**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 
| **x**                                                 | ** ** | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
|                                                  |       |                                                                                             |
| **For the quarterly period ended September 30, 2007** |
|                                                  |       |                                                                                             |
| **o**                                                 | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                   |

 

**For the Transition PeriodFrom           To           **

 

**Commission file number 000-50572**

 

**SOUTHWESTCASINO CORPORATION******

(Exactname of small business issuer as specified in its charter)

 

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

** **

**2001 Killebrew Drive, Suite 350, Minneapolis, Minnesota55425**(Address of principal executive offices)

 

**(952) 853-9990**(Issuer’s telephone number)

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) YES  o  NO  x

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date:  27,286,443 as of October 30, 2007.

 

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

 

 

----

 

**SOUTHWEST CASINO CORPORATION**

 

**FORM 10-QSBSeptember 30, 2007**

 

**TABLE OF CONTENTS**

 
| **Description** | ** **                                                                                                                | ** ** | ** ** |
|-----------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
|            |                                                                                                                      |       |
| PART I.         | FINANCIAL INFORMATION                                                                                                     |       |
| ITEM 1.         | Financial Statements                                                                                                      | 1          |
|            | Consolidated  Balance Sheet (Unaudited), September 30, 2007                                                               | 2          |
|            | Consolidated  Statements of Operations (Unaudited) for the Three and Nine Months ended  September 30, 2007 and 2006       | 3          |
|            | Consolidated  Statements of Cash Flows (Unaudited) for the Nine Months ended September 30,  2007 and 2006                 | 4          |
|            | Consolidated  Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months  ended September 30, 2007 | 5          |
|            | Notes to Unaudited Consolidated Financial Statements                                                                      | 6          |
| ITEM 2.         | Management’s  Discussion and Analysis or Plan of Operation                                                           | 18         |
| ITEM 3.         | Controls and  Procedures                                                                                                  | 27         |
|            |                                                                                                                      |       |
| PART II.        | OTHER INFORMATION                                                                                                         |       |
| ITEM 1.         | Legal Proceedings                                                                                                         | 28         |
| ITEM 6.         | Exhibits                                                                                                                  | 29         |
|            |                                                                                                                      |       |
| SIGNATURE PAGE  | 30                                                                                                                        |

 

*In thisForm 10-QSB, references to “Southwest,” “the company,” “we,” “our” or “us,”unless the context otherwise requires, refer to Southwest Casino Corporationand its consolidated subsidiaries.*

 

i

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**PART I — FINANCIAL INFORMATION**

 

**Item1.  Financial Statements.**

 
| **FINANCIAL STATEMENTS**                                                                                            | 1      |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Consolidated  Balance Sheet (Unaudited), September 30, 2007                                                         | 2      |
| Consolidated  Statements of Operations (Unaudited) for the Three and Nine Months ended September  30, 2007 and 2006 | 3      |
| Consolidated  Statement of Cash Flows (Unaudited) for the Nine Months ended September 30,  2007 and 2006            | 4      |
| Consolidated  Statement of Stockholders’ Equity (Unaudited) for the Nine Months ended  September 30, 2007      | 5      |
| Notes to Unaudited Consolidated Financial Statements                                                                | 6      |

 

1

----

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedBalance Sheets (Unaudited)**

**September 30, 2007**

 
| ** **                                                                                                                               | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ASSETS                                                                                                                                   |       |        |       |
| CURRENT ASSETS                                                                                                                           |       |        |       |
| Cash and Cash Equivalents                                                                                                                |       | $           | 1,546,514  |   |
| Accounts Receivable                                                                                                                      |       | 44,624      |       |
| Inventories                                                                                                                              |       | 129,858     |       |
| Prepaid Expenses and Other Current Assets                                                                                                |       | 912,786     |       |
| Total Current Assets                                                                                                                     |       | $           | 2,633,782  |   |
|                                                                                                                                     |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                                   |       |        |       |
| Leasehold Improvements                                                                                                                   |       | 15,384,266  |       |
| Furniture and Equipment                                                                                                                  |       | 5,187,193   |       |
| Accumulated Depreciation                                                                                                                 |       | (10,471,421 | )          |
| Net Property and Equipment                                                                                                               |       | $           | 10,100,038 |   |
|                                                                                                                                     |       |        |       |
| OTHER ASSETS                                                                                                                             |       |        |       |
| Other Assets                                                                                                                             |       | 14,840      |       |
| Investment in Unconsolidated Subsidiary                                                                                                  |       | 7,296,511   |       |
| Total Other Assets                                                                                                                       |       | $           | 7,311,351  |   |
|                                                                                                                                     |       |        |       |
| TOTAL ASSETS                                                                                                                             |       | $           | 20,045,171 |   |
|                                                                                                                                     |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                               |       |        |       |
| CURRENT LIABILITIES                                                                                                                      |       |        |       |
| Accounts Payable                                                                                                                         |       | $           | 472,749    |   |
| Accrued Expenses                                                                                                                         |       | 1,038,391   |       |
| Accrued Liabilities - Related Parties                                                                                                    |       | 122,467     |       |
| Current Portion of Long-Term Liabilities                                                                                                 |       | 1,000,777   |       |
| Total Current Liabilities                                                                                                                |       | $           | 2,634,384  |   |
|                                                                                                                                     |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                    |       |        |       |
| Long-Term Liabilities Net of Current  Portion                                                                                            |       | $           | 6,743,222  |   |
|                                                                                                                                     |       |        |       |
| 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, 27,643,443 Shares Issued and 27,286,443 Outstanding at September  30, 2007 |       | 27,644      |       |
| Additional Paid-in Capital                                                                                                               |       | 21,384,335  |       |
| Accumulated Deficit                                                                                                                      |       | (10,422,114 | )          |
|                                                                                                                                     |       | 10,989,865  |       |
| Less Treasury Stock (357,000 shares  redeemed)                                                                                           |       | (322,300    | )          |
|                                                                                                                                     |       |        |       |
| Total Stockholders’ Equity                                                                                                          |       | 10,667,565  |       |
|                                                                                                                                     |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                          |       | $           | 20,045,171 |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

2

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**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Operations (Unaudited)**

**For the Three and Nine Months Ended September 30, 2007and 2006**

 
| ** **                                                                         | ** ** | **For the three months**     | ** ** | **For the three months**     | ** ** | **For the nine months**      | ** ** | **For the nine months**      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **ended September 30, 2007** | ** ** | **ended September 30, 2006** | ** ** | **ended September 30, 2007** | ** ** | **ended September 30, 2006** | ** ** |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **NET  REVENUES**                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |       |
| Casino                                                                             |       | $                                           | 4,094,313  |                                        | $          | 4,216,390                                   |       | $                                           | 11,219,589 |   | $ | 11,587,076 |   |
| Food &  Beverage/Hotel                                                         |       | 170,860                                     |       | 194,496                                     |       | 401,180                                     |       | 452,552                                     |       |
| Management and  Consulting                                                         |       | 434,658                                     |       | 1,468,192                                   |       | 3,566,109                                   |       | 4,562,005                                   |       |
| Entertainment                                                                      |       | 38,261                                      |       | 11,304                                      |       | 67,807                                      |       | 17,429                                      |       |
| Other                                                                              |       | 42,525                                      |       | 39,062                                      |       | 124,330                                     |       | 129,295                                     |       |
|                                                                               |       | 4,780,617                                   |       | 5,929,444                                   |       | 15,379,015                                  |       | 16,748,357                                  |       |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **EXPENSES**                                                                       |       |                                        |       |                                        |       |                                        |       |                                        |       |
| Casino                                                                             |       | $                                           | 2,964,218  |                                        | $          | 3,022,993                                   |       | $                                           | 8,709,011  |   | $ | 8,751,517 |   |
| Food &  Beverage/Hotel                                                         |       | 386,956                                     |       | 385,210                                     |       | 1,036,644                                   |       | 1,091,744                                   |       |
| Corporate Expense                                                                  |       | 803,589                                     |       | 741,101                                     |       | 2,928,408                                   |       | 2,053,397                                   |       |
| Project Development  Costs                                                         |       | 99,112                                      |       | 47,642                                      |       | 351,683                                     |       | 225,125                                     |       |
| Entertainment                                                                      |       | 103,207                                     |       | 53,069                                      |       | 172,044                                     |       | 102,649                                     |       |
| Impairment Loss                                                                    |       | 400,435                                     |       |                                        |       | 400,435                                     |       |                                        |       |
| Depreciation and  Amortization                                                     |       | 378,465                                     |       | 542,728                                     |       | 1,406,842                                   |       | 1,627,833                                   |       |
|                                                                               |       | 5,135,982                                   |       | 4,792,743                                   |       | 15,005,067                                  |       | 13,852,265                                  |       |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **INCOME  (LOSS) FROM OPERATIONS**                                                 |       | $                                           | (355,365   | )                                           | $          | 1,136,701                                   |       | $                                           | 373,948    |   | $ | 2,896,092 |   |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **OTHER  INCOME (EXPENSE)**                                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |
| Interest Income                                                                    |       | $                                           | 16         |                                        | $          | 762                                         |       | $                                           | 3,237      |   | $ | 1,934 |   |
| Interest Expense                                                                   |       | (187,410                                    | )          | (307,699                                    | )          | (640,233                                    | )          | (892,222                                    | )          |
| Gain (Loss) on  Disposition of Property and Equipment                              |       | 7,420                                       |       | (11,126                                     | )          | 7,420                                       |       | (11,126                                     | )          |
| Gain on  Disposition of Casino                                                     |       | 452,426                                     |       |                                        |       | 452,426                                     |       |                                        |       |
| Write-off of  Acquisition and Financing Costs                                      |       | (476,723                                    | )          |                                        |       | (603,373                                    | )          | —                                      |       |
|                                                                               |       | (204,271                                    | )          | (318,063                                    | )          | (780,523                                    | )          | (901,414                                    | )          |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **Income  before income taxes, equity in earnings of unconsolidated subsidiaries** |       | (559,636                                    | )          | 818,638                                     |       | (406,575                                    | )          | 1,994,678                                   |       |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| Income taxes                                                                       |       |                                        |       | (214,988                                    | )          | —                                      |       | (615,342                                    | )          |
| Loss of Unconsolidated  Subsidiary, Net of Tax Benefit                             |       | (96,096                                     | )          | (43,667                                     | )          | (312,704                                    | )          | (144,132                                    | )          |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| Income (Loss)  from Continuing Operations                                          |       | (655,732                                    | )          | 559,983                                     |       | (719,279                                    | )          | 1,235,204                                   |       |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **NET  INCOME (LOSS)**                                                             |       | $                                           | (655,732   | )                                           | $          | 559,983                                     |       | $                                           | (719,279   | ) | $ | 1,235,204 |   |
|                                                                               |       |                                        |       |                                        |       |                                        |       |                                        |       |
| **Income  (loss) per share - basic**                                               |       | $                                           | (0.02      | )                                           | $          | 0.03                                        |       | $                                           | (0.03      | ) | $ | 0.06 |   |
| **Income  (loss) per share - diluted**                                             |       |                                        |       | $                                           | 0.03       |                                        | —     |                                        | $          | 0.06 |   |
| **Weighted  average common shares outstanding - basic**                            |       | 27,286,443                                  |       | 19,688,656                                  |       | 26,571,292                                  |       | 19,671,249                                  |       |
| **Weighted  average common shares outstanding - diluted**                          |       |                                        |       | 20,664,715                                  |       | —                                      |       | 20,690,557                                  |       |

 

See Notes to Unaudited Consolidated Financial Statements

 

3

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**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Cash Flows (Unaudited)**

**For the Nine Months Ended September 30, 2007 and 2006**

 
| ** **                                                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows from Operating Activities:                                                     |       |       |       |       |       |
| Net Income (Loss)                                                                         |       | $          | (719,279   | )          | $          | 1,235,204 |   |
| Adjustments to Reconcile Net Income (Loss)  to Net Cash Provided by Operating Activities: |       |       |       |       |       |
| Depreciation and Amortization                                                             |       | 1,406,842  |       | 1,627,833  |       |
| Amortization of Loan Costs                                                                |       | 58,019     |       | 123,730    |       |
| Impairment Loss                                                                           |       | 400,435    |       |       |       |
| Write-off of Acquisition and Financing Costs                                              |       | 603,373    |       |       |       |
| (Gain) Loss on Disposition of Property and  Equipment                                     |       | (7,420     | )          | 11,126     |       |
| Stock-based Compensation Expense                                                          |       | 209,429    |       | 134,082    |       |
| Loss of Unconsolidated Subsidiary                                                         |       | 312,704    |       | 185,974    |       |
| Gain on Disposition of Casino                                                             |       | (452,426   | )          |       |       |
| Change in Current Assets and Liabilities,                                                 |       |       |       |       |       |
| (Increase) Decrease in Restricted Cash                                                    |       | —     |       | 2,656      |       |
| (Increase) Decrease in Receivables                                                        |       | 112,879    |       | (66,402    | )          |
| (Increase) Decrease in Inventories                                                        |       | 43,358     |       | (35,080    | )          |
| (Increase) Decrease in Prepaid Expenses                                                   |       | (263,530   | )          | 25,714     |       |
| (Increase) Decrease in Deferred Tax Asset                                                 |       | —     |       | 573,000    |       |
| Increase (Decrease) in Accounts Payable                                                   |       | (188,088   | )          | (276,721   | )          |
| Increase (Decrease) in Accrued Expenses                                                   |       | 106,960    |       | (55,036    | )          |
| Increase (Decrease) in Accrued Interest  Payable                                          |       | (5,927     | )          | (7,917     | )          |
| Net Cash Provided By Operating Activities                                                 |       | $          | 1,617,329  |       | $          | 3,478,163 |   |
|                                                                                      |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                      |       |       |       |       |       |
| Purchase of Property and Equipment                                                        |       | (276,476   | )          | (328,534   | )          |
| Proceeds from Disposition of Casino                                                       |       | 490,018    |       | —     |       |
| Receipt (Payment) of Deposit                                                              |       | (3,318     | )          | 14,000     |       |
| Payment of Costs Associated with Management  Contract                                     |       | (438,741   | )          |       |       |
| Investment in Unconsolidated Subsidiary                                                   |       | (2,555,195 | )          | (528,502   | )          |
| Net Cash Used In Investing Activities                                                     |       | $          | (2,783,712 | )          | $          | (843,036 | ) |
|                                                                                      |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                      |       |       |       |       |       |
| Net Payments on Short-Term Notes Payable                                                  |       | $          | (446,292   | )          |       |   |
| Principal Payments on Long-Term Borrowings                                                |       | (1,471,418 | )          | (1,976,891 | )          |
| Proceeds from Issuance of Common Stock upon  Exercise of Warrants                         |       | —     |       | 12,000     |       |
| Proceeds from Issuance of Common Stock and  Warrants                                      |       | 3,980,511  |       |       |       |
| Redemption of Common Stock                                                                |       | (322,300   | )          | —     |       |
| Payment of Financing Costs Written-Off                                                    |       | (558,864   | )          |       |       |
| Payments for Liabilities Owed to Related  Parties                                         |       |       |       | (110,000   | )          |
| Net Cash Provided (Used) by Financing  Activities                                         |       | $          | 1,181,637  |       | $          | (2,074,891 | ) |
|                                                                                      |       |       |       |       |       |
| Net Increase in Cash and Cash Equivalents                                                 |       | 15,254     |       | 560,236    |       |
|                                                                                      |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS                                                                 |       |       |       |       |       |
| Beginning of Period                                                                       |       | 1,531,260  |       | 1,195,145  |       |
| End of Period                                                                             |       | $          | 1,546,514  |       | $          | 1,755,381 |   |
|                                                                                      |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                         |       |       |       |       |       |
| Interest Paid                                                                             |       | $          | 588,141    |       | $          | 773,683 |   |
| Income Taxes Paid                                                                         |       | $          | 42,346     |       | $          | 22,506 |   |
|                                                                                      |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES                   |       |       |       |       |       |
|                                                                                      |       |       |       |       |       |
| Capital Assets Acquired with Acounts Payable                                              |       | $          | 136,270    |       | $          | 68,081 |   |
| Financing Costs Included in Accounts Payable                                              |       | $          | 14,776     |       |       |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

4

----

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Changes in Stockholders’ Equity (Unaudited)**

**For the Nine Months Ended September 30, 2007**

 
| ** **                                                        | ** ** | **Treasury Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** ** | ** ** | ** **               | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|--------------------------|------------|
| ** **                                                        | ** ** | **Number of**      | ** ** | ** **            | ** ** | **Number of** | ** ** | ** ** | ** ** | **Additional**           | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Shares**              | ** ** | **Amount**            | ** ** | **Shares**         | ** ** | **Amount** | ** ** | **Paid-in Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| **BALANCE  December 31, 2006**                                    |       | —                  |       | $                     | —     |               | 19,688,656 |       | $          | 19,689                   |       | $ | 17,239,894 |   | $ | (9,702,835 | ) | $ | 7,556,748 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Issuance of  Common Stock and Warrants, net                       |       |                    |       |                  |       | 7,954,787          |       | 7,955      |       | 3,935,012                |       |   |   | 3,942,967 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Redemption of  Common Stock                                       |       | (357,000                | )          | (322,300              | )          |               |       |       |       | —                   |       |   |   | (322,300 | ) |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Stock-based Compensation  Expense Related to Options and Warrants |       |                    |       |                  |       |               |       |       |       | 209,429                  |       |   |   | 209,429 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Net Loss                                                          |       |                    |       |                  |       |               |       |       |       |                     |       | (719,279 | ) | (719,279 | ) |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| **BALANCE  September 30, 2007**                                   |       | (357,000                | )          | $                     | (322,300   | )                  | 27,643,443 |       | $          | 27,644                   |       | $ | 21,384,335 |   | $ | (10,422,114 | ) | $ | 10,667,565 |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

5

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**SOUTHWEST CASINOCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

** **

**NOTE 1 — BASIS OFPRESENTATION**

** **

The unaudited consolidatedfinancial statements of Southwest Casino Corporation, a Nevada corporation (the“Company”), have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”) applicable to interim financialinformation. Accordingly, certain information normally included in the annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States has been condensed or omitted. Forfurther information, please refer to the annual audited consolidated financialstatements of the Company, and the related notes included within the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2006, filedwith the SEC on March 21, 2007.

 

In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included, consisting only of normal recurring adjustments. The results forthe current interim period are not necessarily indicative of the results to beexpected for the full year.

 

**NOTE 2 —MANAGEMENT FINANCIAL PLANS**

 

The Company has completedtwo closings on an equity financing, see Note 5. The net proceeds from the saleof securities were approximately $4 million. In connection with the financingagreement entered into by North Metro, see Note 7, the Company was required tomake additional membership contributions of approximately $2.35 million toNorth Metro from January 1, 2007 to the time the loan closed on April 20,2007.  As a result of the termination ofour management contract with the Cheyenne and Arapaho Tribes of Oklahoma (seeNote 8) we are seeking additional debt and/or equity financing.  The Company believes it will be able to raisethe financing on terms acceptable to the Company and in an appropriatetimeframe; however the Company can provide no assurance that it will be able todo so.

 

**NOTE 3 —STOCK OPTIONS AND AWARDS**

 

Stock option plans:

 

On July 15, 2004, SouthwestCasino and Hotel Corp. shareholders approved the Southwest Casino and HotelCorp. 2004 Stock Incentive Plan that had been adopted by the company’s Board ofDirectors effective June 1, 2004. Under the terms of the reorganizationcompleted July 22, 2004, Southwest Casino Corporation assumed the rights andobligations of Southwest Casino and Hotel 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. EffectiveJune 14, 2007, the shareholders approved an amendment to increase the number ofshares available for grant under the plan from 1,500,000 to 3,000,000.  Asof September 30, 2007, options to purchase 925,000 shares were issued and areoutstanding.  No options have been granted since July 1, 2006.

 

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 assumedstock options to purchase 1,575,000 shares of its common stock at a weightedaverage price of $.62 per share.

 

Valuation and ExpenseInformation under SFAS 123(R)

 

On January 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(“SFAS 123(R)”), which requires the measurement and recognition ofcompensation expense for all stock-based payment awards made to employees anddirectors including employee stock options and employee stock purchases basedon estimated fair values. In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”) relating to SFAS 123(R). TheCompany has applied certain provisions of SAB 107 in its adoption ofSFAS 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’s previous accounting under theprovisions of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”).

 

6

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

The effect of stock optionsissued was to increase the net loss for the three and nine months endedSeptember 30, 2007 by $42,987 and $131,512 respectively, and basic loss pershare by $0.002 and $0.005, respectively.  The effect of stock optionsissued was to decrease net earnings for the three and nine months endedSeptember 30, 2006 by $40,294 and $125,705, respectively, and basic and dilutedearnings per share by $0.002 and $0.006, respectively.

 

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 of each option is amortized into compensationexpense over the period the option vests. We have estimated fair value of allstock options as of the date of grant applying the Black-Scholes pricingvaluation model. The application of this valuation model involves assumptionsthat are judgmental and sensitive in the determination of compensation expense.No options were granted during the nine months ended September 30, 2007.

 

Status of options during thenine months ended September 30, 2007

 
| ** **                                | ** ** | **Options   Outstanding** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Contractual   Term** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------|------------|
| Balance at December 31, 2006              |       | 2,500,000                      |       | $                                                      | 0.65       |                                                       |       |                                      |       |   |
| Granted                                   |       | 0                              |       |                                                   |       |                                                       |       |                                      |       |
| Forfeited/cancelled/expired               |       | 0                              |       |                                                   |       |                                                       |       |                                      |       |
| Exercised                                 |       | 0                              |       |                                                   |       |                                                       |       |                                      |       |
| Balance at September 30, 2007             |       | 2,500,000                      |       | $                                                      | 0.65       |                                                       |       |                                      |       |   |
|                                      |       |                           |       |                                                   |       |                                                       |       |                                      |       |
| Options outstanding at September 30, 2007 |       | 2,500,000                      |       | $                                                      | 0.65       |                                                       | 5.3 years  |                                      | $          | — |   |
| Options exercisable at September 30, 2007 |       | 2,237,500                      |       | $                                                      | 0.65       |                                                       | 5.0 years  |                                      | $          | — |   |

 

As the closing stock priceof $0.47 at September 30, 2007 was less than the weighted average exerciseprice for both options outstanding and options exercisable there was nointrinsic value.  As of September 30, 2007, the Company’s unrecognizedshare-based compensation related to stock options was approximately $172,000.This cost is expected to be expensed over a weighted average period of oneyear.

 

No tax benefit has beenrecorded on the share based compensation expense for the three- and nine-monthperiods ended September 30, 2007 and 2006.

 

**NOTE 4 —WARRANTS**

 

Status of warrants:

 
| ** **                                     | ** ** | **Warrants   Outstanding** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|
| Warrants outstanding as of December 31,  2006  |       | 1,837,500                       |       | $                                                      | 0.56       |   |
| Granted                                        |       | 4,258,602                       |       | $                                                      | 0.64       |   |
| Exercised                                      |       | 0                               |       |                                                   |       |
| Cancelled                                      |       | 0                               |       |                                                   |       |
| Warrants outstanding as of September 30,  2007 |       | 6,096,102                       |       | $                                                      | 0.62       |   |

 

Sale of UnregisteredSecurities

 

In connection with theSecurities Purchase Agreement (“SPA”) entered into on January 24, 2007 andFebruary 26, 2007, the Company issued warrants to purchase 2,975,293 shares ofcommon stock to investors and warrants to purchase and an additional 483,309shares of common stock to the placement agent, see Note 5.

 

### Investor RelationsServices and Financial Consulting Services

 

On January 17, 2007, theCompany entered into two agreements with Strategic Growth International, Inc. (“SGI”)regarding investor relations and financial consulting services. As part ofthese agreements, the Company issued to SGI warrants to purchase 800,000 

 

7

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

shares of Southwest commonstock at a price of $0.63 per share that are exercisable for two years from thedate of the agreements. The exercise price equals the weighted average closingprice for one Southwest share on the Over-the-Counter Bulletin Board market forthe five trading days immediately preceding the date Southwest entered into theInvestor Relations Agreement. Beginning July 17, 2007, SGI has the right torequest the inclusion of the common shares underlying its warrants on anyregistration statement that Southwest files on which the shares are eligiblefor inclusion. Beginning January 17, 2008, SGI will have the right to requireSouthwest to file a registration statement covering those shares.

 

Southwest had the right toterminate the agreements at the end of six months. This right would have voidedif SGI met certain performance goals. If Southwest had terminated the agreementat the end of six months, the number of shares subject to the warrants issuedto SGI would have been reduced by 50 percent. The Company did not exercise thatright. Southwest has the right to terminate the agreement at the end of anymonth of its term during the second year of the agreement. Southwest alsoagreed to indemnify SGI against certain claims that may arise in connectionwith the services provided by SGI under the agreements.

 

The Company reviewed EITF96-18 “ *Accounting for Equity InstrumentsThat Are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling, Goods or Services*” in determining the fair value of thewarrants. The Company valued the warrants based upon the considerationreceived. The warrants have been valued at $220,000, which is being amortizedto consulting expense and additional paid in capital quarterly over the term ofthe service agreements.  For the three and nine months ended September 30,2007, approximately $27,500 and $78,000 have been amortized.

 

The following is adescription of each agreement:

 

•                    *Investor Relations Services:*

 

Under the terms of a letteragreement accepted January 17, 2007, Southwest retained SGI to assist the companyas an investor relations advisor and develop a comprehensive financialrelations program designed to achieve increased awareness of Southwest and itsbusiness and enhanced liquidity in the public market for the Company’s stock.

 

Southwest agreed to pay SGI$10,000 per month for a period of two years for these investor relationsservices. Southwest also agreed to reimburse SGI’s reasonable accountableexpenses incurred in connection with these services. In addition, Southwestissued to SGI a warrant to purchase 100,000 shares of Southwest common stock,see terms of warrant described above.

 

•                    *Financial Consulting Services:*

 

Southwest also entered intoan agreement with SGI for financial consulting services on January 17, 2007(the “Consulting Agreement”). Under the Consulting Agreement, SGI will assistSouthwest in developing a strategy to raise additional capital for gamingprojects the company is pursuing and for general working capital. SGI will alsohelp Southwest arrange and conduct meetings with potential sources of capitaland advise Southwest regarding the terms of any proposed financingarrangements.

 

Southwestis to pay SGI $8,000 per month for 24 months for the financial consultingservices provided under this agreement, however, SGI agreed to waive themonthly fee in exchange for a warrant to purchase 700,000 shares of Southwestcommon stock, see terms of warrant discussed above.

 

TheCompany will also be required to pay an additional consulting fee of $100,000or $200,000 if SGI assists the Company in completing equity or debt financing,respectively, that meets standards stated in the agreement. In addition, if theCompany issues warrants as part of such a debt financing, it will also issuewarrants to purchase 100,000 shares of its common stock to SGI, on the sameterms as the warrants issued as part of debt financing.

 

**NOTE 5 — SALE OFUNREGISTERED SECURITIES**

** **

On January 24, 2007 andFebruary 26, 2007, Southwest Casino Corporation (“Southwest”) entered into aSecurities Purchase Agreement (“SPA”) with certain institutional and otheraccredited investors, as defined in Rule 501 of Regulation D promulgated underthe Securities Act of 1933, as amended, under which Southwest sold in a privateplacement an aggregate of 7.44 million shares of its common stock withaccompanying warrants to purchase an aggregate of 2.98 million shares of itscommon stock, at a purchase price of $0.55 per share of common stock. Thewarrants are exercisable for a period of five years, beginning six months afterthe date 

 

8

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

of issuance, at an exerciseprice of $0.61 per share. The number of shares issuable upon exercise of thewarrants and the exercise price of the warrants are adjustable in the event ofstock splits, combinations and reclassifications, but not in the event of theissuance by Southwest of additional securities, unless such issuance ispursuant to a rights offering or pro rata distribution to all security holdersexcept the investors.

 

The securities that wereissued in this private placement were not registered under the Securities Actof 1933, as amended.  However, under the terms of a Registration RightsAgreement dated January 24, 2007 and February 26, 2007 between Southwest andthe investors, Southwest agreed to register the resale of the shares sold inthe private placement, including shares issuable upon exercise of the warrantson a registration statement that became effective on May 11, 2007.  Underthe Securities 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 placementresulted in net proceeds to Southwest of approximately $3.94 million, after thededuction of approximately, $150,000 of direct offering expenses. The placementagent agreed to accept the cash portion of its placement agent fee in commonstock and warrants on the same terms as the investors, which resulted in theplacement agent receiving approximately 517,000 shares of common stock andwarrants to purchase an aggregate of approximately 207,000 shares of commonstock. In addition, the placement agent received a warrant to purchaseapproximately 277,000 shares of common stock, which is exercisable for a periodof five years, beginning six months after the date of issuance, at an exerciseprice of $1.00 per share.

 

The following officers anddirectors of Southwest participated in the private placement on the same termsas the other investors: James B. Druck, Chief Executive Officer and Director;Thomas E. Fox, President and Chief Operating Officer and entities in which Mr.Fox holds an ownership interest; Jeffrey S. Halpern, Vice President ofGovernment Affairs; Gus A. Chafoulias, Director; and David H. Abramson,Director. Other than with respect to the SPA, there are no materialrelationships between Southwest and any of the other investors in the privateplacement.

 

**NOTE 6 —PROMOTIONAL ALLOWANCES**

 

Revenue does not include theretail amount of rooms, food, and beverages provided gratuitously to customers,which was $881,000 and $895,000 for the nine months ended September 30, 2007and 2006, respectively and was approximately $319,000 and $315,000 for thethree months ended September 30, 2007 and 2006, respectively.

 

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

 

*Organization**:*

 

North Metro HarnessInitiative, LLC (a development stage Minnesota Limited Liability Company) (“NorthMetro”) was formed on June 16, 2003 for the purpose of developing, owning, andoperating a horse race track and card room north of Minneapolis, Minnesota, inAnoka County. North Metro has purchased land and obtained zoning, permittingand regulatory approvals and begun construction of its facilities. On June 8,2004, Southwest Casino and Hotel Corp. (“Southwest”) sold a 50% interest in theCompany to MTR — Harness Inc. (“MTR”), a wholly owned subsidiary of MTR Gaming,Inc.

 

North Metro will do businessin Minnesota under the name “Running Aces Harness Park”.

 

*Accountingfor North Metro**:*

 

The Company evaluateswhether North Metro should be treated as a variable interest entity (“VIE”)subject to consolidation during the applicable reporting periods underFinancial Accounting Standards Board Interpretation 46(R) — *Consolidation of Variable Interest Entities (asamended*).

 

Contributions to capital ofNorth Metro have been made in accordance with the North Metro Member ControlAgreement dated June 8, 2004. Due to the amount of these contributions made byMTR as of October 20, 2005, the Company no longer provided financial support inexcess of its 50 percent decision making power. As of September 30, 2007 theCompany has provided approximately 42 percent of the financial support frommembers, but still retains its 50 percent decision making power. Therefore,since October 20, 

 

9

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

2005, the Company hasaccounted for its investment in North Metro on the equity method. The Company’sinvestment in North Metro as of September 30, 2007 was $7,296,511, which isrecorded on the Company’s consolidated balance sheet.

 

The following representsNorth Metro’s income statement and the Company’s calculation of the loss ofunconsolidated subsidiary net of tax benefit:

 
| ** **                                            | ** ** | **Three months   ended   September 30, 2007** | ** ** | **Three months   ended   September 30, 2006** | ** ** | **Nine months   ended   September 30, 2007** | ** ** | **Nine months   ended   September 30, 2006** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Revenues                                              |       | $                                                                      | 31,844     |                                                                   | $          | 18,218                                                                |       | $                                                                     | 80,305     |   | $ | 18,218 |   |
|                                                  |       |                                                                   |       |                                                                   |       |                                                                  |       |                                                                  |       |
| Lobbying expenses                                     |       | $                                                                      | 21,480     |                                                                   | $          | 24,000                                                                |       | $                                                                     | 109,992    |   | $ | 102,000 |   |
| License fees—Minnesota Racing Commission         |       | 77,995                                                                 |       | 61,090                                                                 |       | 200,496                                                               |       | 187,881                                                               |       |
| Other                                                 |       | 124,560                                                                |       | 40,817                                                                 |       | 395,225                                                               |       | 100,285                                                               |       |
| Total                                                 |       | 224,035                                                                |       | 125,907                                                                |       | 705,713                                                               |       | 390,166                                                               |       |
|                                                  |       |                                                                   |       |                                                                   |       |                                                                  |       |                                                                  |       |
| Net Loss                                              |       | $                                                                      | (192,191   | )                                                                      | $          | (107,689                                                              | )          | $                                                                     | (625,408   | ) | $ | (371,948 | ) |
|                                                  |       |                                                                   |       |                                                                   |       |                                                                  |       |                                                                  |       |
| 50% share of net loss                                 |       | (96,096                                                                | )          | (53,845                                                                | )          | (312,704                                                              | )          | (185,974                                                              | )          |
| Net tax benefit                                       |       | —                                                                 |       | 10,178                                                                 |       | —                                                                |       | 41,842                                                                |       |
| Loss of unconsolidated subsidiary net of  tax benefit |       | $                                                                      | (96,096    | )                                                                      | $          | (43,667                                                               | )          | $                                                                     | (312,704   | ) | $ | (144,132 | ) |

 

In 2006, North Metro formeda wholly-owned subsidiary that acquired a nearby motel in December 2006 thatNorth Metro continues to operate in 2007 and will be used to house personnelinvolved in the care of horses at the track during the racing season. The motelhas 15 rooms available to rent.

 

Southwest did not record atax benefit related to North Metro’s losses during the three and nine monthsended September 30, 2007, while Southwest did record a tax benefit during thethree and nine months ended September 30, 2006, see Note 13.

 

North Metro FinancingAgreement

 

On April 20, 2007, NorthMetro entered into a Credit Agreement (the “Credit Agreement”) with BlackDiamond Commercial Finance, L.L.C. (“Black Diamond”) as agent and lender. Underthe terms of the Credit Agreement, North Metro will borrow $41.7 million toconstruct, equip and open its harness racetrack and card club facility inColumbus, Minnesota on the north side of the Minneapolis — St. Paulmetropolitan area. The initial advance of $5 million of loan proceeds was madeApril 20, 2007. As part of the loan agreement the members of North Metro agreedto complete aggregate membership contributions of $20.8 million prior toclosing the loan. The total cost of the project is expected to approximate $62million.  As of September 30, 2007, Southwest contributed $8.9 million ofthe total amount of $21.2 million contributed by the members.  Certainamounts related to non-construction costs continue to be funded by themembers.  These amounts are not considered to be material to the totalcost of the project.  Under the Credit Agreement, the initial advance ofloan proceeds will be followed by additional advances based on progress inbuilding and opening the racetrack and card room facility. During construction,North Metro will make monthly payments of interest only based on a floatingindex rate plus 4 percent or on a 1-month, 2-month or 3-month LIBOR rate plus 6percent, at North Metro’s option. After the project opens, interest rates willreduce to the applicable index rate plus 2.5 percent or the applicable LIBORrate plus 4.5 percent, again at North Metro’s option. North Metro must also paya fee equal to 4.5% per annum on any unused portion of the $41.7 million creditfacility. Principal payments of $104,250 will be due on the last day of eachfiscal quarter beginning the first full quarter after the project opening, asdefined in the agreement. North Metro will also be required to prepay the loanin an amount equal to 50 percent of the project’s excess cash flow for eachfiscal year beginning with the fiscal year ended December 31, 2008, as definedin the agreement. Final payment equal to all outstanding principal and accruedinterest is due April 20, 2014.

 

North Metro may prepay theloan, in whole or in part, at any time, subject to the payment of certain feesand costs. The loan is secured by substantially all of the assets of NorthMetro. The Credit Agreement does not provide for recourse against the membersof North Metro.

 

10

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

The Credit Agreementcontains standard affirmative and negative covenants regarding North Metro andits wholly-owned subsidiary North Metro Hotel, LLC that restrict, among otherthings, the ability to dispose of assets, transfer or pledge equity interests,incur indebtedness, and make investments or distributions. Financial covenantsapplicable to North Metro include, among other things, limits on capitalexpenditures after opening, minimum EBITDA requirements, satisfaction ofleverage ratio limits, and delivery of financial statements.

 

In addition to customary andstandard events of default included in the Credit Agreement, failure tosubstantially complete (as defined in the Credit Agreement) construction of theNorth Metro project by June 30, 2008, and failure to operate the card room thatis part of the North Metro project at any time after July 1, 2008, wouldconstitute a default under the Credit Agreement.

 

Additional MembershipContribution, Pledge, Subordination and Sponsor Support Agreements of Southwest

 

While the Credit Agreementdoes not provide for recourse against Southwest in the case of a default byNorth Metro, Southwest has pledged its membership interest in North Metro andNorth Metro pledged its membership interest in North Metro Hotel, LLC assecurity for repayment of the loan under the terms of a Pledge Agreement withBlack Diamond (the “Pledge Agreement”).

 

Southwest also entered intoa Subordination Agreement with Black Diamond (the “Subordination Agreement”)under which Southwest has agreed that repayment of a $1.65 million membershippreferred capital contribution to North Metro, which North Metro was to repayto Southwest out of the first available revenue from operations, will besubordinated to the payments due under the loan agreements.

 

In addition, Southwestentered into a Sponsor Support Agreement (the “Support Agreement”) under whicheach member of North Metro has agreed to contribute additional capital to NorthMetro if proceeds from the loan are insufficient to complete construction andopen the facility.

 

**NOTE 8 — TERMINATION OFMANAGEMENT CONTRACT WITH THE CHEYENNE AND ARAPAHO TRIBES AND RELATED LITIGATION**

** **

The management andconsulting revenue on the Consolidated Statement of Operations for the threeand nine months ended September 30, 2007 relate entirely to revenues earnedfrom the management agreement with the Cheyenne and Arapaho Tribes of Oklahoma.As described below, the Cheyenne and Arapaho Tribes contract with the Companyhas terminated and the Company has not and will not receive any revenues frommanaging those casinos after August 17, 2007. In addition, as described below,the remaining contract costs, recorded as an intangible asset, on the Company’sConsolidated Balance Sheet have been written off.

 

On May 18, 2007, theNational Indian Gaming Commission approved Amendment No. 11 to the ThirdAmended and Restated Gaming Management Agreement dated June 16, 1995 betweenthe Company and the Cheyenne and Arapaho Tribes of Oklahoma (the “Tribes”).  Southwest continued to manage the Tribes’Lucky Star – Concho and Lucky Star – Clinton casinos under the terms ofAmendment No. 11 until August 17, 2007.

 

The May 18th NIGCapproval was based on a May 18, 2007 decision of the Cheyenne and Arapaho TrialCourt finding Amendment No. 11 valid under the Tribes’ constitution.  On May 21, 2007, the Governor of the Cheyenneand Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Courtseeking to overturn the decision of the tribal Trial Court.  On August 17,2007, The Supreme Court reversed the Trial Court order and declared thecontract extension invalid. Also on August 17, 2007, the NIGC issued a decisionand order reversing its May 18th approval of the two-year contractextension based on the tribal Supreme Court decision.  Based on the decision of the NIGC, tribalrepresentatives took control of the casinos on Sunday, August 19, 2007.  On August 21, 2007, Southwest appealed thedecision of the NIGC to reverse its approval of the two-year contractextension.  On August 24, 2007, the NIGCrejected that appeal and affirmed its decision. Southwest has not managed thecasinos since August 17, 2007.

 

Inconnection with obtaining the two-year extension on May 18, 2007, the Companyincurred approximately $438,000 of costs directly related to obtaining themanagement contract.  This amount wasrecorded as an intangible asset on the Consolidated Balance Sheet to beamortized over the two-year term of Amendment No. 11.  As a result of the termination effectiveAugust 17, 2007 the remaining unamortized costs of approximately $400,000 wereexpensed consistent with Statement of Financial Accounting Standards No. 144 “*Accounting for the Impairment or Disposal ofLong-Lived Assets*” (“SFAS #144”) and included as a separateline-item as an impairment loss on the Consolidated Statement of Operations forthe three months ended September 30, 2007. We had accounted for 

 

11

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

thesecosts as an intangible asset to be expensed over the two-year term of theextension of the management contract beginning May 19, 2007. We used thestraight-line method of amortization, which was considered to be a systematicand rational approach.

 

TheCompany accounted for this contract and included the revenues and costs in itsoperating segment “Casino Management” in accordance with Statement of FinancialAccounting Standards No. 131 “*Disclosuresabout Segments of an Enterprise and Related Information*” (“SFAS #131”),see Note 16.  The Company has alsodisclosed information about this major customer in accordance with SFAS #131paragraph #39.  In connection with thetermination of this agreement, the Company applied Statement of FinancialAccounting Standards No. 142 “*Goodwill andOther Intangible Assets*” and SFAS #144 in recognizing the impairmentloss.  The Company also considered SFAS#144 paragraph #41 relating to the reporting of discontinued operations and hasdetermined that this does not meet those requirements and has reported thetransaction in continuing operations.

 

**NOTE 9 — CONSULTINGAGREEMENT WITH PALACE RESORTS**

** **

In September 2007, theCompany entered into a consulting agreement to work with Palace Resorts indeveloping and opening a casino at the Moon Palace Casino, Golf and Spa Resort,now under construction in Punta Cana on the easternmost tip of the DominicanRepublic. Under the consulting agreement, Southwest immediately began assistingPalace Resorts in all phases of design, game selection, training and equippingthe casino that will be part of the 1,700-room resort scheduled to open in2008. Southwest will receive $50,000 a month for 10 months beginning in October2007.  Palace Resorts is a leader inproviding world-class resort vacations at all-inclusive properties throughoutCancun, the Riviera Maya, Nuevo Vallarta, Cozumel and soon, Punta Cana,Dominican Republic.

** **

**NOTE 10 —LINE OF CREDIT AND TERM LOAN**

 

On April 16, 2007, theCompany entered into the Third Amendment to the Revolving Credit and Term LoanAgreement with Crown Bank.  The agreement has been amended to extend thematurity date of the $450,000 revolving line of credit to April 30, 2008. The amendment did not alter the terms of the $2.5 million term loan and the Companymade the final payment on the term loan on April 30, 2007.  Additionally,under the amendment, three principal officers of the Company each agreed toincrease their personal guarantees of the line of credit from $100,000 to$150,000 plus expenses.  As of September 30, 2007, no amounts wereoutstanding under the Term Loan or the Revolving Credit facility.

 

The interest rate is Prime+1%, and not less than 7.5%.  Currently the interest rate is 8.75%. At September 30, 2007, the full amount of the line, $450,000, was available tobe borrowed.

 

**NOTE 11 —REDEMPTION OF SECURITIES**

 

The Company redeemed357,000 shares of common stock in accordance with Article XI of the Company’sArticles of Incorporation effective January 22, 2007.  The shares wereredeemed at a price of $0.90 per share based upon the closing stock price ofthe Company’s common stock as reported on January 22, 2007.  The Companyrecorded the redemption as a reduction to stockholders’ equity for the buy backof shares.  The shares of common stock are included in Treasury Stock inthe Consolidated Statements of Changes in Stockholders’ Equity as of September30, 2007.

 

**NOTE 12 — EARNINGS (LOSS)PER SHARE**

** **

For all periods, basicearnings (loss) per share is calculated by dividing earnings (loss) by theweighted-average number of common shares outstanding.  Diluted earningsper share for the three and nine months ended September 30, 2006, reflect theeffect of all potentially dilutive common shares outstanding by dividing netearnings by the weighted-average of all common and potentially dilutive sharesoutstanding.  The Company had a net loss for the three and nine monthsended September 30, 2007; therefore a calculation of loss per share on a fullydiluted basis would be anti-dilutive.

 

The followingis a reconciliation of basic and diluted earnings per share:

 
| ** **                                                      | ** ** | **Net Earnings** | ** ** | **Weighted Average   Equity** | ** ** | **Earnings   Per Share** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------------|------------|------------------------------------|------------|
| ** **                                                      | ** ** | **(Numerator)**       | ** ** | **(Denominator)**                       | ** ** | ** **                         | ** ** |
| **Three months ended September  30, 2006:** |       |                  |       |                                    |       |                               |       |
| Basic Earnings per Share                                        |       | $                     | 559,983    |                                    | 19,688,656 |                               | $          | 0.03 |   |
| Effect of Dilutive Securities:                                  |       |                  |       |                                    |       |                               |       |
| Outstanding  Options and Warrants                               |       |                  |       | 976,059                                 |       |                               |       |
|                                                            |       | $                     | 559,983    |                                    | 20,664,715 |                               | $          | 0.03 |   |

 

12

----

 

**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

Optionsand warrants to purchase 1,395,000 shares of common stock at an exercise priceof $1.00 per share, options to purchase 675,000 shares at $0.65 and options topurchase 50,000 shares of common stock at an exercise price of $0.75 per sharewere not included in the computation of diluted earnings per share for thethree months ended September 30, 2006 because the exercise price was greaterthan the average market price of common shares during the period.  All ofthese options were outstanding as of September 30, 2006.

 
| ** **                                                     | ** ** | **Net Earnings** | ** ** | **Weighted Average  Equity** | ** ** | **Earnings   Per Share** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **(Numerator)**       | ** ** | **(Denominator)**                 | ** ** | ** **                         | ** ** |
| **Nine months ended September  30, 2006:** |       |                  |       |                              |       |                               |       |
| Basic Earnings per Share                                       |       | $                     | 1,235,204  |                              | 19,671,249 |                               | $          | 0.06 |   |
| Effect of Dilutive Securities:                                 |       |                  |       |                              |       |                               |       |
| Outstanding Options and Warrants                               |       |                  |       | 1,019,308                         |       |                               |       |
|                                                           |       | $                     | 1,235,204  |                              | 20,690,557 |                               | $          | 0.06 |   |

 

Options and warrants topurchase 1,395,000 shares of common stock at an exercise price of $1.00 pershare, options to purchase 675,000 shares of common stock at an exercise priceof $0.65 and options to purchase 50,000 shares of common stock at an exerciseprice of $0.75 per share were not included in the computation of dilutedearnings per share for the nine months ended September 30, 2006 because theexercise price was greater than the average market price of common sharesduring the period.  All of these options were outstanding as of September30, 2006.

 

**NOTE 13 — INCOME TAXES**

** **

The Company adoptedStatement of Financial Accounting Standards Interpretation No. 48 “ *Accounting for Uncertainty in Income Taxes*“ (“Interpretation No. 48) effective January 1, 2007.  Interpretation No.48 clarifies the accounting for uncertain tax positions in accordance with SFAS109, “Accounting for Income Taxes.”  Pursuant to Interpretation No. 48,the Company is required to recognize in its financial statements the largesttax benefit of a tax position that is “more-likely-than-not” to be sustained onaudit, based solely on the technical merits of the position as of the reportingdate. Only tax positions that meet the “more-likely-than-not” threshold at thatdate may be recognized.  The term “more-likely-than-not” means alikelihood of more than 50 percent.

 

The Company accounts forinterest and penalties (if any) as interest expense in the Statement ofOperations.

 

The Company does not haveany unrecorded tax benefits as of January 1, 2006 or September 30, 2007.

 

The Company’s tax returnsfor the tax years 2003 through 2006 remain subject to examination by major taxjurisdictions.  However, as the Company has net operating losses fromprior years these tax returns can also be examined once these net operatinglosses are utilized in future tax filings.

 

Management evaluated itsprobable ability to utilize deferred tax assets arising from net operating losscarry forwards, deferred tax assets and other ordinary items and determinedthat a valuation allowance was appropriate during the three and nine monthsended September 30, 2007 based upon the uncertainty and ultimate termination ofthe Company’s management contract with the Cheyenne and Arapaho Tribes, seeNote 8.   As a result of this evaluation, a tax benefit was reducedby a comparable valuation allowance for the three and nine months ended September30, 2007.  As of September 30, 2007, the Company’s deferred tax asset iszero.

 

At December 31, 2003, theCompany established a deferred tax asset relating to net operatinglosses.  As of December 31, 2005, 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.  During the three and nine months ended September 30, 2006, theCompany recorded a tax provision to reduce the previously established deferredtax asset.

 

**NOTE 14 —RELATED PARTY TRANSACTIONS**

 

In addition to $150,000 ofunpaid bonuses, see Note 17, the Company has a liability to certain officersand stockholders for unpaid compensation and expenses of $122,467 as ofSeptember 30, 2007, relating to periods prior to December 31, 2003.

 

James B. Druck, ChiefExecutive Officer and Director; Thomas E. Fox, President and Chief OperatingOfficer; Jeffrey S. Halpern, Vice President of Government Affairs; Gus A.Chafoulias, Director; and David H. Abramson, Director each participated inour January 24, 2007 and February 26, 2007 private placement of common stockwith accompanying warrants.  See Note 5.

 

13

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**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

The Company purchasedfurniture and equipment from Berc and Fox for $25,000.  The operations of Berc & Fox were sold inJanuary 2007 and as a result certain furniture and equipment were available forpurchase.  Thomas Fox, the Company’sPresident, is a shareholder and officer in Berc & Fox Limited.

 

During the three monthsended September 30, 2007, the Company paid Jennifer Sparlin Druck $1,000 forentertainment services at the Gold Rush Palladium.  Ms. Druck is the wife of James Druck, CEO ofSouthwest.

 

**NOTE 15 —PROJECT DEVELOPMENT COSTS**

 

The Company continues topursue additional gaming opportunities and as a result continues to incurproject development expenses.  For the three and nine months endedSeptember 30, 2007, development expenses were $99,112 and $351,683,respectively.  For the three and nine months ended September 30, 2006,development expenses were $47,642 and $225,125, respectively.

 

**NOTE 16 — SEGMENTINFORMATION**

** **

The Company has groupedits operations into three segments, Casino Operations, Casino Management andProject Development.  The segment CasinoOperations includes the Company’s operations in Cripple Creek, Colorado wherethe Company operates two casinos and an outdoor amphitheatre.  In July 2007 the Company disposed of acasino, see Note 20.  The segment CasinoManagement relates to our management and consulting business.  The segment Project Development relates tothe Company’s investments in projects under development including anyacquisition efforts. These include North Metro; see Note 7, and otherdevelopment activities and their related specific costs.   Corporate expenses are included as areduction in Casino Management income.  Corporate expenses have not been allocated toCasino Operations or Project Development.

 

Segment informationrelated to the three months ended September 30, 2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 4,345,959  |                   | $          | 434,658                  | *          | $          | —     |   | $ | 4,780,617 |   |
|                                        |       |                   |       |                   |       |                     |       |       |       |
| Segmented profit (loss) before income taxes |       | 813,141                |       | (796,942               | )#         | (671,931                 | )          | (655,732   | )          |
| Segmented assets                            |       | 12,395,694             |       | 342,966                |       | 7,306,511                |       | 20,045,171 |       |
|                                             |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

*     Allof the revenues related to our operating segment Casino Management during theperiod were from our management contract with the Cheyenne and Arapaho Tribesof Oklahoma that terminated effective August 17, 2007, see Note 8.

 

#     Approximately, $400,000 wasrecorded as an impairment loss writing off all costs (previously reflected asan intangible asset) directly related to our management contract with theTribes.  This loss is shown in theConsolidated Statement of Operations in the line-item impairment loss, see Note8.

 

Segment informationrelated to the three months ended September 30, 2006 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 4,461,252  |                   | $          | 1,468,192                |       | $          | —     |   | $ | 5,929,444 |   |
| Segmented profit (loss) before income taxes |       | 359,352                |       | 506,928                |       | (91,309                  | )*         | 774,971    |       |
| Segmented assets                            |       | 13,489,529             |       | 1,357,680              |       | 4,664,550                |       | 19,511,759 |       |
|                                             |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

*  Included in Project Development in the lineitem segment profit (loss) before income taxes is a tax benefit of $10,178recorded in the loss of unconsolidated subsidiary, net of tax benefit shown onthe Consolidated Statement of Operations for the three months ended September30, 2006 (see Note 7).

 

14

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**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

Segment informationrelated to the nine months ended September 30, 2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 11,812,906 |                   | $          | 3,566,109                | *          | $          | —     |   | $ | 15,379,015 |   |
| Segmented profit (loss) before income taxes |       | 650,620                |       | (102,139               | )#         | (1,267,760               | )          | (719,279   | )          |
| Segmented assets                            |       | 12,395,694             |       | 342,966                |       | 7,306,511                |       | 20,045,171 |       |
|                                             |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

** **

*      All of the revenues relatedto our operating segment Casino Management during the period were from our managementcontract with the Cheyenne and Arapaho Tribes of Oklahoma that terminatedeffective August 17, 2007, see Note 8.

 

#      Approximately, $400,000 wasrecorded as an impairment loss writing off all costs (previously reflected asan intangible asset) directly related to our management contract with theTribes.  This loss is shown in theConsolidated Statement of Operations in the line-item impairment loss, see Note8.

 

Segment informationrelated to the nine months ended September 30, 2006 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 12,186,352 |                   | $          | 4,562,005                |       | $          | —     |   | $ | 16,748,357 |   |
| Segmented profit (loss) before income taxes |       | 386,257                |       | 1,833,546              |       | (369,257                 | )*         | 1,850,546  |       |
| Segmented assets                            |       | 13,489,529             |       | 1,357,680              |       | 4,664,550                |       | 19,511,759 |       |
|                                             |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

*  Included in Project Development in the lineitem segment profit (loss) before income taxes is a tax benefit of $41,842recorded in the loss of unconsolidated subsidiary, net of tax benefit shown onthe Consolidated Statement of Operations for the nine months ended September30, 2006 (see Note 7).

 

**NOTE 17 —COMMITMENTS AND CONTINGENCIES**

** **

In 2004, the Companypurchased player tracking software and slot accounting software from IGT. On December 29, 2005, the Company entered into an agreement with IGT to finance$460,324 of the purchase price for this system over 48 months with interestrate equal to the prime rate, which is currently 7.75%.  In addition, theCompany agreed to purchase additional software for $200,000, which will allowthe Company to offer bonusing to its customers.  The purchase iscontingent upon IGT receiving necessary approvals for the bonusing system fromthe Colorado Division of Gaming.

 

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, these executives can elect to continue their employmentin a reduced capacity, with continuing medical benefits and a salary equal totheir base pay at the time of termination for 12 months and not less than$25,000 after 12 months if the Company terminates the executive’s employmentwithout cause or in connection with a change in control of the Company (asdefined in the employment agreement) or if the executive terminates hisemployment with the Company for good cause (as defined in the employmentagreement).  The initial term of these agreements expired July 1, 2006,after which the agreement renewed and will continue to renew automatically foradditional one-year terms unless terminated.

 

The Company has entered intoemployment agreements with certain other key employees of the Company. Theagreements provide for certain benefits to the employee as well as severance ifthe employee is terminated without cause or due to a “constructive termination”as defined in the agreements.  The severance amounts depend upon the termof the agreement and can be up to six months of base salary and bonus.

 

Bonuses:

 

On March 27, 2007 theboard of directors approved performance bonuses to officers and employees ofthe Company in the amount of $385,000, which amount was recorded as an expenseeffective that date.  Of that amount, the Company has paid $210,000 duringthe 

 

15

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**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

nine months endedSeptember 30, 2007.  Bonuses in the amount of $175,000 were to be paid onor after July 1, 2007 when management determines the Company has sufficientfinancial resources for payment.  Unpaid bonuses in the amount of $175,000are reflected as a liability at September 30, 2007.

 

Other:

 

The Company is involved invarious claims, legal actions and complaints arising in the ordinary course ofbusiness.  In the opinion of management, any losses that may occur fromthese matters are adequately covered by insurance or are provided for in ourfinancial statements, and the ultimate outcome of these other matters will nothave a material effect on our financial position or results of operations.

 

**NOTE 18 —NEW ACCOUNTING PRONOUNCEMENTS**

 

The Company adoptedStatement of Financial Accounting Standards Interpretation No. 48 “Accounting*for Uncertainty in Income Taxes*” (“InterpretationNo. 48”) effective January 1, 2007, see Note 13.

 

In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” which is effective for fiscal years beginning afterNovember 15, 2007 and for interim periods within those years.  Thisstatement defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements.  The Company is currentlyevaluating the potential impact of this statement.

 

In February 2007, the FASBreleased SFAS No. 159, “ *The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115* “ This Statement permits entities to chooseto measure many financial instruments and certain other items at fair value.This Statement is effective as of the beginning of an entity’s first fiscalyear that begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007,provided the entity also elects to apply the provisions of FASB Statement No.157, Fair Value Measurements.  The Company is evaluating the impact ofthis statement.

 

**NOTE 19 —CASINO ACQUISITION**

 

On December 18, 2006,Southwest Eagle, LLC (“Southwest Eagle”), a wholly-owned subsidiary ofSouthwest Casino Corporation, entered into an Asset Purchase Agreement and along-term lease with Pinnacle Casinos and Resorts, LLC (“Pinnacle”). Under the Asset Purchase Agreement, Southwest Eagle had agreed to acquire theoperating assets and lease the real property of the Double Eagle Hotel andCasino and Gold Creek Casino in Cripple Creek, Colorado (collectively, the “DoubleEagle”).

 

On April 13, 2007, SouthwestCasino Corporation and its wholly-owned subsidiary Southwest Eagle notifiedPinnacle that Southwest had elected to terminate the Asset Purchase Agreementbetween Southwest Eagle and Pinnacle dated December 18, 2006 and all relatedagreements.

 

Southwestterminated the Asset Purchase Agreement in response to notice Southwestreceived on April 10, 2007 from Pinnacle that the separate Stock PurchaseAgreement under which Pinnacle was to acquire all of the outstanding capitalstock of Colorado Casino Resorts, Inc. (“CCRI”), the owner of the Double Eagle,had terminated in accordance with its terms when Pinnacle did not make arequired payment. Because Pinnacle was unable to complete its proposedacquisition of the CCRI stock in accordance with the Stock Purchase Agreement,as amended, Pinnacle was also unable to perform its obligations under the AssetPurchase Agreement with Southwest Eagle.  The Company incurred $126,650 oftransaction costs specific to this acquisition.  The Company wrote-offthis amount in the second quarter of 2007 when the negotiations ceased with thesellers of the Double Eagle in early July 2007. The Company had substantial doubt that it would be able to reach termson the Double Eagle with the sellers in late June 2007 and this was confirmedin early July 2007.  Thus the $126,650transaction costs were written-off in the second quarter of 2007. This isincluded as a separate line item under Other Income (Expense) in theConsolidated Statement of Operations for the nine months ended September 30,2007.

 

TheCompany also incurred financing costs with a lender in the amount ofapproximately $477,000.  These financingcosts were initially associated with the financing of the original arrangementsto acquire the Double Eagle. Even though the proposed Double Eagle acquisitionceased effective June 30, 2007, the financing arrangement and negotiationscontinued.  In July 2007 the Company 

 

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**SOUTHWEST CASINOCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**September 30, 2007**

 

receiveda revised term sheet from the lender that provided for a non-specific propertyacquisition line of credit and also included a working capital amount availableimmediately, as defined in the agreement. As part of the terms of this new term sheet the Company wired anadditional expense deposit to the lender on August 6, 2007.  The Company was scheduled to close on thisfinancing by the end of August 2007.

 

As a result of thetermination of the management agreement with the Cheyenne and Arapaho Tribes ofOklahoma, effective August 17, 2007, the financing contemplated with thislender did not occur and the arrangement was terminated.  Thus the Company wrote-off amounts related tothe financing of $476,723 included as a separate line item within Other Income(Expense) in the Consolidated Statement of Operations for the three monthsended September 30, 2007.

 

**NOTE 20 —SALE OF UNCLE SAM’S CASINO**

 

On June 25, 2007, theCompany entered into an agreement with the landlord to purchase the leased realproperty on which it operated Uncle Sam’s Casino in Cripple Creek,Colorado.  The purchase agreement provided that the Company would not beobligated to purchase the real property unless the Company assigned its rightsunder the purchase agreement to a third party.  On June 26, 2007, theCompany entered into an agreement to assign its rights under the purchaseagreement and the operating lease.  On July 29, 2007 the Company closedUncle Sam’s Casino and on July 31, 2007 the Company assigned its rights underthe purchase agreement and lease and received an assignment fee ofapproximately $487,000.  The Company recognized a gain of $452,426 on thistransaction that is recorded in the Consolidated Statement of Operations duringthe three months ended September 30, 2007 as a separate line item within OtherIncome (Expense).  The Company transferred the majority of the equipmentand slot machines to the Gold Rush and Gold Diggers casinos in the amount ofthe net book value of approximately $58,000. Additionally, the Uncle Sam’s employees were transferred to the GoldRush and Gold Diggers casinos and the customers were offered incentives tomigrate their play at Uncle Sam’s to the Gold Rush and Gold Diggers casinos.

 

The Company has recorded thetransaction involving Uncle Sam’s casino in continuing operations as theCompany reviewed SFAS #144 and determined that it did not meet the requirementsfor accounting as discontinued operations. The Company also reviewed Statement of Financial Accounting StandardsNo. 146 “*Accounting for Costs Associatedwith Exit or Disposal Activities*” and determined no accruals werenecessary at June 30, 2007.  Thetransaction was completed and recorded in the third quarter of fiscal 2007.

 

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**Item 2.    Management’sDiscussion and Analysis or Plan 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”, “Southwest”,the “Company”, “we”, “our” and “us”) for the three and nine months endedSeptember 30, 2007 and 2006.

 

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

 

For the three months endedSeptember 30, 2007, we had a net loss of $655,732 on revenues of $4,780,617compared to net income of $559,983 on revenues of $5,929,444 for the sameperiod in 2006.  This amounts to a basic loss per outstanding share duringthe three months ended September 30, 2007 of $0.02 and basic and fully dilutedearnings per outstanding share during the three months ended September 30, 2006of $0.03.

 

For the nine months endedSeptember 30, 2007, we had a net loss of $719,279 on revenues of $15,379,015compared to net income of $1,235,204 on revenues of $16,748,357 for the sameperiod in 2006.  This amounts to a basic loss per outstanding share of$0.03 during the nine months ended September 30, 2007 compared to basic andfully diluted earnings per outstanding share of $0.06 during the same period in2006.

 

The net loss of $655,732 inthe three months ended September 30, 2007, compared to net income of $559,983for the same period in 2006, primarily results from a reduction in revenues ofapproximately $1 million from our management contract with the Cheyenne andArapaho Tribes of Oklahoma, which terminated on August 17, 2007, and increasedoperating expenses of approximately $343,000. We also incurred other expenses of $204,000 during the three monthsended September 30, 2007 compared to $318,000 in 2006. The significantcomponents of the $114,000 decrease related to a decrease in interest expenseof $120,000 and a gain on the disposition of the Uncle Sam’s casino of$452,000, which were offset by the write off of financing costs of $477,000.  During the three months ended September 30,2006 we recognized income tax expense of $215,000 compared to $0 in 2007.

 

The net loss of $719,279 inthe first nine months of 2007, compared to net income of $1,235,204 for thesame period in 2006, primarily results from reduced revenues of approximately$1 million from our management contract with the Cheyenne and Arapaho Tribes ofOklahoma, which terminated on August 17, 2007, and increased operating expensesof approximately $1.2 million related primarily to an increase in corporate andproject development expenses during 2007 compared to the same period in2006.  We also incurred other expenses of$780,000 during the nine months ended September 30, 2007 compared to $901,000in 2006. The significant components of the decrease of $121,000 related to adecrease in interest expense of $252,000 and a gain on the disposition of theUncle Sam’s casino of $452,000, which were offset by the write off ofacquisition and financing costs of $603,000. During the nine months endedSeptember 30, 2006 we recognized income tax expense of $615,000 compared to $0in 2007.

 

***Overview:***

 

Our principal business isthe management, operation and development of gaming facilities in emerging andestablished gaming jurisdictions.  Currently, we operate two casinos inCripple Creek, Colorado — Gold Rush Hotel and Casino and Gold Digger’sCasino.  Until July 28, 2007, we also operated Uncle Sam’s Casino inCripple Creek.  Until August 17, 2007 we managed two Native Americangaming operations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma,Lucky Star - Concho and Lucky Star – Clinton. We also own a 50% membership interest in North Metro Harness Initiative,LLC, (“North Metro”).  North Metro is building a harness racetrack and50-table card room in Columbus, Minnesota on the north side of the Minneapolis— St. Paul Metropolitan area.  North Metro secured financing for theproject and began construction in April 2007 and plans to begin harness racingin Spring 2008 and open the card room after completing 50 days of live racing(as required by Minnesota statue).  InSeptember 2007, we entered into a consulting agreement to work with PalaceResorts in developing and opening a casino at the Moon Palace Casino, Golf andSpa Resort now under construction in Punta Cana on the easternmost tip of theDominican Republic. Under the consulting agreement, we will assist PalaceResorts in all phases of design, game selection, training and equipping thecasino that will be part of the 1,700-room resort that is scheduled to open in2008. Southwest will receive $50,000 a month for 10 months beginning in October2007.  Palace Resorts is a leader inproviding world-class resort vacations at all-inclusive properties throughoutCancun, the Riviera Maya, Nuevo Vallarta, Cozumel and soon, Punta Cana,Dominican Republic.

** **

From May 19, 2007 to August19, 2007, Southwest managed the Lucky Star – Concho and Lucky Star – Clintoncasinos under Amendment No. 11 to the Third Amended and Restated Gaming Managementagreement between Southwest and the Cheyenne and Arapaho Tribes of Oklahoma,which extended that agreement for up to two years.  On August 17, 2007, the Supreme Court of theCheyenne and Arapaho Tribes declared Amendment No. 11 invalid.  Also on August 17, 2007, the National Indian GamingCommission reversed its prior approval 

 

18

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of Amendment No. 11.  On August 24, 2007, the NIGC rejectedSouthwest’s challenge to its decision and Southwest has not received managementfees from the Cheyenne and Arapaho Tribes since August 17, 2007.  As a result of the termination of ourmanagement contract with the Cheyenne and Arapaho Tribes of Oklahoma we believeit is a necessity to seek additional debt and/or equity financing to fund ourfuture operations including project development costs.  We have undertaken such an effort and believewe will be able to raise the financing on terms acceptable to us and in anappropriate timeframe; however we can provide no assurance that we will be ableto do so.

 

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

 

***Operating segments:***

 

Ourexecutive officers review operating results, assess performance and makedecisions related to the allocation of resources on a property by propertybasis; however, certain properties are combined into one operating segment forfinancial reporting purposes as they meet the criteria for aggregation underStatement of Financial Accounting Standards No. 131 paragraph 17.  We have grouped the following properties intothe following two operating segments that are described in further detailbelow:

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

 

**CasinoManagement:**

 

We managed two casinos forthe Cheyenne and Arapaho Tribes of Oklahoma under the Third Amended andRestated Gaming Management Agreement dated June 16, 1995 between us and theCheyenne and Arapaho Tribes of Oklahoma (the “Tribes”) until August 17, 2007.

 

On May 18, 2007, theNational Indian Gaming Commission approved Amendment No. 11 to the ThirdAmended and Restated Gaming Management Agreement.  Southwest continued to manage the Tribes’Lucky Star — Concho and Lucky Star — Clinton casinos under the terms ofAmendment No. 11 until August 17, 2007.

 

The May 18th NIGCapproval was based on a May 18, 2007 decision of the Cheyenne and Arapaho TrialCourt finding Amendment No. 11 valid under the Tribes’ constitution.  On May 21, 2007, the Governor of the Cheyenneand Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Courtseeking to overturn the decision of the tribal Trial Court.  On August 17,2007, the Supreme Court reversed the Trial Court order and declared thecontract extension invalid. Also on August 17, 2007, the NIGC issued a decisionand order reversing its May 18th approval of the two-year contractextension based on the tribal Supreme Court decision.  Based on the decision of the NIGC, tribalrepresentatives took control of the casinos on Sunday, August 19, 2007.  On August 21, 2007, Southwest appealed thedecision of the NIGC to reverse its approval of the two-year contractextension.  On August 24, 2007, the NIGCrejected that appeal and affirmed its decision. Southwest has not received management fees from the casinos since August17, 2007.

 

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

 

We earned management feesof $266,457 and $896,449 from Lucky Star - Concho during the three months endedSeptember 30, 2007 and 2006, respectively.  We earned management feesof $2,045,984 and $2,809,052 from Lucky Star - Concho during the nine monthsended September 30, 2007 and 2006, respectively.  The decrease inmanagement fees for the three and nine months ended September 30, 2007 comparedto the same period in the prior year is due to the amendment of our managementcontract in May 2007 that changed the management fee structure and the subsequenttermination of the management contract on August 17, 2007.

 

#### **Lucky Star - Clinton**

 

We earned management fees of$168,201 and $571,743 from Lucky Star - Clinton during the three months endedSeptember 30, 2007 and 2006, respectively.   We earned managementfees of $1,520,125 and $1,752,953 from Lucky Star - Clinton during the ninemonths ended September 30, 2007 and 2006, respectively.   Thedecrease in management fees for the three and nine months ended September 30,2007 compared to the same period in the prior year is due to the amendment ofour management contract in May 2007 that changed the management fee structureand the subsequent termination of the management contract on August 17, 2007.

 

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**Otoe-MissouriaTribe of Indians**

 

Southwestentered into a Gaming Management Agreement with the Otoe-Missouria Tribe ofIndians under which Southwest was to manage the Tribe’s Seven Clans ParadiseCasino in Red Rock, Oklahoma, on March 24, 2006.  The Otoe-Missouria Tribe submitted the GamingManagement Agreement to the National Indian Gaming Commission, which mustapprove it before it can be effective, on April 10, 2006.   In response to comments from the NIGC,Southwest and the Tribe submitted a revised agreement to the NIGC in August2006.  The NIGC provided additionalcomments on and requested additional changes to the management agreement onSeptember 15, 2006.  The Tribe did not respondto the NIGC or to Southwest’s efforts to complete a revised management agreement.

 

OnJuly 11, 2007, the NIGC delivered a letter to Southwest and the Chairman of theTribe requesting that we submit a revised management agreement or withdraw therequest for approval of the current agreement within 30 days.  Southwest met with representatives of theTribe’s Economic Development Authority (“OMDA”) on August 6, 2007 and discussedthe status of the management agreement. The OMDA has told us that they do not intend to go forward with themanagement agreement and we have withdrawn our request for NIGC review of thismanagement agreement. We continue to seek reimbursement from the Otoe-Missouriaof expenses incurred by Southwest while working with the Tribe in 2006.

 

**Casinooperations**:

 

**GoldRush/Gold Digger’s Casino (“GR/GD”) Results**

 
| ** **                  | ** ** | **Three Months   Ended  September 30, 2007** | ** ** | **Three Months   Ended   September 30, 2006** | ** ** | **Percentage   Increase   (Decrease)** | ** ** | **Nine Months   Ended   September 30, 2007** | ** ** | **Nine Months   Ended   September 30, 2006** | ** ** | **Percentage   Increase   (Decrease)** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Casino revenues             |       | $                                                                | 4,035,628  |                                                                   | $          | 3,957,770                                        |       | 2.0                                                                   | %          | $                                                                     | 10,767,126 |                                             | $          | 10,856,649 |   | (0.8 | )% |
| Total revenues              |       | 4,241,304                                                        |       | 4,166,323                                                              |       | 1.8                                              | %          | 11,271,345                                                            |       | 11,412,467                                                            |       | (1.2                                             | )%         |
| Profit before  income taxes |       | 504,286                                                          |       | 516,049                                                                |       | (2.3                                             | )%         | 653,338                                                               |       | 888,994                                                               |       | (26.5                                            | )%         |
| Earnings margin  (*)        |       | 11.9                                                             | %          | 12.4                                                                   | %          |                                             |       | 5.8                                                                   | %          | 7.8                                                                   | %          |                                             |       |
|                             |            |                                                                  |            |                                                                        |            |                                                  |            |                                                                       |            |                                                                       |            |                                                  |            |  |  |  |  |

 

* The earningsmargin is calculated by dividing profit before income taxes by Total revenues.

 

Profit before income taxesis determined by reducing Total revenues by, among other things, interestexpense on our capital lease at the Gold Rush and depreciation and amortizationexpenses.  The capital lease was carriedon our Consolidated Balance Sheet in the amount of approximately $7.5 millionas of September 30, 2007.  Interestexpense was $183,000 and $561,000 for the three and nine months ended September30, 2007 and $219,000 and $608,000 for the three and nine months endedSeptember 30, 2006.  Depreciation andamortization expenses were $350,000 and $1.1 million for the three and ninemonths ended September 30, 2007 and $383,000 and $1.1 million for the three andnine months ended September 30, 2006.

 

For the three months endedSeptember 30, 2007, GR/GD’s total casino revenues increased by 2.0% as comparedto the same period last year.  The Cripple Creek market increased by 2.6%during this same time period compared to the same period in the prioryear.   In addition we increasedmarketing expenses as a result of closing Uncle Sam’s and offering incentivesto players in order to attract customers who played at Uncle Sam’s to play atGR/GD.  This resulted in a slightdecrease in our earnings margin.

 

Additionally, we closedUncle Sam’s casino on July 29, 2007.  We transferred approximately eightemployees to our GR/GD properties.  Thus certain salaries and expensespreviously incurred by Uncle Sam’s have been included with operations of theGR/GD properties since the closure of Uncle Sam’s casino on July 29, 2007.  Additionally, the players/customers who played at Uncle Sam’s wereoffered incentives to migrate their play to the Gold Rush and Gold Digger’scasino.    We have estimated that weretained approximately 40% - 70% of the revenues from those players who playedpreviously at Uncle Sam’s and now are playing at the Gold Rush and Gold Diggerscasinos.  The Gold Rush and Gold Diggerscasinos had available capacity to absorb the players from Uncle Sam’s.  The Uncle Sam’s brand name is no longer usedin our operations.  However, sinceinception we have used an integrated players club for all three Cripple Creekcasinos whereby the player could redeem points earned at one casino at any ofthe casinos.

 

For the nine months endedSeptember 30, 2007, GR/GD’s total casino revenues declined 0.8% as compared tothe same period last year.  The decrease in revenues can be directlyattributed to bad weather in the months of January and April.  Duringthese two months we suffered a decline in casino revenues of 24.5% for Januaryand a decline of 13.8% for April.   By contrast the Cripple Creekmarket was down 12.2% for January and essentially flat in April.  Some ofour competitors have parking garages that gives them an advantage in badweather months.  During this same time period, our earnings margindeclined from 7.8% to 5.8% from prior year, primarily due to lower revenues andhigher marketing expenses.  The companyspent additional marketing dollars in May and June to 

 

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recapture customerspotentially lost during the bad weather months as well as increased marketingin August as a result of closing Uncle Sam’s.

 

**Uncle Sam’sCasino**:

 
| ** **                        | ** ** | **Three Months   Ended   September 30, 2007** | ** ** | **Three Months   Ended   September 30, 2006** | ** ** | **Nine Months   Ended   September 30, 2007** | ** ** | **Nine Months   Ended   September 30, 2006** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Total revenues                    |       | 60,514                                                                 |       | 279,601                                                                |       | 464,697                                                               |       | 752,043                                                               |       |
| Profit (loss) before income taxes |       | 370,728                                                                |       | (116,001                                                               | )          | 101,032                                                               |       | (413,012                                                              | )          |

 

Operating results at UncleSam’s continued to deteriorate in 2007 because the property was small, detachedfrom the GR/GD and we did not make significant improvements to theproperty.   On June 25, 2007, weentered into an agreement with the landlord to purchase the leased realproperty on which we operated Uncle Sam’s Casino in Cripple Creek,Colorado.  The purchase agreement provided that we would not be obligatedto purchase the real property unless we assigned our rights under the purchaseagreement to a third party.  On June 26, 2007, we entered into anagreement to assign our rights under the purchase agreement and the operatinglease.  On July 29, 2007, we closed Uncle Sam’s Casino and, on July 31,2007, we assigned our rights under the purchase agreement and lease andreceived an assignment fee of approximately $487,000.  We recognized again of $452,426 on this transaction that is recorded in the ConsolidatedStatement of Operations during the three months ended September 30, 2007 as aseparate line item within Other Income (Expense) and included in the scheduleabove in Profit (loss) before income taxes.  We transferred the majorityof the equipment and slot machines to the Gold Rush and Gold Diggers casinos inthe amount of their net book value of approximately $58,000.  Additionally, approximately eight employeeswere transferred to the Gold Rush and Gold Diggers casinos and the customerswere offered incentives to migrate their play at Uncle Sam’s to the Gold Rushand Gold Diggers casinos.

 

We also include within theoperating segment “Casino Operations” our outdoor amphitheatre at the GoldRush.  Revenues from the amphitheatre areless than 1% of total revenues.

 

***Project Development*** costs for the three months ended September 30, 2007 and 2006 were$99,112 and $47,642, respectively.  Project development costs for the ninemonths ended September 30, 2007 and 2006 were $351,683 and $225,125,respectively.  The increase for the three and nine months ended September30, 2007 is primarily a result of increased costs associated with themanagement contract with the Cheyenne and Arapaho Tribes, see above discussionunder “Casino Management,” and costs associated with obtaining our consultingagreement with Palace Resorts in September 2007.

 

***Corporate expenses*** were $803,589 and $741,101 during the three months ended September 30,2007 and 2006, respectively, an increase of approximately $62,000. Corporate expenses were $2,928,408 and $2,053,397 during the nine months endedSeptember 30, 2007 and 2006, respectively, an increase of approximately$875,000.

 

The increase in corporateexpenses of approximately $62,000 during the three months ended September 30,2007 over the comparable period in 2006 is primarily due to increased publicrelations expense of approximately $60,000 and increased salary and benefitexpense of approximately $24,000, which were offset by a reduction of legal andaccounting fees of approximately $30,000 due primarily to timing of servicesperformed.

 

The increase in corporateexpenses of approximately $875,000 during the nine months ended September 30,2007 over the comparable period in 2006 is primarily due to increased salaryand benefit expense of approximately $529,000 which included discretionaryperformance bonuses approved by the board of directors in March 2007 ofapproximately $385,000 (with no corresponding amount in the same period in2006) and fees for investor relations and financial consulting services ofapproximately $173,000.  The bonusapproved and recorded in March 2007 consists of $210,000 that was paid in March2007, and $175,000 to be paid on or after July 1, 2007 at such time asmanagement determines that we have sufficient financial resources for thepayment.  The $175,000 is accrued as a liability at September 30, 2007.

 

***Impairment loss***was approximately $400,000 for the three and nine months endedSeptember 30, 2007.  The impairment lossrelates to the write-off of costs related to the termination of the managementcontract with the Cheyenne and Arapaho Tribes of Oklahoma.

*** ***

***Interest Expense*** was $187,410 and $307,699 for the three months ended September 30,2007 and 2006, respectively, a decrease of approximately $120,000.  Interestexpense was $640,233 and $892,222 for the nine months ended September 30, 2007and 2006, respectively, a decrease of approximately $251,000.  Thedecrease is primarily due to lower interest from our $2.5 million term loan asthe loan was fully paid in April 2007.

 

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***Write off of acquisition and financing costs***of $476,723 and $603,373 during the three andnine months ended September 30, 2007 relate to the write-off of costsassociated with the proposed acquisition of the Double Eagle and the write-offof financing costs.  See furtherdiscussion below under “Liquidity and Capital Resources”.

 

***Loss of unconsolidated subsidiary, net of tax benefit*** represents our share of the losses of NorthMetro, which were $96,096 and $43,667 during the three months ended September30, 2007 and 2006, respectively, and $312,704 and $144,132 during the ninemonths ended September 30, 2007 and 2006, respectively.    Theincrease in losses in 2007 compared to 2006 is primarily due to increased realestate taxes in 2007 due to higher assessed land values following the purchaseof land by North Metro in late 2005.

 

***Effective tax rate.  *** For the three and nine months ended September 30, 2007, we did notrecord a tax benefit for the net loss as a result of our evaluation of deferredtax assets and our ability to utilize the deferred tax assets in thefuture.  In the three and nine months ended September 30, 2006 we recordeda tax provision of approximately $215,000 and $615,000.  As of December31, 2005, we evaluated all evidence and determined that a portion of thedeferred tax assets relating to net operating losses in previous years would beutilized in 2006 based upon forecasted income for 2006.  We evaluated thevaluation allowance against the deferred tax assets at September 30, 2007 andconcluded to continue to record a 100% valuation allowance because of thetermination of our management agreement with the Cheyenne and Arapaho Tribes,effective August 17, 2007.  As of September 30, 2007, our deferred taxasset is zero.

 

***Liquidity and Capital Resources:***

 

We generated cash flow fromour Oklahoma management activities, which terminated in August 2007, andcontinue to generate cash flow from our casino operations in Colorado.  Weuse the cash flows generated to pay off debt in accordance with our agreements,fund reinvestment in existing properties for both refurbishment and replacementof assets, and to pursue additional growth opportunities.  To fund ourcash requirements we supplement the cash flows generated by our operations withfunds provided by financing activities.

 

On January 24, 2007 andFebruary 26, 2007, we entered into a Securities Purchase Agreement (“SPA”) withcertain institutional and other accredited investors, as defined in Rule 501 ofRegulation D promulgated under the Securities Act of 1933, as amended, underwhich we sold in private placements an aggregate of 7.44 million shares of ourcommon stock with accompanying warrants to purchase an aggregate of 2.98 millionshares of our common stock, at a purchase price of $0.55 per share of commonstock.  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 by usof additional securities, unless such issuance is pursuant to a rights offeringor pro rata distribution to all security holders except the investors.

 

The securities that wereissued in this private placement were not registered under the Securities Actof 1933, as amended.  However, under the terms of the Registration RightsAgreements dated January 24, 2007 and February 26, 2007 between us and theinvestors, we agreed to register the resale of the shares sold in the privateplacement, including shares issuable upon exercise of the warrants.  Theregistration statement became effective on May 11, 2007.  Under theSecurities Purchase Agreement, we and the investor parties have made othercovenants and representations and warranties regarding matters that arecustomarily included in financings of this nature.  If certain of ourobligations are not met, we have agreed to make pro-rata cash payments asliquidated damages to each investor.

 

The private placementresulted in net proceeds to us of approximately $3.94 million, after thededuction of approximately $150,000 of direct offering expenses.  Theplacement agent agreed to accept the cash portion of the placement agentcommission in common stock and warrants on the same terms as the investors,which resulted in the placement agent receiving approximately 517,000 shares ofcommon stock and warrants to purchase an aggregate of approximately 207,000shares of common stock.  In addition, the placement agent received awarrant to purchase approximately 277,000 shares of common stock, which isexercisable for a period of five years, beginning six months after the date ofissuance, at an exercise price of $1.00 per share.

 

The following officers anddirectors participated in the private placement on the same terms as the otherinvestors: James B. Druck, Chief Executive Officer and Director; Thomas E. Fox,President and Chief Operating Officer and entities in which Mr. Fox holds anownership interest; Jeffrey S. Halpern, Vice President of Government Affairs;Gus A. Chafoulias, Director; and David H. Abramson, Director.  Other thanwith respect to their participation in this offering, there are no materialrelationships between us and any of the other investors in the privateplacement.

 

On April 20, 2007, NorthMetro entered into a Credit Agreement (the “Credit Agreement”) with BlackDiamond Commercial Finance, L.L.C. (“Black Diamond”) as agent and lender. Under the terms of the Credit Agreement, North Metro will borrow $41.7 millionto construct, equip and open its harness racetrack and card club facility inColumbus, Minnesota on the north side of the Minneapolis — St. Paulmetropolitan area. As part of the loan agreement the members of North Metroagreed to complete aggregate membership 

 

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contributions of $20.8million before closing the loan. The total cost of the project is expected toapproximate $62 million.  As of September 30, 2007, Southwest contributed$8.9 million of the total amount of $21.2 million contributed by themembers.  Certain amounts related to non-construction costs continue to befunded by the members.  These amounts are not considered to be material.

 

While the Credit Agreementdoes not provide for recourse against us in the case of a default by NorthMetro, we have pledged our membership interest in North Metro and North Metropledged its membership interest in North Metro Hotel, LLC as security forrepayment of the loan under the terms of a Pledge Agreement with Black Diamond(the “Pledge Agreement”).

 

We also entered into aSubordination Agreement with Black Diamond (the “Subordination Agreement”)under which we agreed that repayment of a $1.65 million membership preferredcapital contribution to North Metro, which North Metro was to repay to us outof the first available revenue from operations, will be subordinated to thepayments due under the loan agreements.

 

In addition, we entered intoa Sponsor Support Agreement (the “Support Agreement”) under which each memberof North Metro agreed to contribute additional capital to North Metro if proceedsfrom the loan are insufficient to complete construction and open thefacility.  We believe the loan financing secured by North Metro will besufficient to construct and open the facility.

 

As a result of thetermination of our management contract with the Cheyenne and Arapaho Tribes ofOklahoma (see above discussion under the operating segment “Casino Management”)we believe it is necessary to seek additional debt and/or equity financing tofund our future operations including project development costs.  We have undertaken such an effort and believewe will be able to raise the financing on terms acceptable to us and in anappropriate timeframe, but can provide no assurance that we will be able do so.

 

We continue to reviewadditional opportunities to acquire or invest in companies, properties andother investments that meet our strategic and return on investmentcriteria.  If we complete a material acquisition or investment, ouroperating results and financial condition could change significantly in futureperiods.  In addition, any new opportunity we undertake would in alllikelihood require additional equity or debt financing.

 

On December 18, 2006, weentered into an Asset Purchase Agreement and a long-term lease with PinnacleCasinos and Resorts, LLC (“Pinnacle”). Under the Asset Purchase Agreement, weagreed to acquire the operating assets and lease the real property of theDouble Eagle Hotel and Casino and Gold Creek Casino in Cripple Creek, Colorado(collectively, the “Double Eagle”).  OnApril 13, 2007, we notified Pinnacle that we had elected to terminate the AssetPurchase Agreement.

 

Weterminated the Asset Purchase Agreement in response to notice we received onApril 10, 2007 from Pinnacle that the separate Stock Purchase Agreement underwhich Pinnacle was to acquire all of the outstanding capital stock of ColoradoCasino Resorts, Inc. (“CCRI”), the owner of the Double Eagle, had terminated inaccordance with its terms when Pinnacle did not make a required payment.Because Pinnacle was unable to complete its proposed acquisition of the CCRIstock in accordance with the Stock Purchase Agreement, as amended, Pinnacle wasalso unable to perform its obligations under the Asset Purchase Agreement withus.  In connection with this acquisitionwe incurred $126,650 of transaction costs specific to this acquisition. We wrote-off this amount in the second quarter of 2007.  We had substantial doubt that we would beable to reach terms on the Double Eagle with the sellers in late June 2007 andthis was confirmed when the negotiations ceased with the sellers of the DoubleEagle in early July 2007.  Thus the$126,650 transaction costs were written-off in the second quarter of 2007. Thisis included as a separate line item under Other Income (Expense) in the ConsolidatedStatement of Operations for the nine months ended September 30, 2007.

 

Wealso incurred financing costs with a lender in the amount of approximately$477,000.  These financing costs wereinitially associated with the financing of the original arrangements to acquirethe Double Eagle. Even though the proposed Double Eagle acquisition ceasedeffective June 30, 2007, the financing arrangement and negotiationscontinued.  In July 2007 we received arevised term sheet from the lender that provided for a non-specific propertyacquisition line of credit and also included a working capital amount availableimmediately, as defined in the agreement. As part of the terms of this new term sheet we wired an additional expensedeposit to the lender on August 6, 2007. We scheduled to close on this financing by the end of August 2007.

 

As a result of thetermination of the management agreement with the Cheyenne and Arapaho Tribes ofOklahoma, effective August 17, 2007, the financing contemplated with thislender did not occur and the arrangement was terminated.  Thus we wrote-off amounts related to thefinancing of $476,723 which are included as a separate line item within OtherIncome (Expense) in the Consolidated Statement of Operations for the threemonths ended September 30, 2007.

 

Net cash provided byoperating activities during the nine months ended September 30, 2007 was$1,617,329 compared to $3,478,163 during the same period in the prior year, adecrease of approximately $1,861,000.  The decrease between periods isprimarily due to a 

 

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decrease in revenues ofapproximately $1.4 million and an increase in operating expenses ofapproximately $1.2 million, offset by timing of working capital items.

 

Net cash used in investingactivities for the nine months ended September 30, 2007 and 2006 was $2,783,712and $843,036, respectively, an increase of approximately $1,941,000.  Theincrease in use of cash between the periods was due primarily to an increase inour investment in North Metro of approximately $2,027,000 in connection withthe closing of the construction financing secured by North Metro in April2007.  We also had additional costs ofapproximately $439,000 associated with obtaining our two-year extension of theCheyenne and Arapaho management contract, which was subsequently terminated onAugust 17, 2007.  These costs were offset by proceeds from the sale ofUncle Sam’s casino of approximately $490,000.

 

Net cash provided byfinancing activities for the nine months ended September 30, 2007 was$1,181,637 compared to net cash used in financing activities for the ninemonths ended September 30, 2006 of $2,074,891.  During the nine monthsended September 30, 2007 we had the following financing activities:

 

•                                    We completed an equity financing resulting inproceeds of approximately $4.0 million, see further discussion above.

 

•                                    We made payments of approximately $1.5million on long-term borrowings compared to approximately $2.0 million duringthe nine months ended September 30, 2006.

 

•                                    We paid costs of approximately $322,000related to the redemption of 357,000 shares of common stock in accordance withArticle XI of our Articles of Incorporation effective January 22, 2007. The shares were redeemed at a price of $0.90 per share based upon the closingstock price of our common stock as reported on January 22, 2007.  Werecorded the redemption as a reduction to stockholder’s equity for the buy backof shares.  The shares of common stock are included in Treasury Stock inthe Consolidated Statements of Changes in Stockholders’ Equity as of September30, 2007.

 

•                                    We made payments of approximately $559,000related to financing and acquisition costs, see discussion above.

 

•                                    We made payments on our line of credit of$446,292 during the nine months ended September 30, 2007 compared to $0 in thefirst nine months of 2006.

 

•                                    We made payments of $110,000 during the ninemonths ended September 30, 2006 to three officers related to unpaidcompensation from prior periods.  No such amount was paid during the sameperiod in 2007.

 

***Line of Credit.***   On October 20, 2005, we established a $450,000 line of creditwith Crown Bank of Minneapolis, Minnesota.  The line of credit is dueApril 30, 2008 with a variable interest rate at one percent above primebut not less than 7.5% (8.75% at September 30, 2007).  As of September 30,2007, the outstanding balance was $0.  Our three principal officers haveguaranteed up to $450,000 of this line of credit.

 

***Term Note*****.**  On October 20, 2005, the Company entered into a term loan to borrow $2.5million. The loan terminated on April 30, 2007 and had a variable interest rateof one percent above prime but not less than 7.5%. Twelve shareholders of theCompany, including our three principal officers and a member of our board ofdirectors, guaranteed the loan. As of April 30, 2007 the loan was paid in full.

 

***Equipment Loan.***  On December 23, 2005, the Company negotiated a loan of $460,324to pay off outstanding payables in connection with the installation of a playertracking system at our three casinos in Cripple Creek, Colorado. The loan isfor a term of 48 months with interest equal to the prime rate, which is 7.75%as of September 30, 2007.   The outstanding balance as of September30, 2007 was approximately $268,000.

 

***Seasonality:***

 

We believe that theoperations of all casinos managed or owned by us will be affected by seasonalfactors, including holidays, weather and travel conditions.

 

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

*** ***

**CompetitivePressures:**

 

Many casino operators areeither entering or expanding in our markets 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.

 

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

 

The Governor of Coloradorecently signed a bill that removes the exemption for casinos from the state’s2006 smoking ban, effective January 1, 2008.  We expect the extensionof the ban to Colorado casinos will have some negative impact on business volumesat our Cripple Creek property, the magnitude of which we cannot predict at thistime.

 

**PoliticalUncertainties:**

 

The casino entertainmentindustry is subject to political and regulatory uncertainty.  From time totime, individual jurisdictions and Native American Tribes we do business withhave considered actions, legislation or referendums that could adversely impactour operations.  The likelihood or outcome of similar actions, legislationand referendums in the future is difficult to predict.

 

The casino entertainmentindustry represents a significant source of tax revenues to the variousjurisdictions in which casinos operate.  From time to time, various stateand federal legislators and officials have proposed changes in tax laws, or inthe administration of tax laws, that would affect the industry.  It is notpossible to determine with certainty the scope or likelihood of possible futurechanges in tax laws or in the administration of tax laws.  If adopted,changes in tax law could have a material adverse effect on our financialresults.

 

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

 

We prepare our ConsolidatedFinancial Statements in conformity with accounting principles generallyaccepted in the United States.  Certain of our accounting policies,including, but not limited to, the estimated lives assigned to our assets, thedetermination of bad debt, asset impairment, valuation of stock option orwarrant awards, and income taxes, require that we apply significant judgment indefining the appropriate assumptions for calculating financial estimates.

 

By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Our judgmentsare based on our historical experience, terms of existing contracts, ourobservance of trends in the industry, information provided by our customers andinformation available from other outside sources, as appropriate.  Wecannot assure you that our actual results will not differ from ourestimates.  For a discussion of our significant accounting policies andestimates, please refer to Management’s Discussion and Analysis or Plan ofOperation and Notes to Consolidated Financial Statements presented in the 2006Financial Statements included in our Annual Report on Form 10-KSB.

 

***New Accounting Pronouncement*****:**

 

We adopted Statement ofFinancial Accounting Standards Interpretation No. 48 “*Accounting for Uncertainty in Income Taxes*”(“Interpretation No. 48”) effective January 1, 2007, which did not have asignificant impact to our financial statements.

 

In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” which is effective for fiscal years beginning afterNovember 15, 2007 and for interim periods within those years.  Thisstatement defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements.  We are currentlyevaluating the potential impact of this statement.

 

In February 2007, the FASBreleased SFAS No. 159, “*The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115”*.  This Statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue. This Statement is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007. Early adoption is permitted asof the beginning of a fiscal year that begins on or before November 15, 2007,provided the entity also elects to apply the provisions of FASB Statement No.157, Fair Value Measurements.  We are evaluating the impact of thisstatement.

 

***Forward-Looking Statements:***

 

This Quarterly Report onForm 10-QSB contains “forward-looking statements.” 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 

 

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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 reader thatforward-looking statements involve risks and uncertainties that cannot bepredicted or quantified and, consequently, actual results may differ materiallyfrom those expressed or implied in the forward- looking statements. These 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 approval, continuation or extension ofmanagement contracts with Tribal partners;

 

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

 

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

 

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

 

•                  access to and the cost of available andfeasible financing;

 

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

 

•                  success of our customer tracking and customerloyalty programs;

 

•                  abnormal gaming holds;

 

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

 

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

 

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

 

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

 

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

 

Any forward-looking statementsspeak only as of the date made. We undertake no obligation to publicly updateany forward-looking statements, whether as a result of new information, futureevents or otherwise.

 

## ***Risk Factors***

## *** ***

In reviewing this quarterlyreport on Form 10-QSB, you should carefully consider the matters concerningSouthwest Casino Corporation described under the heading “Risk Factors” in theannual report on Form 10-KSB filed by the Corporation on March 21, 2007, whichare incorporated in this document by reference.

 

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**Item3.  Controls and Procedures**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

The company’s principalexecutive officer (Chief Executive Officer) and principal financial officer(President and Chief Operating Officer) have evaluated the company’s disclosurecontrols and procedures as of September 30, 2007, and have concluded that thesecontrols and procedures are effective to ensure that information required to bedisclosed by the company in the reports that it files or submits under theSecurities Exchange Act of 1934 (as defined in Exchange Act Rules 13a—15(e) and15d—15(e)) is recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.These disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe company in the reports that it files or submits is accumulated andcommunicated to management, including the principal executive officer and theprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

(b)          Changes in Internal Controls over Financial Reporting

 

During the nine months endedSeptember 30, 2007, no change occurred in the company’s internal control overfinancial reporting that materially affected, or is likely to materiallyaffect, the company’s internal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

*Approvalof Gaming Management Contracts with Cheyenne and Arapaho Tribes of Oklahoma*

 

At a special meeting held onMarch 31, 2007, the Tribal Council of the Cheyenne and Arapaho Tribes ofOklahoma voted to approve nine separate agreements to extend and expand thegaming management relationship between Southwest and the Tribes and toauthorize and direct the Governor of the Tribes to sign those agreements andthe tribal Legislature to ratify them.  One of the nine approvedagreements was a two-year extension of the existing management agreement thatincluded changes to Southwest’s management fee.  On April 3, 2007, thetribal Governor filed a declaratory judgment action in the Cheyenne and ArapahoTrial court asking the court to declare those resolutions invalid. Southwest intervened in this case on April 13, 2007.  After a hearing onMay 18, 2007, the Cheyenne and Arapaho Trial Court issued an order validatingthe two-year extension of the existing Gaming Management Agreement betweenSouthwest and the Tribes.  After receipt of the May 18, 2007 Order ofTrial Court validating, the Chairman of the NIGC issued a letter approving thattwo-year contract extension.

 

On May 21, 2007, the Governorof the Cheyenne and Arapaho Tribes filed an appeal to the Cheyenne and ArapahoSupreme Court seeking to overturn the decision of the tribal Trial Courtvalidating the two-year contract extension.  On August 17, 2007, TheSupreme Court reversed the Trial Court order and declared the contractextension invalid. Also on August 17, 2007, the NIGC issued a decision andorder reversing its previous approval of the two-year contract extension.  Based on the decision of the NIGC, tribalrepresentatives took control of the casinos on Sunday, August 19, 2007.  On August 21, 2007, Southwest appealed thedecision of the NIGC to reverse its approval of the two-year contractextension.  On August 24, 2007, the NIGCrejected that challenge and affirmed its decision. Southwest has not managedthe casinos since August 17, 2007.

 

*AllegedBreach of Gaming Management Agreement*

 

On July 24, 2007, the tribalGovernor delivered notice to Southwest that on July 13, 2007 he had initiatedan arbitration proceeding against Southwest for alleged breach of the ThirdAmended and Restated Gaming Management Agreement between Southwest and theCheyenne and Arapaho Tribes.  An initial administrative conference in thismatter was held on October 9, 2007 and Southwest is preparing its response tothe arbitration demand.  In addition, onNovember 2, 2007, Southwest filed a counterclaim in this proceeding alleging abreach of the Gaming Management Agreement by the tribal Governor.

 

In the arbitration demand,the Governor alleged that Southwest breached the management agreement byinterfering with or attempting to influence internal affairs or governmentaldecisions of the Tribes in connection with Southwest’s ongoing efforts toextend its gaming management relationship with the Tribes and seeks terminationof the agreement (which terminated on other grounds on August 17, 2007) and $10million in damages.  Southwest does notbelieve it has improperly interfered with or attempted to influence internalgovernmental decisions of the Tribes and Southwest intends to vigorously defenditself in this arbitration proceeding. Under its Gaming Management Agreementwith the Tribes, Southwest was permitted to oppose, publicly or privately, anyaction by the Tribes that Southwest believes is not in the best interest of theTribal gaming operations. Southwest believes that all of the actions it hastaken on behalf of the gaming operations it manages or as part of its effortsto extend its gaming management relationship with the Tribes are consistentwith that provision.

 

In its counterclaim,Southwest alleges that the Governor of the Tribes breached the ManagementAgreement by refusing to negotiate in good faith for an extension and expansionof the gaming management relationship between Southwest and the Tribes.  Southwest asserts that these negotiationswere required under the Management Agreement if Southwest assisted the Tribesin entering into a compact for expanded gaming with the State of Oklahoma.  Under Southwest’s leadership, the Tribesentered into that gaming compact in April 2005.

 

# *Theft and Distribution of Surveillance Video fromLucky Star Clinton casino*

# * *

On August 24, 2007,Southwest Casino and Hotel Corp., as exclusive manager of the Lucky Starcasinos of the Cheyenne and Arapaho Tribes of Oklahoma filed a lawsuit againstDoris Thunderbull, Darrell Flyingman, in his individual capacity, and John DoesNo. 1 and 2 alleging theft (conversion) of confidential surveillance video fromthe Lucky Star – Clinton casino and subsequent copyright infringement and defamationin connection with the posting of the stolen video on the website YouTube.comand widespread distribution of DVDs containing the video by mail.  Southwest initially sought an emergencytemporary restraining order barring further distribution of the video. Thatrequest was denied on August 27, 2007 and Southwest withdrew its request forrestraining order on September 24, 2007. Southwest continues to pursue claims for conversion, copyrightinfringement, tortious interference with contract, defamation, and conspiracyagainst the defendants.

 

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*Recall ofTribal Governor*

 

Concurrent with thelitigation described above regarding the validity of the agreements to extendand expand the management relationship between Southwest and the Cheyenne andArapaho Tribes, separate legal proceedings related to efforts to recall theGovernor of the Cheyenne and Arapaho Tribes were ongoing.  While Southwestwas not a party to this, the proceedings could have impacted our managementagreements with the Tribes.

 

On June 14, 2007, theCheyenne and Arapaho Tribes held a recall election in which they voted toremove Governor Flyingman from office.  On June 19, 2007, the tribalElection Commission certified the results of the recall election.  On July 9, 2007, the Supreme Court of theCheyenne and Arapaho Tribes ruled that due to procedural errors by the tribalElection Commission with regard to timing of the election and election notices,the election was invalid and Darrell Flyingman remained the Governor of theCheyenne and Arapaho Tribes of Oklahoma.

 

On July 13, 2007, the tribalElection Commission again scheduled a second recall election for September 1,2007 based on the previously submitted petition.  On September 1, 2007, the members of theCheyenne and Arapaho Tribes again voted to remove Governor Flyingman fromoffice.  On September 24, 2007, theSupreme Court of the Cheyenne and Arapaho Tribes overruled the votes of themembers of the Tribes and invalidated the recall election on procedural groundsfor a second time.

 

# *Other Litigation Matters*

# * *

In addition to the mattersdescribed above, we are involved in various claims, legal actions and othercomplaints arising in the ordinary course of 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.

 

**Item6.  Exhibits**

 

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

 
| 31.1 |   | Certification of Chief  Executive Officer Pursuant to SEC Rule 13a-14.                                                                                                       |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal  Financial and Accounting Officer Pursuant to SEC Rule 13a-14                                                                                     |
| 32.1 |   | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                    |
| 32.2 |   | Certification of Principal  Financial and Accounting Officer Pursuant to 18.U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

In accordance with therequirements of the Securities and Exchange Act of 1934, as amended, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   November 13, 2007 |   | **SOUTHWEST  CASINO CORPORATION**             |
|-------------------------------|--------|-----------------------------------------------|
|                          |   | ** **                                    |
|                          |   |                                          |
|                          | By:    | /s/ James B. Druck                            |
|                          |   | James B. Druck                                |
|                          |   | Chief Executive Officer                       |
|                          |   | (principal executive  officer)                |
|                          |   |                                          |
|                          | By:    | /s/ Thomas E. Fox                             |
|                          |   | Thomas E. Fox                                 |
|                          |   | President and Chief  Operating Officer        |
|                          |   | (principal financial and  accounting officer) |

 

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