**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-KSB**

**(Mark one)**

**x**                              ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2006**

**o**                                 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from                        to                            .**

**Commission file number 000-50572**

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**SOUTHWEST CASINO CORPORATION**

(Nameof 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’stelephone number, including area code)

Securities registered underSection 12(b) of the Exchange Act:

**None.**

Securitiesregistered under Section 12(g) of the Exchange Act:

**Common Stock, par value $0.001per share**

Checkwhether the issuer (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the past 12months (or for such shorter period that the Issuer was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days. YES x 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. x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES o NO x

Theissuer’s revenues for the fiscal year ended December 31, 2006 were $21,474,908.

Asof March 12, 2007, 27,286,443 shares of common stock of the Issuer wereoutstanding, and the aggregate market value of the common stock of the issuer asof that date (based upon the $1.00 per share closing price of the common stockat that date as reported on the Over-The-Counter Bulletin Board), excluding6,011,448 outstanding shares beneficially owned by directors and executiveofficers, was $21,274,995.

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

 

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**TABLE OF CONTENTS**

| Part I                                                                                                                                           |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Description of Business                                                                                                                  | 2      |
| Risk Factors                                                                                                                                     | 12     |
| Item  2. Description of Property                                                                                                                 | 20     |
| Item  3. Legal Proceedings                                                                                                                       | 21     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                                                     | 21     |
|                                                                                                                                             |   |
| Part II                                                                                                                                          |   |
| Item 5. Market for  Common Equity and Related Stockholder Matters                                                                                | 22     |
| Item 6.  Management’s Discussion and Analysis or Plan of Operation                                                                          | 23     |
| Item  7. Financial Statements                                                                                                                    | F-1    |
| Notes  to Consolidated Financial Statements                                                                                                      | F-7    |
| Item 8. Changes In  and Disagreements With Accountants and Financial Disclosure                                                                  | 33     |
| Item 8A. Controls  and Procedures                                                                                                                | 33     |
| Item 8B. Other  Information                                                                                                                      | 33     |
|                                                                                                                                             |   |
| Part III                                                                                                                                         |   |
| Item 9. Directors,  Executive Officers, Promoters, Control Persons and Corporate Governance;  Compliance with Section 16(A) of the Exchange Act. | 34     |
| Item 10. Executive  Compensation                                                                                                                 | 35     |
| Item 11. Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                                        | 42     |
| Item 12. Certain Relationships and Related  Transactions, and Director Independence                                                              | 43     |
| Item 13.  Exhibits                                                                                                                               | 44     |
| Item 14. Principal Accountant Fees and Services                                                                                                  | 45     |
|                                                                                                                                             |   |
| Exhibit  Index                                                                                                                                   | E-1    |

 

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**PART I**

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

*This Annual Report on Form 10-KSB contains orincorporates by reference not only historical information, but also forward-lookingstatements.  In addition, Southwest orothers on Southwest’s behalf may make forward-looking statements from time totime in oral presentations, including telephone conferences, in press releasesor reports, or elsewhere.  Statementsthat are not historical are forward-looking and reflect expectations andassumptions.  We try to identifyforward-looking statements in this report and elsewhere by using words such as “may,”“will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,”“plans,” “projected,” “predicts,” “potential” or “continue” or the negative ofthese or similar terms.*

*Forward-looking statements involve risks anduncertainties.  These uncertaintiesinclude factors that affect all businesses as well as matters specific toSouthwest.  We caution readers not toplace undue reliance on any forward-looking statement that speaks only as ofthe date made and to recognize that forward-looking statements are predictionsof 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 any furtherdisclosures 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.          DESCRIPTION OF BUSINESS.**

**(a)****                       BusinessDevelopment.**

*Corporate Reorganization*

Southwest Casino and Hotel Corp. is the primary,wholly-owned operating subsidiary of Southwest Casino Corporation and was ourparent company until the July 2004 reorganization that resulted in our currentstructure.  Southwest Casino and HotelCorp. was organized under the laws of the State of Minnesota in 1992 under thename “Southwest Casino and Hotel Ventures, Inc.” and has operated in the gamingindustry since formation.

On July 22, 2004, Southwest Casino and Hotel Corp.merged with Lone Moose Acquisition Corporation, a wholly-owned subsidiary ofLone 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 on January 2,2002 and, before closing the reorganization described above, conducted onlyminimal operations and received only minimal revenue.  Lone Moose was organized to take clients onadventure tours in the Wasatch mountain range of Utah.  Lone Moose conducted fewer than two dozenadventure tours before our reorganization. Upon closing the reorganization, we sold substantially all of the assetsand liabilities of Lone Moose’s adventure tour business to Lone Moose’sfounding shareholders.  Since thereorganization and sale of the adventure tour business, Southwest has notengaged in any aspect of the business conducted by Lone Moose before thereorganization.

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*Casino Management*

Initially, Southwest pursued management contracts forgaming facilities with Native American tribes. In 1993, Southwest Casino andHotel Corp. was the first company approved by the National Indian GamingCommission (NIGC) as a management contractor in connection with our managementcontract with the Cheyenne and Arapaho Tribes of Oklahoma for a gaming facilityin Concho, Oklahoma.

The original term of ouragreement with the Cheyenne and Arapaho Tribes was seven years.  In 1999, we extended the agreement for anadditional three years.  In 2001, weamended the agreement to add a second gaming facility in Clinton,Oklahoma.  We amended the managementagreement again in 2003 to extend our relationship until May 2007.  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 theircasinos.  In April 2005, the tribalgaming commission authorized us to offer this expanded scope of gaming at theLucky Star Concho casino we manage and allowed us to offer this expanded scopeof gaming at the Lucky Star Clinton casino we manage beginning in November2006. Our current management agreement with the Tribes ends on May 19, 2007.

The Tribal Council of theCheyenne and Arapaho Tribes of Oklahoma includes all enrolled members of theTribes. On February 24, 2007, at a convened meeting of the Tribal Council, theTribal Council voted to approve the terms of an extension and expansion of thegaming management relationship between the Tribes and Southwest.  The 183 members of the Tribes who attendedthe Tribal Council meeting voted to adopt resolutions approving proposed termsfor, and authorizing an attorney for the Tribes to review the final terms of,gaming management agreements under which Southwest will continue to manage theTribes’ existing Lucky Star casinos in Concho and Clinton, Oklahoma, expand theConcho and Clinton facilities to provide more gaming space and greateramenities, assume the management of and expand the Tribes’ existing FeatherWarrior casinos in Watonga and Canton Lake, Oklahoma, and develop and managenew gaming facilities on tribal land in four other Oklahoma cities.  In addition to its expanded managementresponsibility, Southwest will pay for construction of a proposed $4.5 millionIndian Health Service clinic building out of the management fees it receivesunder the new agreements. The Tribal Council’s resolutions require theagreements to be presented to the Tribal Council at a meeting scheduled forMarch 31, 2007 for final approval.

Under the terms of theresolutions adopted by the Tribal Council, the management agreements will runfor five years beginning on the first day that Southwest begins management ofthe facilities under the new agreements.

The validity of theFebruary 24, 2007 Tribal Council meeting has been challenged in the Cheyenne andArapaho tribal court. The judge recently ruled that the meeting would beconsidered valid until a formal hearing on the issue could be held, likely inearly May.

Under the Tribes’Constitution adopted in 2006, gaming management agreements must be approved bythe Governor of the Tribes and the Tribal Legislature, as well as the TribalCouncil. The resolutions adopted by the Tribal Council direct the Governor ofthe Tribes to enter into the gaming management agreements on behalf of theTribes within five days of final approval by the Tribal Council and direct thetribal Legislature to ratify the agreements no later than five days after theGovernor signs it or, if the Governor does not sign, no later than 10 daysafter final approval by the Tribal Council. The Governor has disputed the authority of the Tribal Council and thetribal legislature to cause him to take any action on a gaming managementagreement or enter into a gaming management agreement without hisapproval.  The Governor has informed usthat he will not review or negotiate the terms of the agreements prepared inresponse to the Tribal Council’s February 24th resolutions.

In general, gamingmanagement agreements between Native American tribes and management contractorsmust also be approved by the Chairman of the National Indian Gaming Commission(NIGC) before becoming effective.

Although we have received Tribal Council approval asdiscussed above, several additional approvals are required to continue ourmanagement relationship with the Cheyenne and Arapaho Tribes beyond May 19,2007 and we remain uncertain whether we will be able to do so.

*Casino Operations*

Our subsidiaries, Southwest Casino and Hotel Corp. andGold Rush I, LLC, a Colorado limited liability company, hold three gaminglicenses to operate the Gold Rush, Gold Digger’s and Uncle Sam’s casinos inCripple 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.

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*Other Projects*:

In December 2003, North Metro Harness Initiative, LLC,then a wholly owned subsidiary of Southwest Casino and Hotel Corp., filed anapplication with the Minnesota Racing Commission to develop a harness racetrackin Columbus Township, Anoka County, Minnesota, approximately 30 miles north ofdowntown Minneapolis.  In June 2004, wesold a 50 percent membership interest in North Metro to MTR-Harness, Inc., asubsidiary of MTR Gaming Group, Inc.  OnJanuary 19, 2005, the Minnesota Racing Commission voted to grant the licensesrequired for development and operation of this facility.  Minnesota law permits licensed racetracks tooperate card rooms with up to 50 tables after approval of a card club plan ofoperation and completion of the first 50-day live race meet at the track.  North Metro anticipates that it will deriverevenues from charges for hosting the “unbanked” or “player pool” games at thecard room, generally as a percentage of accumulated wagers or a “rake” fromcertain wagers.  North Metro will nothave a stake in the outcome of any card game.

North Metro intends to construct its harness track andentertainment 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 square feetof 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 had filed two lawsuits in attempts to block development of thisfacility and overturn the licenses granted to North Metro, which weresuccessfully resolved in favor of North Metro and the Minnesota RacingCommission in 2006.  North Metro is nowcompleting pre-construction activities at the site and working to close theconstruction financing for this project.

*Consulting*

In addition to managing Native American gamingfacilities and owning and operating our own casinos, we also provide consultingservices for gaming operations.

*Recent Developments*

In December 2006, weentered into an Asset Purchase Agreement to acquire the operations of theDouble Eagle Hotel and Casino and Gold Creek Casino in Cripple Creek, Coloradofor a total purchase price of approximately $23.6 million.  In addition,we agreed to enter into a 30-year lease with three 5-year extensions for thebuilding and real estate in which these casinos operate.  We entered intothe Asset Purchase Agreement with a third party that has a separate agreementto acquire the outstanding capital stock of the current owner of the DoubleEagle and Gold Creek.  On March 15, 2007, the Colorado Division of Gaminggranted licenses to operate these casinos to Southwest. The closing of thetransactions contemplated in the Asset Purchase Agreement is subject tonumerous conditions and risks, including the third party’s completion of thefinancing for and acquisition of the stock, our receipt of financing forpurchase price and prepaid rent, completion of due diligence to the satisfactionof both parties, and other customary closing conditions.  (See Note 20 to the ConsolidatedFinancial Statements included in Item 7 of this Annual Report onForm 10-KSB).

*Prior Bankruptcy*

Gold Rush I, LLC, a wholly-owned subsidiary ofSouthwest 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 Services and Markets andStatus of Publicly-Announced New Products or Services**

Southwest develops, owns, operates and managescasinos, gaming facilities and related amenities in various markets across theUnited States. Based in Minneapolis, Minnesota, Southwest currently owns gamingoperations in Colorado and manages approximately 543 employees of the tribalenterprises of the Cheyenne and Arapaho Tribes of Oklahoma under our managementcontract for those facilities.  We haveapproximately 150 full and part-time employees. Our growth plans include diversifying and expanding existing operations,project development and pursuing new gaming opportunities.

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*Casino Management*

Southwest Casino provides management services in connectionwith two Lucky Star casino facilities, one located in Concho, Oklahoma and theother located in Clinton, Oklahoma, under the terms of a management agreementwith 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.  Refer to further discussion surrounding theextension of the contract above under — *“(a) Business Development —Casino Management”.*

OnMarch 24, 2006, Southwest entered into a Gaming Management Agreement with theOtoe-Missouria Tribe of Indians under which Southwest will manage the Tribe’sSeven Clans Paradise Casino in Red Rock, Oklahoma, just south of Ponca City andnorth of Stillwater.  The Otoe-MissouriaTribe submitted the Gaming Management Agreement to the National Indian GamingCommission, who must approve it before it can be effective, on April 10,2006.  The agreement has a five-year termthat begins the day Southwest takes over management of the casino.  We cannot provide any services or receive anycompensation under this agreement until it has been approved by the Chairman ofthe NIGC.  At this time we cannot predicthow long that approval process may take or if approval will be received.  Also, while the Otoe-Missouria Tribe agreedto the original terms of the management agreement, it has not responded, and wecannot predict when or if it will respond, to comments and questions raised bythe NIGC in connection with the NIGC’s review of that agreement.

*Casino Operations*

Southwest Casino owns and operates three gamingfacilities in Cripple Creek, Colorado. Cripple Creek is a small, historicmining town near Colorado Springs that is permitted to engage in limited stakes($5.00 limit) gaming. Eighteen casinos operate currently in Cripple Creek. Thecombined Gold Rush and Gold Digger’s facilities offer approximately 407 slotmachines and a 4-table game area, while Uncle Sam’s Casino featuresapproximately 65 slot machines.  We alsoown and operate the Palladium, an outdoor amphitheater adjacent to the GoldRush and Gold Digger’s facilities that offers live entertainment and otherspecial events. The impact of the Palladium on our financial results in thecurrent year was minimal.

Through North Metro Harness Initiative, LLC, Southwestand its 50 percent partner MTR-Harness, Inc., an affiliate of MTR Gaming Group,Inc., were granted Class A and Class B licenses from the Minnesota RacingCommission on January 19, 2005 to develop and operate a harness racing trackand card room facility on approximately 180 acres of land in Columbus Township,Anoka County, Minnesota.  Lawsuitsagainst the Minnesota Racing Commission challenging the validity of thoselicenses concluded in favor of the Racing Commission and North Metro duringJuly 2006.  We are now actively engagedin pre-construction activities and arranging construction financing for the project.

Once constructed and operating, this racing facilitywill offer pari-mutuel wagering on a 5/8-mile track with combined seating forover 2,000 track, restaurant and card room patrons.  In addition, the facility will 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 roomoperations before completing 50 days of racing and to simulcast races by allhorse breeds, but cannot provide any assurance that this effort will succeed.

In December 2006, weentered into an Asset Purchase Agreement to acquire the operations of theDouble Eagle Hotel and Casino and Gold Creek Casino in Cripple Creek, Coloradofor a total purchase price of approximately $23.6 million.  In addition,we agreed to enter into a 30-year lease with three 5-year extensions for thebuilding and real estate in which these casinos operate.  We entered intothe Asset Purchase Agreement with a third party that has a separate agreementto acquire the outstanding capital stock of the current owner of the DoubleEagle and Gold Creek.  On March 15, 2007, the Colorado Division of Gaminggranted licenses to operate these casinos to Southwest. The closing of thetransactions contemplated in the Asset Purchase Agreement is subject tonumerous conditions and risks, including the third party’s completion of thefinancing for and acquisition of the stock, our receipt of financing forpurchase price and prepaid rent, completion of due diligence to thesatisfaction of both

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parties, and othercustomary closing conditions.  (SeeNote 20 to the Consolidated Financial Statements included in Item 7of this Annual Report on Form 10-KSB).

*Prior Business of Lone MooseAdventures, Inc.*

Prior to the July 2004 reorganization, Lone Mooseengaged in limited operations primarily related to the provision of adventuretours in the State of Utah. Immediately after closing the reorganization inwhich Lone Moose Adventures became Southwest Casino Corporation and SouthwestCasino and Hotel Corp. became a wholly-owned subsidiary of Southwest CasinoCorporation, we sold substantially all of the assets and liabilities of LoneMoose’s adventure tour business to the founding shareholders of Lone Moose.Since closing the reorganization and sale of assets, Southwest has not engagedin any aspect of the business Lone Moose conducted before the reorganization.

**Competition.**

The gaming industry, including the development,operation and management of casinos, racetracks and other types of gamingfacilities, is highly competitive, especially given the rapid rate at which theindustry is expanding.  For example, anumber of management companies may make proposals to a particular NativeAmerican tribe for the development and management of a single Indian gamingfacility, and any gaming facilities developed or managed by us will competewith a rapidly expanding number of other gaming facilities of varying qualityand size, including gaming facilities that are part of national or regionalchains, along with other forms of gaming and entertainment.  Similarly, with respect to projects we arepursuing or may pursue in the future, new competitors could surface at any timeand present alternative proposals for consideration. Many competitors haveavailable to them substantially greater financial and personnel resources thanus. Competition in the future may also be affected by overbuilding which canadversely affect patronage levels. Given the current regulatory climate andlimited number of new gaming opportunities, it is likely that competition inour industry will intensify in the future.

The approval of a law permitting Oklahoma to enterinto gaming compacts with Native American tribes in the state permits expansionof 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 and many tribes have entered intogaming compacts with the state, we have seen increased competition in Oklahomaand expect the number and size of casinos in this market to continue togrow.  We currently manage two facilitiesfor the Cheyenne and Arapaho Tribes of Oklahoma, and entered into an agreementto manage an additional facility for the Otoe-Missouria Tribe of Indians (whichmust be approved by the NIGC before it becomes effective) in the Oklahomamarket.

The Cripple Creek, Colorado market in which we operatethe Gold Rush, Gold Digger’s and Uncle Sam’s casinos consists of eighteengaming facilities with approximately 4,731 machines, of which we operate472.  The Cripple Creek market generatedtotal gaming revenues of approximately $153 million during fiscal year 2006(July 1, 2005 — June 30, 2006).  This isa very competitive market that has shown relatively slow revenue growth inrecent years, even as the number of gaming devices continues to grow.  Anew casino, expected to offer 700 gaming devices, is under construction, whichwill further increase competition in this market.  Our ability to maintainand grow our Colorado operations is largely dependent on our ability toincrease our market share in a highly competitive environment.  We believethat the Gold Rush and Gold Digger’s Casinos attract customers primarily fromColorado Springs, Pueblo and surrounding areas; while Uncle Sam’s Casinoattracts customers primarily from the local Cripple Creek area.

Southwest owns a 50 percent membership interest inNorth Metro Harness Initiative, LLC, which was granted licenses from theMinnesota Racing Commission to build and operate a harness racing track andcard room north of the Twin Cities of Minneapolis and St. Paul, Minnesota onJanuary 19, 2005.  This facility, ifcompleted, will compete with an existing thoroughbred racetrack and card roomon the south side of the Twin Cities metropolitan area as well as severalIndian gaming facilities located outside of the Twin Cities areas.

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

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

Our current gaming activities are concentrated in ourOklahoma and Colorado operations. The loss of any of these opportunities orconstriction in the scope or types of gaming permitted in these facilitieswould have a material adverse effect on our business.

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Currently, the management fees we receive under ourgaming management agreement with the Cheyenne and Arapaho Tribes of Oklahomafor the Lucky Star casinos in Concho, Oklahoma and Clinton, Oklahoma are ourprimary source of operating revenue. Our current management agreementterminates on May 19, 2007.  If we areunable to extend our management relationship with the Tribes beyond that date,the loss of the management fees we receive for managing these facilities wouldhave a material adverse effect on our financial condition.

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

In addition to the gaming licenses described below,Southwest owns a federally-registered trademark in the name “Lucky Star” forits gaming-related businesses.  Southwestdoes not own any other registered trademarks or patents or other significantintellectual property.

**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 amanagement contract with the Cheyenne and Arapaho Tribes of Oklahoma that hasbeen approved by the National Indian Gaming Commission, which expires on May19, 2007. Any modification or extension of this contract must also be approvedby the NIGC.  We have also entered into aGaming Management Agreement with the Otoe-Missouria Tribe of Indians inOklahoma and this contract must be approved by the NIGC before it becomeseffective. At this time we cannot predict when or if that agreement willreceive NIGC approval.

In Colorado, we holdlicenses issued by Colorado Division of Gaming for our Gold Rush, Gold Digger’sand Uncle Sam’s casinos in Cripple Creek. On March 15, 2007, the Colorado Division of Gaming granted twoadditional licenses to us for operation of the Double Eagle Hotel and Casinoand the Gold Creek Casino in Cripple Creek Colorado.  We have entered into an asset purchaseagreement and long-term lease to acquire the businesses of and operate thesecasinos, but have not completed that acquisition.  The licenses for the Double Eagle and GoldCreek are conditioned on (1) Southwest taking full possession of the casinosand their gaming assets, and (2) because casino operators may only hold threelicenses in Colorado, Southwest surrendering its licenses for the Gold Digger’sand Uncle Sam’s casinos.  If we completeour acquisition of the Double Eagle and Gold Creek casinos, we intend to closeUncle Sam’s Casino and combine the operation of the Gold Digger’s and Gold Rushcasinos under a single license.

On January 19, 2005, theMinnesota Racing Commission voted to grant North Metro Harness Initiative, LLC,in which we own a 50 percent membership interest, licenses to develop andoperate a harness racetrack and card club.

In connection with theselicenses, the Colorado Division of Gaming, the NIGC and the Minnesota RacingCommission must approve any addition of a director, officer or five percent orgreater shareholder.  In addition, anyaffiliate of ours, such as the joint ventures we have worked with in pursuit ofsome of our 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 Probable GovernmentalRegulations on Business.**

The gaming industry and our operations within thatindustry are regulated extensively.  Theservices we provide to the Cheyenne and Arapaho Tribes of Oklahoma at the LuckyStar Casinos, and intend to provide to the Otoe-Missouria Tribe of Indians attheir Seven Clans Paradise Casino, are regulated under the federal IndianGaming Regulatory Act, the rules and regulations of the National Indian GamingCommission, the rules and regulations of the Cheyenne and Arapaho Tribes andthe Otoe-Missouria Tribe, respectively, and of the Oklahoma GamingCommission.  The Gold Rush, Gold Digger’sand Uncle Sam’s casinos in Cripple Creek, Colorado are subject to the ColoradoLimited Gaming Act and related rules and regulations that are enforced by theColorado Division of Gaming.  Inaddition, the Minnesota Racing Commission regulates the activities of North MetroHarness Initiative, LLC, in which Southwest Casino and Hotel Corp. owns a 50percent membership interest, under its class A and class B licenses to developand operate a harness racetrack and card club on the north side of theMinneapolis-St. Paul metropolitan area.

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The process of complying with all applicable state andfederal governmental and tribal regulations is lengthy and has required andwill 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 allapplicable regulations, and delays in compliance, or failure to comply, couldhave a material 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 of whichwould have a material adverse effect on our business.

*Regulation of Indian Gaming*

The terms and conditions of management contracts forthe operation of Indian-owned casinos, and of all gaming on Indian land in theUnited States, are subject to the Indian Gaming Regulatory Act (IGRA), which isadministered by NIGC, and also are subject to the provisions of statutesrelating to contracts with Indian tribes, which are administered by theSecretary of the Interior and the Bureau of Indian Affairs (BIA). Theregulations and guidelines under which NIGC administers IGRA are evolving. TheIGRA and those regulations and guidelines are subject to interpretation by theSecretary and NIGC and may be subject to judicial and legislative clarificationor amendment.

We are required to provide the NIGC with background informationon each of our directors and each shareholder who holds five percent or more ofour outstanding securities, including a complete financial statement, adescription of that person’s gaming experience, and a list of jurisdictions inwhich that person holds gaming licenses. Background investigations of keyemployees also may be required.  The fourindependent members of our Board of Directors joined our board before wesubmitted their background information to the NIGC.  Thus, those directors have agreed not to takeany action in connection with our NIGC-approved management agreement with theCheyenne and Arapaho Tribes of Oklahoma until the NIGC approves their serviceon our board.  These directors also willnot take action with regard to our Gaming Management Agreement with theOtoe-Missouria Tribe of Indians if that contract receives NIGC approval untilthe NIGC approves their service on our board. We submitted the requiredbackground information for each of these directors to the NIGC on December 7,2005, the same day that they joined our board. The NIGC has undertaken itsrelated review, investigation and approval processes.

Under IGRA, the Chairman of the NIGC must approve ourmanagement contracts as well as any amendments to our management contracts andcertain related agreements.  Our currentGaming Management Agreement with the Cheyenne and Arapaho Tribes of Oklahomahas been approved by the NIGC and our performance under it remains subject toNIGC regulation. The NIGC may review any management contracts and relatedagreements of ours for compliance with IGRA at any time in the future. The NIGCwill not approve a management contract if any of our directors or a 5%shareholders (i) is an elected member of the Indian tribal government that ownsthe facility we contract with; (ii) has been or is convicted of a felony gamingoffense; (iii) has knowingly and willfully provided materially falseinformation to the NIGC or the tribe; (iv) has refused to respond to questionsfrom the NIGC; or (v) is a person whose prior history, reputation andassociations pose a threat to the public interest or to effective gamingregulation and control, or create or enhance the chance of unsuitableactivities in gaming or the business and financial arrangements incidentalthereto.

In addition, the NIGC will not approve a managementcontract if we or any of our agents have attempted to unduly influence anydecision or process of tribal government relating to gaming, or if themanagement company has breached materially the terms of the management contractor the tribe’s gaming ordinance, or a trustee, exercising due diligence, wouldnot approve such management contract.

The NIGC also will not approve a management contractunless the NIGC determines that the contract provides, among other things, for(i) adequate accounting procedures and verifiable financial reports to befurnished 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.

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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 of Class IIIgaming unless the tribe has entered into a written agreement with the state inwhich 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 gaming facilities onIndian land are subject to a number of other federal statutes. The operation ofgaming on Indian land is also dependent upon whether the law of the state inwhich the casino is located permits gaming by non-Indian entities, which maychange over time. Any changes in state law regarding Indian or non-Indiangaming may have a material adverse effect on the casinos we manage and ourbusiness.

Indian tribes are sovereign nations with their owngovernmental systems, which have primary regulatory authority over gaming onland within the tribe’s jurisdiction. Because of their sovereign status, Indiantribes possess immunity from lawsuits to which the tribes have not otherwiseconsented or otherwise waived their sovereign immunity defense. Therefore, weare not able to enforce our contracts with Indian tribes unless the tribe hasexpressly waived its sovereign immunity as to the tribe’s contractualobligations. Courts strictly construe such waivers. We have obtained immunitywaivers from the Cheyenne and Arapaho Tribes to enforce the terms of ourmanagement agreement with them; however, the scope of those waivers has neverbeen tested in court, and may be subject to dispute.

In addition to NIGC regulation, the Cheyenne andArapaho Tribes of Oklahoma Gaming Commission (“Gaming Commission”) has primaryjurisdiction over the Lucky Star casinos we manage for the Cheyenne and ArapahoTribes of Oklahoma.  This GamingCommission enforces the provisions of the Tribes’ gaming ordinance, which aresubject to review by NIGC under standards established by IGRA and have receivedNIGC approval.  The Gaming Commissionapproves games played at the casinos, performs background checks and issueslicenses to all employees of the casinos and to Southwest Casino and HotelCorp. as manager of the casinos.  Inaddition, the Gaming Commission approves our internal control systems andinsures that they meet the minimum internal control standards required by theNIGC, reviews reports required under our Gaming Management Agreement, thetribal gaming ordinance and as part of our internal controls, as well asconducts internal audits of our operations. The Gaming Commission is also charged with regulating the expandedgaming permitted under the Tribes’ gaming compact with the State of Oklahoma.

Under the gaming compact between the Tribes andOklahoma, the state also has regulatory authority over the Lucky Star casinooperations.  The state regulatory role issecondary to that of the Tribes’ Gaming Commission, and we anticipate that itwill consist mostly of monitoring our financial reporting and the work of theGaming 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 bring disciplinaryactions against licensees and their employees. The Division of Gaming may also conduct detailed backgroundinvestigations of persons who loan money to, or otherwise provide financing to,a licensee.

Colorado issues fivetypes of 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 any of our Colorado casinos wouldhave a material adverse effect on our operations.

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As a general rule, noperson may have an “ownership interest” in more than three retail gaminglicenses in Colorado.  In addition,Colorado Regulations restrict the ability of any person with a substantialinterest in a manufacturer or distributor of slot machines to also hold asubstantial interest in a casino operator. The Division 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 Commissionalso has the right to request information from any person directly orindirectly interested in, or employed by, a licensee, and to investigate themoral character, honesty, integrity, prior activities, criminal record,reputation, habits and associations of: (1) all persons licensed pursuant tothe Colorado Limited Gaming Act; (2) all officers, directors and stockholdersof a licensed privately held corporation; (3) all officers, directors andstockholders holding either a 5% or greater interest or a controlling interestin a licensed publicly traded corporation; (4) all general partners and alllimited partners of a licensed partnership; (5) all persons that have arelationship similar to that of an officer, director or stockholder of acorporation (such as members and managers of a limited liability company); (6)all persons supplying financing or loaning money to any licensee connected withthe establishment 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 forlicensure or suitability may be denied for any cause deemed reasonable by theColorado Commission or the Colorado Director, as appropriate. Specifically, theColorado Commission and the Colorado Director must deny a license to anyapplicant who, among other things: (1) fails to prove by clear and convincingevidence that the applicant is qualified; (2) fails to provide information anddocumentation requested; (3) fails to reveal any fact material to qualification,or supplies information which is untrue or misleading as to a material factpertaining to qualification; (4) has been convicted of, or has a director,officer, general partner, stockholder, limited partner or other person who hasa financial or equity interest in the applicant who has been convicted ofspecified crimes; or (5) has refused to cooperate with any state or federalbody investigating organized crime, official corruption or gaming offenses.

If the ColoradoCommission determines that a person or entity is unsuitable to directly orindirectly own interests in our company, one or more of our Colorado casinosmay be sanctioned, 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

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unsuitability unless suchvoting securities are transferred to a suitable person (as determined by theColorado Commission) within sixty (60) days after the finding of unsuitability.

Because of theirauthority to deny an application for a license or suitability, the ColoradoCommission and the Colorado Director effectively can disapprove a change incorporate position of a licensee and can cause us to suspend or dismissmanagers, officers, directors and other key employees or sever relationshipswith other persons who refuse to file appropriate applications or who theauthorities find unsuitable 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.

We are required toprovide information and file periodic reports with the Colorado Divisionidentifying those who have a 5% or greater ownership, financial or equityinterest in us, or who have the ability to control us or exercise significantinfluence over us, or who loan money or other things of value to us, or whohave the right to share in our limited gaming revenues, or to whom any interestor share in profits of limited gaming has been pledged as security for a debtor performance of an act.  Any personlicensed by the Division of Gaming and any associated person of a licensee mustreport criminal convictions and criminal charges to the Colorado Division.

The Colorado Commissionhas broad authority to sanction, fine, suspend and revoke a license forviolations of the Colorado Regulations. Violations of many provisions of theColorado Regulations also can result in criminal penalties.

We were fined a total of $55,000 in June 2004 forfailure to comply with Colorado gaming regulations related to maintenance andreview of statistical information regarding slot machine performance and have enteredinto an agreement with the Colorado Division of Gaming under which we agreed tobring our practices into compliance. Failure to do so could lead to suspensionor revocation of our license. For more information, see the risk factorregarding risks we face in connection with obtaining, maintaining and renewingour gaming licenses 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 Harness Initiative, LLCand Southwest Casino and Hotel Corp. filed applications for Class A and Class Blicenses, respectively, to develop and operate a harness racing track and cardclub in Anoka County, Minnesota.  TheClass B license application was subsequently amended and, on January 19, 2005,the Minnesota Racing Commission voted to grant Class A and Class B licenses toNorth Metro.  The class A License iseffective until revoked or suspended by the Racing Commission, or relinquishedby the licensee.  The Class B License isrenewable each year by the Racing Commission after a public hearing (ifrequired by the Racing Commission).

Minnesota established the Minnesota Racing Commissionto regulate horse racing and card playing in the state under its pari-mutuelhorse racing statute.  North Metro andSouthwest, as a 50 percent owner of North Metro, have been subject to the horseracing statute and rules and regulations promulgated under it (the “Racing Act”)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 to enforcethe Racing Act and regulate substantially all aspects of horse racing inMinnesota.  The Racing Commission grantedand will oversee North Metro’s ownership and operating licenses, will: licenseall 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 the RacingCommission of all officers, directors, 5% shareholders, or other persons havinga present or future direct or indirect financial or management interest in anyperson applying for a Class A and Class B license, and if a change of ownershipof more than 5% of the licensee’s shares is made after an application is filedor the license issued, the applicant or licensee must notify the Racing Commissionof the changes within five days of this occurrence and provide the informationrequired by the Racing Act.

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North Metro submitted a card club plan of operationfor approval by the Racing Commission in connection with North Metro’s Class Blicense.  The card club plan has beensubmitted to the Racing Commission; however under current law North Metro willnot receive formal approval of the plan until 50 days of live racing have beencompleted.  Once the card club plan ofoperation is approved, the Racing Commission will regulate the playing of “unbanked”or “player pool” card games at North Metro’s card club, as well as harnessracing.  North Metro must reimburse theRacing Commission for its actual costs, including personnel costs, ofregulating the card club.  North Metromust have the Class B license and card club authorization renewed annually bythe Racing Commission after a public hearing (if required by the RacingCommission).

*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; prohibits certain insider trading during pensionfund blackout periods; and establishes a federal crime of securities fraud, amongother provisions.

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

Gold Rush I, LLC, a wholly owned subsidiary ofSouthwest, leases real property in Cripple Creek, Colorado, a portion of whichincluded a gas station and convenience store. The gas station and related storage tanks were removed in October 1998,before Gold Rush I leased the property. We participate in a Corrective ActionPlan approved by the Colorado Department of Labor and Employment, Division ofOil and Public Safety related to groundwater monitoring and remediation at thesite. We have spent approximately $166,000 monitoring and remediating this sitesince we leased it in March 1999 and estimate the total cost of remediation atapproximately $200,000. We have applied for reimbursement of some or all ofthese expenses from the Colorado Petroleum Storage Tank Fund and have receiveda total of $98,611 in reimbursement to date. We have additional requests for reimbursement pending and will continueto request 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 full andpart-time employees and we manage approximately an additional 519 full and 24part-time employees of the Cheyenne and Arapaho Tribes of Oklahoma under ourmanagement agreement with the Tribes.

**Risk Factors**

In addition to the influences identified elsewhere inthis report, there are several important factors that could cause our actualresults to differ materially from those anticipated by us or that are reflectedin any of our forward-looking statements. These factors, which may impact the success of our operations and ourability to achieve our goals, include the following:

# **1.  Risks related to Southwest’s financialcondition**

** Our Gaming Management Agreement with theCheyenne and Arapaho Tribes of Oklahoma (the “Tribes”) will expire on May19, 2007**.  The management fees we receive under thisagreement are currently the primary source of Southwest’s operatingrevenue.  Any extension of the management agreement beyond May 19, 2007can only occur with the consent of the Cheyenne and Arapaho Tribes of Oklahomaand the approval of the National Indian Gaming Commission.  We cannotassure you that any further extension will be granted and approved.  Inaddition, even if granted and approved, the National Indian Gaming Commission,or NIGC, and the Tribes have the power to unilaterally terminate or void theOklahoma Agreement under certain circumstances, without any recourse byus.  If the Gaming Management Agreement is not extended beyond May 19,2007, or if it is unilaterally terminated, it would eliminate the primarysource of our operating revenue and have a material adverse impact on ourbusiness results.

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**We have an accumulated deficit and uncertainty with respectto achieving future profitability.**  We have incurredsubstantial operating losses since inception and had an accumulated deficit of$9,702,835 as of December 31, 2006.  These losses are primarily the resultof expenses related to our ongoing pursuit of new gaming opportunities. There can be no assurance that we will be able to achieve profitability on aquarterly or annual basis in future periods.  Our future operating resultswill depend upon a number of factors, including (a) the continuation and futureprofitability of our Oklahoma and Colorado operations; (b) our ability tomaintain our current gaming licenses and to obtain additional gaming licensesfor new or expanded gaming facilities; (c) our ability to continue to maintainour contractual and working relationships with the Cheyenne and Arapaho Tribesof Oklahoma and to establish working relationships with other Native Americantribes involved in gaming; and (d) our ability to successfully identify, securelicensing and maintain all necessary approvals and funding related to anyadditional future gaming opportunities.

**We have a continuing need for additional capital. Weanticipate that we will need substantial additional funding to develop a harnessracing track and card room in Minnesota, to provide working capital to meetcurrent and future obligations, and to fund additional gaming projectsincluding the acquisition of the Double Eagle and others we may choose topursue**.  Our operating plans and financing needs aresubject to change depending on, among other things, market conditions andopportunities; land, equipment or other asset-based financing that may beavailable in connection with our development of gaming facilities; cash flowfrom operations, if any; and the number of new gaming projects that we pursue.While additional funds may be provided through borrowings from institutionalinvestors or project partners, equity stock offerings, equipment leasing orother forms of debt or equity financing, we do not have any unconditionalcommitments relating to additional financing and we cannot assure you thatadditional financing will be available when needed. Even if financing isavailable when required, we cannot assure you that it will be on termsfavorable to us and our security holders in terms of cost or dilution.

**We face risks associated with our pursuit of new gamingprojects.**  We have pursued, are pursuing, and willcontinue to pursue new gaming projects that involve substantial pre-developmentcommitments of time and money with no assurance we will receive the approvalsneeded to develop and operate the proposed gaming facility. A number of theseprojects require legislation or voter approval, which not only increases thecost of such projects but also increases the risk the project will not beapproved and extends the time required to obtain licenses, complete developmentand begin operations.  In addition, gaming projects may be controversialin some areas and face significant opposition from competitors or individualsand groups opposed to gaming on moral 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.

**We face litigation threats related to our June and July 2004sale of convertible promissory notes.**  In June and July2004, Southwest Casino and Hotel Corp. sold an aggregate of $2,634,000 ofconvertible promissory notes to accredited investors.  The notes convertedinto Southwest Casino Corporation common stock in connection with ourreorganization on July 22, 2004.  A group of loosely affiliated investorswho participated in that offering, each of whom represented to us that they were“accredited” as defined by Rule 501(a) of the Securities Act of 1933, asamended, had previously demanded rescission of their investments and threatenedto bring a lawsuit against us and our directors based on what they allege wereinadequate disclosures by us at the time of the offering.  We believethese demands for rescission are without merit.  While these investorshave not demanded rescission recently, these claims were not formally resolvedand, if reasserted, we cannot assure you that we would be able to resolve theseclaims on a reasonable basis, if at all.  If we were to be unsuccessful indefending these claims, it could result in large damage awards.  The costsof defending these claims, as well as any damages we may be required to pay,could ultimately harm our business results and adversely affect future gaminglicense applications and renewals.

# **2.  ADDITIONALRISKS RELATED TO SOUTHWEST’S NATIVE AMERICAN GAMING PROJECTS:**

**Ourbusiness activities related to Native American gaming projects are heavily regulatedby the NIGC.**  All of the gaming operations owned by NativeAmerican tribes that we manage or provide consulting services to are regulatedby the National Indian Gaming Commission. Any gaming management agreement we enter into with an Indian tribe, aswell as any amendment to or extension of a gaming management agreement must beapproved by the Chairman of the NIGC before the agreement becomes effective andwe can provide any services or receive any compensation under that agreement.  In addition, background checks must becompleted for all of our directors and executive officers and their servicewith us must be approved by the NIGC. The NIGC’s approval process can be lengthy and, because we are requiredto reimburse the NIGC for its costs of background investigations and management

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agreementapprovals, expensive.  For moreinformation regarding the regulation of our operations by the NIGC, please seethe discussion under the heading *Regulation of IndianGaming* beginning on page 7 of this report.

**TheCheyenne and Arapaho Tribes of Oklahoma adopted a new constitution for theirtribal government that has altered the regulatory and political environmentunder which we manage two of their casinos. **During 2006 the Cheyenne and Arapaho Tribes ofOklahoma adopted a new constitution for their government.  The new constitution restructured the tribalgovernment and has created uncertainty and disputes with regard to theauthority of various branches and departments of the government to regulatetribal gaming and our operations. Several of these disputes have resulted in lawsuits in tribal court todetermine the appropriate roles of the new branches of government andgovernment agencies.  This uncertaintyhas created difficulties for us in determining which government agencies andofficials have authority to regulate the tribal casinos and our management ofthem.  This uncertainty has also made itdifficult for us to negotiate a new or extended gaming management agreementwith the Tribes because of disagreements within the tribal government over theauthority to negotiate and enter into this agreement.  We believe the tribal government and theroles of its branches, agencies and officials will stabilize, however, weexpect continued difficulties for at least one year (if we are successful inextending our management relationship with the Tribes beyond May 19, 2007) withregard to managing the Tribes’ Lucky Star casinos and efforts to extend ourmanagement relationship with the Tribes as a result of the adoption of the newtribal constitution.

**We willcontinue to face legislative, political and judicial hurdles and adverselegislative and judicial actions, as well as challenges and delays due toregulatory oversight in connection with our Native American gaming operations.**  The legislative, political, judicial andregulatory oversight environments related to Indian gaming are dynamic and canchange rapidly and unpredictably.  Anyadverse political, legislative, judicial or regulatory action by a NativeAmerican tribe with which we do business, including any ruling that limitsgaming or the scope of gaming operations, could have a material adverse effecton our operations and financial conditions. See the discussion under “Effect of Existing or Probable GovernmentalRegulations on Business” starting on page 7.

**The National Indian Gaming Commission (NIGC) has expressedconcern about the distribution of gaming proceeds by the Cheyenne and ArapahoTribes of Oklahoma, for whom we manage casinos.**  InDecember 2004, the NIGC notified the Cheyenne and Arapaho Tribes of Oklahomathat the NIGC is concerned the Tribes are not distributing properly the netrevenue they receive from gaming operations.  The NIGC’s concerns relateto the use of gaming revenue after we have distributed it to the Tribes and arenot related to our management of the Tribes’ casinos.  However, if theNIGC determines that the Tribes have committed a substantial violation of theIndian Gaming Regulatory Act, NIGC rules, or the Tribes’ gaming ordinance, itcould bring an enforcement action against the Tribes.  If an enforcementaction were successful, potential penalties range from fines to, in extremecases, an order closing the Tribes’ gaming operations.  Even though theNIGC’s concerns are not related to our management of the Tribes’ casinos,closure of these facilities would eliminate the primary source of our operatingrevenue and have a material adverse impact on our business results.

**We have limited recourse against Indian Tribes, including theCheyenne and Arapaho Tribes of Oklahoma.**  Indian tribesare sovereign nations that are generally immune from legal proceedings commencedin state or federal courts, and congressional policy has mandated the limitedliability of Indian tribes. In addition, because regulatory authorities havebroad discretion when granting, renewing or revoking licenses, approvals andother clearances related to the development, management or operation of gamingfacilities, an Indian tribe that desires to terminate a management contractwith a third party management company may simply elect to refuse to renew atribal gaming license based upon a minor technical 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 theforegoing reasons, if a tribe were to breach a management agreement with us,our sole recourse to collect amounts owed to us under our agreements with thattribe may be to attach undistributed or future proceeds, if any, from theoperation of the tribe’s gaming facilities. If gaming operations fail todevelop or, if developed, cease to operate for any reason, our prospects forpayment of amounts owed to us are minimal.  Accordingly, if we advance orguarantee an advance of significant funds to tribes for the development,construction and furnishing of gaming facilities, we may not be able to recoverthose funds or have a viable source for repayment of any funds we are requiredto expend under a guarantee agreement.

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**We face special risks related to investments in Indian gamingfacilities.**  Investment in Indian gaming facilitiesinvolves numerous special risks in addition to those usually associated withcontractual arrangements or real estate development. Advances made by us todevelop, construct and equip Indian gaming facilities will not result in ourownership of, or any security interest in, the gaming facilities located onIndian land or in the Indian land itself.  Our ability to build andmaintain healthy personal and professional relationships with tribes and theirofficials is critical to the success and longevity of our current and proposedIndian gaming activities and our ability to successfully obtain, develop,effectuate, retain and renew management or other types of serviceagreements.  As sovereign nations, tribes establish their own governmentalsystems under which tribal officials as well as tribal boards, commissions,committees and other bodies are subject to replacement by appointment orelection and to policy changes.  Our relationship with a tribe coulddeteriorate for various reasons, including a change in tribal government ortribal policies.  Deterioration in the relationships between us andindividual officials or collective bodies of any tribes with whom we deal couldhave a material adverse effect on our business and operations.  Similarly,our business relationships with Indian tribes, and revenues generated throughservice agreements with Indian tribes, could be adversely affected or eveneliminated as the result of regulatory or judicial actions taken against thetribe itself, or against a tribe’s leaders or members as individuals. In addition,any investigation of an Indian tribe or tribal member that we work with couldlead to an investigation of our relationship with that tribe or tribal member.

**Our facilities and operations, as well as our key personneland some of our security holders, are subject to government and tribalbackground investigations.**  Failure to complete theseinvestigations satisfactorily could adversely affect our business andoperations.  Our facilities and business operations on Indian land aresubject to approval, regulation and oversight by, among others, the NationalIndian Gaming Commission, the Bureau of Indian Affairs, the Secretary of theInterior and various tribal authorities.  For example, all managementagreements (and extensions or renewals of such agreements) for Class II orClass III gaming facilities (as defined in the Indian Gaming Regulatory Act) onIndian land must be approved by the NIGC and the terms of these managementagreements must conform to various NIGC requirements.  The NIGC will notapprove management agreements for Class II and Class III Indian gamingfacilities (such as our Oklahoma operations) unless federally conductedbackground checks of our directors and officers, some of our security holders,and other parties interested in our management agreements have been completedsatisfactorily. States entering into tribal-state compacts under which we maymanage Class III gaming facilities may have similar (or more stringent)requirements for background checks.

**Successful Native American gaming opportunities typicallydepend upon securing and maintaining Tribal-State gaming compacts that aresubject to substantial uncertainty.**  The Indian GamingRegulatory Act of 1988 (“IGRA”) provides the framework for the regulation ofClass II and Class III gaming on Indian land.  Before Class III gaming(video games including video slots and video blackjack; table games likeblackjack, 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 is not currently required toconduct Class II gaming for Native American tribes subject to the IGRA.

Webelieve that the management and operation of Class III casinos generallypresent significantly greater revenue opportunities than Class II gamingfacilities.  However, our ability to enter into Class III casinomanagement agreements is dependent upon states entering into tribal-statecompacts that permit Class III gaming, such as the compact recently approved inthe State of Oklahoma. The majority of states have not entered intotribal-state compacts that permit Class III gaming.  We cannot predictwith any certainty (a) which additional states, if any, will approve Class IIIgaming on Indian land; (b) the timing of any such approval; (c) the types ofgaming that may be permitted by any tribal-state compact; or (d) whether anystate will attempt to renegotiate or take other steps that may adversely affectexisting tribal-compacts. To the extent that Class III gaming is limited it couldrestrict our growth potential.

# **3.  WE AREIN THE PROCESS OF DEVELOPING A HARNESS RACETRACK AND CARD ROOM IN COLUMBUS,MINNESOTA ON THE NORTH SIDE OF THE TWIN CITIES METROPOLITAN AREA.  WE FACESEVERAL RISKS SPECIFIC TO THAT DEVELOPMENT.**

**Southwest and North Metro Harness Initiative, LLC aredependent on MTR-Harness, Inc., a wholly owned subsidiary of MTR Gaming Group,Inc., the other 50 percent member of North Metro Harness Initiative, LLC, for aportion of the funds needed to continue development of the North Metroracetrack and card**

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**room.**  Under the North Metro HarnessInitiative, LLC Member Control Agreement, Southwest and MTR-Harness, Inc. nowprovide, in equal amounts, financial support for the ongoing operations ofNorth Metro.  If Southwest is unable to make any needed capitalcontribution to those ongoing operations, MTR is the most likely alternativesource of those funds.  If MTR were to make capital contributions inexcess of Southwest, Southwest’s membership interest in North Metro would be diluted.  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 to develop its racetrack and card room,Southwest will not receive any revenue or profit from the operation of thefacility and the value of Southwest’s investment in North Metro will bematerially adversely affected.

**Delays in developing North Metro’s racetrack and card roomcaused by the now concluded legal challenges to North Metro’s racing licensesincreased the cost of the project.**  Because theracetrack and card room facility that North Metro intends to develop will bebuilt for that specific purpose and will have little or no value for otheruses, North Metro could not proceed to construct the facility until we wereconfident that its racing licenses would not be overturned in connection withthe prior legal challenges.  Thus, thelegal challenges caused significant delays in developing the North Metroproject.  These delays caused the costsof developing the facility to increase significantly due to, among otherthings, rising interest rates and borrowing costs, rising construction andlabor costs, rising energy prices, and general inflation.  These risingcosts will increase the ultimate development costs for the North Metro facilitywhich will, in turn, delay and reduce the amount of revenue and profitgenerated by North Metro and available for distribution to Southwest.

**Actionsby the Minnesota state legislature may reduce the value of Southwest’sinvestment in North Metro.** In most years, the Minnesota state legislature considers several billsthat would impact North Metro during its annual legislative session.  During the 2005 and 2006 legislativesessions, bills were introduced to permit slot machines (commonly referred toas a “racino”) at Canterbury Park, the other class A licensed pari-mutuelwagering racetrack in the state, without affording North Metro the sameopportunity.  While unsuccessful to date,if any law that excludes North Metro from gaming opportunities afforded toCanterbury Park or Native American tribes is enacted, it could have a materialadverse effect on North Metro’s operations. Similarly, the legislature may consider proposals to reduce or eveneliminate the scope of gambling North Metro will be permitted to offer undercurrent law, or to increase the taxes that North Metro will be required to payfrom its gaming revenue, either of which could significantly reduce the netrevenue generated by North Metro.

Todate, North Metro has been unsuccessful in its efforts to secure legislativeauthorization to offer simulcast wagering on all breeds of horse racing (undercurrent law, North Metro may only simulcast harness races).  North Metrohas also been unsuccessful to date in its efforts to eliminate the requirementthat we hold 50 days of live harness racing before we begin card roomoperations.  These proposed changes (especially with regard to all-breedsimulcasting) would have a significant positive impact on North Metro’soperating results.  However, we cannot assure that we will ever besuccessful in achieving either of these legislative changes.

**4.  REGULATORY RISKS RELATED TO SOUTHWEST’S PARTICIPATIONIN THE GAMING INDUSTRY:**

**We, and the gaming industry as a whole, are heavily regulatedand any change in the regulatory environment could have a material adverseeffect on our business and operations.**  The gamingindustry is highly regulated at the federal and state levels and gaming ontribal land is further regulated by the National Indian Gaming Commission andthe Bureau of Indian Affairs. The process of complying with all applicablegovernment and tribal regulations is complex and requires us to expendsubstantial time and resources. We cannot assure you that we will be able tocomply on a continuous or timely basis with all applicable regulations, anddelays in compliance, or failure to comply, could have a material adverseeffect on our business, financial condition, results of operations and ourability to maintain and obtain needed licenses. Changes in existing regulationsor the adoption of new regulations at the federal level or in the states inwhich we operate or pursue new opportunities could delay or prevent ourcompliance with those regulations. Our failure to comply with applicable lawsor regulations, whether federal, state or tribal, could result in, among otherthings, the termination of management agreements to which we are a party or thesuspension of some of our operations, both of which would have a materialadverse effect on our business.

**We face risks in connection with obtaining, maintaining andrenewing gaming licenses required for the conduct of our business.** The development and management of gaming facilities are subject to extensivelicensing requirements and we cannot be assured that we will be able to obtainor maintain all necessary licenses, approvals

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andother clearances from regulatory authorities having jurisdiction over ourgaming facilities.  Although we, and our affiliates, have obtained thegovernmental licenses, permits and approvals we believe are necessary for thedevelopment and continued management of our current operations in Oklahoma andColorado and development of a harness racing track in Minnesota, we cannot beassured that we will be able to maintain or renew the necessary licenses,approvals and other clearances required for our operations.

**All licenses that have been or may be obtained by us or our affiliatesare subject to various conditions and in many cases will be subject to renewal.** Notwithstanding the fact that we believe we have earned a good reputation atfederal, state and tribal levels relative to compliance and licensing ability,there is always the possibility that a failure to comply with gamingregulations or the conditions of any license we hold could have an adverseeffect upon our ability to secure, maintain or renew our gaming licenses. We were fined $50,000 by the Colorado Division of Gaming in June 2004 forfailure to properly maintain and review statistical data on slot machineperformance after receiving a warning letter regarding this deficiency andfailing to comply with its recommended action for correction of the deficiency.We entered into a Stipulation and Agreement with the Colorado Limited GamingControl Commission in which we admitted that we failed to comply with theapplicable gaming regulations and agreed to take corrective action immediately.As part of these proceedings, James Druck, in his capacity as Manager of thefacility in question, without any admission of guilt, agreed to take the stepsrequired to insure our compliance in this matter and, further, agreed topay the sum of $5,000 to Colorado’s Limited Gaming Fund as reimbursement forexpenses incurred by Colorado in this investigation.  While this event hasnot had an adverse effect on any license we have renewed or applied for todate, it remains possible that it could have an adverse effect on licensingdecisions in the future.  In addition, wemust disclose this violation to other jurisdictions in which we hold or applyfor gaming licenses. It is difficult to predict what impact, if any, thatdisclosure may have on our ability to obtain a license in those jurisdictions.

**Our facilities and operations, as well as our key personneland some of our security holders, are subject to government backgroundinvestigations**.  Failure to complete theseinvestigations satisfactorily could adversely affect our business and operations. For example, the State of Colorado currently requires extensive backgroundchecks in connection with an application for gaming licenses.  Backgroundchecks and related approvals may take many months to complete.  We cannotassure you that the necessary background investigations will be completedsatisfactorily.

# **5.****   RISKS RELATED TO THEGAMING INDUSTRY GENERALLY:**

**We face intense competition in the gaming industry.** The gaming 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 judicial hurdles andadverse legislative and judicial changes in addition to changes, challenges anddelays from regulatory oversight.**  The legislative,judicial and regulatory environments related to gaming are dynamic and changerapidly. Any federal, state or tribal action, adverse legislation, judicial orregulatory ruling or delay that limits gaming or constricts the scope of ourgaming operations could have a material adverse effect on the gaming industryor our operations and financial condition.

**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 toinvestment in other entertainment enterprises, adverse changes in general andlocal economic conditions may adversely impact investments in the gamingindustry.  Examples of economic conditions subject to change include,among others, (a) competition in the form of other gaming facilities andentertainment opportunities; (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

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costs;(g) seasonality; (h) changes or cancellations in local tourist, recreational orcultural events; and (i) changes in travel patterns or preferences (which maybe affected by increases in gasoline prices, changes in airline schedules andfares, strikes, weather patterns or relocation or construction of highways,among other factors).

**Our directors are subject to the review and approval of theNational Indian Gaming Commission.** Mr. Abramson, Mr.Chafoulias, Mr. Holmes and Mr. Schatzman each joined our Board of Directors onDecember 7, 2005, before we submitted their background information to the NIGCfor review and approval.  We submitted the required background informationfor each of these directors to the NIGC on December 7, 2005, the same day thatthey joined our board.  In the event that any one of these directors isnot approved by the NIGC, they will need to resign from the board.  Insuch an event we may need additional directors to meet the SEC’s independencerequirements for our board and board committees.  There is no guaranteethat we will able to find other suitable candidates who are willing to sit onour board in a timely manner.

# **6. **** ADDITIONAL RISKS:**

**The success of our current operations and our future growthpotential are dependent upon key personnel and will, in the future, beincreasingly dependent on our ability to attract and retain additionalqualified managers and personnel**.  Our success dependsto a significant extent upon the efforts and abilities of our executiveofficers, James B. Druck, Thomas E. Fox, and Brian L. Foster.  We haveentered into employment agreements with Messrs. Druck and Fox. Each of theseindividuals has developed relationships and experience in the gaming industrythat are integral to our success.  We do not maintain key man lifeinsurance on any of these individuals.  The loss of the services of one ormore of these individuals could have a material adverse effect on our businessand current and proposed operations.

We willalso be required to recruit and retain a significant number of management,administrative and other employees for any of our proposed gaming facilitiesthat may come to fruition.  We anticipate that we will be required todevelop and undertake a major training program at each new facility that we maydevelop or manage.  In addition, with regard to facilities on Indian land,we will generally be required to recruit and give preference to individuals ofNative American heritage in order to comply with various tribal employmentrights ordinances that have been adopted by most tribes, including the Cheyenneand Arapaho Tribes. While we believe that we will be able to attract and retaina sufficient number of employees to satisfy our current and futurerequirements, the competition for such employees, particularly at themanagement level, will increase significantly in the future if the gamingindustry expands throughout the United States.  There can be no assurancethat we will be able to attract and retain the personnel required tosuccessfully operate our business.

Inaddition, now that we are conducting our gaming operations as a publiccorporation, we are subject to regulations under state and federal securitieslaws such as the Securities Act of 1933, the Securities Exchange Act of 1934,and the Sarbanes-Oxley Act of 2002. Compliance with these laws and regulationsrequires that we add personnel, including four independent members of our Boardof Directors who joined Southwest in December 2005.  All of thesedirectors and some new personnel must complete background investigations beforejoining our company or performing any services for us. Requiring potentialdirectors and employees to complete these investigations may make it moredifficult to recruit qualified candidates and delays in completing backgroundinvestigations could adversely impact our business and, in the case of directorcandidates, our ability to comply with Sarbanes-Oxley Act requirementsregarding director independence on a timely basis.

**The success of our current operations and our future growthpotential are dependent upon our relationship with and the performance ofcertain third parties.**  The successful operation of ourvarious proposed gaming facilities will be dependent to a significant extent onthe efforts of third parties.  For example, (a) with respect to anyfacility located on Indian land, we will not own the facility and will dependon the performance by a tribe of its obligations under the applicablemanagement agreement; (b) with respect to the harness racing track and cardroom proposed for Minnesota, the success of that project will depend to a greatextent on the expertise of our 50/50 partner in that venture, MTR-Harness,Inc., an affiliate of MTR Gaming Group, Inc., in managing racing facilities aswell as the ability of our financing sources to meet their commitments to us;and (c) finally, with respect to any other project pursued by us, we may needto form partnerships or secure third party funding in order to meet thefinancial requirements that will likely transcend our own financial resources.The failure of any third party to perform its related contractual obligationscould have a material adverse effect on our business and operations.  Inaddition, depending upon the structure of any particular joint venture, we maybe held responsible for the acts or omissions of our co-venturers.

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**In early 2007, we****sold commonstock and warrants to buy shares of our common stock in a private placement**(**see Note 24 to the Consolidated FinancialStatements included in Item 7 of this Annual Report on Form 10-KSB). We likely will issue additional equitysecurities in the future, which will further dilute your share ownership.* *Sales of a substantial number ofshares of our common stock in the public market could lower our stock price andimpair our ability to raise funds in new stock offerings. **Welikely will issue additional equity securities to raise capital.  Theseadditional issuances will dilute share ownership and potentially the value ofthe shares. Future sales of a substantial number of shares of our common stockin the public market or the perception that such sales could occur, couldadversely affect the prevailing market price of our common stock and could makeit more difficult for us to raise additional capital through the sale of equitysecurities.

**We have the ability to issue shares of preferred stock, whichmay reduce the value of our common shares and your rights as a commonshareholder.**  Southwest’s shareholders have authorizedthe issuance of up to 30 million shares of preferred stock with rights andpreferences to be determined by our Board of Directors.  No shares ofpreferred stock are outstanding and we do not have a current intent to issueany shares of preferred stock, although we reserve the right to do so in thefuture.  It is not possible to determine the actual effect of theauthorization and issuance of the preferred stock on the rights of Southwestshareholders until our Board determines the rights of the holders of a seriesof 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 of Southwest,until the satisfaction of any liquidation preference granted to the holders ofpreferred 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.

Inaddition, any particular issuance or series of preferred stock could, dependingon the terms, make it more difficult or discourage any attempt to obtaincontrol of Southwest by means of a merger, tender offer, proxy contest or othermeans.  Issuance of preferred stock could have the effect of diluting thestock ownership of persons seeking control of our company, and the possibilityof such dilution could have a deterrent effect on persons seeking to acquirecontrol. The Board also could, although it has no present intention of sodoing, authorize the issuance of preferred stock to a holder who might therebyobtain sufficient voting power to assure that any proposal to effect certainbusiness combinations or amend our Articles of Incorporation or Bylaws wouldnot receive the required shareholder approval. Accordingly, the power to issueshares of preferred stock could enable the Board to make it more difficult toreplace incumbent directors and to accomplish business combinations opposed bythe incumbent Board.

**Because our common stock is traded on the OTC Bulletin Board,the ability to sell shares in the secondary trading market may be limited.** Our common 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 might otherwiseprevail if our common stock was traded on a national securities exchange likeThe Nasdaq Stock Market LLC, The New York Stock Exchange or American StockExchange.

**Because our shares are “penny stocks,” shareholders may havedifficulty selling them in the secondary trading market.** Federal regulations under the Securities Exchange Act of 1934 regulate thetrading of so-called “penny stocks,” which are generally defined as anysecurity not listed on a national securities exchange or Nasdaq, priced at lessthan $5.00 per share and offered by an issuer with limited net tangible assetsand revenues.  Since our common stock currently trades on the OTC BulletinBoard at less than $5.00 per share, our common stock is a “penny stock” and maynot be traded unless a disclosure schedule explaining the penny stock marketand associated risks is delivered to a potential purchaser before any trade.

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Inaddition, because our common stock is not listed on Nasdaq or any nationalsecurities exchange and currently trades at less than $5.00 per share, tradingin our common stock is subject to Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers must take certain steps prior to selling a “pennystock,” 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 thebroker-dealer does not follow these penny stock rules, the investor has noobligation to purchase the shares.  The application of these comprehensiverules will make it more difficult for broker-dealers to sell our common stockand our shareholders, therefore, may have difficulty selling their shares inthe secondary trading market.

**Our stock price may be volatile and your investment in ourcommon stock could suffer a decline in value.* ***The market price of our common stock may fluctuatesignificantly in response to a number of factors, some of which are beyond ourcontrol.  These factors include:

·                  governmentregulatory action affecting our operations;

·                  actualor anticipated fluctuations in our operating results;

·                  generalmarket conditions for the gaming industry;

·                  broadmarket fluctuations; and

·                  economicconditions in the United States or abroad.

**We do not intend to pay any cash dividends in the foreseeablefuture and, therefore, any return on your investment in our common stock mustcome from increases in the fair market value and trading price of the commonstock.* ***Wedo not intend to pay any cash dividends in the foreseeable future and,therefore, any return on your investment in our common stock must come fromincreases in the fair market value and trading price of our common stock.

# **Item 2.          DESCRIPTION OF PROPERTY**

We own, lease or managethe following real property:

Gold Rush I, LLC, a wholly owned subsidiary ofSouthwest Casino and Hotel Corp., operates the Gold Rush Casino with 321 slotmachines, four table games, a bar/restaurant and 13 hotel rooms, and the GoldDigger’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 2006,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 2006, these assumed obligations averagedapproximately $94,000 per month.  GoldRush I also held an option to purchase this real estate that expired onFebruary 28, 2005.

Southwest Casino and Hotel Corp., a wholly ownedsubsidiary 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 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

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at the Gold Rush and Gold Digger’s casinos. Under thesublease between Southwest Entertainment and Gold Rush I for this site,Southwest Entertainment is required to pay rent of $1,000 per month.

In addition to the Gold Rush and Gold Digger’s casinos,the lease with Mark and Annesse Brockley, Cripple Creek Development and BlueBuilding Corporation includes two additional storefronts that we sublease to athird party.  The monthly rent we receive for these properties is $1,000.

North Metro HarnessInitiative, LLC, in which Southwest Casino and Hotel Corp. owns a 50 percentmembership interest, purchased approximately 180 acres of real property inColumbus Township, Anoka County, Minnesota during October 2005. North Metrointends to build a harness racetrack and card room on this site.  North Metro also acquired a separate 24-acreparcel in the city of Hugo in Washington County, Minnesota that will be usedfor wetland mitigation required in connection with the development of theharness racetrack and card room.  NorthMetro owns all of these properties and there are no material liens orencumbrances against them.  We estimatethe total cost of this development to be approximately $62 million. As ofDecember 31, 2006, the members of North Metro have provided approximately $16.1million of that amount.  The members ofNorth Metro will also contribute an additional amount of approximately $4.7million with the remainder to be borrowed. (See Note 5 to the Consolidated Financial Statements included inItem 7 of this Annual Report on Form 10-KSB).

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, 2006, 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, arestaurant and bar, 24 card games, including 13 tables of blackjack and 11poker tables.  Lucky Star Clinton offersmore than 370 gaming 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.  We also received tribal gaming commissionauthorization to offer Class III gaming machines at the Lucky Star Clintoncasino in November 2006. In December 2006 we placed 34 Class III gaming machinesin Lucky Star Clinton.

Southwest Casino Corporation leases 4,780 square feetof office space at 2001 Killebrew Drive, Suite 350 in Minneapolis, Minnesotawith a base rent of $9,750 per month plus certain operating costs for itscorporate offices under a five-year lease that expires in December 2009.

Southwest does not own any interest in real propertysolely 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 leased propertiessuitable and adequate for our current operations.  In the opinion of our management, all ofthese properties are adequately covered by insurance.

# **Item 3.          LEGAL PROCEEDINGS.**

We are involved invarious claims, legal actions and other complaints arising in the ordinarycourse of business.  In the opinion of management, any losses that mayoccur from these matters are adequately covered by insurance or are providedfor in our financial statements and the ultimate outcome of these other matterswill not have a material effect on our financial position or results ofoperations.

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

No matters were 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.**  **MARKET****FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

**Market Information**

Our common stock isquoted on the Over-the-Counter Bulletin Board (OTCBB) of the NationalAssociation of Securities Dealers, Inc. under the symbol “SWCC.OB.”  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, 2006:** |       |     |       |    |       |
| Quarter  ended Dec. 31, 2006              |       | $        | 0.70       |    | $          | 0.42 |   |
| Quarter  ended Sept. 30, 2006             |       | $        | 0.71       |    | $          | 0.40 |   |
| Quarter  ended June 30, 2006              |       | $        | 0.84       |    | $          | 0.51 |   |
| Quarter  ended March 31, 2006             |       | $        | 0.73       |    | $          | 0.40 |   |
| ** **                                |       |     |       |    |       |
| **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 |   |

These bid quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not represent actual transactions.

**Number of Record Holders**

As of March 12, 2007 there were 388 record holders ofour common stock.

**Dividends**

We have not declared or paid any cash dividend on ourcommon stock. Under the terms of our Revolving Credit and Term Loan Agreementwith Crown Bank, we are prohibited from paying any dividends (other thandividends payable solely in Southwest stock) on any class of our stock.

**Sales of Unregistered Equity Securities duringFourth Fiscal Quarter**

We did not sell anyunregistered equity securities during the fourth quarter of fiscal 2006.

**Repurchases of Equity Securities**

We did not purchase anyof our equity securities during the fourth quarter of fiscal 2006.

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**Item 6.          MANAGEMENT’S DISCUSSION AND ANALYSIS ORPLAN OF OPERATION**.

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

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

For theyear ended December 31, 2006, Southwest had net income of $1,157,211 onrevenues of $21,474,908 as compared to net income of $566,350 on revenues of$20,713,018 for the year ended December 31, 2005.  This amounts toearnings during 2006 of $0.06 per outstanding share on both a basic andfully-diluted basis as compared to earnings of $0.03 per outstanding share in2005 on both a basic and fully-diluted basis, an improvement of $0.03 pershare.  Income from operations for 2006was $3,219,263 compared to $1,664,938 for 2005, an increase of 93%.

***Overview:***

Our principal business is the management, operationand development of gaming facilities in emerging and established gamingjurisdictions.  Currently, we operate three casinos in Cripple Creek,Colorado — Gold Rush Hotel and Casino, Gold Digger’s and Uncle Sam’s.  Wealso manage two Native American gaming operations in Oklahoma for the Cheyenneand Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star -Clinton.  Lucky Star - Concho is locatedon U.S. Highway 81, just north of the Oklahoma community of El Reno.  Lucky Star - Clinton is located 60 miles westof Lucky Star - Concho in the community of Clinton, Oklahoma on Old Route 66near Interstate I-40.

We continually evaluate other management, consulting,development and acquisition opportunities related to gaming that have thepotential to generate new revenue streams for us.  New opportunities for which we have anagreement or have received the appropriate licenses include:

·                  On December 18,2006, Southwest Eagle, LLC, a wholly-owned subsidiary of Southwest CasinoCorporation, entered into an Asset Purchase Agreement and a long-term leasewith Pinnacle Casinos and Resorts, LLC under which Southwest Eagle will,subject to the terms and conditions stated in the asset purchase agreement andlease, acquire the operating assets and lease the real property of the DoubleEagle Hotel and Casino and Gold Creek Casino in Cripple Creek, Colorado(collectively, the “Double Eagle”). We will purchase these assetssimultaneously with Pinnacle’s acquisition of all of the outstanding capitalstock of Colorado Casino Resorts, Inc. (CCRI), the owner and operator of theDouble Eagle, under a separate Securities Purchase Agreement between Pinnacle’sand CCRI’s current shareholders.

Under the terms ofthe Asset Purchase Agreement, we will acquire all of the operating assets ofthe Double Eagle, including all cash in machines and accounts, but excludingreal property and improvements, for $12,625,000 and we will pay CCRI anadditional $11,000,000 as prepaid rent. We will pay $16,000,000 in cash at closing and $7,625,000 by delivery ofa promissory note to Pinnacle.  We willalso assume certain specified liabilities of CCRI, including accounts payableand all liabilities under contracts and leases connected with the operation ofthe Double Eagle.

The long-termlease for the real property and improvements provides that simultaneous withPinnacle’s acquisition of the CCRI stock, Pinnacle will cause CCRI to enterinto a 30-year net lease for all real property and improvements owned by CCRIin Cripple Creek, Colorado, and enter into a right of use agreement for alloff-site real property that is or may be used in the operation of the DoubleEagle.  Initial rent under this lease is$4 million per year, payable in equal monthly installments, and increases to$5.5 million by the 30th year. We can extend the lease for up to 15 years under three 5-yearoptions.  The lease requires us to payall costs associated with the real property and improvements, including realestate taxes, but exclude costs of repair of structural defects, an insuredcasualty, or condemnation. The lease contains other customary terms andconditions.

The ColoradoDivision of Gaming granted licenses for the operation of the Double Eagle andGold Creek casinos to Southwest on March 15, 2007.  These licenses are conditioned on (1)Southwest obtaining full possession of the casinos, and (2) Southwestsurrendering its licenses to operate the Gold Digger’s and Uncle Sam’scasinos.  The parties intend to closeSouthwest’s acquisition of these casinos within 15 days of receipt of theselicenses.

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The closing of thetransactions contemplated in the Asset Purchase Agreement is subject tonumerous additional conditions, including Pinnacle’s completion of thefinancing for and acquisition of the CCRI stock, our receipt of financing forpayment of the purchase price and prepaid rent, completion of due diligence tothe satisfaction of both us and Pinnacle, and other customary closingconditions. (See Note 20 to the Consolidated Financial Statements includedin Item 7 of this Annual Report on Form 10-KSB).

Colorado GamingRegulations allow for up to three licenses per operator.  The two licenses granted to operate theDouble Eagle and Gold Creek casinos granted by the Colorado Division of Gamingon March 15, 2007 are conditioned on the termination of our Gold Digger’s andUncle Sam’s licenses.  If we complete thepending acquisition of the Double Eagle and Gold Creek, we will close Uncle Sam’sand combine our Gold Rush and Gold Digger’s properties under one gaminglicense.

·                  InJanuary 2005, the Minnesota Racing Commission voted to grant class A and Blicenses to own and operate a harness racetrack and card room to North Metro HarnessInitiative, LLC, (“North Metro”) in which we own a 50% membershipinterest.  These licenses permit NorthMetro to develop and run a harness racetrack and a 50-table card room in theCity of Columbus, Anoka County, Minnesota. Lawsuits against the Minnesota Racing Commission (“MRC”) challenging thevalidity of those licenses concluded in favor of MRC and North Metro duringJuly 2006.  We are now actively engagedin pre-construction activities and arranging construction financing for theproject.

·                  On March 24,2006 we entered into a Gaming Management Agreement with the Otoe-MissouriaTribe of Indians in north central Oklahoma. Under this agreement, we will manage the Tribe’s Seven Clans ParadiseCasino near Ponca City, Oklahoma. Southwest will receive management fees equal to 20 percent of the netrevenue from gaming and non-gaming activity at the facility.  The Management Agreement has a five-year termbeginning on the date Southwest assumes management of the facility.  We have submitted the agreement to theNational Indian Gaming Commission (“NIGC”) for approval.  The agreement is not effective, and we cannotprovide any services or receive any compensation under the agreement until wereceive that approval.  At this time wecan not predict how long the NIGC will take to complete its ongoing backgroundinvestigation of Southwest, the total costs related to the NIGC’s backgroundinvestigation and approval process that Southwest will be required to pay, ifor when the Tribe will respond to the NIGC’s outstanding comments on themanagement agreement and if or when the NIGC will approve the managementagreement.

***Operating segments:***

Our executive officers review operating results,assess performance and make decisions related to the allocation of resources ona property-by-property basis. We, therefore, believe that each property is anoperating segment.  In order to provide more detail in a moreunderstandable manner than would be possible on a consolidated basis, and tofacilitate discussion of operating revenue, we have grouped our properties asfollows:

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

 

**CasinoManagement:**

Southwest Casino and 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. 

The Tribal Council of theCheyenne and Arapaho Tribes of Oklahoma includes all enrolled members of theTribes. On February 24, 2007, at a convened meeting of the Tribal Council, theTribal Council voted to approve the terms of an extension and expansion of thegaming management relationship between the Tribes and Southwest.  The 183 members of the Tribes who attendedthe Tribal Council meeting voted to adopt resolutions approving proposed termsfor, and authorizing an attorney for the Tribes to review the final terms of,gaming management agreements under which Southwest will continue to manage theTribes’ existing Lucky Star casinos in Concho and Clinton, Oklahoma, expand theConcho and Clinton facilities to provide more gaming space and greateramenities, assume the management of and expand the Tribes’ existing FeatherWarrior casinos in Watonga and Canton Lake, Oklahoma, and develop and manage newgaming facilities on tribal land in four other Oklahoma cities.  In addition to its expanded managementresponsibility, Southwest will pay for construction of a proposed $4.5 millionIndian Health Service clinic building out of the management fees it receivesunder the new agreements. The Tribal Council’s resolutions require theagreements to be presented to the Tribal Council at a meeting scheduled forMarch 31, 2007 for final approval.

Under the terms of theresolutions adopted by the Tribal Council, the management agreements will runfor five years beginning on the first day that Southwest begins management ofthe facilities under the new agreements. 

The validity of theFebruary 24, 2007 Tribal Council meeting has been challenged in the Cheyenneand Arapaho tribal court. The judge recently ruled that the meeting would beconsidered valid until a formal hearing on the issue could be held, likely inearly May.  

Under the Tribes’Constitution adopted in 2006, gaming management agreements must be approved bythe Governor of the Tribes and the Tribal Legislature, as well as the TribalCouncil. The resolutions adopted by the Tribal Council direct the Governor ofthe Tribes to enter into the gaming management agreements on behalf of theTribes within five days of final approval by the Tribal Council and direct thetribal Legislature to ratify the agreements no later than five days after theGovernor signs it or, if the Governor does not sign, no later than 10 daysafter final approval by the Tribal Council. The Governor has disputed the authority of the Tribal Council and thetribal legislature to cause him to take any action on a gaming managementagreement or enter into a gaming management agreement without hisapproval.  The Governor has informed usthat he will not review or negotiate the terms of the agreements prepared inresponse to the Tribal Council’s February 24th resolutions.

In general, gamingmanagement agreements between Native American tribes and management contractorsmust also be approved by the Chairman of the National Indian Gaming Commission(NIGC) before becoming effective.

Although we have receivedTribal Council approval as discussed above, several additional approvals arerequired to continue our management relationship with the Cheyenne and ArapahoTribes beyond May 19, 2007 and we remain uncertain whether we will be able todo so.

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

We earned management fees of $3,501,795 and $3,187,836from Lucky Star - Concho during the year ended December 31, 2006 and 2005,respectively, an increase of 9.0%.   Theincrease in management fees for the year ended December 31, 2006 as compared tothe same period in the prior year is the direct result of the Tribes signing agaming compact with the state of Oklahoma in April 2005 and the subsequentaddition and effective management of the new gaming opportunities permittedunder that compact.  The compact allowedLucky Star — Concho to offer its

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patrons card games including poker, as well as certainClass III electronic games permitted under the compact, all of which haveresulted in a significant increase in revenue. The increases as a result of the compact were partially offset bygreater competition, which negatively impacted the second half of 2006, fromother tribal gaming operations closer to Oklahoma City and from Remington Park,a racetrack in Oklahoma City that began offering electronic gaming near the endof 2005, and increases in fuel costs that reduced patrons’ discretionaryspending.

**LuckyStar - Clinton**

We earned management fees of $2,363,885 and $1,723,269from Lucky Star - Clinton during the year ended December 31, 2006 and 2005,respectively, an increase of 37.2%.   Theincrease in management fees is the result of an improved mix of games on thefloor, including the introduction of slim line cabinets that allowed us to putmore gaming machines in the same amount of space, and the successfulrenegotiation of machine vendor fees on a number of our more popular electronicgames.  In early November 2006, wereceived a Class ‘B’ license under which Lucky Star - Clinton will also offerClass III games permitted under the gaming compact with the State ofOklahoma.  Even though Lucky Star —Clinton is at capacity in terms of how many gaming machines and customers thefacility can accommodate, especially on weekends, we continue to anticipateincreases in revenues during 2007 as a result of providing these additionalgaming opportunities.

###### **OtherMatters**

On March 4, 2006, the Tribes rescinded their priorapproval of an amendment to the Gaming Management Agreement under which we wereto assist them in developing an additional gaming facility at Canton Lakes,Oklahoma.  This amendment had beensubmitted to the NIGC for approval in September 2003, but that approval had notbeen received.   The management of CantonLakes is part of the management agreement currently being approved by theCheyenne and Arapaho Tribes discussed above.

**Casino operations:**

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

|                  | ** ** | **For the Year  Ended  December 31,  2006** | ** ** | **For the Year  Ended  December 31,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|
|             |       |                                                       |       |                                                       |       |                                 |       |
| Casino revenues  |       | $                                                          | 13,930,824 |                                                       | $          | 14,029,918                           |       | (0.7 | )% |
| Total revenues   |       | 14,640,824                                                 |       | 14,811,603                                                 |       | (1.2                                 | )%         |
| EBITDA(1)        |       | 3,145,945                                                  |       | 3,096,275                                                  |       | 1.6                                  | %          |
| Operating margin |       | 21.5                                                       | %          | 20.9                                                       | %          |                                 |       |
|                  |            |                                                            |            |                                                            |            |                                      |            |  |  |

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(1)           EBITDA is not ameasurement of financial performance under GAAP.  Please see the discussion of our management’suse of EBITDA and the limitations of EBITDA as a performance measure under *“Non-GAAP Financial Measures”* on page 31.

Year Ended December 31,2006 versus December 31, 2005:

Gold Rush/Gold Digger’sgaming revenues and total revenues were slightly lower than the prioryear.  We attribute flat to slightlyreduced gaming and total revenues at these casinos to increased competitionfrom a nearby competitor who expanded their gaming floor and increased theirslot capacity by more than 80 machines. We expect this situation to stabilize in 2007, but anticipate furtherexpansion in the market in future years. For the year, EBITDA is slightly higher with an increase in theoperating margin due to continued monitoring and containment of expenses.  We expect the first quarter of 2007 to beslightly down from the first quarter of 2006 as snowstorms and bad weather inJanuary 2007 reduced customer traffic in Cripple Creek.

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**Uncle Sam’s Casino Results**:

|                  | ** ** | **For the Year  Ended  December 31,  2006** | ** ** | **For the Year  Ended  December 31,  2005** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|
|             |       |                                                       |       |                                                       |       |                                 |       |
| Casino revenues  |       | $                                                          | 913,783    |                                                       | $          | 952,067                              |       | (4.0 | )% |
| Total revenues   |       | 940,562                                                    |       | 955,497                                                    |       | (1.6                                 | )%         |
| EBITDA(1)        |       | (467,462                                                   | )          | (643,016                                                   | )          | 27.3                                 | %          |
| Operating margin |       | (49.7                                                      | )%         | (67.3                                                      | )%         |                                 |       |
|                  |            |                                                            |            |                                                            |            |                                      |            |  |  |

 

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(1)           EBITDA is not ameasurement of financial performance under GAAP.  Please see the discussion of our management’suse of EBITDA and the limitations of EBITDA as a performance measure under *“Non-GAAP Financial Measures”* on page 31.

Year Ended December 31,2006 versus December 31, 2005:

Uncle Sam’s casinorevenues and total revenues were 4.0% and 1.6% lower during 2006 than 2005 as aresult of increased competition from a nearby competitor who expanded theirgaming floor and increased their slot capacity by more than 80 machines.  We offset some of the reduced casino revenuesand total revenues by opening, late in the second quarter of 2006, a new barnamed “Altitude Night Club & Bar”. We improved EBITDA by $175,554 over the prior year as a result ofclosing the poker room in 2006 and continuing to monitor and containcosts.  We expect the first quarter of 2007to be slightly down in comparison with the first quarter of 2006 snow stormsand bad weather in January 2007 reduced customer traffic.  If we are successful in acquiring the DoubleEagle casino we will be required to close Uncle Sam’s because Colorado GamingRegulations allow casino operators to hold only three licenses in the State ofColorado.

***Project Development***costs for the years ended December 31, 2006 and 2005 were $290,623 and$736,739, respectively.  Projectdevelopment costs for year ended December 31, 2005 included a $249,778 writeoff of an option to acquire the Gold Rush/Gold Digger’s real estate, whichexpired unexercised on February 28, 2005. In addition, for the year ended December 31, 2005, the Companyconsolidated the results of operations of North Metro until October 20, 2005,recording development expenses of $407,382 net of minority interest in the lossfrom consolidated subsidiary of approximately $204,000.  North Metro is no longer consolidated in ourfinancial statements.  See Note 5 to ourconsolidated financial statements.

During the year ended December 31, 2006, we continuedto pursue other gaming opportunities. During December 2006 we entered into an agreement to acquire theoperations of the Double Eagle casino in Cripple Creek, Colorado, see discussionabove under “Overview”.

In March 2006 we signed a five-year managementcontract with the Otoe-Missouria Tribe of Oklahoma.  We have submitted the agreement to theNational Indian Gaming Commission for approval. We cannot begin to perform work under this contract until it isapproved.  Currently, the NIGC isperforming a background investigation of the Company, its executive officers,directors and shareholders as part of its contract approval process.  In addition, the NIGC has reviewed theagreement and provided comments on it to Southwest and the Tribe on twooccasions.  The Tribe has not respondedto the second set of comments.  At thistime, the Company cannot predict how long the background investigation may taketo complete, the total costs related to the background investigation andapproval process to be paid by the Company, if or when the Tribe will respondto the NIGC comments, and if or when NIGC might approve the managementagreement.

In February 2006, we formed a new subsidiary to pursueopportunities in the charitable gaming market, Southwest CharitableEnterprises, LLC.  For the year endedDecember 31, 2006, this entity incurred approximately $105,000 in expenses,which are included in project development costs. In connection with entering intoan agreement to acquire the Double Eagle we changed the name of SouthwestCharitable Enterprises, LLC to Southwest Eagle, LLC, which will acquire and bethe operating entity for that facility if we complete that transaction.

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***Corporate expenses***were $2,774,022 and $2,480,942 during the year ended December 31, 2006 and2005, respectively, an increase of $293,080. The increase in corporate expenses during the year ended December 31,2006 over the comparable period in 2005 is primarily due to increased boardfees and salaries of approximately $296,000.

***Interest Expense***was $1,204,296 and $934,417 for the year ended December 31, 2006 and 2005,respectively.  Interest expense increased$269,879 during the year ended December 31, 2006 compared to the prior yearprimarily as a result of interest incurred in connection with the $2,500,000loan we secured in October 2005 to meet our obligations to fund capitalcontributions to North Metro Harness Initiative, LLC.

***Minority interestin loss of consolidated subsidiary and loss of unconsolidated subsidiary, netof tax benefit*** represents our partner’s share of thelosses during the year ended December 31, 2005 and our share of the lossesduring the year ended December 31, 2006. During a portion of the year ended December 31, 2005 until October 20,2005 the results of North Metro were consolidated with our financialstatements.  After October 20, 2005 NorthMetro became an unconsolidated subsidiary. See Note 5 to our consolidated financial statements for our evaluationof the financial reporting for our 50% interest in North Metro.

***Effective tax rate*** for the year endedDecember 31, 2006 and 2005 was 33.4% and approximately 34%, respectively.  At December 31, 2003, the Company establisheda deferred tax asset relating to net operating losses.  Management evaluated all evidence anddetermined that a portion of the deferred tax assets relating to net operatinglosses would be utilized in 2006 based upon forecasted income for the Companyin 2006.  As such we continued to recorda deferred tax asset in the amount of $573,000 at December 31, 2005, which wasnet of a $1,896,000 valuation allowance. During the year ended December 31, 2006, the Company recorded a taxprovision and utilized the deferred tax asset established in prior years andremaining at December 31, 2005. Management evaluated the remaining valuation allowance against thedeferred tax assets at December 31, 2006 and did not reverse the valuationallowance due to the uncertainty of continuing the management relationship withthe Cheyenne and Arapaho Tribes past May 2007. As of December 31, 2006, the Company’s deferred tax asset is zero.  We recorded a tax provision for incomegenerated during 2005.

***Liquidity andCapital Resources:***

We generate cash flow from our Oklahoma managementactivities and casino operations in Colorado.  We use the cash flowsgenerated to pay off debt in accordance with our agreements, fund reinvestmentin existing properties for both refurbishment and replacement of assets, and topursue additional growth opportunities.  To balance our cash requirementswe supplement the cash flows generated by our operations with funds provided byfinancing activities.

Subsequent to December31, 2006, our subsidiary North Metro entered into a commitment letter with alender to provide a $41.7 million financing facility to build and construct theharness track and card room in Anoka County, Minnesota.  The commitment letter requires both membersof North Metro to provide additional equity of approximately $4.7 million to besplit equally by MTR and Southwest prior to closing the financingfacility.  As such, we will be requiredto contribute $2.35 million prior to closing the financing facility, expectedto occur in March 2007.  The financingfacility will be made to North Metro and collateralized by the assets of NorthMetro and will be non-recourse to Southwest and MTR as members of North Metro,(See Note 5 to the Consolidated Financial Statements included inItem 7 of this Annual Report on Form 10-KSB).

Subsequent to December31, 2006, we redeemed 357,000 shares of the Company’s common stock for $321,300in accordance with Article XI of the Company’s Articles of Incorporation.  The redemption price has been paid into anescrow account pending receipt of the stock certificates represented theredeemed shares for cancellation.  (SeeNote 22 to the Consolidated Financial Statements included in Item 7of this Annual Report on Form 10-KSB).

On January 24, 2007 and February 23, 2007 we enteredinto a Securities Purchase Agreement (“SPA”) with certain institutional andother accredited investors, as defined in Rule 501 of Regulation D promulgatedunder the Securities Act of 1933, as amended, under which we sold approximately7.4 million unregistered shares of our common stock and warrants to purchase anaggregate of approximately 3.0 million shares of its common stock in a privateplacement.  The purchase price for one share of our common stock with awarrant to purchase 0.4 shares of common stock was $0.55. The warrants areexercisable for a period of five years, beginning six months after the date ofissuance, at an exercise price of $0.61 per share.   The investors received certain registrationrights as defined in the agreement.

The private placement resulted in net proceeds toSouthwest of approximately $4.0 million, after the deduction of estimatedoffering expenses.

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The following officers and directors of Southwestparticipated in the private placement on the same terms as the other investors:James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, Presidentand Chief Operating Officer; Jeffrey S. Halpern, Vice President of GovernmentAffairs; Gus A. Chafoulias, Director; and David H. Abramson, Director. Other than with respect to the Securities Purchase Agreement, there are nomaterial relationships between Southwest, on the one hand, and any of the otherinvestors in the private placement, on the other hand.  (See Note 24 to the ConsolidatedFinancial Statements included in Item 7 of this Annual Report onForm 10-KSB).

As a result of enteringinto an asset purchase agreement to acquire the operations of the Double Eaglecasino located in Cripple Creek, Colorado we will need to raise debt financing.We have entered into a term sheet (amended March 20, 2007) and received aconfirmation of credit approval for debt financing of this acquisition.  Under the amended Term Sheet, the lender willprovide a senior credit facility in the amount of $20 million, which consistsof an $18 million Term Loan A and $2 million Term Loan B.  Term Loan B will fund if and when ourexisting gaming management relationship with the Cheyenne and Arapaho Tribes ofOklahoma is renewed or extended on terms reasonably satisfactory to the lender.  See further discussion above in the“Overview” section and Note 24 to the Consolidated Financial Statementsincluded in this Annual Report on Form 10-KSB.

We believe our cash flowsfrom operations along with the proceeds received in connection with our SPAwill be sufficient to meet our normal operating and debt repayment requirementsduring the next twelve months as well as funding our equity requirement toNorth Metro and redemption of securities as discussed above.  If we areunsuccessful in continuing our management relationship with the Cheyenne andArapaho Tribes past May 2007, we will likely have to raise additional capitalthrough debt or equity financing for periods after the next 12 months.

We continue to review additional opportunities toacquire or invest in companies, properties and other investments that meet ourstrategic and return on investment criteria. If we complete a materialacquisition or investment, our operating results and financial condition couldchange significantly in future periods. In addition, any new opportunity would in all likelihood require newequity or debt financing.

Net cash provided by operating activities during theyear ended December 31, 2006 and 2005 was $4,610,466 and $2,172,172,respectively.  The increase of $2,438,294is primarily due to an increase in management fees of $954,575, decreasedmanagement fee receivable of $411,288 (due to a payment received in lateDecember 2006 relating to the December management fee earned from the Cheyenneand Arapaho management contract which in the prior year was not received untilJanuary of the following year), decreased payments of accounts payable andaccrued liabilities of $696,424, and a decrease in project development costs of$196,338, net of the write-off of an option to purchase the real estate at GoldRush, which expired unexercised in February 2005, of $249,778.

Net cash used in investing activities for year endedDecember 31, 2006 and 2005 was $1,427,981 and $4,056,164, respectively.  The decrease of $2,628,183 in use of cashbetween the periods was due primarily to a decrease in our cash required tofund the development of North Metro by approximately $2.0 million, reducedpayments for the purchase of property and equipment of approximately $180,000and payments to related parties (from a prior project which was terminated in2004 but the note to the partner in the project was not paid in full until2005) made in 2005 of approximately $458,000 which were not made in the currentyear.

Net cash used in financing activities for the yearended December 31, 2006 was $2,846,370 compared to net cash provided byfinancing activities for the year ended December 31, 2005 of $2,328,581.  During the year ended December 31, 2006 wemade payments of $2,675,826 on long-term borrowings.  During the year ended December 31, 2005 wemade payments on long-term borrowings and notes payable of $1,287,828, whichwere offset by proceeds from a term loan entered into in October 2005 for $2.5million and funding of $1,167,408 from our minority partner in NMHI (at thattime, North Metro was a consolidated subsidiary of Southwest and those contributionswere reported as cash provided by financing activities).  The increase in payments on long-termobligations during 2006 is primarily related to our $2.5 million term noteentered into in October 2005.   For theyear ended December 31, 2006, we made principal payments of $1,755,951 relatingto the term note.  During 2006, we paid$110,000 to three officers related to unpaid compensation from priorperiods.  During 2006, we also madepayments related to financing costs of $72,544.

***Line of Credit.***  On October 20, 2005, we established a $450,000 line of credit with CrownBank of Minneapolis, Minnesota that replaced a $450,000 line of credit withAssociated Bank of Minneapolis.  The lineof credit is due April 30, 2007 with a variable interest rate at onepercent above prime but not less than 7.5% (9.25% at December

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31, 2006).  Asof December 31, 2006, the outstanding balance was $446,292.  Our threeprincipal officers have guaranteed up to $300,000 of this line of credit.

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

TheCompany entered into an amendment of its term loan with Crown Bank in October2006.  The agreement has been amended toallow the Company repay the remaining principal in seven equal payments throughApril 30, 2007 as opposed to the original agreement under which the Companywould have been required to repay the remaining principal in five equalprincipal payments through March 1, 2007. Monthly principal payments are $148,810 as compared to the originalpayments of $208,333.

***Equipment Loan.*** On December 23, 2005, the Company negotiated aloan of $460,324 to pay off outstanding payables in connection with theinstallation of a player tracking system at our three casinos in Cripple Creek,Colorado. The loan is for a term of 48 months with interest equal to the primerate, which is 8.25% as of December 31, 2006***.***  The outstanding balance as of December 31,2006 was $354,833.

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

**CompetitivePressures:**

Many casino operators are either entering or expandingin our markets — Colorado and Oklahoma — thereby increasing competition. Ascompanies have completed new or expanded projects, supply has sometimes grownat a faster pace than demand, and competition has increased significantly.Furthermore, several operators, including Southwest, have plans for additionaldevelopments or expansions in our markets.

Although, the short-term effect on Southwest of thesecompetitive developments generally has been negative, we are not able todetermine the long-term impact, whether favorable or unfavorable, thatdevelopment and expansion trends and events will have on current or futuremarkets. We believe that the geographic diversity of our operations, ourservice training, our rewards and customer loyalty programs, and our continuingefforts to improve our facilities will insure continued customer loyalty andwill enable us to face the competitive challenges present within our industry.

**PoliticalUncertainties:**

The casino entertainment industry is subject topolitical and regulatory uncertainty.  From time to time, individualjurisdictions have considered legislation or referendums that could adverselyimpact our operations.  The likelihood or outcome of similar legislationand referendums in the future is difficult to predict.

The casino entertainment industry represents asignificant source of tax revenues to the various jurisdictions in whichcasinos operate.  From time to time, various state and federal legislatorsand officials have proposed changes in tax laws, or in the administration oftax laws, that would affect the industry.  It is not possible to determinewith certainty the scope or likelihood of possible future changes in tax lawsor in the administration of tax laws.  If adopted, changes in tax lawcould have a material adverse effect on our financial results.

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

We prepare our Consolidated Financial Statements inconformity with accounting principles generally accepted in the UnitedStates.  Certain of our accounting policies, including, but not limitedto, the estimated lives assigned to our assets, the determination of bad debt,asset impairment, and income taxes, require that we apply significant judgmentin defining the appropriate assumptions for calculating financialestimates.  By their nature, these judgments are subject to an inherentdegree of uncertainty.  Our judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate.  We cannot assure you that ouractual results will not differ from our estimates.  For a discussion ofour significant accounting policies and estimates, please refer to our Notes toConsolidated Financial Statements presented in our 2006 Financial Statements.

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***Share-BasedCompensation Expense:***

On January 1, 2006,we adopted Statement of Financial Accounting Standards No. 123 (revised2004), *Share-Based Payment* (“SFAS 123(R)”),which requires us to measure and recognize compensation expense for allshare-based payment awards made to employees and directors, including employeeand director stock options and employee and director stock purchases, based onestimated fair values. In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”) relating to SFAS 123(R). Weapply certain provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R) requiresus to estimate the fair value of share-based payment awards on the date ofgrant using an option-pricing model. The value of the portion of the award thatwe ultimately expect to vest is recognized as expense over the requisiteservice periods in our consolidated statement of operations. SFAS 123(R)supersedes our previous accounting under the provisions ofSFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”). As permitted by SFAS 123, wemeasured compensation cost for options granted before January 1, 2006, inaccordance with Accounting Principles Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees*andrelated interpretations. Accordingly, no accounting recognition was given tostock options granted at fair market value until they were exercised. Uponexercise, net proceeds, including tax benefits realized, were credited toequity.

We adoptedSFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of our fiscal year 2006. In accordance with the modifiedprospective transition method, our consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Share-based compensation expense recognized during the periodis based on the value of the portion of share-based payment awards that isultimately expected to vest during the period. Share-based compensation expenserecognized in our consolidated statement of operations for the year endedDecember 31, 2006 was $166,703 and included both compensation expense forshare-based payment awards granted before, but not vested as of January 1,2006 based on the grant date fair value estimated in accordance with the proforma provisions of SFAS No. 123 and compensation expense for theshare-based payment awards granted after January 1, 2006. There was noshare-based compensation expense related to employee and director stock optionsand employee and director stock purchases recognized during the year endedDecember 31, 2005.

Upon adoption ofSFAS 123(R), we continue to use the Black-Scholes option pricing methodthat we had used to establish fair value of options granted beforeJanuary 1, 2006. Our determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected by ourstock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, our expectedstock price volatility and actual and projected employee stock option exercisebehaviors. Any changes in these assumptions may materially affect the estimatedfair value of the share-based award.

In November 2005, theFASB issued FSP FAS 123(R)-3, Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). FSP 123R-3provides a simplified alternative method to calculate the beginning pool ofexcess tax benefits against which excess future deferred tax assets (thatresult when the compensation cost recognized for an award exceeds the ultimatetax deduction) could be written off under Statement 123R. The guidance inFSP 123R-3 was effective on November 10, 2005. No tax benefit has beenrecorded on the share-based compensation for the year ended December 31, 2006.

***New Accounting Pronouncements*:**

The Financial Accounting Standards Board (“FASB”)released SFAS No. 156, “Accounting*forServicing of Financial Assets*,” to simplify accounting forseparately recognized servicing assets and servicing liabilities. SFAS No. 156amends SFAS No. 140, “Accounting*forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities*.” SFAS No. 156 permits an entity to choose either the amortization method or thefair value measurement method for measuring each class of separately recognizedservicing assets and servicing liabilities after they have been initiallymeasured at fair value.  SFAS No. 156 applies to all separately recognizedservicing assets and liabilities acquired or issued after the beginning of anentity’s fiscal year that begins after September 15, 2006. SFAS No. 156 will beeffective for our fiscal-2007 year.  We do not believe the adoption ofSFAS No. 156 will have a material impact on our consolidated financial positionor results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within

30

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those years. This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements.  We arecurrently evaluating the potential impact of this statement.

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”(Interpretation No. 48). Interpretation No. 48 clarifies the accounting foruncertain tax positions in accordance with SFAS 109, “Accounting for IncomeTaxes.” Pursuant to Interpretation No. 48, the Company will be required torecognize in its financial statements the largest tax benefit of a tax positionthat is “more-likely-than-not” to be sustained on audit, based solely on thetechnical merits of the position as of the reporting date. Only tax positionsthat meet the “more-likely-than-not” threshold at that date may be recognized.The term “more-likely-than-not” means a likelihood of more than 50 percent.Interpretation No. 48 also provides guidance on new disclosure requirements,reporting and accrual of interest and penalties, accounting in interim periodsand transition. The cumulative effect of initially applying Interpretation No.48 will be recognized as a change in accounting principle as of the date ofadoption. We have begun to evaluate the impact of applying this interpretationas of January 1, 2007, the effective date of the interpretation for us.  We do not expect Interpretation No. 48 to havea material impact on our financial position, results of operation or cashflows.

In September 2006, the SEC issued Staff AccountingBulletin (SAB) 108, which expresses the Staff’s views regarding theprocess of quantifying financial statement misstatements. The bulletin waseffective at fiscal year end 2006. The implementation of this bulletin had noimpact on our consolidated results of operations, cash flows or financialposition.

In February 2007, theFASB released SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115*” This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007, providedthe entity also elects to apply the provisions of FASB Statement No. 157, FairValue Measurements.  We are evaluatingthe impact of this statement.

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

Ourexecutive 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.

***Forward-LookingStatements:***

This Annual Report on Form 10-KSB contains “forward-lookingstatements.”  You can identify thesestatements by the fact that they do not relate strictly to historical orcurrent facts. These statements often contain words such as “may,” “will,” “project,”“might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,”“continue” or “pursue,” or the negative or other variations of those words orcomparable terminology. In particular, they include statements relating to,among other things, future actions, new projects, strategies, futureperformance, the outcome of contingencies such as legal proceedings and futurefinancial results. We have based these forward-looking statements on ourcurrent expectations and projections about future events.

We caution the readerthat forward-looking statements involve risks and uncertainties that cannot bepredicted or quantified and, consequently, actual results may differ materiallyfrom those expressed or implied in the forward-looking statements. These risksand uncertainties include, but are not limited to, the following factors aswell as other factors described from time to time in our reports filed with theSecurities and Exchange Commission:

·                  the continuationor extension of management contracts with our Tribal partners;

31

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·                  our ability tobuild and maintain healthy personal and professional relationships with tribesand their officials;

·                  the potentialchange of policies and personnel of tribal governments, which could adverselyaffect our relationships;

·                  the effects ofcompetition, including location of competitors and operating and marketcompetition;

·                  access toavailable and feasible financing;

·                  our ability torecoup costs of capital investments through higher revenues;

·                  success of ourcustomer tracking and customer loyalty programs;

·                  abnormal gamingholds;

·                  litigationoutcomes and judicial actions, including gaming legislation, referenda andtaxation;

·                  the effect ofeconomic, credit and capital market conditions on the economy in general, andon gaming companies in particular;

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

·                  the effects ofenvironmental and structural building conditions relating to the Company’sproperties; and

·                  changes in laws(including increased tax rates), regulations or accounting standards,third-party relationships and approvals, and decisions of courts, regulatorsand governmental bodies.

Any forward-looking statements speak only as of thedate made. We undertake no obligation to publicly update any forward-lookingstatements, whether as a result of new information, future events or otherwise.

32

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# **Item 7.          FINANCIALSTATEMENTS.**

**Table ofContents**

| Report of Independent  Registered Public Accounting Firm                                                        |   | F-2    |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                            |   |   |
| Consolidated Balance Sheets December 31, 2006 and 2005                                                          |   | F-3    |
|                                                                                                            |   |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006 and 2005                           |   | F-4    |
|                                                                                                            |   |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006 and 2005                           |   | F-5    |
|                                                                                                            |   |   |
| Consolidated Statements of Changes in Stockholders’  Equity for the Years Ended December 31, 2006 and 2005 |   | F-6    |
|                                                                                                            |   |   |
| Notes to Financial Statements                                                                                   |   | F-7    |

 

F-1

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## [Letterhead of Eide Bailly LLP]

**REPORTOF INDEPENDENT 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, 2006 and 2005,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 auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we do not express such an opinion. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates bymanagement, as well as evaluating the overall financial statement presentation.We believe our audits provide 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, 2006 and 2005 and the resultsof its operations its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.
|                        | /s/ Eide Bailly LLP |
|------------------------|---------------------|
| Minneapolis, Minnesota |                |   |

March 21, 2007

F-2

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** **

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedBalance Sheets**

**December31, 2006**

** **
| ** **                                                                                                                                                         | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                                                                             |       |        |       |        |       |
| CURRENT ASSETS                                                                                                                                                     |       |        |       |        |       |
| Cash and Cash  Equivalents                                                                                                                                         |       | $           | 1,531,260  |        | $          | 1,195,145 |   |
| Cash -  Restricted                                                                                                                                                 |       | —      |       | 2,656       |       |
| Accounts  Receivable                                                                                                                                               |       | 55,321      |       | 125,341     |       |
| Management Fees  Receivable                                                                                                                                        |       | 102,185     |       | 443,453     |       |
| Inventories                                                                                                                                                        |       | 173,216     |       | 148,283     |       |
| Prepaid Expenses                                                                                                                                                   |       | 588,731     |       | 574,371     |       |
| Other Current  Assets                                                                                                                                              |       | 120,918     |       | 40,000      |       |
| Total Current  Assets                                                                                                                                              |       | $           | 2,571,631  |        | $          | 2,529,249 |   |
|                                                                                                                                                               |       |        |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                                                             |       |        |       |        |       |
| Leasehold  Improvements                                                                                                                                            |       | 15,747,888  |       | 15,671,888  |       |
| Furniture and  Equipment                                                                                                                                           |       | 6,046,315   |       | 5,984,114   |       |
| Accumulated  Depreciation                                                                                                                                          |       | (10,940,192 | )          | (9,547,838  | )          |
| Net Property and  Equipment                                                                                                                                        |       | $           | 10,854,011 |        | $          | 12,108,164 |   |
|                                                                                                                                                               |       |        |       |        |       |
| OTHER ASSETS                                                                                                                                                       |       |        |       |        |       |
| Intangible  Assets                                                                                                                                                 |       | $           | 269,038    |        | 944,730    |   |
| Other Assets                                                                                                                                                       |       | 106,249     |       | 61,150      |       |
| Investment in  Unconsolidated Subsidiary                                                                                                                           |       | 5,054,020   |       | 4,298,367   |       |
| Deferred Tax  Asset                                                                                                                                                |       | —      |       | 573,000     |       |
| Total Other  Assets                                                                                                                                                |       | $           | 5,429,307  |        | $          | 5,877,247 |   |
|                                                                                                                                                               |       |        |       |        |       |
| TOTAL ASSETS                                                                                                                                                       |       | $           | 18,854,949 |        | $          | 20,514,660 |   |
|                                                                                                                                                               |       |        |       |        |       |
| LIABILITIES AND  STOCKHOLDERS' EQUITY                                                                                                                              |       |        |       |        |       |
|                                                                                                                                                               |       |        |       |        |       |
| CURRENT LIABILITIES                                                                                                                                                |       |        |       |        |       |
| Accounts Payable                                                                                                                                                   |       | $           | 535,294    |        | $          | 638,409 |   |
| Accrued Expenses                                                                                                                                                   |       | 972,804     |       | 1,076,238   |       |
| Accrued  Liabilities - Related Parties                                                                                                                             |       | 122,467     |       | 232,467     |       |
| Notes Payable                                                                                                                                                      |       | 446,292     |       | 446,292     |       |
| Current Portion  of Long-Term Liabilities                                                                                                                          |       | 1,720,193   |       | 2,778,571   |       |
| Accrued Interest  Payable                                                                                                                                          |       | 5,927       |       | 17,552      |       |
| Total Current  Liabilities                                                                                                                                         |       | $           | 3,802,977  |        | $          | 5,189,529 |   |
|                                                                                                                                                               |       |        |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                                              |       |        |       |        |       |
| Long-Term  Liabilities Net of Current Portion                                                                                                                      |       | $           | 7,495,224  |        | $          | 9,112,672 |   |
|                                                                                                                                                               |       |        |       |        |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                     |       |        |       |        |       |
|                                                                                                                                                               |       |        |       |        |       |
| STOCKHOLDERS' EQUITY                                                                                                                                               |       |        |       |        |       |
| Preferred Stock,  $.001 Par Value; 30,000,000 Shares Authorized                                                                                                    |       | $           | —     |        | $          | — |   |
| Common Stock,  $.001 Par Value  75,000,000 Shares Authorized, 19,688,656 and 19,588,656 Shares Issued and  Outstanding at December 31, 2006 and 2005, respectively |       | 19,689      |       | 19,589      |       |
| Additional  Paid-in Capital                                                                                                                                        |       | 17,239,894  |       | 17,052,916  |       |
| Accumulated  Deficit                                                                                                                                               |       | (9,702,835  | )          | (10,860,046 | )          |
| Total  Stockholders' Equity                                                                                                                                        |       | 7,556,748   |       | 6,212,459   |       |
|                                                                                                                                                               |       |        |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                         |       | $           | 18,854,949 |        | $          | 20,514,660 |   |

 

See Notes to ConsolidatedFinancial Statements

F-3

----

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Operations**

**For theYears Ended December 31, 2006 and 2005**

 

 
| ** **                                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| **NET REVENUES**                                             |       |       |       |       |       |
| Casino                                                       |       | $          | 14,844,607 |       | $          | 14,981,985 |   |
| Food &  Beverage/Hotel                                   |       | 556,475    |       | 582,546    |       |
| Management and  Consulting                                   |       | 5,865,680  |       | 4,911,105  |       |
| Entertainment                                                |       | 17,429     |       | 26,178     |       |
| Other                                                        |       | 190,717    |       | 211,204    |       |
|                                                         |       | 21,474,908 |       | 20,713,018 |       |
|                                                         |       |       |       |       |       |
| **EXPENSES**                                                 |       |       |       |       |       |
| Casino                                                       |       | $          | 11,492,218 |       | $          | 11,839,907 |   |
| Food &  Beverage/Hotel                                   |       | 1,410,887  |       | 1,474,223  |       |
| Corporate  Expense                                           |       | 2,774,022  |       | 2,480,942  |       |
| Project  Development Costs                                   |       | 290,623    |       | 736,739    |       |
| Entertainment                                                |       | 117,905    |       | 158,204    |       |
| Depreciation and  Amortization                               |       | 2,169,990  |       | 2,358,065  |       |
|                                                         |       | 18,255,645 |       | 19,048,080 |       |
|                                                         |       |       |       |       |       |
| **INCOME FROM OPERATIONS**                                   |       | $          | 3,219,263  |       | $          | 1,664,938 |   |
|                                                         |       |       |       |       |       |
| **OTHER INCOME (EXPENSE)**                                   |       |       |       |       |       |
| Interest Income                                              |       | $          | 2,849      |       | $          | 6,899 |   |
| Interest Expense                                             |       | (1,204,296 | )          | (934,417   | )          |
| Loss on  Disposition of Property and Equipment               |       | (6,932     | )          | (44,813    | )          |
|                                                         |       | (1,208,379 | )          | (972,331   | )          |
| **Income (loss) before income  taxes, equity in earnings**   |       |       |       |       |       |
| **of unconsolidated subsidiaries  and minority interest in** |       |       |       |       |       |
| **in loss of consolidated  subsidiary**                      |       | 2,010,884  |       | 692,607    |       |
|                                                         |       |       |       |       |       |
| Income Taxes                                                 |       | (670,800   | )          | (291,000   | )          |
| Minority  Interest in Loss of Consolidated Subsidiary        |       | -          |       | 204,173    |       |
| Loss of  Unconsolidated Subsidiaries, Net of Tax Benefit     |       | (182,873   | )          | (39,430    | )          |
|                                                         |       |       |       |       |       |
| **NET INCOME (LOSS)**                                        |       | $          | 1,157,211  |       | $          | 566,350 |   |
|                                                         |       |       |       |       |       |
| **Income (Loss) per Share - Basic**                          |       | $          | 0.06       |       | $          | 0.03 |   |
| **Income (Loss) Per Share -  Diluted**                       |       | $          | 0.06       |       | $          | 0.03 |   |
| **Weighted Average Common Shares  Outstanding - Basic**      |       | 19,675,779 |       | 19,531,402 |       |
| **Weighted Average Common Shares Outstanding -  Diluted**    |       | 20,651,331 |       | 22,463,724 |       |

 

See Notes to ConsolidatedFinancial Statements

F-4

----

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Cash Flows**

**For theYear Ended December 31, 2006 and 2005**

 
| ** **                                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash Flows from Operating  Activities:                                  |       |       |       |       |       |
| Net Income  (Loss)                                                      |       | $          | 1,157,211  |       | $          | 566,350 |   |
| Adjustments to  Reconcile Net Income (Loss) to                          |       |       |       |       |       |
| Net Cash  Provided by Operating Activities:                             |       |       |       |       |       |
| Minority  Interest in Loss of Consolidated Subsidiary                   |       | —     |       | (204,173   | )          |
| Depreciation and  Amortization                                          |       | 2,169,990  |       | 2,358,065  |       |
| Amortization of  Loan Costs                                             |       | 162,906    |       | 28,770     |       |
| Loss on  Disposition of Property and Equipment                          |       | 6,932      |       | 44,813     |       |
| Impairment Loss  on Gaming Equipment                                    |       | —     |       | 69,290     |       |
| Stock Based  Compensation Expense                                       |       | 175,078    |       | 20,625     |       |
| Loss of Unconsolidated  Subsidiaries                                    |       | 244,673    |       | 39,430     |       |
| Change in  Current Assets and Liabilities,                              |       |       |       |       |       |
| (Increase)  Decrease in Restricted Cash                                 |       | 2,656      |       | 199,491    |       |
| (Increase)  Decrease in Receivables                                     |       | 411,288    |       | (191,320   | )          |
| (Increase)  Decrease in Inventories                                     |       | (24,933    | )          | 6,441      |       |
| (Increase)  Decrease in Prepaid Expenses                                |       | (14,360    | )          | (127,060   | )          |
| (Increase)  Decrease in Other Current Assets                            |       | (42,849    | )          |       |       |
| (Increase)  Decrease in Deferred Tax Asset                              |       | 573,000    |       | 269,000    |       |
| Increase  (Decrease) in Accounts Payable                                |       | (96,067    | )          | (1,004,506 | )          |
| Increase  (Decrease) in Accrued Expenses                                |       | (103,434   | )          | 189,179    |       |
| Increase  (Decrease) in Accrued Interest Payable                        |       | (11,625    | )          | (92,223    | )          |
| Net Cash  Provided By Operating Activities                              |       | $          | 4,610,466  |       | $          | 2,172,172 |   |
|                                                                    |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                   |       |       |       |       |       |
| Purchase of  Property and Equipment                                     |       | (426,927   | )          | (606,751   | )          |
| Payment of  Deposit                                                     |       | (728       | )          | (1,126     | )          |
| Payment of  Capitalized License                                         |       | —     |       | (196,542   | )          |
| Payments to  Related Parties                                            |       | —     |       | (457,816   | )          |
| Conversion of  Consolidated to Uncosolidated Subsidiary                 |       | —     |       | (19,185    | )          |
| Investment in  Unconsolidated Subsidiary                                |       | (1,000,326 | )          | (2,774,744 | )          |
| Net Cash Used In  Investing Activities                                  |       | $          | (1,427,981 | )          | $          | (4,056,164 | ) |
|                                                                    |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                   |       |       |       |       |       |
| Net Payments on  Short-Term Notes Payable                               |       | $          | —     |       | $          | (433,839 | ) |
| Proceeds from Long-Term  Borrowings                                     |       | —     |       | 2,500,000  |       |
| Principal  Payments on Long-Term Borrowings                             |       | (2,675,826 | )          | (853,989   | )          |
| Proceeds from  Investors in Consolidated Subsidiary - Minority Interest |       | —     |       | 1,167,408  |       |
| Proceeds from  Issuance of Common Stock                                 |       | —     |       | 24,001     |       |
| Proceeds from  Issuance of Common Stock and Exercise of Warrants        |       | 12,000     |       |       |       |
| Settlement of  Convertible Subordinated Debentures                      |       | —     |       | (75,000    | )          |
| Payments for  Liabilities Owed to Related Parties                       |       | (110,000   | )          | —     |       |
| Payment of  Deferred Financing Costs                                    |       | (72,544    | )          |       |       |
| Net Cash Provided  (Used) by Financing Activities                       |       | $          | (2,846,370 | )          | $          | 2,328,581 |   |
|                                                                    |       |       |       |       |       |
| Net Increase in  Cash and Cash Equivalents                              |       | 336,115    |       | 444,589    |       |
|                                                                    |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS                                              |       |       |       |       |       |
| Beginning of  Period                                                    |       | 1,195,145  |       | 750,556    |       |
| End of Period                                                           |       | $          | 1,531,260  |       | $          | 1,195,145 |   |
|                                                                    |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION                       |       |       |       |       |       |
| Interest Paid                                                           |       | $          | 1,006,812  |       | $          | 886,135 |   |
| Income Taxes  Paid                                                      |       | $          | 22,506     |       | $          | 197 |   |
|                                                                    |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |       |       |       |       |
|                                                                    |       |       |       |       |       |
| Capital Assets Acquired  with Acounts Payable                           |       | $          | 7,303      |       | $          | 25,303 |   |
| Conversion of Accounts Payable to Long-Term Debt                        |       | $          | —     |       | $          | 460,324 |   |

 

See Notes to ConsolidatedFinancial Statements

F-5

----

 

**SOUTHWESTCASINO CORPORATION**

**Consolidated Statements ofChanges in Stockholders’ Equity**

**For theYears Ended December 31, 2006 and 2005**
| ** **                                                        | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **               | ** ** | ** **   | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------------|------------|--------------|------------|
| ** **                                                        | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Additional**           | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Paid-in Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **               | ** ** | ** **   | ** ** | ** ** | ** ** |
| **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 upon Exercise of Warrants               |       | 200,000               |       | 200        |       | 23,800                   |       |         |       | 24,000 |   |
|                                                              |       |                  |       |       |       |                     |       |         |       |   |   |
| Stock-based  Compensation Expense Related to Warrants             |       |                  |       |       |       | 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 |   |
|                                                              |       |                  |       |       |       |                     |       |         |       |   |   |
| Issuance of  Common Stock upon Exercise of Warrants               |       | 100,000               |       | 100        |       | 11,900                   |       |         |       | 12,000 |   |
|                                                              |       |                  |       |       |       |                     |       |         |       |   |   |
| Stock-based  Compensation Expense Related to Options and Warrants |       |                  |       |       |       | 175,078                  |       |         |       | 175,078 |   |
|                                                              |       |                  |       |       |       |                     |       |         |       |   |   |
| Net Income                                                        |       |                  |       |       |       |                     |       | 1,157,211    |       | 1,157,211 |   |
|                                                              |       |                  |       |       |       |                     |       |         |       |   |   |
| **BALANCE December 31, 2006**                                |       | 19,688,656            |       | $          | 19,689     |                     | $          | 17,239,894   |       | $ | (9,702,835 | ) | $ | 7,556,748 |   |

 

See Notes to ConsolidatedFinancial Statements

F-6

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

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

Southwest CasinoCorporation

Southwest Casino andHotel Corp. is the primary, wholly-owned operating subsidiary of SouthwestCasino Corporation and was the parent company until the July 2004 reorganizationthat resulted in the 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.”  The Company has operated in thegaming industry since formation.

On July 22, 2004,Southwest Casino and Hotel Corp. merged with Lone Moose AcquisitionCorporation, a wholly-owned subsidiary of Lone Moose Adventures, Inc., a Nevadacorporation.  Lone Moose AcquisitionCorporation was formed solely for the purpose of completing ourreorganization.  Southwest Casino andHotel Corp. was the surviving corporation in that merger and became awholly-owned subsidiary of Lone Moose Adventures, Inc., which changed its nameto Southwest Casino Corporation.  The reorganizationrepresented a recapitalization of Southwest Casino Corporation with accountingtreatment similar to that used in a reverse acquisition, except that nogoodwill or intangible 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 CasinoCorporation, through its wholly-owned subsidiaries, operates three casinos inCripple Creek, Colorado, manages Native American gaming facilities undercontractual agreements, and offers and has provided consulting services forcasinos.  Southwest Casino Corporation’soperations include the following consolidated and unconsolidated subsidiaries:

Southwest Casino andHotel Corp.

Southwest Casino andHotel Corp. was formed in 1992 and provides management and consulting servicesfor casinos under contractual agreements and operates Uncle Sam’s Casino inCripple 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 both 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.

North Metro HarnessInitiative, LLC (Unconsolidated)

North Metro HarnessInitiative, LLC (North Metro) (a development stage Minnesota limited liabilitycompany) was formed on June 16, 2003 for the purpose of developing, owning, andoperating a harness racetrack and card room north of Minneapolis, Minnesota, inAnoka County.  North Metro was issuedlicenses to own and operate the racetrack by the Minnesota Racing Commission onFebruary 16, 2005.  Southwest CasinoCorporation owns a 50% interest in North Metro.

SW Missouri, LLC 

SW Missouri, LLC wasformed on May 25, 2004.  Its sole assetis a 30% membership interest in Southwest Missouri Gaming, LLC.

Southwest MissouriGaming, LLC (unconsolidated)

SW Missouri, LLC owns a30% membership interest in Southwest Missouri Gaming, LLC, which was formedMarch 29, 2004.  This entity had noactivities in 2005 or 2006.

Southwest CharitableEnterprises, LLC

On February 22, 2006, theCompany formed a new subsidiary, Southwest Charitable Enterprises, LLC, aMinnesota limited liability company. Southwest is the sole member of Southwest Charitable Enterprises, LLC,which will pursue business opportunities in charitable gaming.  In December 2006, the subsidiary’s name waschanged to Southwest Eagle, LLC. Southwest Eagle will be used to complete the acquisition of a casino inColorado, see Note 20.

F-7

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

**NOTE 2 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

Principles ofConsolidation

The accompanyingconsolidated financial statements include the accounts of Southwest CasinoCorporation, its wholly-owned subsidiaries (referred to as “the Company” or “Southwest”),and North Metro Harness Initiative, LLC, which is accounted for as an equityinvestment, see Note 5.  All materialinter-company transactions and balances have been eliminated in consolidation.

Basis of Accounting

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

Use of Estimates

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the period.  Actual results coulddiffer from those estimates.

Cash Equivalents

The Company considers allhighly liquid debt instruments purchased with a maturity of three months orless when purchased to be cash equivalents.

Revenue Recognition

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

Receivables and CreditPolicies

Accounts receivable arecarried at face value less an estimated allowance for doubtful accounts. Thecarrying amount of receivables is reduced by a valuation allowance thatreflects management’s best estimate of the amounts that will be collected.  Management reviews all trade receivablebalances that exceed 30 days from the invoice date and, based on an assessmentof the current creditworthiness, estimates the portion, if any, of the balancethat will not be collected.

Net Income Per Share —Basic and Diluted

Net income per share iscomputed by dividing the net income for the period by the weighted averagenumber of common shares outstanding during the period presented.  Basic 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 consistprincipally of food and beverage products and gift shop merchandise.  Inventories are carried at cost, determinedunder the first-in, first-out (FIFO) method.

Concentrations of CreditRisk

The Company’s cashbalances maintained in bank depositories periodically exceed federally insuredlimits.

Advertising Costs

The Company expensesadvertising costs as incurred. Advertising expense for the years ended December 31, 2006 and 2005 wasapproximately $343,000 and $393,000, respectively.

F-8

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Employee Benefit Plan

The Company hasestablished a defined contribution profit sharing plan for its eligibleemployees.  To be eligible, an employeemust be 21 years of age and have completed one year of service.  Contributions to the plan are made at thediscretion of management, based on results of operations from year toyear.  No discretionary contributionswere made during 2006 or 2005.

The Company has adopted a401(k) retirement plan.  The planprovides for employee pre-tax salary deferrals of up to 10% of a participant’scompensation (not to exceed federal limits) and a matching contribution by the Company— dollar for dollar up to 3% and fifty cents per dollar up to 5% of theparticipant’s compensation. Employees are eligible for the plan if they havecompleted one year of service, as defined in the plan, and are at least 21years old.  A participant is fully-vestedafter one year of service, as defined in the plan.  The Company’s matching contribution made andexpensed for the years 2006 and 2005 was $109,383 and $93,889, respectively.

Property and Equipment

Property and equipmentare carried on the books at cost. Depreciation on property and equipment is calculated using thestraight-line method over their estimated useful lives, which range from 3 to10 years.  Upon sale or retirement, thecost and related accumulated depreciation are eliminated from the respectiveaccounts, and the resulting gain or loss is included in the income statement.

Repair and maintenancecharges, which do not increase the useful lives of the assets, are charged toexpense as incurred.

Depreciation expense was $934,840 and $1,122,920 forthe years ended December 31, 2006 and 2005, respectively.

Leaseholds attributable to the lease in Note 10**have been capitalized in accordance with generally accepted accounting principlesand are being amortized over the length of the lease, 20 years, using thestraight-line method.

Amortization expense for these leaseholds was $725,340for each of the years ended December 31, 2006 and 2005.   Total accumulated amortization of leaseholdswas $5,897,291 and $5,171,951 at December 31, 2006 and 2005, respectively.

Long-lived assets to beheld and used are tested for recoverability whenever events or changes incircumstances indicate that the related carrying amount may not be recoverable.When required, impairment losses on assets to be held and used are recognizedbased on the fair value of the asset. Certain long-lived assets to be disposedof by sale are reported at the lower of carrying amount or fair value less costto sell.

Income taxes

The Company accounts for income taxes under the provisionsof Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes (SFAS No. 109).*Under this method, the Company determines deferred tax assets and liabilitiesbased upon the difference between the financial statement and tax bases ofassets and liabilities using enacted tax rates in effect for the year in whichthe differences are expected to affect taxable income. The tax consequences ofevents recognized in the current year’s consolidated financial statements areincluded in determining income taxes currently payable. However, because taxlaws and financial accounting standards differ in their recognition andmeasurement of assets, liabilities, equity, revenue, expenses, gains andlosses, differences arise between the amount of taxable income and pretaxfinancial income for a year and between the tax bases of assets or liabilitiesand their reported amounts in the consolidated financial statements.

Because it is assumed that the reported amounts ofassets and liabilities will be recovered and settled, respectively, adifference between the tax basis of an asset or a liability and its reportedamount in the balance sheet will result in a taxable or a deductible amount insome future years when the related liabilities are settled or the reportedamounts of the assets are recovered, hence giving rise to deferred tax assetsand liabilities. The Company must then assess the likelihood that deferred taxassets will be recovered from future taxable income and, to the extentmanagement believes that recovery is not likely, they must establish avaluation allowance. The Company recorded a 100 percent valuationallowance against all deferred income tax assets as of December 31, 2006 and apartial valuation allowance at December 31, 2005.  See Note 13.

Organization and start-upcosts

Organization and start-upcosts are expensed as incurred. Organization costs consist of amounts related to the formation of acompany.  Start-up costs consist ofamounts incurred during the development stage related to the operation,management and development of a company, which do not qualify as a capitalizedcost.  For federal and state income taxpurposes the Company elected to capitalize and amortize start-up costs pursuantto Internal Revenue Code (IRC) Section 195(B).

F-9

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Stock basedcompensation

Effective the beginning of fiscal year 2006, theCompany adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004) (“SFAS 123(R)”), *Share-Based Payment*, which is a revision of SFAS 123, *Accounting for Stock-Based Compensation*.The Company implemented SFAS 123(R) using the modified prospective method,which does not result in the restatement of previously issued financialstatements.  In all prior periods, the Company accounted for stock-basedcompensation awards to employees using the intrinsic value method prescribed byAPB Opinion No. 25 and, as such, recognized no compensation cost for employeestock options, but rather disclosed the related pro forma effect on net loss,see Note 11.

Operating segments

The Company hassegregated its activities into three operating segments based on operating andmanagement characteristics related to its sources of revenue or basis foraccumulating assets or expenses.  Thesegments are defined as casino operations, casino management for unrelatedparties, and project development activities. Separate operations are aggregated based on the above general segmentdescriptions.

Legal defense costs

The Company does not accrue for estimated future legaland related defense costs, if any, to be incurred in the event of any pendingor threatened litigation or other disputed matters but rather, records such as periodcosts when the services are rendered.

Other comprehensive income

The Company does not have amounts to be disclosed asother comprehensive income.

Reclassifications

Certain minor reclassifications to previously reportedamounts, have been made to conform to the current year presentation.

New accounting standards 

Effective January 1, 2006, the company adopted SFASNo. 123(R) using the modified prospective method.  See Note 11 forinformation regarding stock-based compensation.

The Financial Accounting Standards Board (“FASB”)released SFAS No. 156, “Accounting*forServicing of Financial Assets*,” to simplify accounting forseparately recognized servicing assets and servicing liabilities. SFAS No. 156amends SFAS No. 140, “Accounting*forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities*.” SFAS No. 156 permits an entity to choose either the amortization method or thefair value measurement method for measuring each class of separately recognizedservicing assets and servicing liabilities after they have been initiallymeasured at fair value.  SFAS No. 156 applies to all separately recognizedservicing assets and liabilities acquired or issued after the beginning of anentity’s fiscal year that begins after September 15, 2006. SFAS No. 156 will beeffective for the Company’s fiscal-2007 year.  The company does notbelieve the adoption of SFAS No. 156 will have a material impact on the company’sconsolidated financial position or results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years. This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. We are currently evaluating the potential impact ofthis statement.

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”(Interpretation No. 48). Interpretation No. 48 clarifies the accounting foruncertain tax positions in accordance with SFAS 109, “Accounting for IncomeTaxes.” Pursuant to Interpretation No. 48, the Company will be required torecognize in its financial statements the largest tax benefit of a tax positionthat is “more-likely-than-not” to be sustained on audit, based solely on thetechnical merits of the position as of the reporting date. Only tax positionsthat meet the “more-likely-than-not” threshold at that date may be recognized.The term “more-likely-than-not” means a likelihood of more than 50 percent.Interpretation No. 48 also provides guidance on new disclosure requirements,reporting and accrual of interest and penalties, accounting in interim periodsand transition. The cumulative effect of initially applying Interpretation No.48 will be recognized as a change in accounting principle as of the date ofadoption. We have begun to evaluate the impact of applying this interpretationas of January 1, 2007, the effective date of the interpretation for theCompany. We do not expect Interpretation No. 48 to have a material impact onour financial position, results of operation or cash flows.

F-10

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

In September 2006, the SEC issued Staff AccountingBulletin (SAB) 108, which expresses the Staff’s views regarding theprocess of quantifying financial statement misstatements. The bulletin waseffective at fiscal year end 2006. The implementation of this bulletin had noimpact on the Company’s results of operations, cash flows or financialposition.

In February 2007, theFASB released SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115*” This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007, providedthe entity also elects to apply the provisions of FASB Statement No. 157, FairValue Measurements.  The Company isevaluating the impact of this statement.

Management FinancialPlans 

The Company has completedtwo closings on an equity financing subsequent to year-end, see Note 24.  The net proceeds from the sale of securitieswere approximately $4 million.  As aresult of the financing agreement entered into by North Metro, the Company willbe required to fund an additional approximately $2.35 million subsequent toDecember 31, 2006 and prior to the loan closing, see Note 5 — “commitments”.  The Company’s management contract with theCheyenne and Arapaho Tribes expires on May 19, 2007.  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, see Note 24,which discusses the recent Tribal Council meeting and status of the contractextension.  The Company has also recentlyentered into an asset purchase agreement (referred to as the “acquisition”);see Note 20, which requires the Company to raise additional debt financing.  The Company has executed a Term Sheet, amendedMarch 20, 2007 and received a credit confirmation from a lender for therequired financing.  See Note 24.  The Company will be required to seekadditional debt or equity financing beyond twelve months if the managementcontract terminates.  We may also seekdebt and equity financing at various times throughout the year related tovarious initiatives.

**NOTE 3 —PROMOTIONALALLOWANCES**

Revenuedoes not include the retail amount of rooms, food, and beverage providedgratuitously to customers, which was $1,155,521 and $1,115,953 in 2006 and2005, respectively.

**NOTE 4 —INTANGIBLE ASSETS AND CASINO MANAGEMENT AGREEMENT**

|                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Casino management  contract rights |       | $        | 212,420    |     | $          | 722,229 |   |
| Loan Costs                         |       | 56,618   |       | 222,501  |       |
| Total                              |       | $        | 269,038    |     | $          | 944,730 |   |

 

The Company entered intoan agreement with the Cheyenne and Arapaho Tribes of Oklahoma (CATO) formanagement of its casinos located in Oklahoma, which was to expire on May 19,2004.  In exchange for extending the contractthrough May 19, 2007, the Company has transferred title of a tract of land toCATO.  The exchange took place in2003.  Since the asset transfer isrelated to the extension agreement for management services, the cost of theland is being amortized as Casino management contract rights over the term ofthe agreement.

Management revenues of$5,865,680 and $4,911,105 were earned related to the agreement with CATO forthe years ended December 31, 2006 and 2005, 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, see Note 24.

Amortization expense ofthe contract rights for the years ended December 31, 2006 and 2005 was $509,810and $509,805, respectively.  In October2005 the Company entered into a loan agreement with Crown Bank. Amortizationexpense on the loan costs associated with the Crown Bank Note for the yearsended December 31, 2006 and 2005 was $169,423 and $28,770, respectively.  See Note 10 for a discussion of this loan.

F-11

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Amortizationexpense for future years is estimated as follows:

| Year Ended December 31, | ** ** | **Contract Rights** | ** ** | **Loan Costs** | ** ** |
|----------------------------------------|------------|--------------------------|------------|---------------------|------------|
|                                   |       |                     |       |                |       |
| 2007                                   |       | $                        | 212,420    |                | $          | 56,618 |   |
|                                        |            |                          |            |                     |            |  |  |

 

**NOTE5—UNCONSOLIDATED SUBSIDIARY**

**NorthMetro Harness Initiative, LLC (“North Metro”)**

*Organization:*

North Metro (adevelopment stage Minnesota Limited Liability Company) was formed on June 16,2003 for the purpose of developing, owning, and operating a horse race trackand card room north of Minneapolis, Minnesota, in Anoka County.  North Metro has purchased land and obtainedzoning, permitting and regulatory approvals for the proposed operations.  On June 8, 2004, Southwest Casino and HotelCorp. (“Southwest”) sold a 50% interest in the Company to MTR — Harness Inc. (“MTR”),a wholly owned subsidiary of MTR Gaming, Inc. for $10,000, and a commitment tomake additional contributions as discussed below.

Under the North MetroMember Control Agreement dated June 8, 2004, MTR was required to contribute$7,500,000, upon satisfaction of certain conditions and Southwest was requiredto contribute $2,500,000.  The amountscontributed in excess of the amounts agreed to under the Member ControlAgreement were agreed upon by Southwest and MTR as managing members of theCompany.  These amounts were contributedon an equal basis.

As specified in theCompany’s Member Control Agreement, membership interests include financialrights, governance rights and voting rights. Voting rights are assigned to members based on their proportionatevoting interest.  Financial rightsinclude allocation of net profits, losses and distributions.  Governance rights include all of a member’srights other than financial rights and the right to assign financialrights.  A member of the Company may onlyassign governance and voting rights to another party with the consent of theremaining members, which consent may be withheld in any member’s sole andabsolute discretion.  If a member assignsmembership rights to another party and the other member or members do notconsent to the assignee becoming a substitute member, the assignee will only beentitled to receive those distributions and allocations that would have beenmade to the assigning member and the assignee will not have any voting orgovernance rights.  As of December 31,2006, Southwest and MTR each hold 50% of the voting rights. Financial andgovernance rights are determined in accordance with the Member ControlAgreement dated June 8, 2004.

Net income, losses anddistributions are allocated on a 50/50 basis to members in accordance with themember control agreement.

North Metro’s MemberControl Agreement requires North Metro to make tax distributions to members ona quarterly and annual basis equal to 40% of the estimated taxable income ofthe company for the applicable time period, with annual tax distributionsreduced by the amount of any quarterly tax distributions made during the taxyear.  Tax distributions to the membersshall be made in proportion to each member’s respective share of the taxableincome of North Metro.

North Metro was formallyorganized as a limited liability company on June 16, 2003.  Prior to that date, agreements wereconsummated and amounts related to the business purpose of the Company weredirectly incurred and paid by Southwest or entities related to Southwest.

*Accounting for North Metro:*

The Company evaluates whether North Metro should betreated as a variable interest entity (“VIE”) subject to consolidation duringthe applicable reporting periods under Financial Accounting Standards BoardInterpretation 46(R) — *Consolidation of VariableInterest Entities (as amended*).

Due to contributions of capital made by MTR as ofOctober 20, 2005, in accordance with the North Metro Member Control Agreementdated June 8, 2004, the Company no longer provides financial support in excessof its 50 percent

F-12

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

decision making power. As of December 31, 2006, theCompany has provided approximately 39 percent of the financial support, butstill retains its 50 percent decision making power.  Therefore, since October 20, 2005, theCompany has accounted for its investment in North Metro on the equitymethod.  The Company’s investment inNorth Metro as of December 31, 2006 and 2005 was $5,054,020 and $4,298,367,respectively, which is recorded on the Company’s consolidated balance sheets.

Until October 20, 2005, the Company had provided approximately 67percent of North Metro’s financial support, but held only 50 percent of theNorth Metro voting power.  Because theCompany would absorb financial losses of North Metro that were disproportionateto its 50 percent decision making power, the Company determined that NorthMetro was a VIE subject to consolidation until October 20, 2005.

On October 20, 2005, MTRmade capital contributions of $5,760,043 to North Metro.  Of these contributions, $4,679,913 wasrequired to fulfill MTR’s capital commitments to North Metro under the MemberControl Agreement dated June 8, 2004. The remaining $1,080,130 of these capital contributions was an additionalcontribution agreed upon by Southwest and MTR as managing members of NorthMetro.  These capital contributions byMTR resulted in MTR’s aggregate capital contributions to North Metro exceedingfinancial contributions from Southwest to North Metro.  Because it was no longer true that theCompany would absorb financial losses in excess of its decision making power,North Metro was no longer consolidated with Southwest.  As such since October 20, 2005, financialresults are reported as income (loss) from an unconsolidated subsidiary by theCompany under the equity method of accounting.

On October 20, 2005, theCompany also made capital contributions of $2,330,130 to North Metro.  Of these capital contributions, $1,250,000was required to fulfill Southwest’s capital commitments to North Metro underthe Member Control Agreement dated June 8, 2004.  The remaining $1,080,130 of these capitalcontributions was an additional contribution agreed upon by Southwest and MTRas managing members of North Metro.

North Metro used thesecapital contributions to complete the purchase of three separate parcels ofland necessary to build and construct the harness track and card club in AnokaCounty, Minnesota.  The total cost ofland acquired by North Metro is approximately $10.4 million as of December 31,2006.

As of December 31, 2006,the Company has contributed $4,719,779 in consideration of its membershipinterests in North Metro.  In addition,the Company has advanced $1,656,051 for costs related to North Metro that theCompany paid, and which exceeded the Company’s agreed pre-license capitalcontribution of $1,000,000, before the Minnesota Racing Commission grantedracing licenses to North Metro.  Theseadvances, together with interest, will only be paid out of first available cashfrom operations (and then after certain distributions to the members for incometax purposes).  The pre-licensingadvances to North Metro are characterized as a membership preferred contributionmade by the Company under the North Metro Harness Initiative, LLC MemberControl Agreement dated June 8, 2004. The Company treats these payments as an additional investment in NorthMetro.  The Company has combined the advances(accounted for as a membership preferred contribution) and its capitalcontributions 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 endedDecember 31, 2005, the Company recorded $407,382 of project expenses related toNorth Metro in its consolidated financial statements relating to the periodJanuary 1, 2005 to October 20, 2005 (the period North Metro was consolidatedwith the Company).

For the years ended December 31, 2006 and 2005, theCompany has recorded a loss from this unconsolidated subsidiary, net of taxbenefit of $182,873 and $39,430.

F-13

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

The following representssummary financial information for North Metro as of December 31, 2006 and 2005and for the twelve months ended December 31, 2006 and for the period fromOctober 20, 2005 to December 31, 2005:

|                                                         | ** ** | ** **                       | ** ** | **As of and For** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **As of and For** | ** ** | **the Period**              | ** ** |
| ** **                                              | ** ** | **The Year**                | ** ** | **From October**            | ** ** |
| ** **                                              | ** ** | **ended**                        | ** ** | **20, 2005 to**        | ** ** |
| ** **                                              | ** ** | **December 31,**            | ** ** | **December 31,**            | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                         | ** ** |
| North Metro:                                            |       |                             |       |                             | ** ** |
| Total assets                                            |       | $                                | 15,587,187 |                             | $          | 12,718,024 | ** ** |
| Total  liabilities                                      |       | 1,411,109                        |       | 53,245                           | ** ** |
| Results of operations:                                  |       |                             |       |                             | ** ** |
| Revenues                                                |       | $                                | —     |                             | $          | — | ** ** |
| Lobbying  expenses                                      |       | 126,000                          |       | 20,000                           |       |
| License fees —  Minnesota Racing Commission        |       | 248,907                          |       | 44,987                           |       |
| Other expenses                                          |       | 135,722                          |       | 14,868                           |       |
| Total expenses                                          |       | 510,629                          |       | 79,855                           |       |
| Interest Income                                         |       | 21,280                           |       | —                           |       |
| Net (loss)                                              |       | $                                | (489,349   | )                                | $          | 79,855 | ) |
|                                                    |       |                             |       |                             |       |
| Southwest Casino  Corporation:                          |       |                             |       |                             |       |
| 50% share of net  (loss)                                |       | (244,675                         | )          | (39,928                          | )          |
| Net tax benefit                                         |       | 61,802                           |       | 498                              |       |
| (Loss) of  unconsolidated subsidiary net of tax benefit |       | $                                | (182,873   | )                                | $          | (39,430 | ) |

*Commitments of North Metro:*

On February 22, 2006 theColumbus Township Board of Supervisors approved a Development Agreement betweenNorth Metro and Columbus Township.  ThisDevelopment Agreement, which incorporates the terms of the Conditional UsePermit issued by Columbus Township, formalizes North Metro’s agreement to makecertain public improvements, including a township road and water and sewerutilities, on the site of its proposed harness racetrack and card room.  North Metro will construct and pay for theseimprovements and, once completed, the improvements will become the property ofthe Township.  The cost of these publicimprovements is included in North Metro’s estimates of overall developmentcosts and will be financed as part of North Metro’s overall financing for theproject.  Under the DevelopmentAgreement, North Metro is required to post a letter of credit for the benefitof Columbus Township in an amount equal to 125% of estimated $1.9 million costof these public improvements before it can receive building permits for theproject.

On August 21, 2006, NorthMetro entered into a Development Agreement with the Town of Columbus wherebyNorth Metro, upon commencement of operations, will make annual payments to theTown of Columbus in the amount of $88,300.

North Metro entered intoan Improvement Agreement with Columbus Township and Patricia, Mary and JessePreiner, the owners of the real estate immediately south of the site on whichNorth Metro plans to build its harness racetrack and card room.  Under this Agreement, Columbus Township willconstruct a road and utilities through the Preiner property that will connectto the road and utilities that North Metro plans to build on its property andserve the harness track and card room. The Township will pay for this construction through municipal bonds andthen assess the cost of those bonds to the Preiner property and the property onwhich North Metro intends to develop the racetrack and card room.  The Columbus Township Board of Supervisorsapproved this Agreement on March 22, 2006. The Columbus City Council approved an amendment to this agreement onDecember 13, 2006.  Under the ImprovementAgreement, as amended, the Preiners will donate the land needed for the roadand utilities to Columbus Township and pay $146,805 of the construction coststhrough assessments (plus up to an additional $55,000 in costs if the fillingof certain wetlands on the Preiner property requires mitigation).  North Metro will pay all remaining costs, upto $1,513,705 to construct the road and utilities through assessments on itsproperty.  The estimated cost of the roadand utility construction is $1.66 million. Assessed costs will be paid by North Metro over a 15-year period.

F-14

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

North Metro has enteredinto an agreement with LaSalle Development Group, Ltd. (“LaSalle”) for thedevelopment of the land, building and related property for the race track andcard room.  Fees related to the agreementtotal 3% of the project cost, not to exceed $750,000, which is defined as thetotal development cost less the cost to purchase the land.  The agreement began on May 1, 2003, andcontinues until the completion of the project, unless earlier terminated.  Fees are payable at a rate of $6,000 permonth, plus applicable out of pocket expenses, beginning on May 1, 2003.  Upon the start of construction, two thirds ofthe 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.  Thomas LaSalle, the principalof LaSalle Development Group, is a shareholder and warrant holder of SouthwestCasino Corporation, which owns a 50% membership interest in North Metro.   North Metro paid LaSalle approximately$66,000 in fiscal year 2006 and paid approximately $277,000 from June 16, 2003through December 31, 2006.

North Metro has enteredinto an agreement with a general contractor to provide construction managerservices for the construction of North Metro’s harness race track and cardclub.  As per the terms of the agreementthe construction manager will receive a fee of 2% of the guaranteed maximumprice (“GMP”) of the construction contract.  The GMP has not been finalized as of December 31, 2006.  The contract allows for termination of thecontract by North Metro and the contractor in accordance with the agreement.

North Metro has enteredinto an agreement with a company to provide architectural and design servicesrelated to North Metro’s harness race track and card club.  The total fee for these services is estimatedto be approximately $1.5 million of which North Metro has incurredapproximately $1.3 million as of December 31, 2006.

North Metro has enteredinto consulting agreements with non-related parties to monitor legislation andperform lobbying activities related to establishing and developing the racetrack and card room.  The agreements aregenerally on a month-to-month basis, and may be terminated by either party tothe agreement.  North Metro has monthlyobligations related to these agreements of approximately $18,000 during thelegislative session and $8,000 for the balance of the year.

Payments to vendors madedirectly by Southwest and/or MTR are recognized as additional capitalcontributions to North Metro when paid. North Metro’s operations are dependent on the continued financialsupport of Southwest and MTR.  Southwestand MTR will be required to contribute additional equity per the terms of acommitment letter entered into in January 2007, as discussed below.

In January 2007, NorthMetro entered into commitment letter that provides for a senior secured creditfacility in the amount of $41.7 million. The commitment letter requires the members to contribute equity of $20.8million on or before the closing date of the loan.   The total cost of the project is expected toapproximate $62 million.  As of December31, 2006 the members had contributed $16,095,609, which includes the membershippreferred contribution made by Southwest of $1,656,051.  The additional amount to be contributed bythe members of approximately $4.7 million will be contributed equally(Southwest’s share will be approximately $2.35 million).  In December 2006, North Metro paid a work feeof $100,000 and an expense deposit of $150,000 to the lender in connection withproviding the commitment letter and final loan facility.  North Metro has recorded the $250,000 asdeferred financing costs on the balance sheet as of December 31, 2006.  Per the terms of the commitment letter, NorthMetro also paid a non-refundable commitment fee of $625,500 and an expensedeposit in the amount of $200,000 on January 24, 2007.

Theclosing of the loan as described in the commitment letter is conditioned onsatisfactory due diligence by the lender, the members contributing equity of$20.8 million, and other customary closing conditions.

Thefollowing describe the loan facility as described in the commitmentletter.  The term of the loan is sevenyears with advances drawn in multiple draws thereafter on or prior to March 31,2008 (“the construction period”). Principal amortization in quarterly installments in the amount ofapproximately $104,000 will begin on the last day of the first full calendarquarter after the project opens.   Untilthe project is open, as defined in the agreement, the interest rate is basedupon LIBOR plus 6% and after the project opens it will be reduced by 1.5%.  Interest is payable monthly in arrears.  Upon closing, a closing fee of $525,500,which is net of the fees previously paid of $725,500, will be due and payablein full (the total closing fee under the commitment letter is $1,251,000, whichhas been reduced by the commitment fee ($625,500) and the work fee ($100,000)that were paid previously and will apply toward the closing fee).  At closing an administrative fee of $250,000will be due and payable in full.  Anadministrative fee of $250,000 will be due on each anniversary date of the loanwith the amount being reduced to $150,000 once the project is open as definedin the agreement.  The facility will alsoinclude an unused fee of 4.5% on the balance of the unused credit facilitypayable monthly in arrears.   In additionto the principal amortization, North Metro will be required to make an annualprepayment in an amount equal to 50% of the excess cash flows, as defined inthe agreement.  The facility is securedby all real and personal property of North Metro.  The facility is

F-15

----

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

nonrecourse to the members of North Metro. The facility will also contain customary covenants.  Voluntary prepayment of the loan is permittedafter the second anniversary of the loan at which time there are certainprepayment fees and exit fees, as defined in the agreement.

On February 23, 2007,North Metro entered into an extension letter, extending the closing date in thecommitment letter to March 23, 2007 from the original date of February 23,2007.  North Metro paid a fee of $208,500for this extension, of which $104,250 will be applied to and further reduce theamount of the closing fee due at closing.

*Legal Proceeding - North Metro*:

North Metro intervened inlitigation between an anti-gambling group and the Minnesota RacingCommission.  This litigation began in RamseyCounty District Court in December 2004. The anti-gambling group alleged that members of the Minnesota RacingCommission violated Minnesota’s “open meeting” law while considering NorthMetro’s application for licenses to build and operate a harness racetrack andcard room in Columbus Township, Anoka County, Minnesota.  In June 2005, the District Court issued asummary judgment order dismissing plaintiff’s claims and in favor of theMinnesota Racing Commission and North Metro. On June 6, 2006 the Minnesota Court of Appeals affirmed the decision ofthe District Court to dismiss the case. The plaintiffs did not file a timely request for review with theMinnesota Supreme Court, concluding this lawsuit in July 2006.

Inaddition, on March 10, 2005, the anti-gambling group filed a petition with theMinnesota Court of Appeals appealing the Minnesota Racing Commission’s grant ofClass A and Class B licenses to the Company to develop and operate the harnessracetrack and card club.  On March 28,2006, the Appellate Court affirmed the decision of the Minnesota RacingCommission to grant licenses to North Metro. On June 20, 2006, the Minnesota Supreme Court issued an order denyingfurther review of that decision and concluded the lawsuit.

**NOTE 6 —SHORT-TERM NOTES PAYABLE**

On October 20, 2005, theCompany entered into an agreement to borrow up to $450,000 under a revolvingline of credit.  The interest rate isPrime +1%, not less than 7.5%, due April 30, 2007.  Currently the interest rate is 9.25%. Thenote is secured by the majority of the Company’s assets.  The loan is also guaranteed to the extent of$300,000 by three principal officers of the Company.  See Discussion of Warrants Issued — Note12.  As of December 31, 2006 and 2005 thebalance outstanding is $446,292.

**NOTE 7 — EARNINGS PER SHARE**

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

| Year ended December 31, 2006: | ** ** | **Net Earnings  (Numerator)** | ** ** | **Weighted Average  Equity  (Denominator)** | ** ** | **Earnings  Per Share** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|
|                                              |       |                               |       |                                             |       |                         |       |
| Basic Earnings  per Share                         |       | $                                  | 1,157,211  |                                             | 19,675,779 |                         | $          | .06 |   |
| Effect of  Dilutive Securities:                   |       |                               |       |                                             |       |                         |       |
| Outstanding Options and Warrants                  |       | —                             |       | 975,552                                          |       |                         |       |
|                                              |       | $                                  | 1,157,211  |                                             | 20,651,331 |                         | $          | .06 |   |

 

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

| 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 |   |

 

**NOTE 8 — STOCKHOLDERS’ EQUITY**

The Company hasauthorized the issuance of up to 75,000,000 shares of common stock with a parvalue of $.001 and up to 30,000,000 shares of undesignated preferred stock witha par value of $0.001 per share with preferences

F-16

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

and designationsdetermined by the Board of Directors.  Asof December 31, 2006, there were no shares of preferred stock designated oroutstanding.  Each share of common stockis entitled to one vote on all matters submitted to shareholders.  Under the terms of a gaming license held by asubsidiary of the Company, the Company has amended its Articles ofIncorporation to provide that all shares of common stock are subject toredemption, at the discretion of the Board of Directors, at fair market valueif 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, modificationor non-renewal of any contract, license or franchise related to the Company’s gamingoperations.

During the years endedDecember 31, 2006 and 2005, the company issued the following shares of commonstock:

**YearEnded December 31, 2006**

On February 16, 2006, theCompany issued 100,000 shares upon exercise of warrants to purchase 100,000shares of common stock and the receipt of $12,000 in cash.

**YearEnded December 31, 2005**

On February 14, 2005, theCompany issued 22,728 shares in connection with the redemption of anoutstanding $75,000 Series A debenture.

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

On May 2, 2005, theCompany issued 75,000 shares upon exercise of a warrant to purchase 75,000shares of common stock and the receipt of $9,000 in cash.

**NOTE 9 — OPERATING LEASES**

OnMay 1, 1998, the Company entered into a five-year agreement to lease propertylocated in Cripple Creek, Colorado.  Thelease started the first day of the month that Uncle Sam’s began operations,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.

Thelease agreement includes provisions whereby the Company has the option topurchase the property for $2,000,000 plus 50% of the increase in the fairmarket value of the building as of the expiration of the initial term.  In the event of termination by the tenant, thelandlord may assess a penalty of $144,000.

TheCompany also leases office space for corporate offices.  The lease expires December 31, 2009.

Rentexpense was approximately $284,400 for the years ended December 31, 2006 and2005, respectively.

Futureoperating lease payments required as of December 31, 2006 are as follows:

| 2007  |   | $       | 284,400 |   |
|-------|--------|---------|---------|--------|
| 2008  |   | 284,400 |    |
| 2009  |   | 158,400 |    |
| Total |   | $       | 727,200 |   |

 

**NOTE 10— LONG-TERM OBLIGATIONS**

Capital Lease

On April 9, 1999, the Company entered into a 20-yearcapital lease for the land and buildings relating to The Gold Rush Hoteland Casino and Gold Digger’s Casino.  Theamount capitalized 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 is required to make additional rent payments if the net income fromthe Gold Rush and Gold Digger’s casinos exceeds certain thresholds stated inthe lease.  Because the Company ispermitted to allocate a portion of its general overhead expenses to theseoperations when calculating net income for purposes of determining additionalrent due, the Company has not been required to make additional rent payments.

F-17

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Future minimum leasepayments required under the capital leases as of December 31, 2006, are asfollows:

| 2007                                     |   | $          | 1,574,675 |   |
|------------------------------------------|--------|------------|-----------|--------|
| 2008                                     |   | 1,525,453  |      |
| 2009                                     |   | 1,266,936  |      |
| 2010                                     |   | 1,112,443  |      |
| 2010                                     |   | 1,078,535  |      |
| Thereafter                               |   | 5,958,298  |      |
| Total minimum  lease payments            |   | 12,516,340 |      |
| Less amount  representing interest       |   | (4,399,804 | )         |
| Present value of  minimum lease payments |   | 8,116,536  |      |
| Less current  portion                    |   | 861,064    |      |
| Long-term portion                        |   | $          | 7,255,472 |   |

 

**CrownBank Term Loan and IGT Note**

OnOctober 20, 2005, the Company entered into a term loan to borrow $2.5million.  The loan is secured by themajority of the Company’s assets.  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 9.25%.  The loan requiredtwelve equal monthly principal payments of $208,333 beginning April 1,2006.  The repayment period will beextended to May 31, 2008, if the Company achieves certain business goals.  The loan is guaranteed by twelve shareholdersof the Company, including three principal officers.  See Discussion of Warrants Issued — Note 12.

InOctober 2006, the Company entered into an amendment of its term loan with CrownBank.  The agreement has been amended toallow the Company to repay the remaining principal in seven equal paymentsbeginning November 1, 2006 through April 30, 2007 as opposed to the originalagreement under which the Company would have been required to repay theremaining principal in five equal principal payments through March 1,2007.  Monthly principal payments will be$148,810 as compared to the original payments of $208,333.

On December 23, 2005, the Company negotiated a loan of $460,324 to payoff outstanding payables in connection with the installation of a playertracking system at our three casinos in Cripple Creek, Colorado.  The loan is for a term of 48 months withinterest equal to the prime rate.

Future minimum principal payments required as of December 31, 2006 areas follows:

| 2007   |   | $       | 859,129   |   |
|--------|--------|---------|-----------|--------|
| 2008   |   | 115,081 |      |
| 2009   |   | 115,081 |      |
| 2010   |   | 9,590   |      |
| Total: |   | $       | 1,098,881 |   |

 

**NOTE 11 —STOCK OPTIONS**

Stock option plans:

On July 15, 2004,Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino andHotel Corp. 2004 Stock Incentive Plan that had been adopted by the company’sBoard of Directors effective June 1, 2004. Under the terms of the reorganization completed July 22, 2004, SouthwestCasino Corporation assumed the rights and obligations of Southwest Casino andHotel Corp. under this plan.  The planpermits Southwest Casino Corporation to issue incentive awards to all employeesof Southwest Casino Corporation or any of its subsidiaries and any non-employeedirectors, 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.   As of December 31, 2006, 925,000 optionswere issued and are outstanding.

In addition to theassumption of the 2004 Stock Incentive Plan, Southwest Casino Corporationassumed outstanding non-plan options to acquire shares of Southwest Casino andHotel Corp. common stock as part of its reorganization.  The Company assumed obligations in the formof stock options to issue 1,575,000 shares of its common stock at a weightedaverage price of $.62 per share.

F-18

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Valuation andExpense Information under SFAS 123(R)

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s consolidated statement of operations.  SFAS 123(R) supersedes the Company’sprevious accounting under the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*(“SFAS 123”).As permitted by SFAS 123, the Company measured compensation cost foroptions granted before January 1, 2006, in accordance with AccountingPrinciples Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees*and relatedinterpretations. Accordingly, before January 1, 2006 no accounting recognitionwas given to stock options granted at fair market value until they wereexercised. Upon exercise, net proceeds, including tax benefits realized, werecredited to equity.

The Company adoptedSFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of the Company’s fiscal year 2006. In accordance with themodified prospective transition method, the Company’s consolidated financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). The effect of the change was todecrease net earnings for the year ended December 31, 2006 by $166,703 andbasic and diluted earnings per share by $0.01, as compared to what results forthe period would have been had the intrinsic method been used. There was noshare-based compensation expense related to employee stock options and employeestock purchases recognized in the financial statements during the year endedDecember 31, 2005.

Options are granted toemployees and directors at prices equal to the market value of the stock on thedates the options are granted. The options granted have terms of 5 to 10 yearsfrom the grant date and granted options typically vest quarterly over a one tothree year period.  The fair value ofeach option is amortized into compensation expense over the period the optionvests.  We have estimated fair value ofall stock options as of the date of grant applying the Black-Scholes pricingvaluation model.  The application of thisvaluation model involves assumptions that are judgmental and sensitive in thedetermination of compensation expense. The key assumptions used in determining the fair value of options duringthe year ended December 31, 2006 were:

|                                          | ** ** | **Year Ended  December 31, 2006** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| Expected price  volatility               |       | 105% - 112                                       | %          |
| Risk-free  interest rate                 |       | 4.42% - 5.05                                     | %          |
| Weighted average  expected life in years |       | 10 years                                         |       |
| Dividend yield                           |       | 0                                                | %          |
| Pre-vesting  forfeiture rate             |       | 0                                                | %          |
| Weighted-average Fair  value             |       | $                                                | 0.61       |   |
|                                          |            |                                                  |            |  |

 

Historical information was the primary basis for theselection of the expected volatility, expected dividend yield, and the expectedlives of the options.  The risk-freeinterest rate was selected based upon yields of U.S. Treasury issues with aterm equal to the expected life of the option being valued.  SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Pre-vesting forfeitures wereestimated to be zero for the year ended December 31, 2006 based primarily onhistorical experience.  If pre-vestingforfeitures occur in the future, the Company will record the benefit related tothose forfeitures as the forfeitures occur. In the Company’s pro forma information required under SFAS 123 for theperiods before March 31, 2006, the Company also accounted for forfeitures asthey occurred.

F-19

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Status of options 
| ** **                                | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Weighted  Average  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| Balance at  December 31, 2004             |       | 1,720,000                |       | $                                          | 0.65       |                                     |       |                                |       |   |
| Granted                                   |       | 55,000                   |       | $                                          | 0.50       |                                     |       |                                |       |   |
| Forfeited/cancelled/expired               |       | —                   |       |                                       |       |                                     |       |                                |       |
| Exercised                                 |       | —                   |       |                                       |       |                                     |       |                                |       |
| Balance at  December 31, 2005             |       | 1,775,000                |       | $                                          | 0.64       |                                     |       |                                |       |   |
| Granted (1)                               |       | 725,000                  |       | $                                          | 0.66       |                                     |       |                                |       |   |
| Forfeited/cancelled/expired               |       | —                   |       |                                       |       |                                     |       |                                |       |
| Exercised                                 |       | —                   |       |                                       |       |                                     |       |                                |       |
| Balance at  December 31, 2006             |       | 2,500,000                |       | $                                          | 0.65       |                                     |       |                                |       |   |
|                                      |       |                     |       |                                       |       |                                     |       |                                |       |
| Options  outstanding at December 31, 2006 |       | 2,500,000                |       | $                                          | 0.65       |                                     | 6.1 years  |                                | $          | 100,000 |   |
| Options exercisable at  December 31, 2006 |       | 2,040,417                |       | $                                          | 0.65       |                                     | 5.3 years  |                                | $          | 81,617 |   |

----

(1) - See Note 17

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on Southwest CasinoCorporation closing stock price of $0.69 on December 29, 2006, that the optionholders would have received had all option holders exercised their options asof that date.  As of December 31, 2006,the Company’s unrecognized share-based compensation related to stock optionswas approximately $304,000.  This cost isexpected to be expensed over a weighted average period of two years.

Consolidated pro forma information required under SFAS123(R)

The following tableillustrates the effect on net income and earnings per share if we had appliedthe fair value recognition provisions of SFAS No. 123(R) during the year endedDecember 31, 2005.  For the purpose ofthis pro forma disclosure, the value of the options is estimated usingBlack-Scholes option-pricing model and amortized to expense over the optionsvesting periods.

|                                                                                                                                                   | ** ** | **Year Ended  December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net Income as  Reported                                                                                                                           |       | $                                                | 566,350    |   |
| Deduct:   Total stock-based compensation expenses  determined under fair value

based method for all awards, net of related tax  effect |       | 87,063                                           |       |
| *Pro  forma*net income                                                                                                                            |       | $                                                | 479,287    |   |
|                                                                                                                                              |       |                                             |       |
| Income per  share:                                                                                                                                |       |                                             |       |
| Basic — as reported                                                                                                                          |       | $                                                | 0.03       |   |
| *Basic — pro forma*                                                                                                                          |       | $                                                | 0.02       |   |
| Fully-diluted — as reported                                                                                                                  |       | $                                                | 0.03       |   |
| Fully-diluted*— pro forma*                                                                                                                   |       | $                                                | 0.02       |   |

 

The fair value of eachoption grant was estimated on the date of grant using the Black Scholesoption-pricing model with the following weighted average assumptions for theyear ended December 31, 2005:

|                                          | ** ** | **Year Ended  December 31, 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| Expected price  volatility               |       | 103                                              | %          |
| Average Risk-free  interest rate         |       | 3.52                                             | %          |
| Weighted average  expected life in years |       | 10 years                                         |       |
| Dividend yield                           |       | 0                                                | %          |
| Pre-vesting  forfeiture rate             |       | 0                                                | %          |
| Weighted-average Fair  value             |       | $                                                | 0.46       |   |
|                                          |            |                                                  |            |  |

 

F-20

----

 

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

On November 10, 2005, the FASB issued FASB StaffPosition No. FAS 123(R)-3 (“FSP 123(R)”), Transition Election Related toAccounting for the Tax Effects of Share-Based Payment Awards.  FSP 123(R)-3 permits the Company to electfrom alternative transition methods for calculating the pool of tax benefitsavailable to absorb tax deficiencies recognized subsequent to the adoption ofFAS 123(R).  No tax benefit has beenrecorded on the share based compensation expense for the year ended December 31,2006.

**NOTE 12 — WARRANTS**

Status of warrants: 

|                                               | ** ** | **Warrants  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|--------------------------------------------|------------|
| Warrants  outstanding as of December 31, 2004 |       | 1,187,500                 |       | $                                          | 0.36       |   |
| Granted                                       |       | 1,300,000                 |       | 0.53                                       |       |
| Exercised                                     |       | (200,000                  | )          | 0.12                                       |       |
| Cancelled                                     |       | (200,000                  | )          | 0.12                                       |       |
| Warrants  outstanding as of December 31, 2005 |       | 2,087,500                 |       | $                                          | 0.51       |   |
| Granted                                       |       | 0                         |       |                                       |       |
| Exercised                                     |       | (100,000                  | )          | 0.12                                       |       |
| Cancelled                                     |       | (150,000                  | )          | 0.20                                       |       |
| Warrants outstanding as  of December 31, 2006 |       | 1,837,500                 |       | $                                          | 0.56       |   |

 

As part of the July 22,2004 reorganization, Southwest Casino Corporation assumed outstanding warrantsof Southwest Casino and Hotel Corp. (predecessor parent company which wasreorganized in July 2004 with the new parent being Southwest Casino Corporationa public entity, see Note 1) to acquire 1,187,500 shares of the Company’scommon stock.  These warrants areexercisable subject to the occurrence of certain events at a weighted averageprice of $.36 per share as of December 31, 2004 and expire at various timesthrough June 10, 2009.

At December 31, 2006 and2005, the Company had 1,837,500 and 2,087,500 shares of common stock reservedfor the exercise of warrants that have been granted in connection with debt andequity offerings and in lieu of cash payment for services provided.  The Company received $12,000 and $24,000during 2006 and 2005, respectively on the exercise of warrants. The warrantsexpire at various times through 2009. The Company has not computed any value or recognized any expense forthose warrants where the conditions to exercise were considered unlikely tooccur.

On October 20, 2005, theCompany secured a $2.5 million term loan (see Note 10) with the guaranties of12 Southwest Casino Corporation shareholders. Under the shareholder guaranties, each guarantor is individually liablefor a portion of the $2.5 million term loan. As a condition to entering into the Loan Agreement, James Druck, ChiefExecutive Officer, Thomas Fox, President, 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 exercise price of the warrants issued inconnection with the $2.5 million term loan was established based on fair marketvalue at the time the loan was applied for but was lower than fair market valuewhen the warrants were granted in connection with the loan closing.  The Company calculated the fair value of thewarrants issued using the Black Scholes pricing valuation model and recordedthe amount as a loan cost that is being amortized to interest expense over theterm of the loan.  The Company recognizedadditional interest expense related to the warrants of $138,862 and $23,144during 2006 and 2005, respectively, see Note 4.

The Company has grantedstock options and warrants to purchase shares of its common stock to variousinvestors, directors and key employees.  Theexercise price of all stock options and warrants granted have been set atprices equal to or above the fair market value of the Company’s stock on thedate of grant except for warrants issued in connection with the $2.5 millionterm loan.

On October 14, 2005, theCompany issued warrants to purchase 40,000 shares to Corporate CapitalManagement, LLC and 10,000 shares to DMSR Investments at $1.00 per share insettlement of claims against the Company related to the Convertible Debtoffering and proposed equity transaction. The closing stock price of the Company’s

F-21

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

common stock was $0.57 onthe date of grant.  No value wasassociated with the grant of these warrants based upon using a Black Scholespricing model to value the warrants.

In connection with otherwarrants issued in exchange for services or settlement, the Company recognized$8,375 and $20,625 of expense in 2006 and 2005, respectively.

**NOTE 13 — PROVISION FOR INCOMETAXES**

|                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Current        |       |     |       |     |       |
| Federal        |       | $        | (683,701   | )        | $          | (291,000 | ) |
| State          |       | (88,479  | )          | (38,000  | )          |
| Total Current  |       | (772,180 | )          | (329,000 | )          |
|           |       |     |       |     |       |
| Deferred       |       |     |       |     |       |
| Federal        |       | 89,764   |       | —   |       |
| State          |       | 11,616   |       | 38,000   |       |
| Total Deferred |       | 101,380  |       | 38,000   |       |
|           |       |     |       |     |       |
| Total          |       | $        | (670,800   | )        | $          | (291,000 | ) |

 

A reconciliationof the income tax provision with amounts determined by applying the federalstatutory rate to income before income taxes is as follows:

|                                                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Federal  statutory income tax rate                                                                               |       | (34.0    | )%         | (34.0    | )%         |
| State and local  income tax rate                                                                                 |       | (4.4     | )%         | (4.4     | )%         |
| Effect of  utilization of deferred tax liability (asset related to net operating losses  and valuation allowance |       | 5.0      | %          | 4.4      | %          |
| Effective Tax Rate                                                                                               |       | (33.4    | )%         | (34.0    | )%         |

 

The net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposesare reflected in deferred income taxes. Significant components of the Company’sdeferred tax liabilities as of December 31, 2006 and 2005 are as follows:

|                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| Current deferred  tax assets (liabilities)    |       | $          | —     |       | $          | — |   |
| Non-current  deferred tax assets:             |       |       |       |       |       |
| Operating loss and contribution carryforwards |       | 1,473,000  |       | 2,234,000  |       |
| Property and Equipment                        |       | 329,000    |       | 213,000    |       |
| Alternative minimum tax carryforward          |       | 58,000     |       | 22,000     |       |
| Total Deferred                                |       | 1,860,000  |       | 2,496,000  |       |
|                                          |       |       |       |       |       |
| Less Valuation  Allowance                     |       | (1,860,000 | )          | (1,896,000 | )          |
| Net Deferred Tax Asset                        |       | $          | —     |       | $          | 573,000 |   |

 

Property and equipmentdeferred tax asset includes the development and pre-opening expensescapitalized for tax purposes in connection with the development of theracetrack and card room.

As of December 31, 2006,the Company has federal and state net operating loss carryforwards ofapproximately $3,900,000. These operating losses expire between 2015 and2024.  The Internal Revenue Code limitsthe availability of net operating loss carryforwards to offset future taxable incomeif there has been a “change of ownership” as defined in Section 382 of theInternal Revenue Code.  Such a “change ofownership” could be triggered by sales of the Company’s securities by theCompany or its shareholders. Additionally, the excess of the alternative minimum tax (“AMT”) overregular federal income tax is a tax credit, which can be carried forwardindefinitely to reduce future federal income tax liability.  At December 31, 2006, the Company hasavailable $58,000 of AMT credit carryforward. The income tax rate does not correspond to statutory tax rates due tothe difference in the valuation allowance for deferred tax assets.

F-22

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

**NOTE14 — RELATED PARTY TRANSACTIONS**

The Company has aliability to certain officers and stockholders for unpaid compensation andexpenses of $122,467 and $223,467 as of December 31, 2006 and 2005,respectively.

At its meeting on April26, 2006, the independent members of the Company’s Board of Directors approvedone-time payments to James Druck, CEO, Thomas Fox, President, and JeffreyHalpern, Vice President of Government Affairs, as partial repayments of theCompany’s outstanding liabilities for their unpaid salaries, the majority ofwhich is from years before 1998.  TheBoard approved payments of $50,000 to Mr. Druck and Mr. Halpern and $10,000 toMr. Fox.  The Company made these paymentsto Mr. Halpern on April 28, 2006 and Mr. Druck and Mr. Fox on May 15, 2006.

During the years endedDecember 31, 2006 and 2005, the Company paid Berc & Fox Limited $17,950 and$17,648 for tax and accounting services, respectively.  North Metro paid Berc & Fox Limited $975and $0 during the years ended December 31, 2006 and 2005, respectively for taxservices.  The operations of Berc &Fox were acquired in January 2007 by Virchow Krause, Ltd.  Thomas Fox, our President, is a shareholderand officer in Berc & Fox Limited.

In connection with theCompany’s investment in Southwest Missouri Gaming, LLC, the Company signed aone-year promissory note agreeing to pay to Prime Inc., the other member ofSouthwest Missouri Gaming, $367,000 plus interest at a variable rate equal toprime plus 2 percent for its share of expenses in connection with SouthwestMissouri Gaming’s unsuccessful efforts to develop a riverboat casino inRockaway Beach, Missouri.  Under thenote, the Company agreed to pay $5,000 per month, a principal payment of$100,000 on July 1, 2005, and the balance of the note on December 31,2005.  The note was secured by slotmachines owned by Gold Rush I, LLC.  Thenote was paid in full on December 29, 2005 and the security interest has beenreleased.  The investment in SouthwestMissouri Gaming, LLC, was written off during 2004.

During the year endedDecember 31, 2005, the Company paid Jennifer Sparlin Druck $1,000 forentertainment services at the Gold Rush Palladium.  No amounts were paid during 2006.  Ms. Druck is the wife of James Druck, anofficer of the Company.

**NOTE 15 —PROJECT DEVELOPMENT COSTS**

The Company continues to pursue additional gamingopportunities and as a result continues to incur project developmentexpenses.  For the years ended December31, 2006 and 2005, development expenses were $290,623 and $736,739.  Included in the year ended December 31, 2005amount is a $249,778 write-off of an option to acquire the Gold Rush realestate that the Company allowed to expire unexercised on February 28,2005.   In addition, the Company includeddevelopment expenses incurred by North Metro Harness Initiative, LLC, in theCompany’s consolidated financial statements for the period from January 1, 2005through October 20, 2005 of $407,382, see Note 5.

**NOTE 16 —SEGMENTED INFORMATION**

Segmented informationrelated to the year ended December 31, 2006 follows:

|                                                        | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                               |       | $                      | 15,609,228 |                   | $          | 5,865,680                |       | $          | —     |   | $ | 21,474,908 |   |
| Interest Revenue                                       |       | 659                    |       | 2,190                  |       | —                   |       | 2,849      |       |
| Interest Expense                                       |       | 844,465                |       | 359,831                |       | —                   |       | 1,204,296  |       |
| Depreciation  & amortization                       |       | 1,646,473              |       | 523,517                |       | —                   |       | 2,169,990  |       |
| Segmented profit  (loss) before income taxes           |       | 91,007                 |       | 2,210,500              |       | (290,623                 | )          | 2,010,884  |       |
| Income tax  expense (benefit)                          |       | 30,487                 |       | 737,672                |       | (97,359                  | )          | 670,800    |       |
| Loss of  unconsolidated subsidiary, net of tax benefit |       |                   |       |                   |       | 182,873                  |       | 182,873    |       |
| Investment in  unconsolidated subsidiary               |       |                   |       |                   |       | 5,054,020                |       | 5,054,020  |       |
| Total segmented  assets                                |       | 12,942,003             |       | 833,926                |       | 5,079,020                |       | 18,854,949 |       |
| Expenditures for  segmented assets                     |       | 417,948                |       | 9,707                  |       | 1,000,326                |       | 1,427,981  |       |
|                                                        |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

F-23

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

Segmented informationrelated to the year ended December 31, 2005 follows:
| ** **                                             | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  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                |       | 1,960                    |       | —                 |       | 934,417    |       |
| Depreciation  & amortization                       |       | 1,833,836              |       | 524,229                |       | —                   |       | —                 |       | 2,358,065  |       |
| Segmented profit  (loss) before income taxes           |       | (336,958               | )          | 1,768,264              |       | (738,699                 | )          |                   |       | 692,607    |       |
| Income tax  expense (benefit)                          |       | (141,417               | )          | 742,671                |       | (310,254                 | )          |                   |       | 291,000    |       |
| Minority  interest in loss of consolidated subsidiary  |       |                   |       |                   |       | 204,173                  |       |                   |       | 204,173    |       |
| Loss of  unconsolidated subsidiary, net of tax benefit |       |                   |       |                   |       | 39,430                   |       |                   |       | 39,430     |       |
| Investment in  unconsolidated subsidiary               |       |                   |       |                   |       | 4,298,367                |       |                   |       | 4,298,367  |       |
| Total segmented  assets                                |       | 13,976,593             |       | 2,239,700              |       | 4,298,367                |       |                   |       | 20,514,660 |       |
| Expenditures for  segmented assets                     |       | 153,848                |       | 3,467                  |       | 3,898,849                |       | (1,167,408             | )          | 2,888,756  |       |
|                                                        |            |                        |            |                        |            |                          |            |                        |            |            |            |  |  |  |  |  |

----

(1)           Reconciling Items are the adjustments toremove the contribution of equity by MTR while the Company consolidated NorthMetro.

Corporate expenses are included as a reduction inCasino Management income.  Corporateexpenses have not been allocated to Casino Operations or Project Development.

**NOTE 17 —BOARD OF DIRECTORS**

On January 10, 2006, aspart of the Company’s compensation for independent members of its Board ofDirectors, Southwest granted non-qualified options to purchase 150,000 sharesof its common stock at a price of $0.65 per share to each of the fourindependent members of its Board of Directors. These options vest in 12 equal installments on the last day of eachfiscal quarter of the company over the next three years and remain exercisablefor 10 years.  If a director’s service onthe Southwest Board terminates due to mandatory retirement, the option willcontinue to vest and remain exercisable for the full 10 years.  If a director’s service terminates due todeath or disability, the option will remain exercisable, to the extent vestedat the time service terminated, for 12 months. If a director’s service terminates for any other reason, the option willremain exercisable, to the extent vested at the time service terminated, for 90days. If a change in control of Southwest occurs, as defined in the Company’s2004 Stock Incentive Plan, the option will immediately vest in full and remainexercisable for the entire 10-year term.

On January 10, 2006, theBoard of Directors established an Audit Committee and elected David Abramson,Jim Holmes, and Gregg Schatzman to serve on the Committee.  The Board of Directors elected David Abramsonas Chair of its Audit Committee.  Mr.Abramson received an option to purchase 75,000 shares of common stock, on thesame terms as described in the preceding paragraph, in consideration of hisservice as Audit Committee Chair.

On February 1, 2006, theBoard of Directors established a Compensation Committee and a NominatingCommittee.  The directors elected GusChafoulias, Jim Holmes and Gregg Schatzman to serve on the CompensationCommittee and elected Gregg Schatzman as Chair of its CompensationCommittee.  The board elected GusChafoulias and David Abramson to serve on its Nominating Committee, with GusChafoulias as Chair.

**NOTE 18 — FAIR VALUE OF FINANCIALINSTRUMENTS**

The Company believes itis not practical to estimate the fair value of its investment in North Metrobecause there is no established market for these securities and it isinappropriate to estimate future cash flows because they are dependent on theability of North Metro to develop and then generate earnings from the operationof its proposed harness track and card room. There were no other financial instruments with significant differencesbetween the carrying amount and the fair value due to the short maturity of theinstruments.

**NOTE 19 — NEW MANAGEMENT CONTRACT**

On March 24, 2006, Southwest entered into a GamingManagement Agreement with the Otoe-Missouria Tribe of Indians. Under the termsof the Gaming Management Agreement, Southwest will have exclusive management

F-24

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

responsibility for the Tribe’s Seven Clans ParadiseCasino near Ponca City, Oklahoma. Southwest will receive management fees equalto 20 percent of the net revenue from gaming and non-gaming activity at thefacility. The management agreement runs for 5 years beginning on the first daythat Southwest begins management of the facility.

This agreement must be approved by the Chairman of theNational Indian Gaming Commission (“NIGC”) before it becomes effective.Currently, the NIGC is performing a background investigation of the Company,its executive officers, directors, and shareholders as part of its contractapproval process.  In addition, the NIGChas reviewed the agreement and provided comments on it to Southwest and theTribe on two occasions.  The Tribe hasnot responded to the second set of comments. At this time, the Company cannot predict how long the backgroundinvestigation may take to complete, the total costs related to the backgroundinvestigation and approval process to be paid by the Company, if or when theTribe will respond to the NIGC comments, and if or when NIGC approval of theagreement may be received.

**NOTE 20 — ACQUISITION**

On December 18, 2006, Southwest Eagle, LLC (“SouthwestEagle”), a wholly-owned subsidiary of Southwest Casino Corporation, enteredinto an Asset Purchase Agreement and a long-term lease with Pinnacle Casinosand Resorts, LLC (“Pinnacle”) under which Southwest Eagle will, subject to theterms and conditions stated in the asset purchase agreement and lease, acquirethe operating assets and lease the real property of the Double Eagle Hotel andCasino and Gold Creek Casino in Cripple Creek, Colorado (collectively, the “DoubleEagle”). Southwest will purchase these assets simultaneously with Pinnacle’sacquisition of all of the outstanding capital stock of Colorado Casino Resorts,Inc. (“CCRI”), the owner and operator of the Double Eagle, under a separateSecurities Purchase Agreement between Pinnacle’s and CCRI’s currentshareholders.

Under the terms of the Asset Purchase Agreement,Southwest will acquire all of the operating assets of the Double Eagle,including all cash in machines and accounts, but excluding real property andimprovements, for $12,625,000 and Southwest will pay CCRI an additional$11,000,000 as prepaid rent.  Southwestwill pay $16,000,000 in cash at closing and $7,625,000 by delivery of apromissory note to Pinnacle.  Southwestwill also assume certain specified liabilities of CCRI, including accountspayable and all liabilities under contracts and leases connected with theoperation of the Double Eagle.

The Colorado Division of Gaming granted licenses forthe operation of the Double Eagle and Gold Creek casinos to Southwest on March15, 2007.  These licenses are conditionedon (1) Southwest obtaining full possession of the casinos, and (2) Southwestsurrendering its licenses to operate the Gold Digger’s and Uncle Sam’scasinos.  The parties intend to closeSouthwest’s acquisition of these casinos within 15 days of receipt of theselicenses.

The closing of the transactions contemplated in theAsset Purchase Agreement is subject to numerous conditions, including Pinnacle’scompletion of the financing for and acquisition of the CCRI stock, Southwest’sreceipt of financing for payment of the purchase price and prepaid rent,completion of due diligence to the satisfaction of both Southwest and Pinnacle,and other customary closing conditions.

Under the terms of the promissory note to be issued toPinnacle, Southwest will make monthly payments of interest only at annual ratesof three percent, four percent and five percent, respectively, during the firstthree years the note is outstanding. After the third year, Southwest will makemonthly payments of its interest at Prime plus principal based on a 20-yearamortization schedule.  The note will bedue in full on its tenth anniversary. With the consent of the note holder, Southwest may convert up to $4million of the principal amount of the note into Southwest common stock at aprice equal to the average closing market price of Southwest common shares forthe 10 business days immediately preceding the conversion date.  The promissory note will be unsecured.  There is no penalty for prepayment.

The long-term lease for the real property andimprovements provides that simultaneous with Pinnacle’s acquisition of the CCRIstock, Pinnacle will cause CCRI to enter into a 30-year net lease for all realproperty and improvements owned by CCRI in Cripple Creek, Colorado, includingoff-site real property that is or may be used in the operation of the DoubleEagle.  Initial rent under this lease is $4million per year, payable in equal monthly installments, and increases to $5.5million by the 30th year. Southwest can extend the lease for up to 15 years under three 5-yearoptions.  The lease requires Southwest topay all costs associated with the real property and improvements, includingreal estate taxes, but exclude costs of repair of structural defects, aninsured casualty, or condemnation. The lease contains other customary terms andconditions.

On January 31, 2007, Southwest Eagle entered into twoagreements, an Amended and Restated Lease Agreement and a Right of Access andUse Agreement, with Pinnacle.  These agreements have the effect ofamending and

F-25

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

restating the terms under which Southwest intends tolease real property in Cripple Creek, Colorado from CCRI upon Pinnacle’spurchase of the outstanding stock of CCRI from its current owners and Southwest’ssimultaneous acquisition of the operating assets of the Double Eagle from CCRI.

The Amended and Restated Lease provides that Pinnaclewill cause CCRI to enter into a 30-year net lease for the real property andimprovements on which the Double Eagle is located.  Unlike the OriginalLease, the Amended and Restated Lease does not include other real property inCripple Creek that is owned by CCRI but is not on the site of the DoubleEagle.  The terms of the lease have not changed except to exclude certainproperty and include that property under a separate agreement, as discussedbelow.

With regard to the real property in Cripple Creek thatis owned by CCRI but not on the Double Eagle site and is no longer includedunder the Amended and Restated Lease, Southwest and Pinnacle entered into aseparate Right of Access and Use Agreement.  This off-site propertyconsists of numerous parcels near the Double Eagle, portions of which are usedfor employee parking, valet parking and records, equipment and other storage.Under this agreement, Southwest will have the exclusive right to access and usethis off-site property, except five specified parcels owned by CCRI that arenot used in connection with the operations of the Double Eagle.  Southwestwill pay a nominal annual fee for this right to use the property, which runsfor the same 30-year term with three 5-year extension options as the Amendedand Restated Lease.  Southwest will also pay costs to keep the off-siteproperty in good repair, but unlike the property covered under the Amended andRestated Lease, Southwest will not be responsible for other costs associatedwith this property, including real estate taxes.  The use agreement alsoprovides both Pinnacle and Southwest with the right to make improvements to theoff-site property.  If Pinnacle determines to improve any portion of theoff-site property then used in the operation of the Double Eagle, Pinnacle mustprovide an acceptable alternative site to Southwest for that use.

The transactions contemplated in the Amended andRestated Lease and the Right of Access and Use Agreement described above arecontingent on: (a) Pinnacle consummating its acquisition of all of theoutstanding capital stock of CCRI under the Securities Purchase Agreementbetween Pinnacle and the current CCRI shareholders, and (b) Southwestconsummating its acquisition of the operations of the Double Eagle fromPinnacle and CCRI under the terms of the Asset Purchase Agreement datedDecember 18, 2006.  Following a dispute regarding satisfaction ofconditions in the Securities Purchase Agreement between the current CCRIshareholders and Pinnacle, those parties entered into a Revival and SecondAmendment to Stock Purchase Agreement under which Pinnacle intends to acquirethe CCRI stock.  Under this amended agreement, Pinnacle must close its purchaseof the CCRI stock on the earlier of 15 days after receiving regulatory approvalor April 7, 2007.  Pinnacle has the right to extend that deadline ifPinnacle and Southwest have not received or been denied regulatory approval ofthe transactions if Pinnacle pays a non-refundable fee.  This would extendthe closing deadline under the agreement until the earlier of 15 days afterreceiving regulatory approval or June 30, 2007.  The agreement terminatesautomatically on June 30, 2007 if the transaction has not been completed.

In connection with the negotiations regarding thisamendment to the Securities Purchase Agreement, Pinnacle requested andSouthwest offered to issue warrants to purchase 1 million shares of its commonstock to the current CCRI shareholders, which consist of two individuals andtwo entities controlled by those individuals, upon the closing of Southwest’sacquisition of the Double Eagle.  The CCRI shareholders did not acceptSouthwest’s offer and Southwest is currently under no contractual obligation todeliver warrants to Pinnacle or the current CCRI shareholders.  However,Pinnacle has obligated itself to deliver these warrants to the current CCRIshareholders as a condition to closing under the Revival and Second Amendmentto Stock Purchase Agreement.  Thus, Southwest’s management believes thatit will be necessary to issue these warrants to the CCRI shareholders in orderto complete Southwest’s proposed acquisition of the Double Eagle.  Asproposed on January 5, 2007, these warrants would have an exercise price equalto the greater of $0.6325 per share or the preceding 5-day average market pricefor Southwest common stock as of the closing date and would terminate September1, 2009. Southwest also offered “piggyback” registration rights for the commonshares underlying the warrants that would not be effective until (a) thewarrant has been fully-exercised and (b) Southwest completes the registrationof (i) shares and warrants issued in Southwest’s recent confidential privateplacement and (ii) any securities Southwest may issue in connection with thefinancing for Southwest’s purchase of the Double Eagle operations.

Southwest’s acquisition of the operations of theDouble Eagle and performance under the Amended and Restated Lease and the Rightof Access and Use Agreement remain subject to all of the risks associated withconsummation of transactions of this nature, including but not limited to:satisfactory completion of due diligence investigations by both Southwest andPinnacle; Southwest obtaining suitable financing for its acquisition of theDouble Eagle operations; and Pinnacle obtaining suitable financing for itspurchase of the CCRI stock.

F-26

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

**NOTE 21 — SETTLEMENT AGREEMENT**

On February 15, 2006, theCompany entered into a Settlement and Release Agreement with MBC Global,LLC.  Under the terms of the Settlementand Release Agreement, the Company paid MBC $66,000 that the Company had previouslyagreed it owed to MBC under a terminated advisory services agreement and theCompany and MBC released each other from all claims raised in an arbitrationproceeding initiated by MBC in September 2005. The Company did not release MBC from any potential liability related toits actions on behalf of the Company 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.

**NOTE 22 — REDEMPTION OFSECURITIES**

The Company notified ashareholder on December 22, 2006 that, that effective January 22, 2007, theCompany would redeem all shares of the Company’s common stock owned by theshareholder in accordance with Article XI of the Company’s Articles ofIncorporation.  The Company notified theshareholder by letter dated January 26, 2007 that an escrow account was beingestablished in the amount of $321,300, representing the redemption price of357,000 shares of the Company’s common stock at a redemption price of$0.90.  The valuation was based upon theclosing stock price of the Company’s common stock as reported on January 22,2007.  The Company will record theredemption in January 2007 as a reduction to shareholder’s equity for the buyback of shares.  The Company received aletter on February 7, 2007 from the shareholder, which indicated theshareholder would deliver the shares of common stock as instructed by theCompany.

**NOTE 23 — COMMITMENTS ANDCONTINGENCIES**

Refer to Note 5 forcommitments entered into by North Metro.

In 2004, the Companypurchased player tracking software and slot accounting software from IGT.  On December 29, 2005, the Company reached anagreement with IGT to finance $460,324 of the purchase price for this systemover 48 months with interest rate equal to the prime rate, which is currently7.5%, see Note 10.  In addition, theCompany agreed to purchase additional software for $200,000, which will allowthe Company to offer bonusing to its customers. The purchase is contingent upon IGT receiving necessary approvals forthe bonusing system from the Colorado Division of Gaming.  We anticipate that IGT will also finance thisadditional software on similar terms.

Under the Company’semployment agreements with James B. Druck, CEO, Thomas E. Fox, President andCOO, and Jeffrey S. Halpern, Vice President of Government Affairs, which wereeffective July 1, 2004, the Company has agreed to allow these executives toelect to continue their employment in a reduced capacity, with continuing medicalbenefits and a salary equal to their base pay at the time of termination for 18months and not less than $25,000 after 18 months, if the Company terminates theexecutive’s employment without cause or in connection with a change in controlof the Company (as defined in the employment agreement) or if the executiveterminates his employment with the Company for good cause (as defined in theemployment agreement).  The initial termof these agreements expired July 1, 2006, after which the agreement renewed andwill continue to renew automatically for additional one-year terms unlessterminated.

The Company has entered into employment agreementswith certain other key employees of the Company. The agreements provide forcertain benefits to the employee as well as severance if the employee isterminated without cause or due to a “constructive termination” as defined inthe agreements.  The severance amountsdepend upon the term of the agreement and can be up to six months of basesalary and bonus.

**Other litigation**

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

**NOTE 24 — SUBSEQUENT EVENTS**

**Investor Relations Services and FinancialConsulting Services**

On January 17, 2007, the Company entered into twoagreements with Strategic Growth International, Inc. (“SGI”) regarding investorrelations and financial consulting services.

*InvestorRelations Services:*

Under the terms of a letter agreement accepted January17, 2007 (the “Investor Relations Agreement”), Southwest retained SGI to assistthe company as an investor relations advisor and develop a comprehensivefinancial relations

F-27

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

program designed to achieve increased awareness ofSouthwest and its business and enhanced liquidity in the public market for theCompany’s stock.

Southwest will pay SGI $10,000 per month for a periodof two years for these investor relations services.  Southwest also agreedto reimburse SGI’s reasonable accountable expenses incurred in connection withservices provided under the Investor Relations Agreement.  In addition,Southwest will issue to SGI a warrant to purchase 100,000 shares of Southwestcommon stock at a price of $0.63 per share that is exercisable for two yearsfrom the date of the Investor Relations Agreement.  The exercise priceequals the weighted average closing price for one Southwest share on theOver-the-Counter Bulletin Board market for the five trading days immediatelypreceding the date Southwest entered into the Investor RelationsAgreement.  Beginning July 17, 2007, SGI will have the right to requestthe inclusion of the common shares underlying its warrant on any registrationstatement that Southwest files on which the shares are eligible forinclusion.  Beginning January 17, 2008, SGI will have the right to requireSouthwest to file a registration statement covering those shares. The Companyis in the process of valuing the warrants, which will be recorded as consultingexpense over the term of the agreement, with the value recorded as additionalpaid in capital.

Southwest has the right to terminate the InvestorRelations Agreement at the end of six months.  This right is void if SGImeets certain performance goals.  If Southwest terminates the agreement atthe end of six months, the number of shares subject to the warrant issued toSGI will be reduced to 50,000.  Southwest has the right to terminate theagreement at the end of any month of its term during the second year of theagreement.  Southwest also agreed to indemnify SGI against certain claimsthat may arise in connection with the services provided by SGI under theInvestor Relations Agreement.

*Financial Consulting Services:*

Southwest also entered into an agreement with SGI forfinancial consulting services on January 17, 2007 (the “Consulting Agreement”). Under the Consulting Agreement, SGI will assist Southwest in developing astrategy to raise additional capital for gaming projects the company ispursuing and for general working capital.  SGI will also help Southwestarrange and conduct meetings with potential sources of capital and adviseSouthwest regarding the terms of any proposed financing arrangements.

Southwest is to pay SGI $8,000 per month for 24 monthsfor the financial consulting services provided under this agreement, however,SGI has agreed to waive the monthly fee in exchange for a warrant to purchase700,000 shares of Southwest common stock at a price of $0.63 per share (theweighted average closing price for one share of Southwest common stock on theOver-the-Counter Bulletin Board market for the five trading days immediatelypreceding the date of the Consulting Agreement).  The warrant is exercisablefor two years.  After six months, SGI will have the right to requestinclusion of the common shares issuable upon exercise of the warrant on anyregistration statement filed by the Company on which the shares are eligiblefor inclusion.  After one year, SGI will have the right to require theCompany to initiate a registration statement covering all shares underlyingwarrants held by SGI. The Company is in the process of valuing the warrants,which will be recorded as consulting expense over the term of the agreement,with the value recorded as additional paid in capital.

The Company will also be required to pay an additionalconsulting fee of $100,000 or $200,000 if SGI assists the Company in completingan equity or debt financing that meets standards stated in the agreement.  In addition, if the Company issues warrantsas part of such a debt financing, it will also issue warrants to purchase100,000 shares of its common stock to SGI on the same terms as the terms issuedto the lender.

Southwest has the right to terminate the financialconsulting services agreement at the end of six months.  This right isvoid if SGI meets certain performance goals.  If Southwest terminates theagreement at the end of six months, the number of shares subject to the warrantissued to SGI will be reduced to 350,000.

**Sale of unregistered securities**

On January 24, 2007 and February 26, 2007, SouthwestCasino Corporation (“Southwest”) entered into a Securities Purchase Agreement (“SPA”)with certain institutional and other accredited investors, as defined in Rule501 of Regulation D promulgated under the Securities Act of 1933, as amended,pursuant to which Southwest sold in a private placement an aggregate of 7.44million shares of its common stock and warrants to purchase an aggregate of2.98 million shares of its common stock, at a purchase price of $0.55 perunit.  The warrants are exercisable for a period of five years, beginningsix months after the date of issuance, at an exercise price of $0.61 pershare.  The number of shares issuable upon exercise of the warrants andthe exercise price of the warrants are adjustable in the event of stock splits,combinations and reclassifications, but not in the event of the issuance bySouthwest of additional securities, unless such issuance is pursuant to arights offering or pro rata distribution to all security holders except theinvestors.

The securities that were issued in this privateplacement were not registered under the Securities Act of 1933, as amended, andmay not be offered or sold in the United States absent registration or anapplicable exemption from the registration requirements of the SecuritiesAct.  Pursuant to the terms of a Registration Rights Agreement dated

F-28

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

January 24, 2007 between Southwest and the investors,Southwest has agreed to register the resale of the shares sold in the privateplacement, including shares issuable upon exercise of the warrants, on a registrationstatement to be filed by Southwest with the Securities and Exchange Commissionunder the Securities Act of 1933, as amended. Southwest has agreed to use itscommercially reasonable efforts to file the registration statement with the SECwithin 30 days after the closing of the private placement, to cause suchregistration statement to be declared effective by the SEC within the earlierof 120 days after the closing (or, in the event, of a review by the SEC, 150days after closing) or the 5th business dayfollowing the date on which Southwest is notified by the SEC that the SEC willnot review the registration statement or that the SEC has no further commentson the registration statement and to cause such registration statement toremain effective for the required registration period. Pursuant to theSecurities Purchase Agreement, Southwest and the investor parties have madeother covenants and representations and warranties regarding matters that arecustomarily included in financings of this nature.  If certain of itsobligations are not met, Southwest has agreed to make pro-rata cash payments asliquidated damages to each investor.

The private placement resulted in net proceeds toSouthwest of approximately $4.07 million, after the deduction of estimatedoffering expenses.  The Company also incurred expenses related to thisoffering of $60,393 as of December 31, 2006 which are included as part of othercurrent assets at December 31, 2006 on the consolidated balance sheet and willbe netted with the proceeds of this offering. The placement agent agreed to accept the cash portion of its placementagent commission in common stock and warrants on the same terms as theinvestors, which resulted in the placement agent receiving approximately517,000 shares of common stock and warrants to purchase an aggregate ofapproximately 207,000 shares of common stock. In addition, the placement agentreceived a warrant to purchase approximately 277,000 shares of common stock,which is exercisable for a period of five years, beginning six months after thedate of issuance, at an exercise price of $1.00 per share.

The following officers and directors of Southwestparticipated in the private placement on the same terms as the other investors:James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, Presidentand Chief Operating Officer; Jeffrey S. Halpern, Vice President of GovernmentAffairs; Gus A. Chafoulias, Director; and David H. Abramson, Director. Other than with respect to the Securities Purchase Agreement, there are nomaterial relationships between Southwest, on the one hand, and any of the otherinvestors in the private placement, on the other hand.

**Confirmation of Credit Approval with a lender**

 

On February 23, 2007, theCompany received a confirmation letter from a lender that approved the terms ofa financing transaction described in the Term Sheet entered into on February16, 2007.  The lender will provide asenior credit facility in the amount of $20 million, which consists of an $18million Term Loan A and a $2 million Term Loan B.  The Term Loan B will fund if and when theCompany’s existing contract with the Cheyenne and Arapaho Tribes is renewed onterms reasonably satisfactory to the lender. As part of the term sheet entered into on February 16, 2007, the Companypaid a $50,000 non-refundable underwriting fee and a $50,000 expense deposit tobe applied against out of pocket expenses incurred by the lender.   The loans will be used to finance theacquisition of two casinos in Cripple Creek, Colorado, see Note 20, pay feesand expenses related to the financing facility, pay off debt with Crown Bank,(see Note 6 and 10), and for general working capital of the Company.  In March 2007, the Company paid an additional$200,000 non-refundable work fee that will be applied against the closing feeupon closing the transaction and an additional expense deposit of $50,000. 

The closing of the loanas described in the confirmation letter is conditioned on satisfactory duediligence by the lender among other customary closing conditions.

As described in the TermSheet (as amended on March 20, 2007), and approved in the confirmation letterfrom the lender, this debt facility will have the following terms.  The term of the loan is four years.  Principal amortization of $250,000 quarterlybegins on the first day of the third quarter and continues for the next fivequarters.  Principal amortizationincreases to $500,000 quarterly beginning on the first day of the ninth quarterand continuing for the remainder of the term of the loan, with the finalpayment to include the aggregate principal amount of the Term Loan thenoutstanding.  The interest rate is basedupon LIBOR plus 6%, which may be reduced if the Company’s ratio of EBITDA tototal indebtedness, as defined in the agreement, meets standards stated in theagreement.  Interest is payable monthlyin arrears.  Upon closing, a closing feeof $300,000 will be due and payable in full (the closing fee is $500,000 whichwill be reduced by the $200,000 work fee paid in March 2007).  At closing, a loan servicing fee $17,500 willbe due and payable in full, and then continue to be due each quarterthereafter.  The facility will be securedby substantially all real and personal property of the Company.  Voluntary prepayments of up to $2 millionannually and up to $5 million over the term of the loan will be allowed.  Voluntary prepayment in excess of thoseamounts are permitted, but require payment of a premium during the first threeyears after the closing.   The loan will besubject to customary covenants.

Upon closing the loan, the Company will be required topay a fee of approximately $700,000 to a financial advisor in connection withthe financing and issue that advisor a warrant to purchase approximately700,000 shares of common stock with a term of five years and an exercise priceof $1.00.  Upon closing, the fees andfair value of warrants will be accounted for as a loan cost and amortized overthe term of the loan.

F-29

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2006 AND 2005**

**Cheyenne and Arapaho TribalCouncil Meeting**

The Tribal Council of theCheyenne and Arapaho Tribes of Oklahoma includes all enrolled members of theTribes. On February 24, 2007, at a convened meeting of the Tribal Council, theTribal Council voted to approve the terms of an extension and expansion of thegaming management relationship between the Tribes and Southwest.  The 183 members of the Tribes who attendedthe Tribal Council meeting voted to adopt resolutions approving proposed termsfor, and authorizing an attorney for the Tribes to review the final terms of,gaming management agreements under which Southwest will continue to manage theTribes’ existing Lucky Star casinos in Concho and Clinton, Oklahoma, expand theConcho and Clinton facilities to provide more gaming space and greateramenities, assume the management of and expand the Tribes’ existing FeatherWarrior casinos in Watonga and Canton Lake, Oklahoma, and develop and managenew gaming facilities on tribal land in four other Oklahoma cities. In additionto its expanded management responsibility, Southwest will pay for constructionof a proposed $4.5 million Indian Health Service clinic building out of themanagement fees it receives under the new agreements. The Tribal Council’sresolutions require the agreements to be presented to the Tribal Council at ameeting scheduled for March 31, 2007 for final approval.

Under the terms of theresolutions adopted by the Tribal Council, the management agreements will runfor five years beginning on the first day that Southwest begins management ofthe facilities under the new agreements

The validity of theFebruary 24, 2007 Tribal Council meeting has been challenged in the Cheyenneand Arapaho tribal court. The judge recently ruled that the meeting would beconsidered valid until a formal hearing on the issue could be held, likely inearly May.

Under the Tribes’Constitution adopted in 2006, gaming management agreements must be approved bythe Governor of the Tribes and the Tribal Legislature, as well as the TribalCouncil. The resolutions adopted by the Tribal Council direct the Governor ofthe Tribes to enter into the gaming management agreements on behalf of theTribes within five days of final approval by the Tribal Council and direct thetribal Legislature to ratify the agreements no later than five days after theGovernor signs it or, if the Governor does not sign, no later than 10 daysafter final approval by the Tribal Council. The Governor has disputed the authority of the Tribal Council and thetribal legislature to cause him to take any action on a gaming managementagreement or enter into a gaming management agreement without hisapproval.  The Governor has informed us thathe will not review or negotiate the terms of the agreements prepared inresponse to the Tribal Council’s February 24th resolutions.

In general, gamingmanagement agreements between Native American tribes and management contractorsmust also be approved by the Chairman of the National Indian Gaming Commission(NIGC) before becoming effective.

Although we have received Tribal Council approval asdiscussed above, we remain uncertain whether we will be able to continue ourmanagement relationship with the Cheyenne and Arapaho Tribes beyond May 19,2007.

F-30

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# **Item 8.****                             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.**

None.

**Item 8A.        CONTROLSAND PROCEDURES.**

**Evaluation of Disclosure Controls andProcedures**

The Company’s principal executive officer andprincipal financial officer believe the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) areeffective as of the end of the period covered by this Form 10-KSB based on anevaluation of the effectiveness of disclosure controls and procedures.

**Changes in Internal Controls**

There were no changes in internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))that occurred during the fourth quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

Because of its inherent limitations, internal controlsover financial reporting may not prevent or detect misstatements. Also,projections of any evaluations of the effectiveness to future periods aresubject to the risk that the controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

**Item 8B.       OTHER INFORMATION.**

Not applicable.

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**PART III**

# **Item 9.****                             DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND CORPORATEGOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

Our directors and executive officers, their ages andthe offices they held with Southwest Casino Corporation, as of March 12, 2007,are as follows:

 

|  Name          | ** ** | **Age** | ** ** | **Position**                                       |
|---------------------|------------|---------|------------|----------------------------------------------------|
| James B. Druck      |       | 65      |       | Chief Executive Officer and Director               |
|                |       |    |       |                                               |
| David H.  Abramson  |       | 65      |       | Director                                           |
|                |       |    |       |                                               |
| Gus A.  Chafoulias  |       | 71      |       | Director                                           |
|                |       |    |       |                                               |
| Jim Holmes          |       | 64      |       | Director                                           |
|                |       |    |       |                                               |
| Gregg P.  Schatzman |       | 53      |       | Director                                           |
|                |       |    |       |                                               |
| Thomas E. Fox       |       | 59      |       | President and Chief Operating Officer              |
|                |       |    |       |                                               |
| Jeffrey S.  Halpern |       | 64      |       | Vice President of Government Affairs and Secretary |
|                |       |    |       |                                               |
| Brian L. Foster     |       | 38      |       | Vice President of Native American Operations       |
|                |       |    |       |                                               |
| Tracie L. Wilson    |       | 40      |       | Chief Financial Officer                            |

 

*James B. Druck*. Mr. Druck joined the Southwest Casino Corporation Board of Directors and wasappointed as our Chief Executive Officer and Secretary on July 22, 2004 inconnection with the closing of the reorganization in which Southwest Casino andHotel Corp. became a wholly-owned subsidiary of Southwest Casino Corporation(formerly Lone Moose Adventures).  Mr. Druck has been a director ofSouthwest Casino and Hotel Corp. since its inception.  He served asPresident of Southwest Casino and Hotel Corp. from October 1992 until June2004, at which time he became the Chief Executive Officer of Southwest Casinoand Hotel Corp.  From 1967 until April 1993, Mr. Druck was an attorney inprivate 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 Directors andappointed as our President, Chief Operating Officer, and Chief FinancialOfficer on July 22, 2004 in connection with the closing of the reorganizationin which Southwest Casino and Hotel Corp. became a wholly-owned subsidiary ofSouthwest Casino Corporation.  Mr. Fox resigned from our Board of Directorson December 7, 2005 in connection with the election of four new independentdirectors.  Mr. Fox resigned his position as Chief Financial Officer inJune 2006 in connection with the hiring of our new CFO.  Mr. Fox has beena Certified Public Accountant since November 1969.  He began his careerwith Arthur Andersen & Co. in June 1969, and was promoted to tax manager inJune 1973.  In September 1976, Mr. Fox co-founded the accounting firm ofBerc & Fox, Limited.  He joined Southwest Casino and Hotel Corp. as ChiefFinancial Officer in November 1993 and was appointed to the Board of Directorsof Southwest Casino and Hotel Corp. in January 2000.

*Jeffrey S. Halpern*. Mr. Halpern has served as our Vice President of Government Affairs andSecretary since November 21, 2005.  Mr. Halpern was appointed Chairman ofthe Southwest Casino Corporation Board of Directors on July 22, 2004 inconnection with the closing of the reorganization in which Southwest Casino andHotel 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 Chairmanof the Board and Chief Executive Officer of Southwest Casino and Hotel Corp.from October 1992 until June 2004.  Mr. Halpern also serves currently as adirector and Vice President of Government Affairs and Secretary of SouthwestCasino and Hotel Corp.  From 1967 until July 1993, Mr. Halpern was anattorney in private practice in Minneapolis, Minnesota. His practice focusedprimarily in the areas of corporate finance and securities.

*Brian L. Foster*. Brian Foster is our Vice President of Native American Operations and managesour Native American gaming operations in Oklahoma.  In addition to thesetitles, 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

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President of Bingo Operations since 1998.  Mr.Foster is the Chairman of the Oklahoma Indian Gaming Association and served asthat organization’s Vice Chairman in 2000 and 2001.

*Tracie L. Wilson*. Tracie Wilson joined Southwest on June 7, 2006 as our Chief FinancialOfficer.  Ms. Wilson has also served as Chief Financial Officer ofSouthwest Casino and Hotel Corp. since June 7, 2006.   Before joiningSouthwest, Ms. Wilson served as a consultant to and, most recently, as theDirector of Financial Reporting for Lakes Entertainment, Inc. where she workedsince January 2005.  From December 1999 through December 2004,Ms. Wilson held positions as Director of Finance and as Vice President ofFinance and Treasurer of Netco Communications Corporation, a global networkinformation technology company.  Before joining Netco Communications, Ms.Wilson served as a CPA in the public accounting firms of Grant Thornton LLP andDeloitte & Touche LLP from 1989 to 1999. Ms. Wilson is a Certified PublicAccountant (inactive license holder) and received a Bachelor of Science inBusiness from the University of Colorado.  No family relationships existbetween Ms. Wilson and any of the directors or executive officers of thecompany, nor does Ms. Wilson have any direct or indirect material interest inany transaction with Southwest.

*David H. Abramson*. David Abramson joined the Southwest Board of Directors on December 7, 2005 andwas elected to chair its Audit Committee on January 10, 2006.  He is alsoa member of the Board’s Nominating Committee.  Mr. Abramson is theChairman and CEO of David Abramson & Associates, LLC, a retained executivesearch and leadership development firm he founded in January 2002. Immediately before founding David Abramson & Associates, he was a SeniorVice President of AXA Financial/Equitable Life Insurance and the Chairman andCEO of Grant Thornton Advisors, a joint venture of AXA Financial/Equitable LifeInsurance and Grant Thornton, LLP, from January to December 2001.  Beforethis, Mr. Abramson had an extensive career at Grant Thornton, certified publicaccountants, beginning in 1967 during which he was a member of the NationalLeadership and Senior Management Team and the Managing Partner of and an auditpartner in the Minneapolis office.  Among many board memberships, Mr.Abramson has been the Chairman of Board of Directors of the Minneapolis Chamberof Commerce, President and Board member of the Minnesota Society of CertifiedPublic Accountants, Chairman and board member of the Minnesota CooperationOffice for Job Creation, and a member of the Governing Council of the AmericanInstitute of CPAs.  Mr. Abramson holds a B.S. in Accounting from theCarlson School of Management and an MBA from the University of Michigan.

*Gus A. Chafoulias*. Gus Chafoulias joined to Southwest’s Board of Directors on December 7, 2005 andwas elected chair of its Nominating Committee on February 1, 2006.  He isalso a member of the Board’s Compensation Committee.  Mr. Chafoulias isChairman of the Board of Chafoulias Management Company, where he has workedsince 1987.  Mr. Chafoulias has developed more than 3 million square feetof apartments and commercial space during more than 40 years in the developmentbusiness.  One of Mr. Chafoulias’ liquor stores, which Mr. Chafoulias hasowned and operated since 1957, has been voted as a top ten liquor retailer inthe United States.  Mr. Chafoulias is also a United Way Alexis deTocqueville Society member, Leadership 100 board member, and Blue Cross BlueShield Champions of Health award winner.  He has served on numerous boardsof directors including the Rochester (MN) Chamber of Commerce, DiversityCouncil, U.S. Bank, Medvision, and Comfortex, Inc.  In addition toSouthwest, Mr. Chafoulias currently serves on the boards of JaguarCommunications and Festival Airlines.

*Jim Holmes.*JimHolmes was elected a Director of Southwest on December 7, 2005 and serves onthe Board’s Audit Committee and Compensation Committee.  Mr. Holmes is a1965 graduate of West Point’s U.S. Military Academy and has a master’s degreein law enforcement administration from Central Missouri State University. Mr. Holmes has significant experience on both the regulatory and businesssides of the gaming industry.  Since 1991, Mr. Holmes has been Presidentof Jim Holmes and Company and, beginning in 1987, has acted as a national andinternational gaming consultant for lottery operations, bingo projects, casinosand Indian gaming, 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 fromFebruary 2001 to January 2004, Mr. Holmes was president of APITechnologies, LLC.  From January 2000 to January 2001, Mr. Holmes wasExecutive Vice President of Sierra Design Group.  In 1985, Mr. Holmes wasappointed by then Governor Ashcroft as the first Executive Director of theMissouri Lottery.  Before working to establish the Missouri Lottery, hespent 15 years with the FBI in Missouri as both a Special Agent and Supervisor.

*Gregg P. Schatzman*. Gregg Schatzman joined Southwest’s Board of Directors on December 7,2005.  He also serves on the Board’s Audit Committee and CompensationCommittee, which he chairs.  Mr. Schatzman has in-depth experience as botha regulator and an operator in the gaming industry.  Mr. Schatzman hasbeen the Managing Director of Schatzman & Associates, LLC, which providesconsulting services to gaming companies and law firms regarding casinooperations and regulatory issues, since June 2003.  From March 2003 toJune 2003, he was a partner and owner of Castaways Hotel and Casino in LasVegas, Nevada and owned and worked as Executive Vice

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President of VSS Enterprises, LLC, from March 1999 toMay 2003.  Mr. Schatzman’s 13 years in casino operations included work asan Executive 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 businessside of 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 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 wesubmitted their background information to the NIGC for review andapproval.  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 ourboard.  These directors also will not take action with regard to ourGaming Management Agreement with the Otoe-Missouria Tribe of Indians if thatcontract receives NIGC approval until the NIGC approves their service on ourboard.  We submitted the required background information for each of thesedirectors to the NIGC on December 7, 2005, the same day that they joined ourboard.

Each of Mr. Abramson, Mr. Chafoulias, Mr. Holmes andMr. Schatzman has been determined to be “independent” under the rules of theNasdaq stock market.

**FamilyRelationships**

No family relationships exist among our directors andexecutive officers.

**LegalProceedings**

To the knowledge of our management, during the pastfive years, no present or former director, person nominated to become adirector, executive officer, promoter or control person of our company, exceptas disclosed below:

·           Was a general partner or executive officer of any business by oragainst which any bankruptcy petition was filed, whether at the time of suchfiling or two years prior the filing;

·           Was convicted in a criminal proceeding or named the subject of apending criminal proceeding (excluding traffic violations and other minoroffenses);

·           Was subject to any order, judgment or decree, not subsequentlyreversed, suspended or vacated, of any court of competent jurisdiction,permanently or temporarily enjoining, barring, suspending or otherwise limitinghis or her involvement in any type of business, securities or bankingactivities.

·           Was found by a court of competent jurisdiction in a civil action,or by the Securities and Exchange Commission or the Commodity Futures TradingCommission to have violated federal or state securities or commodities law, andthe judgment has not been subsequently reversed, suspended, or vacated.

*Prior Bankruptcy Proceeding ofSubsidiary*

James B. Druck, Jeffrey S. Halpern and Thomas E. Foxare Managers of Gold Rush I, LLC, a Colorado limited liability company and awholly-owned subsidiary of Southwest Casino and Hotel Corp.  In August2001, Cripple Creek Development Corp., a Colorado corporation, Blue BuildingDevelopment, Inc., a Wyoming corporation, Mark Brockley, an individual, andAnnesse Brockley, an individual, initiated a lawsuit against Gold Rush I, LLC,and Southwest Casino and Hotel Corp. in District Court, Teller County, Colorado(01-CV-156).  The plaintiff alleged that the defendants failed to paycertain obligations to the plaintiffs under the terms of their lease agreementand breach of contract.  The lease included a provision that capped themaximum monthly amount required to be paid to Mr. Brockley’s creditors. In the early years of the operation, Mr. Brockley’s obligations to creditorsfar exceeded this cap and Southwest paid these obligations as they camedue.  Under the lease, Southwest set off against current rent the amountof the excess payments.  In the lawsuit, Mr. Brockley sought to evict GoldRush I from the premises for failing to pay amounts claimed to be owed underthe Lease.  Gold Rush I responded by denying any failure to pay.

Before an evidentiary hearing in this lawsuit wascompleted, Gold Rush I filed a voluntary petition for reorganization underChapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for theDistrict of Minnesota (Case No. 01-33755) to ensure that we did not losepossession of the premises while the underlying claims were litigated.  OnOctober 15, 2001, the Colorado District Court entered an Order in which itfound (a) that Gold Rush I was not in default under the lease, (b) that GoldRush I had made payments in excess of the monthly caps provided in the lease(which overpayments the court subsequently quantified at $554,362.09), and (c)that Gold

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Rush I was entitled to offset the overpayments againstrent and other payments due under the terms of the lease. Mr. Brockley appealed the Colorado District Court’s Order to the ColoradoCourt of Appeals, which dismissed the appeal on May 21, 2002.  Aftersuccessfully defending the lawsuit brought by its landlord, Gold Rush I emergedfrom bankruptcy on January 10, 2003, when the Bankruptcy Court confirmedits reorganization plan, which provided for full payment to all creditors, withinterest.

*Colorado Regulatory Proceeding*

In June 2004, Southwest Casino and Hotel Corp. paid a$50,000 fine by the Colorado Division of Gaming for failure to properlymaintain and review statistical data on slot machine performance afterreceiving a warning letter regarding this deficiency and failing to comply withits agreement to correct the deficiency.  Southwest Casino and Hotel Corp.paid the full amount of the fine.  As part of these proceedings, JamesDruck, in his capacity as manager of the facility in question, without anyadmission of guilt, agreed to take the necessary steps to ensure SouthwestCasino and Hotel Corp.’s compliance in this matter and, further, agreed to pay$5,000 to the Limited Gaming Fund to reimburse expenses incurred by Colorado inthis investigation.

**Audit Committee and AuditCommittee Financial Expert.**

Southwest’s Board ofDirectors created an Audit Committee on January 10, 2006 and elected DavidAbramson to serve as Chairman of that committee.  The Board of Directors has determined thatMr. Abramson qualifies as an audit committee financial expert and as anindependent member of our Board of Directors under SEC rules and the rules ofthe Nasdaq stock market.  The othermembers of our Audit Committee are Jim Holmes and Gregg Schatzman, both of whomqualify as independent members of our Board of Directors under SEC rules andthe rules of the Nasdaq stock market.

Our Board of Directorsalso created a Compensation Committee and a Nominating Committee on February 1,2006.  The Board of Directors hasdetermined that all of the members of these committees are independent underthe rules of the Nasdaq stock market.

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

Based solely upon a review ofForms 3, 4 and 5 and amendments to Forms 3, 4 and 5 furnished to us during ourmost recent fiscal year, we are not aware of any director, officer, orbeneficial 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 2006.

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

We have adopted a Code of Conduct that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller or persons performing similar functions and meets therequirements of the SEC.  A copy of ourCode of Conduct was filed as an exhibit to our Annual Report on Form 10-KSBfiled June 29, 2004.  We will provide acopy of our Code of Conduct to any person, without charge, upon written requestsubmitted to our office at 2001 Killebrew Drive, Suite 350, Minneapolis, MN55425, Attn: Investor Relations.  Weintend to disclose any amendments to and any waivers from a provision of ourCode of Ethics on a Form 8-K filed with the SEC.

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**Item 10.    EXECUTIVE COMPENSATION**

The following table provides summary informationconcerning cash and non-cash compensation paid to or earned by our principalexecutive officer and our two other highest paid executive officers during theSouthwest Casino Corporation fiscal year ended December 31, 2006.

**SUMMARYCOMPENSATION TABLE**
| **Name And**                     | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Award(s)** | ** ** | **Option  Awards** | ** ** | **Nonequity  Incentive  Plan  Compensation** | ** ** | **Non qualified  deferred  compensation  earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|-----------|------------|---------------------|------------|--------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| **Principal Position**           | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**   | ** ** | **($)**             | ** ** | **($)**            | ** ** | **($)**                                      | ** ** | **($)**                                                  | ** ** | **($)**                          | ** ** | **($)**   | ** ** |
| James B. Druck,                       |       | 2006       |       | 220,000    | (1)        | —    |       | —              |       | —             |       | —                                       |       | —                                                   |       | 44,988                           | (2)        | 264,988   |       |
| *CEO and Director*                    |       | 2005       |       | 220,000    |       | —    |       | —              |       | —             |       | —                                       |       | —                                                   |       | 46,608                           | (2)        | 266,608   |       |
|                                  |       |       |       |       |       |      |       |                |       |               |       |                                         |       |                                                     |       |                             |       |      |       |
| Thomas E. Fox,                        |       | 2006       |       | 220,000    | (1)        | —    |       | —              |       | —             |       | —                                       |       | —                                                   |       | 31,961                           | (2)        | 251,961   |       |
| *President*                           |       | 2005       |       | 220,000    |       | —    |       | —              |       | —             |       | —                                       |       | —                                                   |       | 32,231                           | (2)        | 252,231   |       |
|                                  |       |       |       |       |       |      |       |                |       |               |       |                                         |       |                                                     |       |                             |       |      |       |
| Brian L. Foster,                      |       | 2006       | ** ** | **—** | (3)        | 203,790   |       | —              |       | —             |       | —                                       |       | —                                                   |       | 14,746                           | (4)        | 218,536   |       |
| *VP of  Native American Operations -* |       | 2005       |       | —     | (3)        | 273,355   |       | —              |       | —             |       | —                                       |       | —                                                   |       | 16,576                           | (4)        | 289,931   |       |

 

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(1)           Does not include$50,000 paid to Mr. Druck and $10,000 paid to Mr. Fox during the second quarterof 2006 as partial payment of salary earned in years before 1998 but not paid.

(2)           Consists of companypaid medical, dental, life and disability insurance, 401(k) matching funds, anda car allowance.

(3)           Mr. Foster manages twogaming facilities owned by the Cheyenne and Arapaho Tribes of Oklahoma.  Mr. Foster also receives compensation,including a salary, directly from the Cheyenne and Arapaho Tribes of Oklahomatribal enterprises.

(4)           Consistsof company paid medical, dental, life and disability insurance, and 401(k)matching funds.

*James Druck Employment Agreement*

In July2004, we entered into an employment agreement with James B. Druck under whichMr. Druck serves as our Chief Executive Officer. The initial term of thisagreement continued until July 1, 2006, after which the term renewsautomatically for additional one-year periods unless terminated earlier byeither party. Under this agreement, Mr. Druck receives a base salary of$220,000 per year, an automobile allowance of $1,000 per month, and is eligiblefor an additional performance bonus if granted by our Board of Directors.  Any adjustment to base salary will bedetermined by the Board of Directors. This bonus is discretionary and no bonus was awarded in fiscal years2006 or 2005.  Mr. Druck also was granteda non-plan option to purchase 300,000 shares of our common stock at a price of$1.00 per share under this agreement. This option was immediately exercisableas to 100,000 shares and 1/24 of the remaining shares would vest on the firstday of 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 January19, 2005, 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 12 months, Mr. Druck will receive a salary of notless than $25,000 and continuing medical benefits.  Mr. Druck is also subject to customaryassignment of inventions, confidentiality, non-solicitation and non-competeprovisions.

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*ThomasFox Employment Agreement*

In July2004, we entered into an employment agreement with Thomas E. Fox under whichMr. Fox serves as our President and Chief Operating Officer. The initial termof this agreement continued until July 1, 2006, after which the term renewsautomatically for additional one-year periods unless terminated earlier byeither party. Under this agreement, Mr. Fox receives a base salary of $220,000per year, an automobile allowance of $1,000 per month, and is eligible for anadditional performance bonus if granted by our Board of Directors.  Any adjustment to base salary will bedetermined by the Board of Directors. This bonus is discretionary and no bonus wasawarded in fiscal years 2006 or 2005. Mr. Fox also was granted a non-plan option to purchase 300,000 shares ofour common stock at a price of $1.00 per share under this agreement. Thisoption was immediately exercisable as to 100,000 shares and 1/24 of theremaining shares would vest on the first day of each of the next 24 monthsbeginning August 1, 2004.  Becausevesting of this option could accelerate if specified milestones were achieved,including the grant of racing licenses to North Metro Harness Initiative, LLCon January 19, 2005, this option was fully-vested at the end of 2005.  After the initial two-year term of thisagreement, if Mr. Fox is terminated without cause, in connection with a changein control of the company, or if Mr. Fox terminates his employment for “goodreason”, Mr. Fox may elect to continue employment with us in a diminishedcapacity. If Mr. Fox so elects, Mr. Fox will continue to receive his basesalary and medical benefits for 12 months. After 12 months, Mr. Fox willreceive a salary of not less than $25,000 and continuing medical benefits.  Mr. Fox is also subject to customaryassignment of inventions, confidentiality, non-solicitation and non-competeprovisions.

***Change in Control Arrangements.***

Under our employmentagreements with Mr. Druck and Mr. Fox, if either of them is terminated withinnine months after a change in control occurs, they may elect to continue theiremployment with us in a diminished capacity. If the terminated employee soelects and his employment was terminated during the initial term of the employmentagreement, the terminated employee will continue to receive his base salary andmedical benefits for 18 months. After 18 months, he will receive a salary ofnot less than $25,000 and continuing medical benefits. If the employee is soterminated after the initial term of the employment agreement, he will receivecontinuing salary and medical benefits at his then base rate for 12 monthsafter which his salary may be reduced to not less than $25,000 with continuingmedical benefits.  In addition, anyunexpired stock options will vest immediately.

For purposes ofthese employment agreements, a “change in control” includes:

**·**                  any merger, acquisition, reorganization orconsolidation after which the shareholders of Southwest immediately before thetransaction do not own a majority of the surviving corporation;

**·**                  any sale, lease, license or transfer ofsubstantially all of our assets;

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

**·**                  acquisition by any individual or group of more than50 percent 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 other transaction orseries of transactions (other than venture capital or institutional investorfinancings) that the SEC would require us to report.

**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 allor substantially all of our assets;

**·**                  our shareholders approve any plan of or proposal forthe liquidation or dissolution of our company;

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

**·**                  20% or more, but not 50% or more, of the combinedvoting power of our outstanding securities ordinarily having the right to voteat elections of directors, unless the transaction resulting in their ownershipwas approved in advance by the “continuity directors” who are members of theBoard of 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 ouroutstanding securities ordinarily having the right to vote at elections ofdirectors (regardless of any approval by the “continuity directors”); providedthat a traditional institution or venture capital financing transaction areexcluded from this definition;

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**·**                  we are a party to a merger or consolidation thatresults in our shareholders beneficially owning securities representing:

**·**                  more than 50%, but less than 80%, of the combinedvoting power of the surviving corporation’s then outstanding securitiesordinarily having the right to vote at elections of directors, unless themerger or consolidation was approved in advance by the “continuity directors”;or

**·**                  50% or less of the combined voting power of thesurviving corporation’s then outstanding securities ordinarily having the rightto vote at elections of directors (regardless of any approval by the “continuitydirectors”);

**·**                  a change in control that outside legal counseldetermines must 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.

**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR END TABLE**

The following tableprovides information regarding unexercised options for our named executiveofficers that remain outstanding at December 31, 2006.
| ** **   | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                    | ** ** |
|--------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Name**     | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  price  ($/share)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of  Shares  or Units  of Stock  that  have  not  Vested  (#)** | ** ** | **Market  Value of  Shares  or Units  of Stock  that  have  not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of Shares  that have  not  Vested (#)** | ** ** | **Equity  Incentive  Plan  Awards;  Market  Value of  Shares or  Units of  Stock that  have not  Vested ($)** | ** ** |
| James Druck  |       | 300,000                                                                                | (1)        | —                                                                                   |       | — |   | 1.00 |   | 6/30/2009 |   | — |   | — |   | — |   | — |   |
|         |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Thomas Fox   |       | 300,000                                                                                | (1)        | —                                                                                   |       | — |   | 1.00 |   | 6/30/2009 |   | — |   | — |   | — |   | — |   |
|         |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brian Foster |       | 250,000                                                                                |       | —                                                                                   |       | — |   | 0.12 |   | 12/7/2013 |   | — |   | — |   | — |   | — |   |

 

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(1)      Does notinclude warrants issued to Mr. Druck, Mr. Fox or parties in which Mr. Fox has abeneficial ownership interest in connection with their participation in thecompany’s October 2005 private placement of warrants and the company’s Januaryand February 2007 private placement of common stock with accompanying warrants.

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**DIRECTOR COMPENSATION**

Thefollowing table states information concerning the compensation of members ofour Board of Directors during the fiscal year ended December 31, 2006.
| **Name**              | ** ** | **Fees  earned  or paid  in cash  ($)** | ** ** | **Stock   Awards  ($)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Non-equity  incentive  plan  compensation  ($)** | ** ** | **Non-qualified deferred  compensation earnings ($)** | ** ** | **All other  compensation  ($)** | ** ** | **Total ($)** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| David H.  Abramson(2) |       | $                                                 | 13,500     |                         | —     |                       | $          | 135,000                                            |       | —                                                          |       | —                                |       | —             |       | $ | 148,500 |   |
| Gus A.  Chafoulias(3) |       | $                                                 | 13,500     |                         | —     |                       | $          | 90,000                                             |       | —                                                          |       | —                                |       | —             |       | $ | 103,500 |   |
| Jim Holmes (3)        |       | $                                                 | 13,500     |                         | —     |                       | $          | 90,000                                             |       | —                                                          |       | —                                |       | —             |       | $ | 103,500 |   |
| Gregg P. Schatzman(3) |       | $                                                 | 13,500     |                         | —     |                       | $          | 90,000                                             |       | —                                                          |       | —                                |       | —             |       | $ | 103,500 |   |

 

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(1)     We have estimated fair valueof the director stock options as of the date of grant by applying the Black-Scholespricing valuation model in accordance with SFAS 123(R).

(2)     As of December 31, 2006, Mr.Abramson had options to acquire an aggregate of 225,000 shares of common stockat a price of $0.65 per share outstanding that had been awarded to him inconnection with his service as a director.

(3) As of December 31, 2006, Messrs. Chafoulias,Holmes and Schatzman each had options to acquire an aggregate of 150,000 sharesof common stock at a price of $0.65 per share outstanding that had been awardedto them in connection with their service as directors.

Southwest’s Board of Directors consists of fourindependent, non-employee directors and James Druck, our CEO. Mr. Druckdoes not receive any additional compensation for his service as a director.

Beginning in the first quarter of 2006, the non-employeemembers of our Board of Directors receive a quarterly retainer of $2,500, withan initial retainer of $5,000 paid for the fourth quarter of 2005, their firstquarter of service. Each director also received a non-qualified option topurchase 150,000 shares of Southwest common stock under our 2004 StockIncentive Plan. These options were granted on January 10, 2006 and have anexercise price of $0.65 per share. The options become exercisable in 12 equalquarterly installments on the last day of each quarter over three years.Southwest also pays directors meeting fees of $1,000 for each in-person meetingand $500 for each telephonic meeting at which formal action is taken by ourboard or any committee of the board. These meeting fees do not apply to one in-personmeeting of the Board of Directors and one meeting of each committee on which aboard member serves each quarter. The increased retainer during the firstquarter of a director’s service is intended to compensate the director for theextra time and meetings required to orient a director to Southwest and the workof 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.

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**Item11. ****                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

** **

**SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

The following table states the information known to uswith respect to the beneficial ownership of our common stock as of March 12,2007 for (1) each person known by us to beneficially own more than 5% of ourcommon stock, (2) each of our executive officers, (3) each of our directors,and (4) all of our executive officers and directors as a group.

Shares are deemed “beneficially owned” by a person ifthat person, directly or indirectly, has sole or shared power to vote or todirect the voting of those shares or sole or shared power to dispose or directthe disposition of those shares.  Exceptas otherwise indicated, we believe that each of the beneficial owners of ourcapital stock listed below, based on information provided by these owners, hassole dispositive and voting power with respect to its shares, subject tocommunity property laws where applicable. Shares not outstanding but deemed beneficially owned by virtue of theright of a person or member of a group to acquire them within 60 days aretreated as outstanding only when determining the amount and percent owned bythat person or group.
| ** **                                                   | ** ** | **Common Stock** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** Name and Address**                         | ** ** | **Number**            | ** ** | **Percent** | ** ** |
| James B. Druck (1)                                           |       | 2,056,700             | (2)        | 7.4 | % |
| David H.  Abramson (3)                                       |       | 160,750               | (4)        |   | * |
| Gus A.  Chafoulias (5)                                       |       | 558,186               | (6)        | 2.0 | % |
| Jim Holmes (1)                                               |       | 62,500                | (7)        |   | * |
| Gregg P.  Schatzman (1)                                      |       | 62,500                | (7)        |   | * |
| Thomas E. Fox (1)                                            |       | 2,915,292             | (8)        | 10.4 | % |
| Jeffrey S.  Halpern (1)                                      |       | 2,027,980             | (9)        | 7.3 | % |
| Brian L. Foster (1)                                          |       | 250,000               | (10)       |   | * |
| Tracie L. Wilson  (1)                                        |       | 16,668                | (11)       |   | * |
| All executive  officers and directors as a group (9 persons) |       | 8,160,576             | (12)       | 29.3 | % |

 

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* Less than 1 percent

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

(2)          Includes300,000 shares of common stock issuable upon exercise of an option and 77,200shares issuable upon exercise of warrants.

(3)          Address:  Parkdale Plaza, 1660 S. Highway 100, Suite500, Minneapolis, MN 55416.

(4)          Includes93,750 shares issuable upon exercise of stock options and 12,000 sharesissuable upon exercise of a warrant.

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

(6)          Includes62,500 shares issuable upon exercise of a stock option and 222,728 sharesissuable upon exercise of warrants.

(7)          Consistsof 62,500 shares issuable upon exercise of a stock option.

(8)          Includes:(i) 159,152 shares held by F&B Properties, a partnership in which Mr. Foxis a 50% general partner; (ii) 181,819 shares held by BFL General Partnership,a partnership in which Mr. Fox is a general partner, (iii) 381,819 sharesheld by Richfield Hotel Associates Limited Partnership, in which Mr. Fox isgeneral partner of a partnership that is a limited partner; (iv) 300,000 sharesissuable upon exercise of a stock option; (v) 50,000 shares issuable uponexercise of a warrant; (vi) 54,546 shares issuable upon exercise of a warrantheld by F&B Properties; (vii) 72,728 shares issuable upon exercise of awarrant held by BFL General Partnership; and (viii) 152,728 shares issuableupon exercise of a warrant held by Richfield Hotel Associates LimitedPartnership.

(9)          Includes:(i) 40,000 shares held by Mr. Halpern’s wife; (ii) 300,000 shares issuable uponexercise of a stock option; and (iii) 77,280 shares issuable upon exercise ofwarrants.

(10)    Consistsof 250,000 shares issuable upon exercise of a stock option.

(11)    Consistsof 16,668 shares issuable upon exercise of a stock option.

(12) Includes: (i)an aggregate of 1,429,918 shares issuable upon exercise of options; (ii)719,210 shares issuable upon exercise of warrants; (iii) 340,971 shares held bypartnerships in which an executive officer is a general partner; (iv) 381,819shares held by a limited partnership in which and executive officer is ageneral partner of a limited partner; and (v) 40,000 shares held by the spouseof an executive officer.

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**SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN**

The following tablesummarizes our equity compensation plan information as of December 31, 2006.Options granted in the future under the plan are within the discretion of ourBoard of Directors and therefore cannot be ascertained at this 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)                                   |       | 925,000                                                                                                                                  |       | $                                                                                                       | 0.70       |                                                                                                                                                                                                         | 575,000    |   |
|                                                            |       |                                                                                                                                     |       |                                                                                                    |       |                                                                                                                                                                                                         |       |
| Equity compensation  plans not approved by security holders (2) |       | 1,775,000                                                                                                                                |       | $                                                                                                       | 0.57       |                                                                                                                                                                                                         | 0          |   |
|                                                            |       |                                                                                                                                     |       |                                                                                                    |       |                                                                                                                                                                                                         |       |
| **Total**                                                       |       | 2,700,000                                                                                                                                |       | $                                                                                                       | 0.62       |                                                                                                                                                                                                         | 575,000    |   |

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(1)   Our only equity compensation plan under whichshares of our common stock may be issued is the 2004 Stock Incentive Plan thatwas maintained by Southwest Casino and Hotel Corp. before the consummation ofour 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 equity compensationplans.

(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 the time ofconsummation of the reorganization.

**Item12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

On October 20, 2005,Southwest granted warrants to purchase 50,000 shares of common stock at a priceof $0.58 per share to each of James Druck, Tom Fox and Jeff Halpern and awarrant to purchase 150,000 shares of common stock at a price of $0.50 issuedto Gus Chafoulias before he joined our Board of Directors.  Southwest granted these warrants inconsideration of the agreements of each of Messrs. Druck, Fox and Halpern toguarantee personally up to $100,000 and Mr. Chafoulias to guarantee personally$300,000 of a $2.5 million term loan provided to Southwest by Crown Bank.  The guarantees of Messrs. Druck, Fox andHalpern also apply to a $450,000 revolving line of credit provided to Southwestby Crown Bank. Crown Bank requested the loan guarantees from Messrs. Druck, Foxand 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 ofthe of the term loan.  The $0.58 pershare exercise price of the warrants issued to Messrs. Druck, Fox and Halpernequals the average closing price for a single share of Southwest common stockon the Over-the-Counter Bulletin Board market for the ten trading daysimmediately preceding the loan closing date.

The Company had aggregateoutstanding liabilities to James B. Druck, Thomas E. Fox and Jeffrey S. Halpernfor unpaid compensation and expense reimbursements of $122,467 as of December 31,2006 and $250,699 as of December 31, 2005. At its meeting on April 26, 2006,the independent members of the Company’s Board of Directors approved one-timepayments to James Druck, CEO, Thomas Fox, President and CFO, and JeffreyHalpern, Vice President of Government Affairs, as partial repayments of theCompany’s outstanding liabilities for their unpaid salaries, the majority ofwhich is from years before 1998.  TheBoard approved payments of $50,000 to Mr. Druck and Mr. Halpern and $10,000 toMr. Fox.  The Company made these paymentsto Mr. Halpern on April 28, 2006 and Mr. Druck and Mr. Fox on May 15, 2006.

During the years endedDecember 31, 2006 and 2005, Southwest paid Berc & Fox Limited $17,950 and$17,648 for tax and accounting services, respectively.  Thomas Fox is a shareholder and officer inBerc & Fox Limited.

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During the year ended December 31, 2005, Southwestpaid Jennifer Sparlin Druck $1,000 for performing at the Gold RushPalladium.  Ms. Druck is the wife ofJames B. Druck.

Each of Mr. Abramson, Mr. Chafoulias, Mr. Holmes andMr. Schatzman has been determined to be “independent” under the rules of theNasdaq stock market.

**Item 13.  EXHIBITS**

Please see the Exhibit Index at page E-1 of thisReport.

A copy of any exhibits listed or referred to in thisReport will be furnished at a reasonable cost to any person who is astockholder upon receipt of a written request for an exhibit.  These requests should be sent to:  Southwest Casino Corporation, 2001 KillebrewDrive, Suite 350, Minneapolis, Minnesota 55425 Attn:  Stockholder Information.

The following is a list of each management contract orcompensatory plan or arrangement required to be filed as an exhibit to thisAnnual Report on Form 10-KSB under Item 13:

### A.                                   2004 Stock IncentivePlan (incorporated by reference to Exhibit 10.1 to our Current Report on Form8-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 toExhibit 10.3 to 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 10.4 to our Current Report on Form 8-Kfiled August 6, 2004).

### E.                                      Employment Agreement dated effectiveJuly 1, 2004, between Southwest Casino and Hotel Corp. and James B. Druck(incorporated by reference to Exhibit 10.13 to our Current Report on Form 8-Kfiled August 6, 2004).

### F.                                      Employment Agreement dated effectiveJuly 1, 2004, between Southwest Casino and Hotel Corp. and Jeffrey S.Halpern (incorporated by reference to Exhibit 10.14 to our Current Report onForm 8-K filed August 6, 2004).

### G.                                     Employment Agreement dated effectiveJuly 1, 2004, between Southwest Casino and Hotel Corp. and Thomas E. Fox(incorporated by reference to Exhibit 10.15 to our Current Report on Form 8-Kfiled August 6, 2004).

### H.                                    Form of Indemnification Agreements by andbetween Southwest Casino and Hotel Corp. its corporate officers (incorporatedby reference to Exhibit 10.17 to our Current Report on Form 8-K filed August 6,2004).

**I.**                                         Formof Option 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. (Incorporation by reference to Exhibit 4.8 to our Annual Report on Form10-KSB filed March 31, 2006)

**J.**                                      OptionAgreement dated January 10, 2006 between Southwest and David H. Abramson,Chairman of the Audit Committee of the Board of Directors.  (Incorporated by reference to exhibit 4.9 toour Annual Report on Form 10-KSB filed March 31, 2006)

**K.**                                    Formof Indemnification Agreements by and between Southwest of the independentmembers of Southwest’s Board of Directors. (Incorporated by reference to Exhbit10.35 to our Annual Report on Form10-KSB filed March 31, 2006)

L**.**                                      Employmentagreement between Southwest and Tracie L. Wilson dated June 29, 2006 (Incorporatedby reference to Exhibit 10.1 to the quarterly report on Form 10-QSB file August14, 2006)

M.                                 StockOption Agreement between Southwest and Tracie L. Wilson dated June 29, 2006(Incorporated by reference to Exhibit 10.2 to the quarterly reports on Form10-QSB file August 14, 2006)

44

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# **Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

The following table presents fees billed by EideBailly LLP, 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, 2006 and2005.
| ** **          | ** ** | **Aggregate Amount Billed** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Audit Fees          |       | $                                | 140,865    | (1) | $  | 115,758 | (1) |
| Audit-Related  Fees |       | $                                | 0          | (2) | $  | 3,511 | (2) |
| Tax Fees            |       | $                                | 0          | (3) | $  | 0 | (3) |
| All Other Fees      |       | $                                | 8,604      | (4) | $  | 14,026 | (4) |

----

(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 2006 audit for which we have not yet been billed),review of the consolidated financial statements included in our quarterlyreports on Form 10-QSB, and other services normally provided in connection withour statutory and regulatory filings or engagements.

(2)                      Theseother audit-related services consisted of accounting research and relatedissues and assistance with response to SEC correspondence.  The Board has considered whether the provisionof these services is compatible with maintaining Eide Bailly LLP’s independenceand has determined that it is.

(3)                      We did notpay nor incur any fees for tax services provided by our principal accountantsto Southwest.

(4)                      Consists of Feespaid for an audit of Southwest Casino Corporation’s 401(k) employee benefitplan and finance charges.

**AuditCommittee Pre-Approval Policy**

On December 7, 2005, Southwest Casino Corporationelected four new independent (as defined under the rules 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 meeting ofthe Board of Directors on January 10, 2006, the Board selected David Abramson,Jim Holmes and Gregg Schatzman, each an independent member of the Board ofDirectors, to serve on the Audit Committee of the Board of Directors.  The Board appointed Mr. Abramson as Chair ofits 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 to Southwest by its independent public accountants.

Because the Audit Committee’s approval policy was notadopted until 2006, services provided by Eide Bailly LLP to Southwest during2005 and in connection with the audit of Southwest’s financial statements forfiscal year 2005 were not approved in advance by the Audit Committee.  However, all services rendered to Southwestby Eide Bailly LLP during 2005 and in connection with the audit of Southwest’sfinancial statements for fiscal year 2005 were permissible under applicablelaws and regulations.  All other servicesprovided to Southwest by Eide Bailly for 2006 were approved in advance and allservices to be provided by Eide Bailly subsequent to 2006 are or will beapproved by the Audit Committee, in advance.

45

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15 ofthe Securities Exchange Act of 1934, the Issuer has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                | SOUTHWEST CASINO CORPORATION |
|----------------|------------------------------|
|           |                         |   |
| March 21, 2007 | By:                          | /s/ James B. Druck |
|           |                         | James B. Druck |
|           |                         | Chief Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below by the followingpersons on behalf of the Issuer on March 20, 2007 in the capacities indicated.
| Name                    | ** ** | **Title**                                                  |
|-------------------------|------------|------------------------------------------------------------|
|                    |       |                                                       |
| /s/  James B. Druck     |       | Chief Executive Officer (principal  executive officer) and |
|                    |       | Director                                                   |
|                    |       |                                                       |
| /s/  Thomas E. Fox      |       | President and Chief Operating  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                                                   |

 

46

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**SOUTHWESTCASINO CORPORATION**

**EXHIBIT INDEX TO ANNUAL REPORTON FORM 10-KSBFOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

 
| 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                                                                                                                                                 |       | Incorporated by reference to Exhibit 4.3 to the  Annual Report on Form 10-KSB filed March 31, 2006.                                         |
|         |       |                                                                                                                                                                                                                             |       |                                                                                                                                        |
| 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 8-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                                                           |       | Incorporated by reference to Exhibit 4.6 to the  Annual Report on Form 10-KSB filed March 31, 2006.                                         |
|         |       |                                                                                                                                                                                                                             |       |                                                                                                                                        |
| 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.                          |
|         |       |                                                                                                                                                                                                                             |       |                                                                                                                                        |

 

E-1

----

 
| Exhibit  No. | ** ** | **Exhibit***                                                                                                                                                                                                                               | ** ** | **Method of Filing**                                                                                     |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                       |       |                                                                                                               |
|  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 |       | Incorporated by reference to Exhibit 4.8 to the  Annual Report on Form 10-KSB filed March 31, 2006.                |
|         |       |                                                                                                                                                                                                                                       |       |                                                                                                               |
| 4.9          |       | Option Agreement dated January 10, 2006 between  Southwest and David H. Abramson, Chairman of the Audit Committee of the Board  of Directors                                                                                          |       | Incorporated by reference to Exhibit 4.9 to the  Annual Report on Form 10-KSB filed March 31, 2006.                |
|         |       |                                                                                                                                                                                                                                       |       |                                                                                                               |
| 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.                                                                                                                |       | Incorporated by reference to Exhibit 10.10 to the Registration  Statement of Form SB-2 filed February 28, 2007     |
|         |       |                                                                                                                                                                                                                                       |       |                                                                                                               |

 

E-2

----

 
| Exhibit  No. | ** ** | **Exhibit***                                                                                                                                                                                                                                                                                      | ** ** | **Method of Filing**                                                                                                                                |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                              |       |                                                                                                                                                          |
| 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 corporate officers and directors                                                                                                                                                                     |       | Incorporated by reference to Exhibit 10.17 to  the Current Report on Form 8-K/A filed October 5, 2004.                                         |
| 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                                                                                                                                                                                     |       | Incorporated by reference to Exhibit 10.18 to the  Registration on Form SB-2 filed February 28, 2007.                                                         |
|         |       |                                                                                                                                                                                                                                                                                              |       |                                                                                                                                                          |
| 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.                                            |

 

E-3

----

 
| Exhibit  No. | ** ** | **Exhibit***                                                                                                                                                                                                                           | ** ** | **Method of Filing**                                                                                       |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                   |       |                                                                                                                 |
| 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.  |
| 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 |       | Incorporated by reference to Exhibit 10.35 to the  Annual Report on Form 10-KSB filed March 31, 2006.                |
|         |       |                                                                                                                                                                                                                                   |       |                                                                                                                 |

 

E-4

----

 
| Exhibit  No. | ** ** | **Exhibit***                                                                                                                                                                                                                                                                     | ** ** | **Method of Filing**                                                                           |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 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)                                                              |       | Incorporated by reference to Exhibit 10.36 to the  Annual Report on Form 10-KSB filed March 31, 2006.    |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.37        |       | Employment Agreement between Southwest and Tracie L.  Wilson dated June 29, 2006                                                                                                                                                                                                 |       | Incorporated by reference to Exhibit 10.1 to the  Quarterly Report on Form 10-QSB filed August 14, 2006. |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.38        |       | Stock Option Agreement between Southwest and Tracie  L. Wilson dated June 29, 2006                                                                                                                                                                                               |       | Incorporated by reference to Exhibit 10.2 to the  Quarterly Report on Form 10-QSB filed August 14, 2006. |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.39        |       | Asset Purchase Agreement dated December 18, 2006 by  and among Southwest Eagle, LLC, Richard F. Fabiano, Frank R. Spadafore,  Dorian N. Lange and Pinnacle Casinos and Resorts, LLC, and Colorado Casino  Resorts, Inc., Double Eagle Resorts, Inc. and Gold Creek Ventures, LLC |       | Incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K filed December 21, 2006.    |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.40        |       | Lease dated December 20, 2006 by and between  Pinnacle Casinos and Resorts, LLC, Colorado Casino Resorts, Inc. and  Southwest Eagle, LLC                                                                                                                                         |       | Incorporated by reference to Exhibit 10.2 to the  Current Report on Form 8-K filed December 21, 2006.    |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.41        |       | Form of Securities Purchase Agreement dated as of  January 24, 2007 by and among Southwest Casino Corporation and the purchasers  named therein                                                                                                                                  |       | Incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K filed January 30, 2007.     |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.42        |       | Form of Series A Common Stock Warrant dated as of  January 24, 2007 issued by Southwest Casino Corporation to each of the  purchasers party to the Securities Purchase Agreement                                                                                                 |       | Incorporated by reference to Exhibit 10.2 to the  Current Report on Form 8-K filed January 30, 2007.     |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.43        |       | Form of Registration Rights Agreement dated as of  January 24, 2007 by and among Southwest Casino Corporation and the purchasers  named therein                                                                                                                                  |       | Incorporated by reference to Exhibit 10.3 to the  Current Report on Form 8-K filed January 30, 2007.     |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.44        |       | Amended and Restated Lease dated January 31, 2007 by  and between Pinnacle Casinos and Resorts, LLC, Colorado Casino Resorts, Inc.  and Southwest Eagle, LLC                                                                                                                     |       | Incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K filed January 31, 2007.     |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.45        |       | Right of Access and Use Agreement dated January 31,  2007 by and between Pinnacle Casinos and Resorts, LLC, Colorado Casino  Resorts, Inc. and Southwest Eagle, LLC                                                                                                              |       | Incorporated by reference to Exhibit 10.2 to the  Current Report on Form 8-K filed January 31, 2007.     |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.46        |       | Form of Securities Purchase Agreement dated as of  February 26, 2007 by and among Southwest Casino Corporation and the  purchasers named therein                                                                                                                                 |       | Incorporated by reference to Exhibit 10.46 to the  Registration on Form SB-2 filed February 28, 2007.    |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.47        |       | Form of Series A Common Stock Warrant dated as of  February 26, 2007 issued by Southwest Casino Corporation to each of the  purchasers party to the Securities Purchase Agreement                                                                                                |       | Incorporated by reference to Exhibit 10.47 to the  Registration on Form SB-2 filed February 28, 2007.    |
|         |       |                                                                                                                                                                                                                                                                             |       |                                                                                                     |
| 10.48        |       | Form of Registration Rights Agreement dated as of  February 26, 2007 by and among Southwest Casino Corporation and the  purchasers named therein                                                                                                                                 |       | Incorporated by reference to Exhibit 10.48 to the  Registration on Form SB-2 filed February 28, 2007.    |

 

E-5

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| Exhibit  No. | ** ** | **Exhibit***                                                                                                    | ** ** | **Method of Filing**                                                                                        |   |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|         |       |                                                                                                            |       |                                                                                                                  |   |
| 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.                                                                                               |
|         |       |                                                                                                            |       |                                                                                                                  |
| 23.1         |       | Consent of Independent Auditors                                                                                 |       | 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 Item601(b)(2) of Regulation S-B, the registrant agrees to furnish,supplementally, a copy of any exhibit or schedule omitted from anyfiled exhibit to this report to the Securities and Exchange Commissionupon request.

 

E-6

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