS**

 

Capital Lease

 

On April 9, 1999, the Companyentered into a 20-year capital lease with Cripple Creek Development Co, BlueBuilding Development, Inc. and Mark and Annesse Brockley (the Lessors) for theland and buildings relating to The Gold Rush Hotel and Casino andGold Digger’s Casino.  The amountcapitalized is based upon:

 

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

 

Under this capital lease, the Company isrequired to make additional rent payments if the net income from the Gold Rushand Gold Digger’s casinos exceeds certain thresholds stated in the lease.  Because the Company is permitted to allocatea portion of its general overhead expenses to these operations when calculatingnet income for purposes of determining additional rent due, the Company has notbeen required to make additional rent payments.

 

Future minimumlease payments required under the capital leases as of December 31, 2005, areas follows:

 

| 2006                                     |   | $          | 1,713,898 |   |
|------------------------------------------|--------|------------|-----------|--------|
| 2007                                     |   | 1,671,725  |      |
| 2008                                     |   | 1,636,868  |      |
| 2009                                     |   | 1,334,381  |      |
| 2010                                     |   | 1,233,903  |      |
| Thereafter                               |   | 8,492,600  |      |
| Total  miniumum lease payments           |   | 16,083,375 |      |
| Less-amount  representing interest       |   | (8,087,824 | )         |
| Present  value of minimum lease payments |   | 8,930,919  |      |
| Less-current  portion                    |   | (819,461   | )         |
| Long-term  portion                       |   | $          | 8,111,458 |   |
|                                          |        |            |           |        |  |

 

Crown Bank Term Loan and IGT Note

 

On October 20, 2005, the Company entered intoa term loan to borrow $2.5 million.  Theinterest rate is Prime +1%, not less than 7.5%, and the loan is due April 30,2007.  Currently the interest rate onthis loan is 8.5%.  The repayment periodwill be extended to May 31, 2008, if the Company achieves certain businessgoals.  The loan is guaranteed by twelveshareholders of the Company, including three principal officers.  See Discussion of Warrants Issued – Note 12.

 

On December 23, 2005, the Company negotiateda loan of $460,324 to pay off outstanding payables in connection with theinstallation of a player tracking system at our three casinos in Cripple Creek,Colorado.  The loan is for a term of 48months with interest equal to the prime rate.

 

Future loan payments required as of December31, 2005 are as follows:

 
| 2006   |   | $ | 2,749,842 |   |
|--------|--------|---|-----------|--------|
| 2007   |   | $ | 789,918   |   |
| 2008   |   | $ | 132,918   |   |
| 2009   |   | $ | 132,918   |   |
| 2010   |   | $ | 11,077    |   |
| Total: |   | $ | 3,816,673 |   |
|        |        |   |           |        |  |

 

F-18

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

**NOTE 12 – STOCK OPTIONS AND WARRANTS**

 

On July 15, 2004, Southwest Casino and Hotel Corp. shareholdersapproved the Southwest Casino and Hotel Corp. 2004 Stock Incentive Plan thathad been adopted by the company’s Board of Directors effective June 1,2004.  Under the terms of thereorganization completed July 22, 2004, Southwest Casino Corporation assumedthe rights and obligations of Southwest Casino and Hotel Corp. under thisplan.  The plan permits Southwest CasinoCorporation to issue incentive awards to all employees of Southwest CasinoCorporation or any of its subsidiaries and any non-employee directors,consultants or independent contractors of the Company or any of itssubsidiaries. Incentive awards under the plan include “incentive options” underSection 422 of the Internal Revenue Code of 1986, “non-statutory stock options”that do not qualify for “incentive option” treatment, stock appreciationrights, restricted stock awards, performance units and stock bonuses.  A maximum of 1,500,000 shares of SouthwestCasino Corporation common stock are reserved for issuance under the plan.During calendar year 2005, Southwest Casino Corporation issued incentive stockoptions to acquire 55,000 shares of common stock at a price of $.50 per shareunder this plan.

 

In addition to the assumption of the 2004 Stock Incentive Plan,Southwest Casino Corporation assumed outstanding non-plan options to acquireshares of Southwest Casino and Hotel Corp. common stock as part of itsreorganization.  The Company assumedobligations to issue 1,575,000 shares of its common stock at a weighted averageprice of $.62 per share.  The Company didnot issue any non-plan options during the calendar year 2004 or 2005.

 

As part of the July 22, 2004 reorganization, Southwest CasinoCorporation assumed outstanding warrants of Southwest Casino and Hotel Corp. toacquire 1,212,500 shares of the Company’s common stock.  These warrants are exercisable subject to theoccurrence of certain events at a weighted average price of $.36 per share asof December 31, 2004 and expire at various times through June 10, 2009.  The Company also agreed to issue warrants toacquire 1,400,000 shares of Southwest Casino Corporation common stock at aprice of $1.00 per share upon the successful closing of a privateplacement.  The private placement wasnever secured; therefore, the Company’s obligation to issue these warrants terminatedin 2005.

 

On October 20, 2005, the Company secured a $2.5 million term loan (seeNote 7) with the guaranties of 12 Southwest Casino Corporationshareholders.  Under the shareholderguaranties, each guarantor is individually liable for a portion of the $2.5million term loan.  As a condition toentering into the Loan Agreement, James Druck, Chief Executive Officer, ThomasFox, President and Chief Financial Officer, and Jeffrey Halpern, Vice Presidentof Government Affairs, were required by Crown Bank to become three of the 12shareholder guarantors.  Mr. Druck, Mr.Fox and Mr. Halpern each personally guaranteed $100,000 of this borrowing.  As further required by Crown Bank, theguaranties of Mr. Druck, Mr. Fox and Mr. Halpern also apply to the revolvingline of credit, while the guaranties of the other shareholders do not.  In consideration for these shareholderguaranties, Southwest Casino Corporation issued five-year fully exercisablewarrants to purchase an aggregate of 1,250,000 shares of its common stock at anexercise price of $0.50 per share to the non-affiliated shareholder guarantors,including Gus Chafoulias who subsequently joined our Board of Directors, and$0.58 per share to Mr. Druck, Mr. Fox and Mr. Halpern.

 

The Company has granted stock options and warrants to purchase sharesof its common stock to various investors, directors and key employees.  The exercise price of all stock options andwarrants granted have been set at prices equal to or above the fair marketvalue of the Company’s stock on the date of grant except for warrants issued inconnection with the $2.5 million term loan. See Note 11.  The exercise priceof the warrants issued in connection with the $2.5 million term loan wasestablished based on fair market value at the time the loan was applied for butwas lower than fair market value when the warrants were granted in connectionwith the loan closing.  The number ofshares reserved for issuance is equal to the number of shares into which alloutstanding stock options and warrants would be converted, if exercised.

 

F-19

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

A summary of changes in options outstanding is as follows:

 
| ** **                   | ** ** | **Options  and  Warrants** | ** ** | **Price Per Share** | ** ** |
|------------------------------|------------|----------------------------|------------|---------------------|------------|
| Balance at December 31, 2003 |       | 1,037,500                  |       | $                   | 0.14       |   |
| Options and Warrants issued  |       | 3,295,000                  |       | $                   | 0.85       |   |
| Balance at December 31, 2004 |       | 4,332,500                  |       | $                   | 0.68       |   |
| Options and Warrants Issued  |       | 1,355,000                  |       | $                   | 0.53       |   |
| Warrants Exercised           |       | (200,000                   | )          | $                   | 0.12       |   |
| Warrants Cancelled           |       | (1,625,000                 | )          | $                   | 0.88       |   |
| Balance at December 31, 2005 |       | 3,862,500                  |       | $                   | 0.57       |   |

 

On January 10, 2006, the Company issued options to purchase 675,000shares of its common stock at a price of $0.65 per share to each of the fourindependent members of its Board of Directors. See Note 21, Subsequent Events.

 

As allowed under the provisions of SFAS No. 123, “Accounting forStock-Based Compensation,” we apply the provisions of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations to account for our stock option plans and, accordingly, do notrecognize compensation expense. Furthermore, no stock option-based employeecompensation cost is reflected in net income, as all options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant. Had compensation expense for the stock option been determined inaccordance with SFAS No. 123, total stock-based employee compensation expense,net of tax effects, would have been $87,063 and $77,079 for the years endedDecember 31, 2005, and 2004, respectively, and our pro forma Net income andEarnings per share for the indicated periods would have been:

 

| ** **          | ** ** | **2005**         | ** ** | **2004**       | ** ** |
|---------------------|------------|------------------|------------|----------------|------------|
| ** **          | ** ** | **As  Reported** | ** ** | **Pro  Forma** | ** ** | **As  Reported** | ** ** | **Pro  Forma** | ** ** |
| Net Income  (Loss)  |       | $                | 566,350    |           | $          | 508,289 |   | $ | (4,358,016 | ) | $ | (4,453,617 | ) |
| Earnings per  share |       |             |       |           |       |   |   |   |   |
| Basic               |       | $                | 0.03       |           | $          | 0.03 |   | $ | (0.38 | ) | $ | (0.38 | ) |
| Diluted             |       | $                | 0.03       |           | $          | 0.02 |   | $ | (0.38 | ) | $ | (0.38 | ) |
|                     |            |                  |            |                |            |  |  |  |  |  |  |  |  |  |  |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions:

 

| Expected  Dividend Yield                 |   | 0.00   | %      | 0.00 | %      |
|------------------------------------------|--------|--------|--------|------|--------|
| Expected Stock Price Volatility          |   | 181.00 | %      | 0.00 | %      |
| Average Risk-Free Interest Rate          |   | 3.52   | %      | 3.78 | %      |
| Expected Average Life of Options (years) |   | 7.46   |   | 5.69 |   |

 

# **At December31, 2005 and 2004, the Company had 3,862,500 and 4,332,500 shares of commonstock reserved for the exercise of warrants that have been granted in connectionwith debt and equity offerings and in lieu of cash payment for servicesprovided.  The exercisability of many ofthese options is conditioned on the Company’s achievement of certainobjectives.  The warrants wereexercisable at a weighted average price $.57 and $.68 per share as of December31, 2005 and 2004, respectively.  Thewarrants expire at various times through July 19, 2009.  In connection with these warrants, theCompany recognized $20,625 of expense in 2005 and $12,875 of expense in 2004. **TheCompany has not computed any value or recognized any expense for those warrantswhere the conditions to exercise were considered unlikely to occur.

#  

F-20

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

Recently Issued Accounting Pronouncements

 

On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-BasedPayment,” which is a revision to SFAS No. 123. SFAS No. 123(R)requires the recognition of compensation expense in an amount equal to the fairvalue of share-based payments, including employee stock options and restrictedstock, granted to employees. SFAS No. 123(R) will become effective in theCompany’s quarter ending March 31, 2006.

 

SFAS No. 123(R) permits companies to adopt its requirements usingone of two methods:

 

1.             A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS No. 123(R)for all share-based payments granted after the effective date and (b) basedon the requirements of SFAS No, 123 for all awards granted to employees priorto the effective date of SFAS No. 123(R) that remain unvested on the effectivedate.

 

2.             A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS No. 123 for purposes ofpro forma disclosures either (a) all prior periods presented, or (b) priorinterim periods of the year of adoption.

 

The Company is assessing the appropriate transition method.

 

The adoption of SFAS No. 123(R) will have an impact on the Company’sresults of operations, but it will not have any impact on the Company’s overallfinancial position. The Company is currently evaluating the provisions of SFAS No. 123(R)to determine the impact on future financial statements. SFAS No. 123(R)also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after adoption. The Company cannotestimate what those amounts will be in the future because they depend on, amongother things, when employees exercise stock options.

 

# **NOTE13 – PROVISION FOR INCOME TAXES**

 

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Current         |       |     |       |     |       |
| Federal         |       | $        | (291,000   | )        | $          | — |   |
| State           |       | (38,000  | )          | —   |       |
| Total  Current  |       | (329,000 | )          | —   |       |
|            |       |     |       |     |       |
| Deferred        |       |     |       |     |       |
| Federal         |       | —   |       | —   |       |
| State           |       | 38,000   |       | —   |       |
| Total  Deferred |       | 38,000   |       | —   |       |
|            |       |     |       |     |       |
| Total           |       | $        | (291,000   | )        | $          | — |   |

 

F-21

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

A reconciliation of the income tax provision with amounts determined byapplying the federal statutory rate to income before income taxes is asfollows:

 
| ** **                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Federal  statutory income tax rate                                                                                |       | -34.0    | %          | -34.0    | %          |
| State and  local income tax rate                                                                                  |       | -4.4     | %          | -4.4     | %          |
| Effect of  realization of deferred tax liability (asset) related to net operating losses  and valuation allowance |       | 4.4      | %          | 38.4     | %          |
| Effective  Tax Rate                                                                                               |       | -34.0    | %          | 0.0      | %          |

 

The net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes are reflected in deferred income taxes.Significant components of the Company’s deferred tax liabilities as of December 31,2005 and 2004 are as follows:

 
| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| Current  deferred tax assets (liabilities):    |       | $          | —     |       | $          | — |   |
| Noncurrent  deferred tax assets:               |       |       |       |       |       |
| Operating  loss and contribution carryforwards |       | 2,234,000  |       | 2,776,000  |       |
| Property and  Equipment                        |       | 213,000    |       | 15,000     |       |
| Alternative  minimum tax carryforward          |       | 22,000     |       |       |       |
| Total  Deferred                                |       | 2,469,000  |       | 2,791,000  |       |
|                                           |       |       |       |       |       |
| Less  valuation allowance                      |       | (1,896,000 | )          | (1,949,000 | )          |
|                                           |       |       |       |       |       |
| Net deferred  tax asset                        |       | $          | 573,000    |       | $          | 842,000 |   |

 

The net operating loss carryforwards from 2004 and 2003 have beenreduced to reflect the non-deductibility of lobbying and campaign expensesincurred in connection with the pursuit of a constitutional amendment to permitthe development of a gaming riverboat at Rockaway Beach, Missouri.

 

Property and equipment deferred tax asset includes the development andpre-opening expenses capitalized for tax purposes in connection with thedevelopment of the racetrack and card room.

 

The valuation allowance has been reduced in 2005 to reflect utilizationof net operating loss carryforwards in the current year.

 

As of December 31, 2005, the Company has federal and state netoperating loss carryforwards of approximately $5,800,000. These operatinglosses expire between 2015 and 2024. The Internal Revenue Code limits theavailability of net operating loss carryforwards to offset future taxableincome if there has been a “change of ownership” as defined in Section 382of the Internal Revenue Code. Such a “change of ownership” could be triggeredby sales of the Company’s securities by the Company or its shareholders. Additionally,the excess of the alternative minimum tax (“AMT”) over regular federal incometax is a tax credit, which can be carried forward indefinitely to reduce futurefederal income tax liability. At December 31, 2005, the Company hasavailable $22,000 of AMT credit carryforward. The income tax rate does notcorrespond to statutory tax rates due to the difference in the valuationallowance for deferred tax assets.

 

**NOTE 14 –IMPAIRMENT AND DISCONTINUEDOPERATIONS**

 

As of December 31, 2005, the Company had placed in storage certaingaming equipment that it does not intend to reuse. As a result, the Company hastaken an impairment loss included in casino operating expense of approximately$69,000.

 

F-22

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

In February 2004, as a result of continued losses from operations,the Company discontinued the operation of its casino in Deadwood, South Dakota.As a result, the Company sold or abandoned certain assets and transferred theremaining assets to other casino operations. Although the casino discontinuedoperations on February 29, 2004, the Company continued to incur expenses,primarily payroll expenses, in connection with closing the casino. TheCompany paid its final payroll in June 2004. The following tablesummarizes the results of the Company’s Deadwood operations for 2004:

 

| REVENUES                               |   |    |     |
|----------------------------------------|--------|---------|----------|
| Gaming  revenues                       |   | $       | 155,854  |   |
| Restaurant  and Bar                    |   | 107,333 |     |
| Total  Revenues                        |   | $       | 263,187  |   |
|                                   |   |    |     |
| EXPENSES                               |   |    |     |
| Casino                                 |   | $       | 336,346  |   |
| Food and  Beverage                     |   | 149,056 |     |
| Depreciation  and Amortization         |   | 34,322  |     |
| Total  Expenses                        |   | $       | 519,724  |   |
|                                   |   |    |     |
| (Loss)                                 |   | $       | (256,537 | ) |
| Disposition  of equipment (Loss)       |   | (46     | )        |
| Net Loss  from Discontinued operations |   | $       | (256,583 | ) |

 

The above loss was included in loss from discontinued operations on theaccompanying statements of operations for the year ended December 31,2004.

 

Revenues from the Deadwood casino totaled approximately $0 and$263,187, respectively, for the years ended December 31, 2005 and 2004,and are not included in the casino operations segment.

# ** **

# **NOTE15 – RELATED PARTY TRANSACTIONS**

 

The Company has aliability to certain officers and stockholders for unpaid compensation andexpenses of $250,699 and $272,950 as of December 31, 2005 and 2004,respectively.

 

In connection withthe Company’s investment in Southwest Missouri Gaming, LLC, the Company signeda one-year promissory note agreeing to pay to Prime Inc., the other member ofSouthwest Missouri Gaming, $367,000 plus interest at a variable rate equal toprime plus 2 percent for its share of expenses in connection with SouthwestMissouri Gaming’s unsuccessful efforts to develop a riverboat casino inRockaway Beach, Missouri. Under the note, the Company agreed to pay $5,000 permonth, a principal payment of $100,000 on July 1, 2005, and the balance ofthe note on December 31, 2005. The note was secured by slot machines ownedby Gold Rush I, LLC. The note was paid in full on December 29, 2005 andthe security interest has been released.

 

During the yearended December 31, 2005 and 2004, the Company paid Berc & FoxLimited $17,648 and $41,275 for tax and accounting services, respectively. ThomasFox is a shareholder and officer in Berc & Fox Limited.

 

During the yearended December 31, 2005 and 2004, the Company paid Jennifer Sparlin Druck$1,000 each year for entertainment services at the Gold Rush Palladium.Ms. Druck is the wife of James Druck, an officer of the Company.

#### ** **

F-23

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**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

#### **NOTE 16 – PROJECT DEVELOPMENTCOSTS**

 

In February 2004 the Company entered into an option to purchasethe Gold Rush real estate with the lessor. This option was for a term of oneyear that expired on February 28, 2005, during which time, the Companycould purchase the lessor’s interest in the property. As consideration for thisoption, the Company dismissed certain claims against the lessor and other costsincurred in connection with a dispute regarding provisions of the lease. Thesecosts amounted to $249,778. Upon expiration of the option in 2005, these costswere written off as project development expense because the Company did notexercise its option to purchase the Gold Rush real estate.

 

During the years ended December 31, 2005 and 2004, $406,387 and$473,578 in project expenses were incurred in connection with the developmentof the racetrack and card room in Minnesota, of which $204,670 and$108,446 were allocated to our 50% partner. In addition, $39,928 was recordedas a loss from an unconsolidated subsidiary related to the same project. Seediscussion of Variable Interest Entity, Note 6.

 

During the year ended December 31, 2004, $361,874 in project costswas incurred in connection with the initiative to develop a riverboat inRockaway Beach, Missouri, and $2,361,334 was recorded as a loss from anunconsolidated subsidiary related to the same project. The Company became aminority partner in this project in June 2004.

 

**NOTE 17 – SEGMENTED INFORMATION**

 

Segmented information related to the year ended December 31, 2005follows:

 
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| Revenues                                     | ** ** | $                      | 15,801,913 |                   | $          | 4,911,105               | ** ** | $                      | —     |       | $          | **—** | ** ** | $ | 20,713,018 | ** ** |
| Interest  Revenue                            |       | 34                     |       | 6,865                  |       | —                  |       | —                 |       | 6,899      |       |
| Interest  Expense                            |       | (789,621               | )          | (142,836               | )          | (2,955                  | )          | 995                    |       | (934,417   | )          |
| Depreciation &  amortization        |       | 1,833,836              |       | 524,229                |       | —                  |       | —                 |       | 2,358,065  |       |
| Segmented  profit (loss) before income taxes |       | (336,958               | )          | 1,398,979              |       | (409,341                | )          | 204,670                |       | 857,350    |       |
| Income tax  expense (benefit)                |       | 114,566                |       | (475,154               | )          | 139,176                 |       | (69,588                | )          | (291,000   | )          |
| Segmented  assets                            |       | 14,092,599             |       | 2,392,704              |       | 2,719,748               |       | (2,719,748             | )          | 16,485,303 |       |
| Expenditures  for segmented assets           |       | 153,848                |       | 3,467                  |       | 409,343                 |       | (409,343               | )          | 157,315    |       |
|                                              |            |                        |            |                        |            |                         |            |                        |            |            |            |  |  |  |  |  |

 

Segmented information related to the year ended December 31, 2004follows:

 
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Casino  Development** | ** ** | **Reconciling  Items** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| Revenues                                     | ** ** | $                      | 16,388,615 |                   | $          | 4,083,189               |       | $                      | —     |       | $          | (263,187 | ) | $ | 20,208,617 |   |
| Interest  Revenue                            |       | —                 |       | 8,459                  |       | —                  |       | —                 |       | 8,459      |       |
| Interest  Expense                            |       | 1,053,859              |       | 77,235                 |       | —                  |       | —                 |       | 1,131,094  |       |
| Depreciation &  amortization        |       | 1,973,346              |       | 494,675                |       | —                  |       | (34,322                | )          | 2,433,699  |       |
| Segmented  profit (loss) before income taxes |       | (931,679               | )          | (337,997               | )          | (3,196,786              | )          | 2,617,916              |       | (1,848,546 | )          |
| Income tax  expense (benefit)                |       | —                 |       | —                 |       | —                  |       | —                 |       | —     |       |
| Segmented assets                             |       | 16,138,945             |       | 2,640,537              |       | 1,829,083               |       | —                 |       | 20,608,565 |       |
| Expenditures  for segmented assets           |       | 706,683                |       | 24,781                 |       | 1,187,079               |       | —                 |       | 1,918,543  |       |
|                                              |            |                        |            |                        |            |                         |            |                        |            |            |            |  |  |  |  |  |

 

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(1)           Reconciling Items are the adjustments toremove the impact of the losses from unconsolidated subsidiaries, discontinuedoperations and utilization of net operating loss carryforwards.

 

Corporate expenses are included as a reduction in Casino Managementincome. Corporate expenses have not been allocated to Casino Operations orCasino Development.

 

F-24

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**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

#### **NOTE 18 – BANKRUPTCY FILING**

 

In 2001, a dispute arose between the lessor (Note 11) and Gold Rush I, LLC over the amount ofrent paid. The lessor filed a motion to remove Gold Rush I, LLC from the property. In order to insure that Gold Rush I, LLC would retainpossession of the property, management elected to file for protection fromcreditors under Chapter 11 of the Bankruptcy Code on August 31, 2001.

 

On October 15, 2001, the Teller County District Court in Coloradoruled that Gold Rush I, LLC wasnot in default under the lease and had properly treated certain excess paymentsas offsets. In addition, the court found that the Company had a remainingcredit toward continuing obligations under the lease in the amount of $277,798.This finding was later amended to $284,457 of remaining credit.

 

On September 11, 2002, the Bankruptcy Court approved Gold Rush I,LLC’s plan of reorganization. The plan provided that all creditors would bepaid the full amount owed to them. On January 10, 2003, the bankruptcycase was closed. Liabilities related to the bankruptcy claim were scheduled forpayment through February, 2005 and included in accounts payable. As of December 31,2005, all payables associated with the bankruptcy settlement have been paid infull.

 

**NOTE 19 – FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes it is not practical to estimate the fair value ofits investment in North Metro because there is no established market for thesesecurities and it is inappropriate to estimate future cash flows because theyare dependent on the ability of North Metro to develop and then generateearnings from the operation of its proposed harness track and card room. Therewere no other financial instruments with significant differences between thecarrying amount and the fair value due to the short maturity of theinstruments.

 

**NOTE 20 – COMMITMENTS AND CONTINGENCIES**

 

The Company entered into consulting agreements with non-related partiesto monitor legislation and perform lobbying activities, and other publicrelations and development activities related to establishing and developing theRockaway Beach, Missouri riverboat casino. The Company has terminated allof these agreements. North Metro Harness Initiative, LLC, in which the Companyowns a 50 percent membership interest, has entered into similar agreements tomonitor legislation and perform lobbying activities related to its racetrackand card room development. These agreements are generally on amonth-to-month basis, and may be terminated by either party to theagreement. The monthly commitments are paid by North Metro and North Metro paidlegislative and lobbying costs for the years ended December 31, 2005 and2004 of $180,000 and $186,000 respectively.

 

During the years ended December 31, 2004 and 2003, an employeeissued and cashed Company checks and deposited the amounts to the employee’spersonal accounts. During January 2004, the employee left the employmentof the Company. In the year ended December 31, 2004, the Company wrote off$100,000, which had been set up as a receivable from the former employee in2004. Although the former employee has been ordered to pay restitution, theCompany believes it is reasonably doubtful that it will receive any significantrecovery. A loss of $100,000 was included in casino expense for the year ended December 31,2004.

 

In 2004, the Company purchased player tracking software and slot accountingsoftware from IGT. On December 29, 2005, the Company reached an agreementwith IGT to finance $460,324 of the purchase price for this system over 48months with interest rate equal to the prime rate, which is currently 7.5%. Inaddition, the Company agreed to purchase additional software for $200,000,which will allow the Company to offer bonusing to its customers. The purchaseis contingent upon IGT receiving necessary approvals for the bonusing systemfrom the Colorado Division of Gaming. We anticipate that IGT will also financethis additional software on similar terms.

 

F-25

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**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

Under the Company’s employment agreements with James B. Druck, CEO,Thomas E. Fox, President and CFO, and Jeffrey S. Halpern, Vice President ofGovernment Affairs, which were effective July 1, 2004, the Company hasagreed to allow these executives to elect to continue their employment in areduced capacity, with continuing medical benefits and a salary equal to theirbase pay at the time of termination for 18 months and not less than $25,000after 18 months, if the Company terminates the executive’s employment withoutcause or in connection with a change in control of the Company (as defined inthe employment agreement) or if the executive terminates his employment withthe Company for good cause (as defined in the employment agreement). Theinitial term of these agreements expires July 1, 2006, after which theagreement renews automatically for additional one-year terms unless terminated.

 

The Company is involved in various claims, legal actions and complaintsarising in the ordinary course of business. In the opinion of management, anylosses that may occur from these matters are adequately covered byinsurance or are provided for in our financial statements, and the ultimateoutcome of these other matters will not have a material effect on our financialposition or results of operations.

 

**NOTE 21 – SUBSEQUENT EVENTS**

 

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

 

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

 

On January 24, 2006, Southwest entered into aConsulting and Training Agreement with the Otoe-Missouria Tribe of Indians. Underthe terms of the Consulting and Training Agreement, Southwest was to assist theTribe in developing, implementing and improving operating procedures for theTribe’s Seven Clans Paradise Casino near Ponca City, Oklahoma. Southwest was toreceive consulting fees equal to 10 percent of the net revenues of the casino. TheConsulting and Training Agreement had a term of one year, but could have beenterminated by either Southwest or the Tribe 30 days after delivery of notice oftermination, and would also terminate if Southwest and the Tribe entered into aseparate agreement under which Southwest manages gaming facilities on behalf ofthe Tribe and that agreement is approved by the National Indian GamingCommission, as required by law.

 

On February 24,2006, Southwest and the Otoe-Missouria Tribe of Indians received a letter fromthe National Indian Gaming Commission (“NIGC”) stating that the NIGC haddetermined that the consulting agreement between Southwest and theOtoe-Missouria Tribe was in fact a management agreement and must be approved bythe NIGC. Further, the letter stated that because the NIGC determined theconsulting agreement was a management agreement that had not been approved,Southwest and the Tribe were prohibited from acting under that agreement andcontinuing to do so could constitute a substantial violation of the IndianGaming Regulatory Act. Southwest disagrees with the NIGC’s conclusion regardingthe consulting agreement, but discontinued services to the Tribe that day.

 

F-26

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**SOUTHWEST CASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005 AND 2004**

 

On March 24, 2006, Southwest entered into aGaming Management Agreement with the Otoe-Missouria Tribe of Indians. Under the termsof the Gaming Management Agreement, which must be approved by the NIGC beforeit becomes effective, Southwest will have exclusive management responsibilityfor the Tribe’s Seven Clans Paradise Casino near Ponca City, Oklahoma. Southwestwill receive management fees equal to 20 percent of the net revenue from gamingand non-gaming activity at the facility. Southwest will also assist the Tribein its efforts to refurbish and expand the casino. The managementagreement runs for 5 years beginning on the first day that Southwest beginsmanagement of the facility.

 

On February 1, 2006,the Board of Directors established a Compensation Committee and a NominatingCommittee. The directors elected Gus Chafoulias, Jim Holmes and Gregg Schatzmanto serve on the Compensation Committee and elected Gregg Schatzman as Chair ofits Compensation Committee. The board elected Gus Chafoulias and David Abramsonto serve on its Nominating Committee, with Gus Chafoulias as Chair.

 

On February 15,2006, the Company entered into a Settlement and Release Agreement with MBCGlobal, LLC. Under the terms of the Settlement and Release Agreement, theCompany paid MBC $66,000 that the Company had previously agreed it owed to MBCunder a terminated advisory services agreement and the Company and MBC releasedeach other from all claims raised in an arbitration proceeding initiated by MBCin September 2005. The Company did not release MBC from any potentialliability related to its actions on behalf of the Company in its 2004 sale ofconvertible notes and corporate reorganization, and MBC did not release anyrights to indemnification it may have under the terminated advisoryagreement.

 

On February 16,2006, two advisors who had worked with the Company in connection with theharness racetrack and card room that North Metro Harness Initiative, LLC,in which the Company owns a 50 percent membership interest, intends to buildnear Minneapolis and St. Paul, Minnesota exercised warrants to purchase a totalof 100,000 shares of the Company common stock at a price of $0.12 per share.

 

On February 22,2006, the Company formed a new subsidiary, Southwest Charitable Enterprises,LLC, a Minnesota limited liability company. Southwest is the sole member ofSouthwest Charitable Enterprises, LLC, which will pursue business opportunitiesin charitable gaming.

 

F-27

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| **ITEM 8.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-------------|------------|--------------------------------------------------------------------------------------------|

 

None.

 
| **Item 8A.** | **CONTROLS AND PROCEDURES.** |
|--------------|------------------------------|

 

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

 

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of December 31, 2005. Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that as ofthat date our disclosure controls and procedures were ineffective because ofthe material weakness in our internal control over financial reportingdescribed below. Notwithstanding the existence of this material weakness in ourinternal control over financial reporting, our management believes, includingour Chief Executive Officer and Chief Financial Officer that the consolidatedfinancial statements included in this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

 

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

 

We are in the process of designing andimplementing improvements in our internal control over financial reporting toaddress the material weakness described above. Our management has determinedthat this material weakness is the result of the relatively small size of ouraccounting department. To address this issue, we intend to acquire additionalaccounting resources with the expertise needed to assist us in preparation ofour financial statements, including addressing issues related to accounting formatters that are outside the ordinary course of our business. We have notdetermined at this time whether to hire additional accounting staff or engageoutside advisors separate from our independent auditors to provide us with theneeded assistance in preparing our financial statements.

 

**Changesin Internal Controls over Financial Reporting**

 

There was no change inour internal control over financial reporting during the fourth quarter ended December 31,2005 that has materially affected, or is reasonably likely to affectmaterially, our internal control over financial reporting.

 
| **Item 8B.** | **OTHER INFORMATION.** |
|--------------|------------------------|

 

Not applicable.

 

32

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**PART III**

# ** **

| **ITEM 9.** | **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL  PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.** |
|-------------|---------------------------------------------------------------------------------------------------------------------------------|

** **

**Directors, ExecutiveOfficers, Promoters and Control Persons**

 

Our directors andexecutive officers, their ages and the offices they held with Southwest CasinoCorporation, as of December 31, 2005, are as follows:

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                    |
|--------------------|------------|---------|------------|-----------------------------------------------------------------|
| James B. Druck     |       | 64      |       | Chief Executive Officer, Secretary and Director                 |
| David H. Abramson  |       | 64      |       | Director                                                        |
| Gus A. Chafoulias  |       | 70      |       | Director                                                        |
| Jim Holmes         |       | 63      |       | Director                                                        |
| Gregg P. Schatzman |       | 52      |       | Director                                                        |
| Thomas E. Fox      |       | 58      |       | President, Chief Financial Officer, and Chief Operating Officer |
| Jeffrey S. Halpern |       | 63      |       | Vice President of Government Affairs                            |
| Brian L. Foster    |       | 37      |       | Vice President of Native American Operations                    |

 

Informationregarding the business experience of our executive officers:

 

*James B. Druck*.Mr. Druck joined the Southwest Casino Corporation Board of Directors andwas appointed as our Chief Executive Officer and Secretary on July 22,2004 in connection with the closing of the reorganization in which SouthwestCasino and Hotel Corp. became a wholly-owned subsidiary of Southwest CasinoCorporation (formerly Lone Moose Adventures). Mr. Druck has been adirector of Southwest Casino and Hotel Corp. since its inception. He served asPresident of Southwest Casino and Hotel Corp. from October 1992 until June 2004,at which time he became the Chief Executive Officer and Secretary of SouthwestCasino and Hotel Corp. From 1967 until April 1993, Mr. Druck was anattorney in private practice in Minneapolis, Minnesota. His practice focusedprimarily in the areas of real estate development and finance.

 

*Thomas E. Fox*.Mr. Fox was elected to the Southwest Casino Corporation Board of Directorsand appointed as our President, Chief Operating Officer, and Chief FinancialOfficer on July 22, 2004 in connection with the closing of thereorganization in which Southwest Casino and Hotel Corp. became a wholly-ownedsubsidiary of Southwest Casino Corporation. Mr. Fox resigned from ourBoard of Directors on December 7, 2005 in connection with the election offour new independent directors. Mr. Fox has been a Certified PublicAccountant since November 1969. He began his career with Arthur Andersen &Co. in June 1969, and was promoted to tax manager in June 1973. In September 1976,Mr. Fox co-founded the accounting firm of Berc & Fox, Limited. Hejoined Southwest Casino and Hotel Corp. as Chief Financial Officer in November 1993and was appointed to the Board of Directors of Southwest Casino and Hotel Corp.in January 2000. Mr. Fox continues to serve as a director andPresident, Chief Operating Officer, and Chief Financial Officer of SouthwestCasino and Hotel Corp.

 

*Jeffrey S. Halpern*. Mr. Halpern has served as our Vice President of GovernmentAffairs and Secretary since November 21, 2005. Mr. Halpern wasappointed Chairman of the Southwest Casino Corporation Board of Directors on July 22,2004 in connection with the closing of the reorganization in which SouthwestCasino and Hotel Corp. became a wholly-owned subsidiary of Southwest CasinoCorporation. He resigned from his position as Chairman of the Board ofDirectors on December 7, 2005 in connection with the election of four newindependent board members. Mr. Halpern had been a director of SouthwestCasino and Hotel Corp. since its inception in 1992. He served as Chairman ofthe Board and Chief Executive Officer of Southwest Casino and Hotel Corp. from October 1992until June 2004. Mr. Halpern also serves currently as a director andAssistant Secretary of Southwest Casino and Hotel Corp. From 1967 until July 1993,Mr. Halpern was an attorney in private practice in Minneapolis, Minnesota.His practice focused primarily in the areas of corporate finance andsecurities.

 

*Brian L. Foster*.Brian Foster is our Vice President of Native American Operations and managesour Native American gaming operations in Oklahoma. In addition to these titles,Mr. Foster has been the General Manager of the Lucky Star Casino, anenterprise of the Cheyenne and Arapaho Tribes of Oklahoma, since 1995 and ourVice

 

33

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Presidentof Bingo Operations since 1998. Mr. Foster is the Chairman of the OklahomaIndian Gaming Association and served as that organization’s Vice Chairman in2000 and 2001.

 

Information regarding thebusiness experience of our independent directors:

 

*David H. Abramson.* David Abramson joined the Southwest Board ofDirectors on December 7, 2005 and was elected to chair its Audit Committeeon January 10, 2006. He is also a member of the Board’s NominatingCommittee. Mr. Abramson is the Chairman and CEO of David Abramson &Associates, LLC, a retained executive search and leadership development firm hefounded in January 2002. Immediately before founding David Abramson &Associates, he was a Senior Vice President of AXA Financial/Equitable LifeInsurance and the Chairman and CEO of Grant Thornton Advisors, a joint ventureof AXA Financial/Equitable Life Insurance and Grant Thornton, LLP, from January toDecember 2001. Before this, Mr. Abramson had an extensive career atGrant Thornton, certified public accountants, beginning in 1967 during which hewas a member of the National Leadership and Senior Management Team and theManaging Partner of and an audit partner in the Minneapolis office. Among manyboard memberships, Mr. Abramson has been the Chairman of Board ofDirectors of the Minneapolis Chamber of Commerce, President and Board member ofthe Minnesota Society of Certified Public Accountants, Chairman and boardmember of the Minnesota Cooperation Office for Job Creation, and a member ofthe Governing Council of the American Institute of CPAs. Mr. Abramsonholds a B.S. in Accounting from the Carlson School of Management and an MBAfrom the University of Michigan.

 

*GusA. Chafoulias.*Gus Chafoulias joined to Southwest’s Board ofDirectors on December 7, 2005 and was elected chair of its NominatingCommittee on February 1, 2006. He is also a member of the Board’sCompensation Committee. Mr. Chafoulias is Chairman of the Board of ChafouliasManagement Company, where he has worked since 1987. Mr. Chafoulias hasdeveloped more than 3 million square feet of apartments and commercial spaceduring more than 40 years in the development business. One of Mr. Chafoulias’liquor stores, which Mr. Chafoulias has owned and operated since 1957, hasbeen voted as a top ten liquor retailer in the United States. Mr. Chafouliasis also a United Way Alexis de Tocqueville Society member, Leadership 100 boardmember, and Blue Cross Blue Shield Champions of Health award winner. He hasserved on numerous boards of directors including the Rochester (MN) Chamber ofCommerce, Diversity Council, U.S. Bank, Medvision, and Comfortex, Inc. Inaddition to Southwest, Mr. Chafoulias currently serves on the boards ofJaguar Communications and Festival Airlines.

 

*Jim Holmes.* Jim Holmes was elected a Directors ofSouthwest on December 7, 2005 and serves on the Board’s Audit Committeeand Compensation Committee. Mr. Holmes is a 1965 graduate of West Point’sU.S. Military Academy and has a master’s degree in law enforcementadministration from Central Missouri State University. Mr. Holmes hassignificant experience on both the regulatory and business sides of the gamingindustry. Since 1991, Mr. Holmes has been President of Jim Holmes andCompany and, beginning in 1987, has acted as a national and internationalgaming consultant for lottery operations, bingo projects, casinos and Indiangaming, specializing in start-up operations and risk analysis. In addition,from March 2005 to October 2005 Mr. Holmes was an Executive VicePresident for Cadillac Jack, Inc., a slot machine manufacturer, and from February 2001to January 2004, Mr. Holmes was president of API Technologies, LLC. FromJanuary 2000 to January 2001, Mr. Holmes was Executive VicePresident of Sierra Design Group. In 1985, Mr. Holmes was appointed bythen Governor Ashcroft as the first Executive Director of the Missouri Lottery.Before working to establish the Missouri Lottery, he spent 15 years with theFBI in Missouri as both a Special Agent and Supervisor.

 

*GreggP. Schatzman.*Gregg Schatzman joined Southwest’s Board ofDirectors on December 7, 2005. He also serves on the Board’s AuditCommittee and Compensation Committee, which he chairs. Mr. Schatzman hasin-depth experience as both a regulator and an operator in the gaming industry.Mr. Schatzman has been the Managing Director of Schatzman &Associates, LLC, which provides consulting services to gaming companies and lawfirms regarding casino operations and regulatory issues, since June 2003. FromMarch 2003 to June 2003, he was a partner and owner of CastawaysHotel and Casino in Las Vegas, Nevada and owned and worked as Executive VicePresident of VSS Enterprises, LLC, from March 1999 to May 2003.Mr. Schatzman’s 13 years in casino operations included work as anExecutive Vice President of Primadonna Resorts, Inc.; a Vice President andGeneral Manager for Ameristar Casinos and Vice President and General Managerfor Gem Gaming and worked with Trump casinos. Before joining the business sideof the gaming industry, Mr. Schatzman spent 10 years as a gaming regulatorwith the Nevada Gaming Control Board, rising from Financial Investigator toChief of Investigations. As Chief of

 

34

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Investigations, Mr. Schatzmansupervised the work of the 80 agents in the Investigations and CorporateSecurities Divisions of the Gaming Control Board.

 

Mr. Abramson, Mr. Chafoulias,Mr. Holmes and Mr. Schatzman each joined our Board of Directors on December 7,2005, before we submitted their background information to the NIGC for reviewand approval. Thus, these directors have agreed not to take any action inconnection with our NIGC-approved management agreement with the Cheyenne andArapaho Tribes of Oklahoma until the NIGC approves their service on our board. Thesedirectors also will not take action with regard to our Gaming ManagementAgreement with the Otoe-Missouria Tribe of Indians if that contract receivesNIGC approval until the NIGC approves their service on our board. We submittedthe required background information for each of these directors to the NIGC on December 7,2005, the same day that they joined our board.

 

**Family Relationships.**

 

Nofamily relationships exist among our directors and executive officers.

 

**Legal Proceedings.**

 

Tothe knowledge of our management, during the past five years, no present orformer director, person nominated to become a director, executive officer,promoter or control person of our company, except as disclosed below:

 

•      Was a general partner or executive officer ofany business by or against which any bankruptcy petition was filed, whether atthe time of such filing or two years prior the filing;

 

•      Was convicted in a criminal proceeding ornamed the subject of a pending criminal proceeding (excluding trafficviolations and other minor offenses);

 

•      Was subject to any order, judgment or decree,not subsequently reversed, suspended or vacated, of any court of competentjurisdiction, permanently or temporarily enjoining, barring, suspending orotherwise limiting his or her involvement in any type of business, securitiesor banking activities.

 

•      Was found by a court of competentjurisdiction in a civil action, or by the Securities and Exchange Commission orthe Commodity Futures Trading Commission to have violated federal or statesecurities or commodities law, and the judgment has not been subsequentlyreversed, suspended, or vacated.

 

*Prior Bankruptcy Proceeding of Subsidiary*

 

JamesB. Druck, Jeffrey S. Halpern and Thomas E. Fox are Managers of Gold Rush I,LLC, a Colorado limited liability company and a wholly-owned subsidiary ofSouthwest Casino and Hotel Corp. In August 2001, Cripple Creek DevelopmentCorp., a Colorado corporation, Blue Building Development, Inc., a Wyomingcorporation, Mark Brockley, an individual, and Annesse Brockley, an individual,initiated a lawsuit against Gold Rush I, LLC, and Southwest Casino and HotelCorp. in District Court, Teller County, Colorado (01-CV-156). The plaintiffalleged that the defendants failed to pay certain obligations to the plaintiffsunder the terms of their lease agreement and breach of contract. The leaseincluded a provision that capped the maximum monthly amount required to be paidto Mr. Brockley’s creditors. In the early years of the operation, Mr. Brockley’sobligations to creditors far exceeded this cap and Southwest paid theseobligations as they came due. Under the lease, Southwest set off againstcurrent rent the amount of the excess payments. In the lawsuit, Mr. Brockleysought to evict Gold Rush I from the premises for failing to pay amountsclaimed to be owed under the Lease. Gold Rush I responded by denying anyfailure to pay.

 

Anevidentiary hearing on Mr. Brockley’s eviction claim began in the ColoradoDistrict Court on August 22, 2001. Because the hearing could not becompleted that day, it was continued to August 31, 2001. Before thehearing was reconvened, Gold Rush I filed a voluntary petition forreorganization under Chapter 11 of the United States Bankruptcy Code in theBankruptcy Court for the District of Minnesota (Case No. 01-33755) toensure that we did not lose possession of the premises while the underlyingclaims were litigated. After considering several motions,

 

35

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theBankruptcy Court directed that the Colorado Court determine (1) whetherGold Rush I was in default under the terms and conditions of the lease, and ifso, the nature and amounts of the defaults; and (2) whether Gold Rush Imade payments in excess of the caps provided in the lease, and the amounts, ifany, paid in excess of the caps. The Colorado District Court conducted ahearing on these three issues on October 5, 2001. On October 15,2001, the Colorado District Court entered an Order in which it found (a) thatGold Rush I was not in default under the lease, (b) that Gold Rush I hadmade payments in excess of the monthly caps provided in the lease (whichoverpayments the court subsequently quantified at $554,362.09), and (c) thatGold Rush I was entitled to offset the overpayments against rent and otherpayments due under the terms of the lease. Gold Rush I was successful in itslitigation against the landlord regarding the rent dispute and emerged frombankruptcy when the Bankruptcy Court confirmed its reorganization plan, whichprovided for full payment to all creditors, with interest, on January 10,2003.

 

Mr. Brockleyappealed the Colorado District Court’s Order to the Colorado Court of Appeals,which dismissed the appeal on May 21, 2002.

 

*Colorado Regulatory Proceeding*

 

SouthwestCasino and Hotel Corp. was recently fined $50,000 by the Colorado Division ofGaming for failure to properly maintain and review statistical data on slotmachine performance after receiving a warning letter regarding this deficiencyand failing to comply with its agreement to correct the deficiency. SouthwestCasino and Hotel Corp. paid the full amount of the fine. As part of theseproceedings, James Druck, in his capacity as manager of the facility inquestion, without any admission of guilt, agreed to take the necessary steps toensure Southwest Casino and Hotel Corp.’s compliance in this matter and,further, agreed to pay $5,000 to the Limited Gaming Fund to reimburse expensesincurred by Colorado in this investigation.

 

**Audit Committee Financial Expert.**

 

Southwest’sBoard of Directors created an Audit Committee on January 10, 2006 andelected David Abramson to serve as Chairman of that committee. The Board ofDirectors has determined that Mr. Abramson qualifies as an audit committeefinancial expert and as an independent member of our Board of Directors underSEC rules and the rules of the Nasdaq stock market. The other membersof our Audit Committee are Jim Holmes and Gregg Schatzman, both of whom qualifyas independent members of our Board of Directors under SEC rules and the rules ofthe Nasdaq stock market.

 

OurBoard of Directors also created a Compensation Committee and a NominatingCommittee on February 1, 2006.

** **

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Based solely upon areview of Forms 3, 4 and 5 and amendments to Forms 3, 4 and 5 furnished to usduring our most recent fiscal year, we are not aware of any director, officer,or beneficial owner of more than 10 percent of any class of our registeredsecurities that failed to file on a timely basis, as disclosed in Forms 3, 4and 5 and amendments to those Forms, reports required under Section 16(a) ofthe Securities Exchange Act of 1934 during 2004.

** **

**Code of Conduct andEthics for Employees, Officers and Directors**

 

We have adopted a Code ofConduct that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller or persons performingsimilar functions and meets the requirements of the SEC. A copy of our Code ofConduct was filed as an exhibit to our Annual Report on Form 10-KSBfiled June 29, 2004. We will provide a copy of our Code of Conduct to anyperson, without charge, upon written request submitted to our office at 2001Killebrew Drive, Suite 350, Minneapolis, MN 55425, Attn: InvestorRelations. We intend to disclose any amendments to and any waivers from aprovision of our Code of Ethics on a Form 8-K filed with the SEC.

 

36

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**Item 10.****        EXECUTIVECOMPENSATION**

 

Summary of Cash and Other Compensation.

 

Thefollowing table provides summary information concerning cash and non-cashcompensation paid to or earned by our Chief Executive Officer and our executiveofficers who received or earned cash and non-cash salary and bonus of more than$100,000 during the Southwest Casino Corporation fiscal year ended December 31,2005. Please note that we completed a corporate reorganization with Lone MooseAdventures, Inc. on July 22, 2004 that is described under *Item 1. DESCRIPTION OF BUSINESS – (a) Business Development –Corporate Reorganization* in this report. The information belowreflects compensation paid to the executive officers of Southwest Casino andHotel Corp. and Southwest Casino Corporation by Southwest for the past twofiscal years. In addition, under Item 402 of Regulation S-B, we must disclosecompensation information for Christopher B. Glover, the Chief Executive Officerof Lone Moose Adventures before the reorganization. The compensationinformation regarding Mr. Glover represents compensation paid by LoneMoose Adventures, Inc. before our reorganization.

 

**Summary Compensation Table**

 
| **Name and Principal Position** | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation  Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation  ($)** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------------------------------------------------------------|------------|----------------------------------|------------|
| **Year**                        | ** ** | **Salary ($)**          | ** ** | **Bonus ($)**                                                    |
| ** **                      | ** ** | ** **              | ** ** | ** **                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| *James B. Druck*                | ** ** | 2005                    | ** ** | $                                                                | 220,000    | ** **                       | $          | 0 | ** ** | 0 | ** ** | $ | 46,608 | (4) |
| *Chief  Executive Officer and*  | ** ** | 2004                    | ** ** | 220,000                                                          | ** ** | 64,497                           | (1)        | 300,000 | (3) | 48,085 | (4) |
| *Secretary*                     | ** ** | 2003                    | ** ** | 220,000                                                          | ** ** | 108,490                          | (2)        | 0 | ** ** | 32,424 | (4) |
| * *                        |       |                    |       |                                                             |       |                             |       |   |   |   |   |
| *Thomas E. Fox*                 |       |                    |       |                                                             |       |                             |       |   |   |   |   |
| *President,  Chief Operating*   |       | 2005                    |       | $                                                                | 220,000    |                             | $          | 0 |   | 0 |   | $ | 32,231 | (4) |
| *Officer  and Chief Financial*  |       | 2004                    |       | 220,000                                                          |       | 57,912                           | (1)        | 300,000 | (3) | 31,854 | (4) |
| *Officer*                       |       | 2003                    |       | 220,000                                                          |       | 94,936                           | (2)        | 0 |   | 49,887 | (4) |
| * *                        |       |                    |       |                                                             |       |                             |       |   |   |   |   |
| *Jeffrey S. Halpern*            |       | 2005                    |       | $                                                                | 120,000    |                             | $          | 0 |   | 0 |   | $ | 38,289 | (4) |
| *Vice  President of Government* |       | 2004                    |       | 120,000                                                          |       | 58,349                           | (1)        | 300,000 | (3) | 37,230 | (4) |
| *Affairs*                       |       | 2003                    |       | 120,000                                                          |       | 54,120                           | (2)        | 0 |   | 41,960 | (4) |
| * *                        |       |                    |       |                                                             |       |                             |       |   |   |   |   |
| *Brian L. Foster*               |       | 2005                    |       | $                                                                | 0          | (5)                              | $          | 273,355 | (6) | 0 |   | $ | 16,576 | (9) |
| *Vice  President of Native*     |       | 2004                    |       | 0                                                                | (5)        | 100,772                          | (7)        | 0 |   | 17,189 | (9) |
| *American  Operations*          |       | 2003                    |       | 0                                                                | (5)        | 113,411                          | (8)        | 250,000 |   | 9,349 | (9) |
| * *                        |       |                    |       |                                                             |       |                             |       |   |   |   |   |
| *Christopher B. Glover*         |       | 2005                    |       | $                                                                | 0          |                             | $          | 0 |   | 0 | (11) | 0 |   |
| *President,  Lone Moose*        |       | 2004                    |       | 6,000                                                            | (10)       | 0                                |       | 0 | (11) | 0 |   |
| *Adventures,  Inc*              |       | 2003                    |       | 12,000                                                           | (10)       | 0                                |       | 0 | (11) | 0 |   |

 

----

(1)   Represents bonus awarded for performanceduring 2003 and paid during 2004. No bonus was awarded for 2004.

(2)   Represents bonus awarded for performance during2002 and paid during 2003.

(3)   Consists of options to acquire 300,000 sharesof common stock granted to the executive under the terms of employmentagreements entered into with Southwest on July 1, 2004.

(4)   Consists of company paid medical, dental, lifeand disability insurance, 401k matching funds, and a car allowance.

(5)   Mr. Foster manages two gaming facilitiesowned by the Cheyenne and Arapaho Tribes of Oklahoma. Mr. Foster alsoreceives compensation, including a salary, directly from the Cheyenne andArapaho Tribes of Oklahoma tribal enterprises.

(6)   Represents bonus awarded for 2004 performanceand 2005 performance and paid during 2005.

(7)   Represents bonus awarded for performance andpaid during 2004.

(8)   Represents bonus awarded for performance andpaid during 2003.

(9)   Consists of company paid medical, dental, lifeand disability insurance, and 401k matching funds.

(10)Lone Moose Adventures, Inc. accruedsalary for an officer/shareholder starting April 1, 2002 at the rate of$1,000 per month, but did not make any payment. Under the terms of ourreorganization, Southwest did not assume any obligation for accrued but unpaidwages.

(11)Does not include 83,333 shares of restrictedstock issued to Mr. Glover by Lone Moose Adventures, Inc. during January 2002.

 

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Option Grants in Last Fiscal Year.

 

Thefollowing table summarizes grants of options to purchase shares of SouthwestCasino Corporation (or options to purchase shares of Southwest Casino and HotelCorp. assumed by Southwest Casino Corporation in the reorganization) during thefiscal year ended December 31, 2005 to each of the executive officersnamed in the above Summary Compensation Table.

 
| ** **             | ** ** | **Individual Grants**                                       | ** ** |
|------------------------|------------|-------------------------------------------------------------|------------|
| **Name**               | ** ** | **Number of  Securities  Underlying  Options  Granted (#)** | ** ** | **Percent of  Total Options  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price  ($ Per Share)(2)** | ** ** | **Expiration  Date** | ** ** |
| James B.  Druck        |       | 0                                                           | (1)        | — |   | — |   | — |   |
| Thomas E.  Fox         |       | 0                                                           | (1)        | — |   | — |   | — |   |
| Jeffrey S.  Halpern    |       | 0                                                           | (1)        | — |   | — |   | — |   |
| Brian L.  Foster       |       | 0                                                           |       | — |   | — |   | — |   |
| Christopher  B. Glover |       | 0                                                           |       | — |   | — |   | — |   |

 

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(1)   Does not include warrants to purchase 50,000shares of common stock issued to Messrs. Druck, Fox and Halpern inconsideration of each of their agreements to guarantee personally up to $100,000of a $2.5 million term loan and $450,000 revolving line of credit from CrownBank to Southwest Casino and Hotel Corp. Crown Bank requested the participationof Messrs. Druck, Fox and Halpern in the loan guarantees as a condition tomaking these loans to Southwest. The exercise price of these warrants is $0.58per share, which was the average closing market price of a share of Southwestcommon stock on the Over-the-Counter Bulletin Board market for the 10 tradingdays immediately preceding the closing of the loan transaction.

 

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-EndOption Values.

 

Thefollowing table summarizes the number and value of options held by each of theexecutive officers named in the above Summary Compensation Table at December 31,2005. None of these executive officers exercised any stock options during thefiscal year ended December 31, 2005.

 
| ** **             | ** ** | **Number of Securities  Underlying Unexercised  Options at December 31, 2005** | ** ** | **Value of Unexercised  In-the-Money Options  at December 31, 2005 (1)** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Exercisable**                                                                     | ** ** | **Unexercisable**                                                             | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| James B.  Druck        |       | 300,000                                                                             |       | 0                                                                             |       | 0 |   | — |   |
| Thomas E.  Fox         |       | 300,000                                                                             |       | 0                                                                             |       | 0 |   | — |   |
| Jeffrey S.  Halpern    |       | 300,000                                                                             |       | 0                                                                             |       | 0 |   | — |   |
| Brian L.  Foster       |       | 250,000                                                                             |       | 0                                                                             |       | $ | 120,000 |   | — |   |
| Christopher  B. Glover |       | 0                                                                                   |       | 0                                                                             |       | 0 |   | — |   |
|                        |            |                                                                                     |            |                                                                               |            |  |  |  |  |  |

 

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(1)   Based on the difference between the fairmarket value of one share of common stock at December 30, 2005 of $0.60 per share, and the exerciseprice of the options, which range from $0.12 to $1.00 per share. Options are inthe money if the market price of the shares exceeds the option exercise price.

 

Compensation of Directors.

 

On December 7, 2005, Southwest’s Board ofDirectors elected four new independent (as defined under Nasdaq rules). Southwest’sBoard of Directors consists of four independent, non-employee directors andJames Druck, our CEO. Mr. Druck does not receive any additionalcompensation for his service as a director.

 

Beginning in the first quarter of 2006, thenon-employee members of our Board of Directors receive a quarterly retainer of$2,500, with an initial retainer of $5,000 in their first quarter of service. Eachdirector also received a non-qualified option to purchase 150,000 shares ofSouthwest common stock under our 2004 Stock Incentive Plan. These options weregranted on January 10, 2006 and have an exercise price of $0.65 per share. The options becomeexercisable in 12 equal quarterly installments on the last day of each quarterover three years. Southwest also pays directors meeting fees of $1,000 for eachin-person meeting and $500 for each telephonic meeting at which formal actionis taken by our board or any committee of the board. These meeting fees do notapply to one in-person

 

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meeting of the Board of Directors and one meeting ofeach committee on which a board member serves each quarter. The increasedretainer during the first quarter of a director’s service is intended tocompensate the director for the extra time and meetings required to orient adirector to Southwest and the work of our Board.

 

We also issued a non-qualified option to purchase75,000 shares of Southwest common stock, on the same terms as described above,to David Abramson to compensate him for his work as Chairman of the AuditCommittee of the Board of Directors.

 

Employment Contracts.

 

*James Druck Employment Agreement*

 

In July 2004, we entered into an employmentagreement with James B. Druck under which Mr. Druck serves as our ChiefExecutive Officer. The initial term of this agreement continues until July 1,2006, after which the term renews automatically for additional one-year periodsunless terminated earlier by either party. Under this agreement, Mr. Druckreceives a base salary of $220,000 per year, an automobile allowance of $1,000per month, and is eligible for an additional performance bonus if granted byour Board of Directors. Any adjustment to base salary will be determined by theBoard of Directors. This bonus is discretionary and no bonus was awarded forfiscal years 2005 or 2004, although Mr. Druck received a bonus for fiscalyear 2003 that was paid during 2004.   Mr. Druckalso was granted a non-plan option to purchase 300,000 shares of our commonstock at a price of $1.00 per share. This option was immediately exercisable asto 100,000 shares and 1/24 of the remaining shares will vest on the first dayof each of the next 24 months beginning August 1, 2004. Because vesting ofthis option could accelerate if specified milestones were achieved, includingthe grant of racing licenses to North Metro Harness Initiative, LLC on January 19,2006, this option was fully-vested at the end of 2005. If Mr. Druck isterminated without cause, in connection with a change in control of thecompany, or if Mr. Druck terminates his employment for “good reason”, Mr. Druckmay elect to continue employment with us in a diminished capacity. If Mr. Druckso elects, Mr. Druck will continue to receive his base salary and medicalbenefits for 18 months. After 18 months, Mr. Druck will receive a salaryof not less than $25,000 and continuing medical benefits. Mr. Druck isalso subject to customary assignment of inventions, confidentiality,non-solicitation and non-compete provisions.

 

*Thomas Fox Employment Agreement*

 

In July 2004, we entered into an employmentagreement with Thomas E. Fox under which Mr. Fox serves as our President,Chief Operating Officer and Chief Financial Officer. The initial term of thisagreement continues until July 1, 2006, after which the term renews automaticallyfor additional one-year periods unless terminated earlier by either party.Under this agreement, Mr. Fox receives a base salary of $220,000 per year,an automobile allowance of $1,000 per month, and is eligible for an additionalperformance bonus if granted by our Board of Directors. Any adjustment to basesalary will be determined by the Board of Directors. This bonus isdiscretionary and no bonus was awarded for fiscal years 2005 or 2004, although Mr. Foxreceived a bonus for fiscal year 2003 that was paid during 2004. Mr. Foxalso was granted a non-plan option to purchase 300,000 shares of our commonstock at a price of $1.00 per share. This option was immediately exercisable asto 100,000 shares and 1/24 of the remaining shares will vest on the first dayof each of the next 24 months beginning August 1, 2004. Because vesting ofthis option could accelerate if specified milestones were achieved, includingthe grant of racing licenses to North Metro Harness Initiative, LLC on January 19,2006, this option was fully-vested at the end of 2005. If Mr. Fox isterminated without cause, in connection with a change in control of thecompany, or if Mr. Fox terminates his employment for “good reason”, Mr. Foxmay elect to continue employment with us in a diminished capacity. If Mr. Foxso elects, Mr. Fox will continue to receive his base salary and medicalbenefits for 18 months. After 18 months, Mr. Fox will receive a salary ofnot less than $25,000 and continuing medical benefits. Mr. Fox is alsosubject to customary assignment of inventions, confidentiality,non-solicitation and non-compete provisions.

 

*Jeffrey Halpern Employment Agreement*

 

In July 2004, we entered into an employmentagreement with Jeffrey S. Halpern under which Mr. Halpern serves as the Chairmanof our Board of Directors and Assistant Secretary. The initial term of thisagreement continues until July 1, 2006, after which the term renewsautomatically for additional one-year periods unless terminated earlier by

 

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either party. Under this agreement, Mr. Halpernreceives a base salary of $120,000 per year, an automobile allowance of $1,000per month, and is eligible for an additional performance bonus if granted byour Board of Directors. Any adjustment to base salary will be determined by theBoard of Directors. This bonus is discretionary and no bonus was awarded forfiscal years 2005 or 2004, although Mr. Halpern received a bonus forfiscal year 2003 that was paid during 2004. Mr. Halpern also was granted anon-plan option to purchase 300,000 shares of our common stock at a price of$1.00 per share. This option was immediately exercisable as to 100,000 sharesand 1/24 of the remaining shares will vest on the first day of each of the next24 months beginning August 1, 2004. Because vesting of this option couldaccelerate if specified milestones were achieved, including the grant of racinglicenses to North Metro Harness Initiative, LLC on January 19, 2006, thisoption was fully-vested at the end of 2005. If Mr. Halpern is terminatedwithout cause, in connection with a change in control of the company, or if Mr. Halpernterminates his employment for “good reason”, Mr. Halpern may elect tocontinue employment with us in a diminished capacity. If Mr. Halpern soelects, Mr. Halpern will continue to receive his base salary and medicalbenefits for 18 months. After 18 months, Mr. Halpern will receive a salaryof not less than $25,000 and continuing medical benefits. Mr. Halpern isalso subject to customary assignment of inventions, confidentiality,non-solicitation and non-compete provisions.

** **

**2004 Stock Incentive Plan.**

** **

**From time to time, we grantincentive awards under our 2004 Stock Incentive Plan. The incentive plan wasapproved by the Board of Directors on June 1, 2004 and approved byshareholders on July 14, 2004. The incentive plan provides for the grantto employees, officers, directors, consultants and independent contractors ofour company and our subsidiaries of incentive awards to purchase shares ofcommon stock that qualify as “incentive stock options” within the meaning of Section 422of the Internal Revenue Code of 1986, as amended, as well as non-statutoryoptions that do not qualify as incentive stock options, stock appreciationrights, restricted stock awards, performance units and stock bonuses. Thisincentive plan is administered by the Board of Directors, which determines thepersons who are to receive awards, as well as the type, terms and number ofshares subject to each award.**

** **

**We have reserved an aggregate of1,500,000 shares of Southwest common stock for awards under the incentive plan.As of December 31, 2005, options to purchase an aggregate of**205,000 shares of Southwest common stock were outstanding underthe incentive plan and a total of 1,295,000 shares of Southwest common stockremained available for grant. As of December 31, 2005, the outstandingoptions under the incentive plan were held by six individuals and had exerciseprices of $0.50 or $1.00 per share.

** **

**Incentive stock options grantedunder the incentive plan may not have an exercise price less than the fairmarket value of Southwest common stock on the date of the grant (or, if grantedto a person holding more than 10% of our voting stock, at less than 110% offair market value). Non-statutory stock options granted under the incentiveplan may not have an exercise price less than 85% of fair market value onthe date of grant. Aside from the maximum number of shares of Southwest commonstock reserved under the plans, there is no minimum or maximum number of sharesthat may be subject to options under the incentive plan. However, theaggregate fair market value of the stock subject to incentive stock optionsgranted to any optionee that are exercisable for the first time by an optioneeduring any calendar year may not exceed $100,000. Options generally expirewhen the optionee’s employment or other service with us terminates. Optionsgenerally may not be transferred, other than by will or the laws ofdescent and distribution, and only the optionee can exercise the option duringthe optionee’s lifetime. The term of each option, which is fixed by the Boardof Directors at the time of grant, may not exceed 10 years from the datethe option is granted (except that an incentive stock option may beexercisable only for 10 years and an incentive stock option granted to a personholding more than 10% of our voting stock may be exercisable only for fiveyears regardless of the availability of such exemption).**

** **

**The incentive plan contains changein control provisions, as described below under the heading “Change in ControlArrangements.”**

** **

40

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**Change in Control Arrangements.**

** **

***Druck, Fox and Halpern EmploymentAgreements***

 

Underour employment agreements with Messrs. Druck, Fox and Halpern, if any ofthem is terminated within nine months after a change in control occurs, they may electto continue their employment with us in a diminished capacity. If theterminated employee so elects and his employment was terminated during theinitial term of the employment agreement, the terminated employee will continueto receive his base salary and medical benefits for 18 months. After 18 months,he will receive a salary of not less than $25,000 and continuing medicalbenefits. If the employee is so terminated after the initial term of theemployment agreement, he will receive continuing salary and medical benefits athis then base rate for 12 months after which his salary may be reduced tonot less than $25,000 with continuing medical benefits. In addition, anyunexpired stock options will vest immediately.

 

Forpurposes of these employment agreements, a “change in control” includes:

 

**•**      any merger, acquisition, reorganization or consolidationafter which the shareholders of Southwest immediately before the transaction donot own a majority of the surviving corporation;

**•**      any sale, lease, license or transfer of substantially allof our assets;

**•**      any statutory exchange of securities with another entity(except where we are the acquiring entity);

**•**      acquisition by any individual or group of more than 50percent of our outstanding voting stock from existing shareholders;

**•**      members of our Board of Directors as of July 1, 2004or new board members approved by a majority of those board members cease toconstitute a majority of our Board of Directors; or

**•**      any othertransaction or series of transactions (other than venture capital orinstitutional investor financings) that the SEC would require us to report.

 

*2004 Stock Incentive Plan*

 

**Under our 2004 Stock IncentivePlan, incentive awards granted under the plan will become fully exercisableafter certain changes in control of our company, such as:**

** **

**•**      the sale, lease, exchange or other transfer of all orsubstantially all of our assets;

**•**      our shareholders approve any plan of or proposal for theliquidation or dissolution of our company;

**•**      any person becomes the beneficial owner of:

**•**      20% or more, but not 50% or more, of the combined votingpower of our outstanding securities ordinarily having the right to vote atelections of directors, unless the transaction resulting in their ownership wasapproved in advance by the “continuity directors” who are members of the Boardof Directors at the time of the special meeting or whose nomination forelection meets certain approval requirements related to continuity with ourcurrent Board of Directors; or

**•**      50% or more of the combined voting power of our outstandingsecurities ordinarily having the right to vote at elections of directors(regardless of any approval by the “continuity directors”); provided that atraditional institution or venture capital financing transaction are excludedfrom this definition;

**•**      we are a party to a merger or consolidation that results inour shareholders beneficially owning securities representing:

**•**      more than 50%, but less than 80%, of the combined votingpower of the surviving corporation’s then outstanding securities ordinarilyhaving the right to vote at elections of directors, unless the merger orconsolidation was approved in advance by the “continuity directors”; or

**•**      50% or less of the combined voting power of the survivingcorporation’s then outstanding securities ordinarily having the right to voteat elections of directors (regardless of any approval by the “continuitydirectors”);

**•**      a change in control that outside legal counsel determinesmust be reported under Section 13 or 15(d) of the Exchange Act,whether or not we are then subject to these reporting requirements; or

**•**      the “continuity directors” cease, for any reason, toconstitute at least a majority of the Board of Directors, at any time after thedate that our securities are first sold in a registered public offering.

 

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| **Item 11.** | ** ** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS.** |
|--------------|------------|-------------------------------------------------------------------------------------------------------|

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

Thefollowing table states the information known to us with respect to thebeneficial ownership of our common stock as of March 15, 2006 for (1) eachperson known by us to beneficially own more than 5% of our common stock, (2) eachof the executive officers named in the Summary Compensation Table under theheading “Summary of Cash and Other Compensation,” (3) each of ourdirectors, and (4) all of our executive officers and directors as a group.

 

Sharesare deemed “beneficially owned” by a person if that person, directly orindirectly, has sole or shared power to vote or to direct the voting of thoseshares or sole or shared power to dispose or direct the disposition of thoseshares. Except as otherwise indicated, we believe that each of the beneficialowners of our capital stock listed below, based on information provided bythese owners, has sole dispositive and voting power with respect to its shares,subject to community property laws where applicable. Shares not outstanding butdeemed beneficially owned by virtue of the right of a person or member of agroup to acquire them within 60 days are treated as outstanding only whendetermining the amount and percent owned by that person or group.

 
| ** **                                                   | ** ** | **Common Stock** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|
| **Name**                                                     | ** ** | **Number**       | ** ** | **Percent** | ** ** |
| James B.  Druck (1)                                          |       | 1,962,500        | (2)        | 9.8 | % |
| David H.  Abramson (3)                                       |       | 43,750           | (4)        | * |   |
| Gus A.  Chafoulias (5)                                       |       | 253639           | (6)        | 1.3 | % |
| Jim Holmes  (1)                                              |       | 12,500           | (7)        | * |   |
| Gregg P.  Schatzman (1)                                      |       | 12,500           | (7)        | * |   |
| Thomas E.  Fox (1)                                           |       | 1,935,288        | (8)        | 9.7 | % |
| Jeffrey S.  Halpern (1)                                      |       | 1,952,500        | (9)        | 9.8 | % |
| Brian L.  Foster                                             |       | 250,000          | (10)       | 1.3 | % |
| Christopher  B. Glover                                       |       | 0                |       | 0 |   |
|                                                         |       |             |       |   |   |
| All  executive officers and directors as a group (8 persons) |       | 6,422,677        | (11)       | 30.4 | % |

 

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*  Less than 1 percent.

(1)   Address: 2001 Killebrew Drive, Suite 350,Minneapolis, Minnesota 55425.

(2)   Includes 300,000 shares of common stockissuable upon exercise of an option and 50,000 shares of common stock issuableupon exercise of a warrant.

(3)   Address: Parkdale Plaza, 1660 S. Highway 100, Suite 500,Minneapolis, MN 55416

(4)   Includes 18,750 shares of common stockissuable upon exercise of options.

(5)   Address: 121 23rd Avenue SW, Rochester,MN 55902.

(6)   Includes 12,500 shares of common stockissuable upon exercise of an option and 150,000 shares of common stock issuableupon exercise of a warrant.

(7)   Consists of 12,500 shares of common stockissuable upon exercise of an option.

(8)   Includes: (i) 22,788 shares held byF&B Properties, a partnership in which Mr. Fox is a 50% generalpartner; (ii) 300,000 shares of common stock issuable upon exercise of anoption; and (iii) 50,000 shares of common stock issuable upon exercise ofa warrant.

(9)   Includes: (i) 40,000 shares held by Mr. Halpern’swife; (ii) 300,000 shares of common stock issuable upon exercise of anoption; and (iii) 50,000 shares of common stock issuable upon exercise ofa warrant.

(10)Consists 250,000 shares of our common stockissuable upon exercise of an option.

(11)Includes: (i) an aggregate of 1,206,250shares issuable upon exercise of options; (ii) 300,000 shares issuableupon exercise of warrants; (iii) 22,788 shares held by a partnership inwhich an executive officer is a general partner; and (iv) 40,000 sharesheld by a director’s spouse.

 

42

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**Securities Authorized forIssuance under Equity Compensation Plan**

 

The following tablesummarizes our equity compensation plan information as of December 31,2005. Options granted in the future 

under the plan are withinthe discretion of our Board of Directors and therefore cannot be ascertained atthis time:

 
| **Plan Category**                                               | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options, Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities Remaining  Available for Future Issuance  Under Equity Compensation  Plans (excluding securities  reflected in column (a))** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                            |       |                                                                                              |       |                                                                               |       |                                                                                                                                                |       |
| Equity  compensation plans approved by security holders:        |       |                                                                                              |       |                                                                               |       |                                                                                                                                                |       |
| 2004 Stock  Incentive Plan (1)                                  |       | 200,000                                                                                           |       | $                                                                                  | 0.86       |                                                                                                                                                | 1,300,000  |   |
| Equity  compensation plans not approved by security holders (2) |       | 2,425,000                                                                                         |       | $                                                                                  | 0.46       |                                                                                                                                                | 0          |   |
| **Total**  (3)                                                  |       | 2,625,000                                                                                         |       | $                                                                                  | 0.49       |                                                                                                                                                | 1,300,000  |   |

 

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(1)   Our only equity compensation plan under whichshares of our common stock may be issued is the 2004 Stock Incentive Planthat was maintained by Southwest Casino and Hotel Corp. before the consummationof our reorganization and was assumed by Southwest Casino Corporation under theterms and at the time of consummation of our reorganization. Southwest Casinoand Hotel Corp. shareholders approved the 2004 Stock Incentive Plan at aspecial meeting on July 14, 2004. We do not have any other equitycompensation plans.

(2)   Consists of individual option and warrantagreements issued by Southwest Casino and Hotel Corp. before July 22,2004, which Southwest Casino Corporation assumed under the terms and at thetime of consummation of the reorganization.

(3)   Does not include non-qualified options topurchase 675,000 shares of common stock issued to our newly-elected independentboard members on January 10, 2006.

 

**Item 12.****       ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

OnOctober 20, 2005, Southwest granted warrants to purchase 50,000 shares ofcommon stock at a price of $0.58 per share to each of James Druck, Tom Fox andJeff Halpern and a warrant to purchase 150,000 shares of common stock at aprice of $0.50 issued to Gus Chafoulias before he joined our Board of Directors.Southwest granted these warrants in consideration of the agreements of each of Messrs. Druck,Fox and Halpern to guarantee personally up to $100,000 and Mr. Chafouliasto guarantee personally $300,000 of a $2.5 million term loan provided toSouthwest by Crown Bank. The guarantees of Messrs. Druck, Fox and Halpernalso apply to a $450,000 revolving line of credit provided to Southwest byCrown Bank. Crown Bank requested the loan guarantees from Messrs. Druck,Fox and Halpern as a condition to extending these loans. Southwest also issuedwarrants to purchase an additional 1,100,000 shares of its common stock at aprice of $0.50 per share to non-affiliated individuals, including Mr. Chafoulias,and one trust that agreed to guarantee the remaining $2,350,000 of the of theterm loan. The $0.58 per share exercise price of the warrants issued to Messrs. Druck,Fox and Halpern equals the average closing price for a single share ofSouthwest common stock on the Over-the-Counter Bulletin Board market for theten trading days immediately preceding the loan closing date.

 

Immediatelyafter completing our July 22, 2004 reorganization, we sold substantiallyall of the Lone Moose Adventures, Inc. adventure tour business assets toLone Moose’ founding shareholders, Christopher B. Glover and Michael C. Brown.In exchange for these assets, Messrs. Glover and Brown (a) assumedall of the pre-closing liabilities of the adventure tour business previouslyoperated by Lone Moose (which liabilities exceeded the net book value of LoneMoose immediately before the reorganization), (b) agreed to indemnify LoneMoose (now Southwest Casino Corporation) for any liabilities or damages relatedto Lone Moose’s existence and operations before the closing of the reorganization,and (c) delivered for cancellation certificates representing all of thecommon stock of Lone Moose (an aggregate of 2,489,192 shares) held by Messrs. Gloverand Brown.

 

43

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EffectiveJune 29, 2004, James B. Druck, Thomas E. Fox and Jeffrey S. Halpern eachpurchased for investment 500,000 shares of Lone Moose common stock at apurchase price of $0.05 per share. All of these shares are restrictedsecurities under applicable federal and state securities laws.

 

OnMarch 19, 2004, Southwest Casino and Hotel Corp. issued 125,000 shares ofits common stock to each of James B. Druck, Thomas E. Fox and Jeffrey S.Halpern in consideration of their agreements to guarantee personally a $500,000letter of credit supporting a bond required in connection with North MetroHarness Initiative’s application for licenses to develop and operate a harnessracetrack in Columbus Township, Anoka County, Minnesota. These shares convertedinto 62,500 shares each of Southwest Casino Corporation common stock inconnection with our July 22, 2004 reorganization.

 

TheCompany had aggregate outstanding liabilities to James B. Druck, Thomas E. Foxand Jeffrey S. Halpern for unpaid compensation and expense reimbursements of$250,699 as of December 31, 2005 and $272,950 as of December 31,2004.

 

Duringthe years ended December 31, 2005 and 2004, Southwest paid Berc &Fox Limited $17,648 and$41,275 for tax and accounting services, respectively. Thomas Fox is ashareholder and officer in Berc & Fox Limited.

 

During the years ended December 31,2005 and 2004, Southwest paid Jennifer Sparlin Druck $1,000 each year forentertainment services at the Gold Rush Palladium. Ms. Druck is the wifeof James B. Druck.

 

**ITEM13.****     ****EXHIBITS**

 

Please see the Exhibit Indexat page 48 of this Report.

 

A copy of any exhibitslisted or referred to in this Report will be furnished at a reasonable cost toany person who is a stockholder upon receipt of a written request for anexhibit. These requests should be sent to: Southwest Casino Corporation, 2001 Killebrew Drive, Suite 350,Minneapolis, Minnesota 55425 Attn: Stockholder Information.

 

The following is a listof each management contract or compensatory plan or arrangement required to befiled as an exhibit to this Annual Report on Form 10-KSB under Item13(a):

###  

### A.            2004 Stock Incentive Plan (incorporatedby reference to Exhibit 10.1 to our Current Report on Form 8-K filed August 6,2004).

 

### B.            Option Agreement dated July 1, 2004,between Southwest and James B. Druck (incorporated by reference to Exhibit 10.2to our Current Report on Form 8-K filed August 6, 2004).

 

### C.            Option Agreement dated July 1, 2004,between Southwest Casino and Jeffrey S. Halpern (incorporated by reference to Exhibit 10.3to our Current Report on Form 8-K filed August 6, 2004).

 

### D.            Option Agreement dated July 1, 2004,between Southwest Casino and Thomas E. Fox (incorporated by reference to Exhibit 10.4to our Current Report on Form 8-K filed August 6, 2004).

###  

### E.             Employment Agreement dated effective July 1,2004, between Southwest Casino and Hotel Corp. and James B. Druck (incorporatedby reference to Exhibit 10.13 to our Current Report on Form 8-K filedAugust 6, 2004).

 

### F.             Employment Agreement dated effective July 1,2004, between Southwest Casino and Hotel Corp. and Jeffrey S. Halpern(incorporated by reference to Exhibit 10.14 to our Current Report on Form 8-Kfiled August 6, 2004).

 

44

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### G.            Employment Agreement dated effective July 1,2004, between Southwest Casino and Hotel Corp. and Thomas E. Fox (incorporatedby reference to Exhibit 10.15 to our Current Report on Form 8-K filedAugust 6, 2004).

 

### H.            Form of Indemnification Agreementsby and between Southwest Casino and Hotel Corp. and each of James B. Druck,Jeffrey S. Halpern, Thomas E. Fox and Brian L. Foster (incorporated byreference to Exhibit 10.17 to our Current Report on Form 8-K filed August 6,2004).

 

**I.**              Form ofOption Agreement dated January 10, 2006 between Southwest and each of DavidH. Abramson, Gus A. Chafoulias, Jim Holmes and Gregg P. Schatzman, independentmembers of Southwest’s Board of Directors. (Filed with this report)

 

**J.**             OptionAgreement dated January 10, 2006 between Southwest and David H. Abramson,Chairman of the Audit Committee of the Board of Directors. (Filed with thisreport)

 

**K.**            Form ofIndemnification Agreements by and between Southwest and each of David H.Abramson, Gus A. Chafoulias, Jim Holmes and Gregg P. Schatzman, independentmembers of Southwest’s Board of Directors. (Filed with this report)

 

# **ITEM14.**      PRINCIPAL ACCOUNTANT FEESAND SERVICES.

 

The following table presents fees billed by EideBaillyLLP, our principal accountant, for the audit of Southwest Casino Corporation’sconsolidated financial statements and other professional services provided toSouthwest Casino Corporation for the fiscal years ended December 31, 2005and 2004.

 
| ** **          | ** ** | **Aggregate Amount Billed  by ($)** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **          | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Audit Fees          |       | $                                   | 119,233    | (1) | $ | 121,600 | (2) |
| Audit-Related  Fees |       | $                                   | 3,511      | (3) | $ | 19,800 | (3) |
| Tax Fees            |       | $                                   | 0          | (4) | $ | 0 | (4) |
| All Other  Fees     |       | $                                   | 14,026     | (5) | $ | 0 | (6) |

 

----

(1)       Aggregatefees billed for professional services rendered to Southwest Casino Corporationfor audit of our consolidated financial statements by year (including estimatedfees for the fiscal year 2005 audit for which we have not yet been billed),review of the consolidated financial statements included in our quaterlyreports on Form 10-QSB, and other services normally provided in connection withour statutory and regulatory filings or engagements.

(2)       Aggregate fees billed for professionalservices rendered to Southwest Casino and Hotel Corp. before July 22, 2004and Southwest Casino Corporation after July 22, 2004 for audit of ourconsolidated financial statements by year, review of the consolidated financialstatements included in our quarterly reports on Form 10-QSB, and otherservices normally provided in connection with our statutory and regulatoryfilings or engagements.

(3)       Aggregate feesbilled to Southwest Casino and Hotel Corp. before July 22, 2004 andSouthwest Casino Corporation after July 22, 2004. These otheraudit-related services consisted of accounting research and related issues andassistance with response to SEC correspondence. The Board has consideredwhether the provision of these services is compatible with maintainingEideBailly LLP’s independence and has determined that it is.

(4)       We did not payany fees for professional services provided by our principal accountants toSouthwest Casino and Hotel Corp. before July 22, 2004 and Southwest CasinoCorporation after July 22, 2004, other than the fees described above inthis Item 14, during the last two fiscal years.

(5)       Consists of fees paid for an audit ofSouthwest Casino Corporation’s 401(k) employee benefit plan and finance charges.

(6)       We did not payany fees for professional services provided by our principal accountants toSouthwest Casino and Hotel Corp. before July 22, 2004 and Southwest CasinoCorporation after July 22, 2004, other than the fees described above inthis Item 14, during 2004.

 

**Audit Committee Pre-Approval Policy**

 

On December 7, 2005,Southwest Casino Corporation elected four new independent (as defined under therules of the Nasdaq) directors. Before that date, all members of the company’sBoard of Directors were employees of Southwest and were not independent andcould not qualify for service on an audit committee; thus, the company did nothave policies for approval of audit services by independent directors or anaudit committee. At a regular

 

45

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meeting of the Board ofDirectors on January 10, 2006, the Board selected David Abramson, JimHolmes and Gregg Schatzman, each an independent member of the Board ofDirectors, to serve on the Audit Committee of the Board of Directors. The Boardappointed Mr. Abramson as Chair of its Audit Committee. On February 14,2006, the Board of Directors adopted a written charter for its Audit Committeethat requires Audit Committee preapproval of all future audit and permissiblenon-audit services provided Southwest by its independent public accountants.

 

Because the AuditCommittee’s approval policy was not adopted until 2006, services provided byEideBailly LLP to Southwest during 2005 and in connection with the audit ofSouthwest’s financial statements for fiscal years 2005 and 2004 were notapproved in advance by the Audit Committee. However, all services rendered toSouthwest by EideBailly LLP during 2005 and in connection with the audit ofSouthwest’s financial statements for fiscal years 2005 and 2004 werepermissible under applicable laws and regulations. All services to be providedto Southwest by EideBailly for 2006 and beyond will be approved by the AuditCommittee, in advance.

 

46

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** **

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 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.

 
|                | SOUTHWEST CASINO CORPORATION |                     |
|---------------------|------------------------------|--------------------------|
|                |                         |                     |
| March 31, 2006 | By:                          | /s/  James B. Druck |   |
|                |                         | James B. Druck           |
|                |                         | Chief Executive Officer  |
|                     |                              |                          |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the Registrant on March 30,2005 in the capacities indicated.

 
| **Name**               | ** ** | **Title**                                                          |
|------------------------|------------|--------------------------------------------------------------------|
|                   |       |                                                               |
| /s/ James B. Druck     |       | Chief Executive Officer (principal executive officer) and Director |
|                   |       |                                                               |
| /s/ Thomas E. Fox      |       | President, Chief Operating Officer, and Chief Financial Officer    |
|                   |       | (principal financial officer and principal accounting officer)     |
|                   |       |                                                               |
| /s/ David H. Abramson  |       | Director                                                           |
|                   |       |                                                               |
| /s/ Gus A. Chafoulias  |       | Director                                                           |
|                   |       |                                                               |
| /s/ Jim Holmes         |       | Director                                                           |
|                   |       |                                                               |   |
| /s/ Gregg P. Schatzman |       |                                                               | Director |

 

47

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**SOUTHWESTCASINO CORPORATION**

 

**EXHIBIT INDEXTO ANNUAL REPORT ON FORM 10-KSB**

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2004**

 
| **Exhibit  No.** | ** ** | **Exhibit***                                                                                                                                                                                                                               | ** ** | **Method of Filing**                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Reorganization, dated July 14,  2004, by and among Lone Moose Adventures, Inc., Lone Moose Acquisition  Corporation. Southwest Casino and Hotel Corp. certain of the shareholders of  Lone Moose.          |       | Incorporated by reference to Exhibit 2.1 in the  Current Report on Form 8-K filed August 6, 2004.                            |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 2.2              |       | Asset Purchase Agreement, dated July 14, 2004,  by and among Lone Moose Adventures, Inc., Christopher B. Glover and  Michael C. Brown                                                                                            |       | Incorporated by reference to Exhibit 2.2 in the  Current Report on Form 8-K filed August 6, 2004                             |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 3.1              |       | Articles of Incorporation of Southwest Casino  Corporation, as amended                                                                                                                                                                     |       | Incorporated by reference to Exhibit 3.1 in the  Quarterly Report on Form 10-QSB filed November 14, 2005.                    |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 3.2              |       | Bylaws of Lone Moose Adventures, Inc. (now  Southwest Casino Corporation)                                                                                                                                                             |       | Incorporated by reference to Exhibit 3.2  contained in Lone Moose’s Registration Statement on Form SB-2 (File  No.333-88810) |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.1              |       | Assumption Agreement, dated July 22, 2004, by  and between Southwest Casino Corporation (f/k/a Lone Moose Adventures, Inc.)  and Southwest Casino and Hotel Corp.                                                                |       | Incorporated by reference to Exhibit 4.1 to the  Current Report on Form 8-K filed August 6, 2004.                            |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.2              |       | Registration Rights Agreement, dated June 29,  2004, by and among Lone Moose Adventures, Inc., David C. Merrell and  Jenson Service, Inc.                                                                                   |       | Incorporated by reference to Exhibit 4.2 to the  Current Report on Form 8-K filed August 6, 2004.                            |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.3              |       | Warrant, dated July 22, 2004, between Southwest  Casino Corporation and MBC                                                                                                                                                           |       | Filed with this report.                                                                                                                     |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.4              |       | Registration Rights Agreement, dated June 29,  2004, by and among Southwest Casino and Hotel Corp. and the 8% convertible  demand note holders                                                                                        |       | Incorporated by reference to Exhibit 4.5 to the  Current Report on Form 8-K filed August 6, 2004.                            |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.5              |       | Form of Warrant, dated October 20, 2005,  between Southwest Casino Corporation and non-affiliate guarantors                                                                                                                      |       | Incorporated by reference to Exhibit 4.1 to the  Current Report on Form 9-K filed October 26, 2005.                          |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.6              |       | Form of Warrant, dated October 20, 2005,  between Southwest Casino Corporation and James B. Druck, Thomas E. Fox, and  Jeffrey S. Halpern as loan guarantors                                                                     |       | Filed with this report.                                                                                                                     |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.7              |       | Form of Registration Rights Agreement, dated October 20,  2005, between Southwest Casino Corporation and warrantholders.                                                                                                         |       | Incorporated by reference to Exhibit 4.2 to the  Current Report on Form 8-K filed October 26, 2005.                          |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.8              |       | Form of Option Agreement, dated January 10,  2006, between Southwest Casino Corporation and each of David Abramson, Gus  Chafoulias, Jim Holmes and Gregg Schatzman, independent members of Southwest’s  Board of Directors |       | Filed with this report.                                                                                                                     |
|             |       |                                                                                                                                                                                                                                       |       |                                                                                                                                        |
| 4.9              |       | Option Agreement dated January 10, 2006 between  Southwest and David H. Abramson, Chairman of the Audit Committee of the Board  of Directors                                                                                          |       | Filed with this report                                                                                                                      |

 

48

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| 10.1   |   | 2004 Stock Incentive Plan                                                                                                                                                                                                                                                                         |   | Incorporated by reference to Exhibit 10.1 to  the Current Report to Form 8-K filed August 6, 2004.     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.2   |   | Option Agreement dated July 1, 2004, between  Southwest Casino and James B. Druck                                                                                                                                                                                                            |   | Incorporated by reference to Exhibit 10.2 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.3   |   | Option Agreement dated July 1, 2004, between  Southwest Casino and Jeffrey S. Halpern                                                                                                                                                                                                        |   | Incorporated by reference to Exhibit 10.3 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.4   |   | Option Agreement dated July 1, 2004, between  Southwest Casino and Thomas E. Fox                                                                                                                                                                                                             |   | Incorporated by reference to Exhibit 10.4 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.5   |   | Third Amended and Restated Gaming Management  Agreement dated June 16, 1995 between The Cheyenne and Arapaho Tribes of  Oklahoma and Southwest Casino and Hotel Corp.                                                                                                                        |   | Incorporated by reference to Exhibit 10.5 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.6   |   | Amendment No. 2 to Third Amended and Restated  Gaming Management Agreement dated June 5, 1999 between The Cheyenne and  Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.                                                                                                 |   | Incorporated by reference to Exhibit 10.6 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.7   |   | Amendment No. 3 to Third Amended and Restated  Gaming Management Agreement dated November 13, 2000 between The Cheyenne  and Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.                                                                                            |   | Incorporated by reference to Exhibit 10.7 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.8   |   | Amendment No. 7 to Third Amended and Restated  Gaming Management Agreement dated September 4, 2003 between The Cheyenne  and Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.                                                                                            |   | Incorporated by reference to Exhibit 10.8 to  the Current Report on Form 8-K filed August 6, 2004.     |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.9   |   | Member Control Agreement of North Metro Harness  Initiative, LLC, dated June 8, 2004                                                                                                                                                                                                         |   | Incorporated by reference to Exhibit 10.10 to  the Current Report on Form 8-K filed August 6, 2004.    |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.10  |   | BLN Office Park Lease, dated August 10, 2004,  between Southwest Casino and Hotel Corp. and BLN Office Park Associates.                                                                                                                                                                      |   | To be filed by Amendment.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.11  |   | Lease dated March 1999, by and between Cripple  Creek Development Corp. d/b/a Gold Rush Hotel & Casino, Blue  Building Development, Inc. d/b/a Gold Digger’s Casino, Mark Brockley,  Annesse Brockley, Gold Rush I, LLC and Southwest Casino and Hotel Corp., as  amended |   | Incorporated by reference to Exhibit 10.11 to  the Current Report on Form 8-K filed August 6, 2004.    |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.12  |   | Employment Agreement, dated effective July 1,  2004, between Southwest Casino and Hotel Corp. and James B. Druck                                                                                                                                                                             |   | Incorporated by Reference to Exhibit 10.13 to  the Current Report on Form 8-K filed August 6, 2004.    |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.13  |   | Employment Agreement, dated effective July 1,  2004, between Southwest Casino and Hotel Corp. and Jeffrey S. Halpern                                                                                                                                                                         |   | Incorporated by Reference to Exhibit 10.14 to  the Current Report on Form 8-K filed August 6, 2004.    |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.14  |   | Employment Agreement, dated effective July 1,  2004, between Southwest Casino and Hotel Corp. and Thomas E. Fox                                                                                                                                                                              |   | Incorporated by reference to Exhibit 10.15 to  the Current Report on Form 8-K filed August 6, 2004.    |
|   |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                  |
| 10.15  |   | Form of Indemnification Agreements by and  between Southwest Casino and Hotel Corp. and each of James B. Druck, Jeffery  S. Halpern, Thomas E. Fox and Brian L. Foster                                                                                                                       |   | Incorporated by reference to Exhibit 10.17 to  the Current Report on Form 8-K/A filed October 5, 2004. |

 

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| 10.16  |   | Indemnification Agreement, dated June 29, 2004,  by and between Lone Moose Adventures, Inc. and David C. Merrell                                                                          |   | Incorporated by reference to Exhibit 10.18 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.17  |   | Introduction Agreement, dated June 29, 2004, by  and between Lone Moose Adventures, Inc. and Jenson Services, Inc.                                                                   |   | Incorporated by reference to Exhibit 10.19 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.18  |   | Lease, dated May 1, 1998, by and between Lois  L. Woods and Southwest Casino and Hotel Corp., as amended                                                                                       |   | To be filed by amendment.                                                                                                                                     |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.19  |   | Commitment Letter, dated October 14, 2003, by and  between Southwest Casino and Hotel Corp. and Oppenheimer & Co. Inc.                                                                |   | Incorporated by reference to Exhibit Incorporated  by reference to Exhibit 10.21 to the Current Report on Form 8-K  filed August 6, 2004. |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.20  |   | Member Control Agreement, dated June 14, 2004,  by and between SW Missouri, LLC and Southwest Casino and Hotel Corp.                                                                           |   | Incorporated by reference to Exhibit 10.22 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.21  |   | Operating Agreement of Southwest Missouri Gaming,  LLC dated June 16, 2004.                                                                                                                    |   | Incorporated by reference to Exhibit 10.23 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.22  |   | Management Agreement dated June 16, 2004 by and  among Southwest Missouri Gaming, LLC, Robert E. Low and W Missouri, LLC.                                                                      |   | Incorporated by reference to Exhibit 10.24 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.23  |   | Stipulation and Agreement, dated June 17, 2004,  by and among Southwest Casino and Hotel Corp., and the Colorado Division of  Gaming                                                           |   | Incorporated by reference to Exhibit 10.25 to  the Current Report on Form 8-K filed August 6, 2004.                                            |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.24  |   | Revolving Credit and Term Loan Agreement, dated October 20,  2005, between Southwest Casino and Hotel Corp. and Crown Bank                                                                     |   | Incorporated by reference to Exhibit 10.1 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.25  |   | Guaranty by Corporation, dated October 20,  2005, by Southwest Casino and Hotel Corp. for the benefit of Crown Bank                                                                            |   | Incorporated by reference to Exhibit 10.2 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.26  |   | Security Agreement, dated October 20, 2005,  between Southwest Casino Corporation and Crown Bank                                                                                               |   | Incorporated by reference to Exhibit 10.3 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.27  |   | Stock Pledge Agreement, dated October 20, 2005,  between Southwest Casino Corporation and Crown Bank                                                                                           |   | Incorporated by reference to Exhibit 10.4 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.28  |   | Security Agreement, dated October 20, 2005,  between Southwest Casino and Hotel Corp. and Crown Bank                                                                                           |   | Incorporated by reference to Exhibit 10.5 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.29  |   | Membership Interest Pledge Agreement, dated October 20,  2005 between Southwest Casino and Hotel Corp. and Crown Bank (50% North Metro  Harness Initiative, LLC)                               |   | Incorporated by reference to Exhibit 10.6 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.30  |   | Membership Interest Pledge Agreement, dated October 20,  2005 between Southwest Casino and Hotel Corp. and Crown Bank (Gold Rush I,  LLC, Southwest Casino Deadwood, LLC and SW Missouri, LLC) |   | Incorporated by reference to Exhibit 10.7 to  the Current Report on Form 8-K filed October 26, 2005.                                           |
|   |   |                                                                                                                                                                                                |   |                                                                                                                                                          |
| 10.31  |   | Stock Pledge Agreement, dated October 20, 2005,  between Southwest Casino and Hotel Corp. and Crown Bank (Southwest  Entertainment, Inc.)                                                 |   | Incorporated by reference to Exhibit 10.8 to  the Current Report on Form 8-K filed October 26, 2005.                                           |

 

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| 10.32  |   | Form of Personal Guaranty by James Druck,  Thomas Fox and Jeffrey Halpern, officers of Southwest Casino Corporation,  dated October 20, 2005, for the benefit of Crown Bank                                                  |   | Incorporated by reference to Exhibit 10.9 to  the Current Report on Form 8-K filed October 26, 2005.   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 10.33  |   | Form of Personal Guaranty by non-affiliates  dated October 20, 2005 for the benefit of Crown Bank                                                                                                                            |   | Incorporated by reference to Exhibit 10.10 to  the Current Report on Form 8-K filed October 26, 2005.  |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 10.34  |   | Form of Personal Guaranty by Trust dated October 20,  2005 for the benefit of Crown Bank                                                                                                                                     |   | Incorporated by reference to Exhibit 10.11 to  the Current Report on Form 8-K filed October 26, 2005.  |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 10.35  |   | Form of Indemnification Agreements by and  between Southwest Casino Corporation and each of David H. Abramson, Gus A.  Chafoulias, Jim Holmes and Gregg P. Schatzman, independent members of  Southwest’s Board of Directors |   | Filed with this report.                                                                                               |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 10.36  |   | Gaming Management Agreement, dated March 24,  2006, between Southwest Casino and Hotel Corp. and the Otoe-Missouria Tribe  of Indians (not effective until approved by the National Indian Gaming  Commission)                    |   | Filed with this report.                                                                                               |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 14.1   |   | Code of Conduct                                                                                                                                                                                                                        |   | Incorporated by reference to Exhibit 14 to the  Annual Report on Form 10-KSB filed June 29, 2004.      |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 16.1   |   | Letter on change in certifying public accountant                                                                                                                                                                                       |   | Incorporated by reference to Exhibit 16.1 to  the Current Report on Form 8-K filed September 13, 2004. |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 21.1   |   | List of Subsidiaries of Southwest Casino Corporation                                                                                                                                                                                   |   | Filed with this report                                                                                                |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 31.1   |   | Certification of Chief Executive Officer under Rule 13a-14(a) of  the Securities Exchange Act of 1934                                                                                                                        |   | Filed with this report.                                                                                               |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 31.2   |   | Certification of Chief Financial Officer under Rule 13a-14(a) of  the Securities Exchange Act of 1934                                                                                                                        |   | Filed with this report.                                                                                               |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 32.1   |   | Certification of Chief Executive Officer under 18  U.S.C. Section 1350                                                                                                                                                            |   | Filed with this report.                                                                                               |
|   |   |                                                                                                                                                                                                                                   |   |                                                                                                                  |
| 32.2   |   | Certification of Chief Financial Officer under 18  U.S.C. Section 1350                                                                                                                                                            |   | Filed with this report.                                                                                               |

 

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*Pursuant to Item 601(b)(2) of Regulation S-B,the registrant agrees to furnish, supplementally, a copy of any exhibit orschedule omitted from any filed exhibit to this report to theSecurities and Exchange Commission upon request.

 

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