** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

**(Mark One)**

 
| **x**                                                   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------|--------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                       |
| **For  the quarterly period ended March 31, 2008** |
| ** **                                              | ** **                                                                                       |
| **o**                                                   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT**                   |

 

**For theTransition PeriodFrom                To                **

 

**Commissionfile number 000-50572**

 

**SOUTHWESTCASINO CORPORATION**

(Exact name of small business issuer asspecified in its charter)

 

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

 

**2001Killebrew Drive, Suite 350, Minneapolis, Minnesota 55425**

(Address of principal executive offices)

 

**(952)853-9990**

(Issuer’s telephone number)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES  x   NO  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

YES  o   NO  x

 

Statethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date:  27,460,953 as of April 25,2008.

 

 

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**SOUTHWESTCASINO CORPORATION**

 

**FORM 10-Q**

**March 31,2008**

 

**TABLEOF CONTENTS**

 
| **Description** |                                                                                                                       |   |
|-----------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|            |                                                                                                                       |
| PART I.    | FINANCIAL  INFORMATION                                                                                                     |   |
| ITEM 1.         | Financial  Statements                                                                                                      | 1      |
|            | Consolidated Balance Sheet March 31, 2008  (Unaudited) and December 31, 2007                                     | 2      |
|            | Consolidated Statements of Operations (Unaudited) for  the Three Months ended March 31, 2008 and 2007                 | 3      |
|            | Consolidated Statements of Cash Flows (Unaudited) for  the Three Months ended March 31, 2008 and 2007                 | 4      |
|            | Consolidated Statement of Changes in Stockholders’  Equity (Unaudited) for the Three Months ended March 31, 2008 | 5      |
|            | Notes to Unaudited Consolidated Financial Statements                                                                       | 6      |
| ITEM 2.         | Management’s  Discussion and Analysis or Plan of Operation                                                            | 20     |
| ITEM 4T.        | Controls and  Procedures                                                                                                   | 29     |
|            |                                                                                                                       |   |
| PART II.   | OTHER INFORMATION                                                                                                          |   |
| ITEM 1.         | Legal Proceedings                                                                                                          | 30     |
| ITEM 2.         | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               | 31     |
| ITEM 6.         | Exhibits                                                                                                                   | 31     |
| SIGNATURE PAGE  | 32                                                                                                                         |
|                 |                                                                                                                            |        |  |

 

*In this Form 10-Q, references to “Southwest,” “thecompany,” “we,” “our” or “us,” unless the context otherwise requires, refer toSouthwest Casino Corporation and its consolidated subsidiaries.*

 

i

----

 

 

**PART I– FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 
| **FINANCIAL STATEMENTS**                                                                                         | 1      |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |   |
| Consolidated  Balance Sheet March 31, 2008 (Unaudited), and December 31, 2007                          | 2      |
| Consolidated  Statements of Operations (Unaudited) for the Three Months ended  March 31, 2008 and 2007      | 3      |
| Consolidated  Statement of Cash Flows (Unaudited) for the Three Months ended March 31,  2008 and 2007       | 4      |
| Consolidated  Statement of Stockholders’ Equity (Unaudited) for the Three Months ended  March 31, 2008 | 5      |
| Notes to  Unaudited Consolidated Financial Statements                                                            | 6      |

 

1

----

 

**SOUTHWESTCASINO CORPORATION**

**ConsolidatedBalance Sheets**

**March 31, 2008 (Unaudited)and December 31, 2007**

** **
|                                                                                                                                                                    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                              | ** ** | ** **  | ** ** | ** **  | ** ** |
| CURRENT ASSETS                                                                                                                                                          |       |        |       |        |       |
| Cash and Cash Equivalents                                                                                                                                               |       | $           | 1,630,104  |        | $          | 1,892,401 |   |
| Accounts Receivable                                                                                                                                                     |       | 34,529      |       | 54,582      |       |
| Accounts Receivable - Related Parties                                                                                                                                   |       | 21,671      |       | 41,572      |       |
| Inventories                                                                                                                                                             |       | 133,705     |       | 141,041     |       |
| Prepaid Expenses and Other Current Assets                                                                                                                               |       | 959,910     |       | 679,583     |       |
| Total Current Assets                                                                                                                                                    |       | $           | 2,779,919  |        | $          | 2,809,179 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                                                                  |       |        |       |        |       |
| Leasehold Improvements                                                                                                                                                  |       | 15,423,385  |       | 15,389,750  |       |
| Furniture and Equipment                                                                                                                                                 |       | 5,301,053   |       | 5,280,282   |       |
| Accumulated Depreciation                                                                                                                                                |       | (11,191,638 | )          | (10,835,938 | )          |
| Net Property and Equipment                                                                                                                                              |       | $           | 9,532,800  |        | $          | 9,834,094 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| OTHER ASSETS                                                                                                                                                            |       |        |       |        |       |
| Other Assets                                                                                                                                                            |       | 379,283     |       | 33,374      |       |
| Investment in Unconsolidated Subsidiary                                                                                                                                 |       | 6,946,289   |       | 7,218,720   |       |
| Total Other Assets                                                                                                                                                      |       | $           | 7,325,572  |        | $          | 7,252,094 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| TOTAL ASSETS                                                                                                                                                            |       | $           | 19,638,291 |        | $          | 19,895,367 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                              |       |        |       |        |       |
|                                                                                                                                                                    |       |        |       |        |       |
| CURRENT LIABILITIES                                                                                                                                                     |       |        |       |        |       |
| Accounts Payable                                                                                                                                                        |       | $           | 557,848    |        | $          | 659,284 |   |
| Accounts Payable - Related Parties                                                                                                                                      |       | —      |       | 25,000      |       |
| Accrued Expenses                                                                                                                                                        |       | 963,206     |       | 1,085,797   |       |
| Accrued Liabilities - Related Parties                                                                                                                                   |       | 122,467     |       | 122,467     |       |
| Notes Payable                                                                                                                                                           |       | —      |       | 450,000     |       |
| Current Portion of Long-Term Liabilities                                                                                                                                |       | 1,269,849   |       | 1,005,940   |       |
| Accrued Interest Payable                                                                                                                                                |       | 61,664      |       | 55,465      |       |
| Total Current Liabilities                                                                                                                                               |       | $           | 2,975,034  |        | $          | 3,403,953 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                                                   |       |        |       |        |       |
| Long-Term Liabilities Net of Current Portion                                                                                                                            |       | $           | 7,515,568  |        | $          | 6,486,365 |   |
|                                                                                                                                                                    |       |        |       |        |       |
| 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,  27,817,953 and 27,460,953 Shares Issued and Outstanding at March 31,  2008 and December 31, 2007 |       | 27,819      |       | 27,819      |       |
| Additional Paid-in Capital                                                                                                                                              |       | 22,015,813  |       | 21,496,064  |       |
| Accumulated Deficit                                                                                                                                                     |       | (12,573,643 | )          | (11,196,534 | )          |
|                                                                                                                                                                    |       | 9,469,989   |       | 10,327,349  |       |
| Less Treasury Stock (357,000 shares redeemed)                                                                                                                           |       | (322,300    | )          | (322,300    | )          |
|                                                                                                                                                                    |       |        |       |        |       |
| Total Stockholders’ Equity                                                                                                                                         |       | 9,147,689   |       | 10,005,049  |       |
|                                                                                                                                                                    |       |        |       |        |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                        |       | $           | 19,638,291 |        | $          | 19,895,367 |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

2

----

 

**SOUTHWESTCASINO CORPORATION**

**Consolidated Statements of Operations****(Unaudited)**

**Forthe Three Months Ended March 31, 2008 and 2007**

 
| ** **                                                                     | ** ** | **For the three months**      | ** ** | **For the three months**      | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                     | ** ** | **ended March 31, 2008** | ** ** | **ended March 31, 2007** | ** ** |
|                                                                           |       |                          |       |                          |       |
| **NET REVENUES**                                                               | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Casino                                                                         |       | $                             | 3,501,331  |                          | $          | 3,381,392 |   |
| Food & Beverage/Hotel                                                 |       | 89,883                        |       | 99,455                        |       |
| Management and Consulting                                                      |       | 150,000                       |       | 1,629,823                     |       |
| Other                                                                          |       | 36,530                        |       | 31,559                        |       |
|                                                                           |       | 3,777,744                     |       | 5,142,229                     |       |
|                                                                           |       |                          |       |                          |       |
| **EXPENSES**                                                                   | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Casino                                                                         |       | $                             | 2,787,730  |                          | $          | 2,852,643 |   |
| Food & Beverage/Hotel                                                 |       | 325,965                       |       | 309,700                       |       |
| Corporate Expense                                                              |       | 906,968                       |       | 1,303,585                     |       |
| Project Development Costs                                                      |       | —                        |       | 168,276                       |       |
| Entertainment                                                                  |       | 8,207                         |       | 15,405                        |       |
| Depreciation and Amortization                                                  |       | 365,314                       |       | 540,633                       |       |
|                                                                           |       | 4,394,184                     |       | 5,190,242                     |       |
|                                                                           |       |                          |       |                          |       |
| **LOSS FROM OPERATIONS**                                                       |       | $                             | (616,440   | )                             | $          | (48,013 | ) |
|                                                                           |       |                          |       |                          |       |
| **OTHER INCOME (EXPENSE)**                                                     | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Interest Income                                                                |       | $                             | 218        |                          | $          | 2,569 |   |
| Interest Expense                                                               |       | (202,516                      | )          | (249,449                      | )          |
| Gain (Loss) on Disposition of Property and Equipment                           |       | 1,250                         |       |                          |       |
| Write-off of Financing Costs                                                   |       | (217,329                      | )          | —                        |       |
| Other                                                                          |       | (3,861                        | )          |                          |       |
|                                                                           |       | (422,238                      | )          | (246,880                      | )          |
|                                                                           |       |                          |       |                          |       |
| **Loss before income taxes, loss  in earnings of unconsolidated subsidiaries** | ** ** | (1,038,678                    | )          | (294,893                      | )          |
|                                                                           |       |                          |       |                          |       |
| Income taxes                                                                   |       | —                        |       |                          |       |
| Loss of Unconsolidated Subsidiaries, Net of Tax Benefit                        |       | (338,431                      | )          | (120,171                      | )          |
|                                                                           |       |                          |       |                          |       |
| Loss from Continuing Operations                                                |       | (1,377,109                    | )          | (415,064                      | )          |
|                                                                           |       |                          |       |                          |       |
| **NET LOSS**                                                                   |       | $                             | (1,377,109 | )                             | $          | (415,064 | ) |
|                                                                           |       |                          |       |                          |       |
| **Income (loss) per share - basic**                                            |       | $                             | (0.05      | )                             | $          | (0.02 | ) |
| **Income (loss) per share -  diluted**                                         |       | —                        |       | $                             | —     |   |
| **Weighted average common shares  outstanding - basic**                        |       | 27,460,943                    |       | 24,478,519                    |       |
| **Weighted average common shares  outstanding - diluted**                      |       | —                        |       | —                        |       |

 

See Notes to Unaudited Consolidated Financial Statements

 

3

----

 

**SOUTHWESTCASINO CORPORATION**

**Consolidated Statements of Cash Flows****(Unaudited)**

**Forthe Three Months Ended March 31, 2008 and 2007**

 
| ** **                                                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows from Operating  Activities:                                           |       |       |       |       |       |
| Net Income (Loss)                                                                |       | $          | (1,377,109 | )          | $          | (415,064 | ) |
| Adjustments to Reconcile Net Income (Loss) to                                    |       |       |       |       |       |
| Net Cash Provided by Operating Activities:                                       |       |       |       |       |       |
| Depreciation and Amortization                                                    |       | 365,314    |       | 540,633    |       |
| Amortization of Loan Costs                                                       |       | 16,575     |       | 43,101     |       |
| Write-off of Acquisition and Financing Costs                                     |       | 217,329    |       |       |       |
| (Gain) Loss on Disposition of Property and Equipment                             |       | (1,250     | )          |       |       |
| Stock Based Compensation Expense                                                 |       | 164,399    |       | 67,221     |       |
| Loss of Unconsolidated Subsidiary                                                |       | 338,431    |       | 120,171    |       |
| Change in Current Assets and Liabilities,                                        |       |       |       |       |       |
| (Increase) Decrease in Receivables                                               |       | 20,053     |       | (632,377   | )          |
| (Increase) Decrease in Receivables - Related Parties                             |       | 19,901     |       |       |       |
| (Increase) Decrease in Inventories                                               |       | 7,336      |       | 30,366     |       |
| (Increase) Decrease in Prepaid Expenses and Other Current Assets                 |       | (250,326   | )          | 24,505     |       |
| Increase (Decrease) in Accounts Payable                                          |       | (88,440    | )          | 245,108    |       |
| Increase (Decrease) in Accrued Expenses                                          |       | (122,591   | )          | 95,987     |       |
| Increase (Decrease) in Accrued Interest Payable                                  |       | 6,199      |       | (3,556     | )          |
| Net Cash Provided By Operating Activities                                        |       | $          | (684,179   | )          | $          | 116,095 |   |
|                                                                             |       |       |       |       |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                            |       |       |       |       |       |
| Purchase of Property and Equipment                                               |       | (147,401   | )          | (146,016   | )          |
| Proceeds from Sale of Property and Equipment                                     |       | 25,000     |       | —     |       |
| Receipt (Payment) of Deposit                                                     |       | —     |       | (10,213    | )          |
| Investment in Unconsolidated Subsidiary                                          |       | (66,000    | )          | (1,100,000 | )          |
| Net Cash Used in Investing Activities                                            |       | $          | (188,401   | )          | $          | (1,256,229 | ) |
|                                                                             |       |       |       |       |       |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                            |       |       |       |       |       |
| Payments on Short-Term Notes Payable                                             |       | $          | (450,000   | )          | $          | (446,292 | ) |
| Proceeds from Long-Term Borrowings                                               |       | 1,534,500  |       |       |       |
| Principal Payments on Long-Term Borrowings                                       |       | (256,888   | )          | (684,766   | )          |
| Proceeds from Issuance of Common Stock and Warrants                              |       | —     |       | 4,065,287  |       |
| Redemption of Common Stock                                                       |       | —     |       | (322,300   | )          |
| Payment of Financing Costs                                                       |       | —     |       | (446,758   | )          |
| Payment of Financing Costs Written-Off                                           |       | (217,329   | )          |       |       |
| Net Cash Provided (Used) by Financing Activities                                 |       | $          | 610,283    |       | $          | 2,165,171 |   |
|                                                                             |       |       |       |       |       |
| Net Increase in Cash and Cash Equivalents                                        |       | (262,297   | )          | 1,025,037  |       |
|                                                                             |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS                                                        |       |       |       |       |       |
| Beginning of Period                                                              |       | 1,892,401  |       | 1,531,260  |       |
| End of Period                                                                    |       | $          | 1,630,104  |       | $          | 2,556,297 |   |
|                                                                             |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF  CASH FLOW INFORMATION                                |       |       |       |       |       |
| Interest Paid                                                                    |       | $          | 178,707    |       | $          | 209,904 |   |
| Income Taxes Paid                                                                |       | $          | 1,000      |       | $          | 37,000 |   |
|                                                                             |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING  ACTIVITIES          |       |       |       |       |       |
|                                                                             |       |       |       |       |       |
| Capital assets acquired with acounts payable                                     |       | $          | 92,497     |       | $          | 12,703 |   |
| Financing costs included in accounts payable                                     |       | $          | 13,606     |       | $          | 78,695 |   |
| Costs associated with issuing common stock included in accounts  payable         |       | $          | —     |       | $          | 48,462 |   |
| Value of warrants issued in connection with debt issuance                        |       | $          | 355,350    |       | $          | — |   |
| Financing costs netted from long-term borrowings                                 |       | $          | 15,500     |       |       | — |   |
| Fees included in accounts payable and prepaid expenses and other  current assets |       | $          | 30,000     |       |       | — |   |

 

SeeNotes to Unaudited Consolidated Financial Statements

 

4

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**SOUTHWESTCASINO CORPORATION**

**Consolidated Statements of Changes inStockholders’ Equity (Unaudited)**

**Forthe Three Months Ended March 31, 2008**

 
| ** **                                                       | ** ** | **Treasury Stock** | ** ** | **Common Stock** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **           | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|---------------|------------|------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **Number of**      | ** ** | ** **       | ** ** | **Number of** | ** ** | ** ** | ** ** | **Additional**       | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Shares**         | ** ** | **Amount**       | ** ** | **Shares**    | ** ** | **Amount** | ** ** | **Paid-in  Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                                             |       |               |       |             |       |          |       |       |       |                 |       |   |   |   |   |
| **BALANCE December 31, 2007**                               |       | (357,000           | )          | $                | (322,300   | )             | 27,817,953 |       | $          | 27,819               |       | $ | 21,496,064 |   | $ | (11,196,534 | ) | $ | 10,005,049 |   |
|                                                             |       |               |       |             |       |          |       |       |       |                 |       |   |   |   |   |
| Stock-Based Compensation Expense Related to Options and Warrants |       |               |       |             |       |          |       |       |       | 164,399              |       |   |   | 164,399 |   |
|                                                             |       |               |       |             |       |          |       |       |       |                 |       |   |   |   |   |
| Issuance of Warrants in Connection With Debt Issuance            |       |               |       |             |       |          |       |       |       | 355,350              |       |   |   | 355,350 |   |
|                                                             |       |               |       |             |       |          |       |       |       |                 |       |   |   |   |   |
| Net Loss                                                         |       |               |       |             |       |          |       |       |       |                 |       | $ | (1,377,109 | ) | (1,377,109 | ) |
|                                                             |       |               |       |             |       |          |       |       |       |                 |       |   |   |   |   |
| **BALANCE March 31, 2008**                                  |       | (357,000           | )          | (322,300         | )          | 27,817,953    |       | 27,819     |       | 22,015,813           |       | (12,573,643 | ) | 9,147,689 |   |
|                                                                  |            |                    |            |                  |            |               |            |            |            |                      |            |  |  |  |  |  |  |  |  |  |

 

See Notes to Unaudited Consolidated Financial Statements

 

5

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH31,2008**

** **

**NOTE 1 – BASIS OF PRESENTATION**

 

The unaudited consolidated financial statements ofSouthwest Casino Corporation, a Nevada corporation (the “Company” or “Southwest”),have been prepared pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission (“SEC”) applicable to interimfinancial information.  Accordingly,certain information normally included in the annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States has been condensed or omitted. For further information, pleaserefer to the annual audited consolidated financial statements of the Company,and the related notes included within the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2007, filed with the SEC on March 31,2008.

 

In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included, consistingonly of normal recurring adjustments. The results for the current interimperiod are not necessarily indicative of the results to be expected for thefull year.

 

**NOTE 2 – MANAGEMENT FINANCIAL PLANS**

 

The Company completed a debt financing for $1.55 millionin March 2008, see Note 8.  TheCompany will be required to seek additional debt or equity financing during mid-2008to fund operations as well as repay debt.

 

**NOTE 3 – STOCK OPTIONS AND AWARDS**

 

Stock option plans:

 

On July 15, 2004,Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino andHotel Corp. 2004 Stock Incentive Plan that had been adopted by the company’sBoard of Directors effective June 1, 2004. Under the terms of the reorganization completed July 22, 2004,Southwest Casino Corporation assumed the rights and obligations of SouthwestCasino and Hotel Corp. under this plan. The plan permits Southwest Casino Corporation to issue incentive awardsto all employees of Southwest Casino Corporation or any of its subsidiaries andany non-employee directors, consultants or independent contractors of theCompany or any of its subsidiaries. Incentive awards under the plan include “incentiveoptions” under Section 422 of the Internal Revenue Code of 1986, “non-statutorystock options” that do not qualify for “incentive option” treatment, stockappreciation rights, restricted stock awards, performance units and stockbonuses.  The plan was amended byshareholder approval in June 2007 which increased the number of shares ofSouthwest Casino Corporation common stock reserved for issuance under the planfrom 1,500,000 to 3,000,000.

 

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

 

Valuation and ExpenseInformation under SFAS 123(R)

 

Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123(R)”) requires companiesto estimate the fair value of share-based payment awards on the date of grantusing an option-pricing model. The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite serviceperiods in the Company’s consolidated statement of operations.

 

The effect of stockoptions issued to employees, directors and consultants was to increase the netloss for the three months ended March 31, 2008 and 2007 by $136,899 and$44,304, respectively and basic loss per share by $0.005 and $0.002,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 ofeach option is amortized into compensation 

 

6

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH31,2008**

 

expense over the periodthe option vests. The Company has estimated fair value of all stock options asof the date of grant by applying the Black-Scholes pricing valuationmodel.  The application of this valuationmodel involves assumptions that are judgmental and sensitive in thedetermination of compensation expense. The key assumptions used in determining the fair value of options duringthe three months ended March 31, 2008 were:

 
| ** **                               | ** ** | **Three months ended   March 31, 2008** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| Expected price volatility                |       | 64%  - 66                                    | %          |
| Risk free interest rate                  |       | 2.35%  - 2.76                                | %          |
| Weighted average expected  life in years |       | 5.0  – 6.76 years                       |       |
| Dividend yield                           |       | 0                                            | %          |
| Pre-vesting forfeiture  rate             |       | 0                                            | %          |
| Weighted average fair  value             |       | $                                            | 0.28       |   |
|                                          |            |                                              |            |  |

 

The Company estimated the expected price volatilityusing a pro-rata percentage of both historical information for a peer group aswell as historical information for the Company from January 4, 2007through March 20, 2008.  The Company’ssecurities began trading publicly in July 2004, however the volume andtrading activity was minimal until 2007. As a result the Company used the average volatility for the look backperiod (which is the expected term of the options) for the companies consideredin the peer group and history for the Company from 2007 to March 20, 2008(the date of grant).  The Companyweighted the volatility using 80% of the peer group and 20% of the Company’scalculated volatility.  The Companyapplied the simplified formula for computing the expected term assumptions foremployee and director options in accordance with Staff Accounting Bulletin (“SAB”)No. 107 and as modified in SAB No. 110.  The Company applied 0% to the dividend yieldas the Company has not approved or issued dividends in the past and there areno plans to do so.  The risk-freeinterest rate was selected based upon yields of U.S. Treasury issues with a termequal to the expected life of the option being valued.  SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Pre-vesting forfeitures were estimated to be zero for the three months ended March 31,2008 based primarily on historical experience.  If pre-vesting forfeituresoccur in the future, the Company will record the benefit related to thoseforfeitures as the forfeitures occur.

 

Statusof options during the three months ended March 31, 2008

 
| ** **                                 | ** ** | **Options   Outstanding** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Contractual   Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|--------------------------------|------------|
| Balance at December 31, 2007          |       | 2,500,000                 |       | $                                       | 0.65       |                                        |       |                           |       |   |
| Granted                                    |       | 1,867,500                 |       | $                                       | 0.48       |                                        |       |                           |       |   |
| Forfeited/cancelled/expired                |       | 0                         |       |                                    |       |                                        |       |                           |       |
| Exercised                                  |       | 0                         |       |                                    |       |                                        |       |                           |       |
| Balance at March 31, 2008             |       | 4,367,500                 |       | $                                       | 0.58       |                                        |       |                           |       |   |
|                                       |       |                      |       |                                    |       |                                        |       |                           |       |
| Options outstanding at March 31, 2008 |       | 4,367,500                 |       | $                                       | 0.58       |                                        | 7.0  years |                           | $          | — |   |
| Options exercisable at March 31, 2008 |       | 2,712,240                 |       | $                                       | 0.63       |                                        | 4.7  years |                           | $          | — |   |

 

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on Southwest CasinoCorporation closing stock price of $0.50 on March 31, 2008, that theoption holders would have received had all option holders exercised theiroptions as of that date.  As of March 31,2008, the Company’s unrecognized share-based compensation related to stockoptions issued to employees and directors was approximately $525,981.  This cost is expected to be expensed over aweighted average period of three years.

 

Included in the Status of options table above are:

 

·             On March 20, 2008, the Board ofDirectors awarded options to purchase an aggregate of 1,092,500 shares of theCompany’s common stock to executive officers and employees of theCompany.  All of the options were 

 

7

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

granted under the Company’s2004 Stock Incentive Plan.  The options have a 10-year term and anexercise price of $0.48 per share, the closing market price for one share ofthe Company’s common stock onthe date of grant.  The options were immediatelyexercisable with respect to 25% of the shares awarded and become exercisablewith respect to the remaining shares in equal installments on the last day ofeach fiscal quarter over a three-year period.

 

·             Also on March 20, 2008, the Board ofDirectors granted options to purchase 675,000 shares of the Company’s commonstock to the independent members of the Board.  These options were alsogranted under the Company’s 2004 Stock Incentive Plan.  The options have a10-year term and an exercise price of $0.48 per share, the closing market pricefor one share of the Company’s common stock on the date of grant.  Theoptions become exercisable in equal installments on the last day of each fiscalquarter beginning on the last day of the fourth quarter of 2008 (the firstquarter after the options granted to our independent directors on January 10,2006 are fully vested), over a three-year period.

 

·             Consulting option grant:

 

The Board of Directors awarded two non-qualifiedoptions to purchase 50,000 shares of Southwest common stock each to aconsultant to the company on March 20, 2008.  These options were alsogranted under the company’s 2004 Stock Incentive Plan, have a 10-year term, andan exercise price of $0.48 per share, the closing market price for one share ofthe Company’s common stock onthe date of grant.  These options becomeexercisable upon Southwest’s achievement of certain goals related to theservices provided by the consultant to Southwest.

 

In accordance with SFAS123(R) paragraph 7, the Company evaluated the services being provided anddetermined the fair value of the equity award issued was the more reliablemeasure of fair value.

 

The Company has estimatedthe fair value of these options as of the date of grant by applying theBlack-Scholes pricing valuation model. The application of this valuation model involves assumptions that arejudgmental and sensitive in the determination of compensation expense.  The key assumptions used in determining thefair value of options were:

 
| Expected price volatility    |   | 71        | %      |
|------------------------------|--------|-----------|--------|
| Risk free interest rate      |   | 3.31      | %      |
| Contractual life in years    |   | 10  years |   |
| Dividend yield               |   | 0         | %      |
| Pre-vesting forfeiture  rate |   | 0         | %      |
| Weighted average fair  value |   | $         | 0.37   |   |
|                              |        |           |        |  |

 

The Company estimated the expected price volatilityusing a pro-rata percentage of both historical information for a peer group aswell as historical information for the Company from January 4, 2007through March 20, 2008.  The Company’ssecurities began trading publicly in July 2004, however the volume andtrading activity was minimal until 2007. As a result the Company used the average volatility for the look backperiod (which is the contractual term of the options) for the companiesconsidered in the peer group and history for the Company from 2007 to March 20,2008 (the date of grant).  The Companyweighted the volatility using 80% of the peer group and 20% of the Company’scalculated volatility.   The Companyapplied 0% to the dividend yield as the Company has not approved or issueddividends. The risk-free interest rate was selected based upon yields of U.S.Treasury issues with a term equal to the contractual life of the option beingvalued.  These options are not forfeitable once vested as such thecontractual life is used.

 

The Company is expensing the compensation cost ofthese options over the expected vesting period based upon the performanceconditions and will reassess the likelihood of performance at each reportingdate.  The Company expensed approximately$3,000 during the three months ended March 31, 2008.

 

No tax benefit has beenrecorded on share based compensation expense for the three month periods ended March 31,2008 and 2007.

 

8

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH31,2008**

 

**NOTE 4 –WARRANTS**

 

Statusof warrants:

 
| ** **                                         | ** ** | **Warrants   Outstanding** | ** ** | **Weighted   Average  Exercise Price** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| Warrants outstanding as of  December 31, 2007 |       | 5,946,102                  |       | $                                      | 0.63       |   |
| Granted                                            |       | 2,300,000                  |       | $                                      | 0.39       |   |
| Exercised                                          |       | 0                          |       |                                   |       |
| Cancelled                                          |       | 0                          |       |                                   |       |
| Warrants outstanding as of  March 31, 2008    |       | 8,246,102                  |       | $                                      | 0.56       |   |

 

Issuance of Debt

 

The Company secured debt financing in March 2008,see Note 8.  The Company issued five-yearfully exercisable warrants to purchase an aggregate of 2,300,000 shares of itscommon stock at an exercise price of $0.39 per share to the shareholderco-signers including Mr. Druck, Mr. Fox and Mr. Halpern(officers of the Company and guarantors of the debt).  The $0.39 per shareexercise price of these warrants represented the average closing market priceof one share of Southwest Casino Corporation’s common stock over the 5 tradingdays preceding the closing of the loan transaction.  Warrant holders alsoreceived the right to have the shares of Southwest Casino Corporation commonstock purchasable upon exercise of their warrants included in any registrationstatement that Southwest Casino Corporation may file in the future (“piggy-backrights”) under the terms of a separate Registration Rights Agreement dated March 10,2008.

 

The Company accounts for transactions in whichservices are received in exchange for equity instruments issued based on thefair value of such services received from non-employees or of the equityinstruments issued, whichever is more reliably measured, in accordance withSFAS No. 123R and Emerging Issues Task Force (“EITF”) Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services.”  Additionally, the company has accounted forthis transaction in accordance with EITF Issue No. 00 – 18 “AccountingRecognition for Certain Transactions involving Equity Instruments Granted toOther Than Employees”.   The Company hasestimated the fair value of the warrants as of the date of grant by applyingthe Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that arejudgmental and sensitive in the determination of expense.  The key assumptions used in determining thefair value of the warrants granted on March 10, 2008 were as follows:

 
| Grant date stock price  (unregistered common share estimate) |   | $        | 0.31   |   |
|--------------------------------------------------------------|--------|----------|--------|--------|
| Exercise price of warrant                                    |   | $        | 0.39   |   |
| Expected price volatility                                    |   | 64       | %      |
| Risk free interest rate                                      |   | 2.36     | %      |
| Contractual term                                             |   | 5  years |   |
| Dividend yield                                               |   | 0        | %      |
| Weighted average fair  value                                 |   | $        | 0.1545 |   |

 

The Company estimated the expected price volatilityusing a pro-rata percentage of both historical information for a peer group aswell as historical information for the Company from January 4, 2007through March 20, 2008.  The Companybecame public in July 2004, however the volume and trading activity wasminimal until 2007.  As a result theCompany used the average volatility for the look back period (which is thecontractual term of the warrant) for the companies considered in the peer groupand history for the Company from 2007 to March 10, 2008 (the date ofgrant).  The Company weighted thevolatility using 80% of the peer group and 20% of the Company’s calculatedvolatility.   The Company applied 0% tothe dividend yield as the Company has not approved or issued dividends. Theexercise price of the warrants was based upon the market value of the Company’scommon stock as reported on the Over the Counter Bulletin Board forSWCC.OB.  As the Company has notregistered the underlying shares of common stock the Company has applied a 20%discount to the market price of a freely traded share due to the 

 

9

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

restrictive nature of the award.   The risk-free interest rate was selectedbased upon yields of U.S. Treasury issues with a term equal to the contractuallife of the warrants being valued.

 

The fair value of thewarrants in the amount of $355,350 was credited to additional paid in capitaland the debit is recorded on the consolidated balance sheet as a deferredfinancing cost included in Other Assets. The deferred financing cost is being amortized to interest expense overthe term of the loan using the effective interest method (properly matching thedebt financing cost over the term of the loan).

 

##### **NOTE5 –**PROMOTIONAL ALLOWANCES

##### ** **

Revenue does not includethe retail amount of rooms, food, and beverages provided gratuitously tocustomers, which was $297,000 and $273,000 for the three months ended March 31,2008 and 2007, respectively.

 

**NOTE 6— NORTH METRO HARNESSINITIATIVE, LLC (“North Metro”)**

 

*Organization**:*

 

North Metro (a development stage Minnesota LimitedLiability Company) was formed on June 16, 2003 for the purpose ofdeveloping, owning, and operating a horse race track and card room in Columbus,Minnesota on the north side of the Twin Cities metropolitan area.  On June 8,2004, Southwest Casino and Hotel Corp. (“Southwest”) sold a 50% interest inNorth Metro to MTR — Harness Inc. (“MTR”), a wholly owned subsidiary of MTRGaming, Inc. for $10,000, and a commitment to make additionalcontributions as discussed below.

 

Under the North Metro Member Control Agreement dated June 8,2004, MTR was required to contribute $7,500,000, upon satisfaction of certainconditions and Southwest was required to contribute $2,500,000.  Amountscontributed in excess of the amounts stated in the Member Control Agreementwere agreed upon by Southwest and MTR as managing members of the Company. These amounts were contributed on an equal basis.

 

As specified in the Company’s Member ControlAgreement, membership interests include financial rights, governance rights andvoting rights.  Voting rights are assigned to members based on their proportionatevoting interest.  Financial rights include allocation of net profits,losses and distributions.  Governance rights include all of a member’srights other than financial rights and the right to assign financialrights.  A member of the Company may only assign governance and votingrights to another party with the consent of the remaining members, whichconsent may be withheld in any member’s sole and absolute discretion.  Ifa member assigns membership rights to another party and the other member ormembers do not consent to the assignee becoming a substitute member, theassignee will only be entitled to receive those distributions and allocationsthat would have been made to the assigning member and the assignee will nothave any voting or governance rights.  As of March 31, 2008,Southwest and MTR each hold 50% of the voting rights.  Financial andgovernance rights are determined in accordance with the Member ControlAgreement dated June 8, 2004.

 

Net income, losses and distributions are allocated ona 50/50 basis to members in accordance with the member control agreement.

 

North Metro’s Member Control Agreement requires NorthMetro to make tax distributions to members on a quarterly and annual basisequal to 40% of the estimated taxable income of the company for the applicabletime period, with annual tax distributions reduced by the amount of anyquarterly tax distributions made duringthe tax year.  The tax distributions were reduced to 35% under the CreditAgreement with Black Diamond, described below.  Tax distributions to themembers shall be made in proportion to each member’s respective share of thetaxable income of North Metro.

 

North Metro was formally organized as a limitedliability company on June 16, 2003.  Prior to that date, agreementswere consummated and amounts related to the business purpose of the Companywere directly incurred and paid by Southwest or entities related to Southwest.

 

10

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

North Metro is doing business in Minnesota under thename “Running Aces Harness Park”.

 

*Accounting for North Metro**:*

 

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

 

Due to contributions of capital made by MTR as of October 20,2005, in accordance with the North Metro Member Control Agreement dated June 8,2004, the Company no longer provided financial support in excess of its 50percent decision making power. As of March 31, 2008, the Company hasprovided approximately 42 percent of the financial support, but still retainsits 50 percent decision making power.  Therefore, since October 20,2005, the Company has accounted for its investment in North Metro on the equitymethod.  The Company’s investment in North Metro as of March 31, 2008was $6,946,289, which is recorded on the Company’s consolidated balance sheet.

 

As of March 31, 2008, the Company has contributed$7,386,974 in consideration of its membership interests in North Metro. The Company will receive pro-rata distributions of cash from North Metro uponsuccessful operations in accordance with the North Metro Member ControlAgreement after satisfying all conditions of senior credit agreements, paymentof member taxes and payment of the $1.6 million advance discussed below.  In addition, the Company has advanced$1,656,051 for costs related to North Metro that the Company paid, and whichexceeded the Company’s agreed pre-license capital contribution of $1,000,000,before the Minnesota Racing Commission granted racing licenses to NorthMetro.  The $1,656,051 advance, together with interest, will only be paidback to the Company out of first available cash from operations (and then aftercertain distributions to the members for income tax purposes), see SubordinationAgreement described below under “North Metro Financing Agreement”.  Thepre-licensing advances to North Metro are characterized as a membershippreferred contribution made by the Company under the North Metro HarnessInitiative, LLC Member Control Agreement dated June 8, 2004.  TheCompany treats these payments as an additional investment in North Metro. The Company has combined the advances (accounted for as a membership preferredcontribution) and its capital contributions into an investment in an unconsolidatedsubsidiary on its financial statements.

 

For the three months ended March 31, 2008 and2007, the Company has recorded a loss from this unconsolidated subsidiary, netof tax benefit of $338,431 and $120,171.

 
| ** **        | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------|------------|-------------------------|------------|----------------------------|------------|
| North Metro:      | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Total Assets      |       | $                       | 57,380,294 |                       | $          | 51,556,814 |   |
| Total Liabilities |       | $                       | 39,419,678 |                       | $          | 33,051,334 |   |

 
| ** **                                             | ** ** | **Three months   ended  March 31,   2008** | ** ** | **Three months   ended  March 31,   2007** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| North Metro:                                           |       |                                            |       |                                            |       |
| Revenues                                               |       | $                                               | 15,286     |                                            | $          | 25,302 |   |
| Lobbying expenses                                      |       | $                                               | 24,000     |                                            | $          | 54,012 |   |
| License fees – Minnesota Racing Commission        |       | 67,680                                          |       | 61,411                                          |       |
| Other expense                                          |       | 600,468                                         |       | 150,220                                         |       |
| Total expenses                                         |       | $                                               | 692,148    |                                            | $          | 265,643 |   |
| Net (loss)                                             |       | $                                               | (676,862   | )                                               | $          | (240,341 | ) |
| Southwest Casino  Corporation:                         |       |                                            |       |                                            |       |
| 50% share of net (loss)                                |       | (338,431                                        | )          | (120,171                                        | )          |
| Net tax benefit                                        |       | —                                          |       | —                                          |       |
| (Loss) of unconsolidated subsidiary net of tax benefit |       | $                                               | (338,431   | )                                               | $          | (120,171 | ) |

 

11

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH31,2008**

 

In2006, North Metro formed a wholly-owned subsidiary that acquired a nearby motelin December 2006 for a total cost of approximately $545,000 that North Metrocontinues to operate in 2008 and will be used to house personnel involved inthe care of horses at the track during the live racing season. The motel has 15rooms available to rent.

 

Southwest did not record a tax benefit related toNorth Metro’s losses during the three months ended March 31, 2008 and2007, see Note 10.

 

At March 31, 2008, North Metro’s assets consistedprincipally of cash, land, construction in progress and related deposits andfinancing costs. Liabilities consisted primarily of construction payables andborrowings under its financing agreement discussed below.

 

On April 11, 2008, Running Aces Harness Parkopened for live harness racing.  Otherexpense includes start-up costs necessary for the opening of Running Acesconsisting primarily of salary, benefits, marketing, real estate taxes andsupplies.

 

North Metro Financing

 

On April 20, 2007, North Metro entered into aCredit Agreement (the “Credit Agreement”) with Black Diamond CommercialFinance, L.L.C. (“Black Diamond”) as agent and lender. Under the terms of theCredit Agreement, North Metro will borrow $41.7 million to construct, equip andopen its harness racetrack and card room facility in Columbus, Minnesota on thenorth side of the Minneapolis — St. Paul metropolitan area.  As part ofthe loan agreement the members of North Metro agreed to complete aggregatemembership contributions of $20.8 million prior to closing the loan. The totalcost of the project is expected to approximate $62 million.  As of March 31,2008, Southwest contributed $9.0 million of the total amount of $21.4 millioncontributed by the members.

 

Certain amounts included in the total of $21.4 millioncontributed by the members relate to non-construction costs and continue to befunded by the members.  The Companycontributed $316,000 subsequent to the loan closing from April 20, 2007,thru the end of March 31, 2008.  In addition, the Company contributedan additional $317,500 subsequent to March 31, 2008 thru May 15,2008.  The Company expects to continue tomake contributions of this nature.  Theseamounts are not considered to be material to the total cost of the North Metroproject.

 

Under the Credit Agreement, the initial advance ofloan proceeds was followed by additional advances based on progress in buildingand opening the racetrack and card room facility. During construction, NorthMetro is making monthly payments of interest only based on a floating indexrate 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 (as defined in theagreement), interest rates will reduce to the applicable index rate plus 2.5percent or the applicable LIBOR rate plus 4.5 percent, again at North Metro’soption. North Metro must also pay a fee equal to 4.5% per annum on any unusedportion of the $41.7 million credit facility. Principal payments of $104,250will be due on the last day of each fiscal quarter beginning the first fullquarter after the project opening, as defined in the agreement (projected principalpayments beginning on September 30, 2008). North Metro will also berequired to prepay the loan in an amount equal to 50 percent of the project’sexcess cash flow for each fiscal year beginning with the fiscal year ended December 31,2008, as defined in the agreement. Final payment equal to all outstandingprincipal and accrued interest is due April 20, 2014.

 

North Metro may prepay the loan, in whole or in part,at any time, subject to the payment of certain fees and costs. The loan issecured by substantially all of the assets of North Metro. The Credit Agreementdoes not provide for recourse against the members of North Metro.

 

The Credit Agreement contains standard affirmative andnegative covenants regarding North Metro and its wholly-owned subsidiary NorthMetro Hotel, LLC that restrict, among other things, North Metro’s ability todispose of assets, transfer or pledge equity interests, incur indebtedness, andmake investments or distributions. Financial covenants applicable to NorthMetro include, among other things, limits on capital expenditures afteropening, minimum EBITDA requirements, satisfaction of leverage ratio limits,and delivery of audited financial statements.

 

12

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

In addition to customary and standard events ofdefault included in the Credit Agreement, failure to substantially complete (asdefined in the Credit Agreement) construction of the North Metro project by June 30,2008, and failure to operate the card room that is part of the North Metroproject at any time after July 1, 2008, would constitute a default underthe Credit Agreement.

 

Additional Membership Contribution, Pledge, Subordinationand Sponsor Support Agreements of Southwest

 

While the Credit Agreement does not provide forrecourse against Southwest in the case of a default by North Metro, Southwesthas pledged its membership interest in North Metro and North Metro pledged itsmembership interest in North Metro Hotel, LLC as security for repayment of theloan under the terms of a Pledge Agreement with Black Diamond (the “PledgeAgreement”).

 

Southwest also entered into a Subordination Agreementwith Black Diamond (the “Subordination Agreement”) under which Southwest hasagreed that repayment of a $1.65 million membership preferred capitalcontribution to North Metro, which North Metro was to repay to Southwest out ofthe first available revenue from operations, will be subordinated to thepayments due under the loan agreements.

 

In addition, Southwest entered into a Sponsor SupportAgreement (the “Support Agreement”) under which Southwest may be required undercertain circumstances to contribute additional capital to North Metro iffinancings and equity investments are insufficient to complete construction andopen the facility.  The Company believes the financings and equityinvestments secured and to be secured by North Metro will be sufficient toconstruct and open the facility.

 

Amendment to Credit Agreement:

 

Effective April 3, 2008, North Metro entered intoLimited Waiver and Amendment No. 1 to the Credit Agreement.  The Limited Waiver extends the time periodfor obtaining an audit (made necessary by a change to an audit firm identifiedby the lender) for the fiscal year ended December 31, 2007 from March 31,2008 to May 30, 2008.  The failureto deliver the audit on May 30, 2008 would be an immediate event ofdefault, as defined in the agreement. The amendment to the credit agreement also allows for thefollowing:  (1) Black Diamond willsubordinate its liens on assets up to $2.1 million related to equipmentfinancing with an unrelated third party and (2) North Metro is allowed toissue letters of credit to replace certain cash deposits totaling approximately$1.3 million.  As consideration, NorthMetro paid an amendment fee of $104,250.

 

**NOTE 7 - LINE OF CREDIT**

 

On April 16, 2007, the Company entered into theThird Amendment to the Revolving Credit and Term Loan Agreement with CrownBank.  The amendment extended the maturity date of the $450,000 revolvingline of credit to April 30, 2008.  The amendment did not alter theterms of the $2.5 million term loan and the Company made the final payment onthe term loan on April 30, 2007.  Additionally, under the amendment,three principal officers of the Company each agreed to increase their personalguarantees of the line of credit from $100,000 to $150,000 plus expenses. In connection with a new loan with Crown Bank, each of the three principalofficers agreed to increase their $150,000 personal guarantees to $250,000, seeNote 8.  As of March 31, 2008, noamounts are outstanding under the Revolving Credit facility, see Note 17.  As of April 30, 2008, the Company extendedthe $450,000 line of credit to June 30, 2008.

 

The interest rate is Prime +1%, and not less than7.5%.  As of March 31, 2008 the interest rate is 7.5%.

 

**NOTE 8 – LONG TERM DEBT**

 

Crown Bank Loan:

 

On March 7, 2008, the Company entered into aseries of eight promissory notes with Crown Bank of Minneapolis,Minnesota.  Under the Notes, Crown Bank loaned the Company an aggregate$1.55 million. The Company paid a 1% origination fee of $15,500 thatresulted in net proceeds of $1,534,500 to the Company.  Each of the Notes 

 

13

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

accrues interest at a floating rate of prime plus 1.5percent, with a minimum interest rate of 7.0 percent (currently 7.0%).  The effective interest rate on this loan,after giving effect to the warrant consideration discussed below and in Note 4,is approximately 24.5 percent.  Under theNotes, the Company will make monthly payments of interest only until January 11,2009.  Beginning February 11, 2009, the Company will repay theoutstanding principal balance and accrued interest in12 equal monthly installments with thefinal payment due January 11, 2010.  The Company may prepay anyoutstanding amounts under the Notes at any time without premium or penalty.

 

Future minimum principal payments required as of March 31,2008 are:

 

| April 1, 2008 –  March 31, 2009   |   | $ | 258,333   |   |
|--------------------------------------------------|--------|---|-----------|--------|
| April 1,  2009 – January 11, 2010 |   | $ | 1,291,667 |   |

 

Each of the Notes is co-signed by a shareholder of theCompany.  Each of these co-signers is fully obligated to Crown Bank andindividually liable for the principal amount and any accrued and unpaidinterest and costs outstanding under the co-signed note.  As a conditionto entering into the Notes, Crown Bank required James Druck, Chief ExecutiveOfficer, Thomas Fox, President and Chief Operating Officer, and JeffreyHalpern, Vice President of Government Affairs of the Company to increase theirpreviously existing $150,000 personal guarantees of the Company’s outstanding$450,000 line of credit to $250,000 and extend those guarantees to cover boththe line of credit and the promissory notes through their respective repaymentterms.

 

The promissory notes contain customary events ofdefault, including, without limitation, payment defaults, insolvency orbankruptcy, death or incompetency of a co-signer, business termination,misrepresentation, monetary judgment defaults and other material changes.

 

In consideration of co-signing the promissory notes orincreasing and extending personal guarantees to cover the promissory notes, theCompany issued five-year fully exercisable warrants to purchase an aggregate of2,300,000 shares of its common stock at an exercise price of $0.39 per share tothe shareholder co-signers and Mr. Druck, Mr. Fox and Mr. Halpern. Each co-signer received a warrant to purchase one share of Southwest CasinoCorporation common stock for each $1.00 in principal amount of the promissorynote co-signed by that shareholder.  In consideration of the increase inthe amount and extension of the term of their respective guarantees, Mr. Druck,Mr. Fox and Mr. Halpern each received warrants to purchase one shareof Southwest Casino Corporation common stock for each $1.00 of guarantee, or 250,000shares each.  The $0.39 per share exercise price of these warrantsrepresented the average closing market price of one share of Southwest CasinoCorporation’s common stock over the 5 trading days preceding the closing of theloan transaction.  Warrant holders also received the right to have theshares of Southwest Casino Corporation common stock purchasable upon exerciseof their warrants included in any registration statement that Southwest CasinoCorporation may file in the future (“piggy-back rights”) under the terms of aseparate Registration Rights Agreement dated March 10, 2008.  The Company valued the warrants in connectionwith the financing transaction, see Note 4.

 

In further consideration of co-signing the promissorynotes, the Company also entered into a Pledge Agreement with the co-signers andguarantors under which it pledged its shares of Southwest Casino and HotelCorp. to the co-signers and guarantors to secure any liabilities or obligationsthey may incur under the promissory notes.  The co-signers’ and guarantors’right to recovery under the Pledge Agreement is limited to the actual costspaid by the co-signers or guarantors and subject to a prior security interestin the membership interests of North Metro Harness Initiative, LLC thatSouthwest Casino & Hotel owns, as well as the terms of the North MetroHarness Initiative, LLC Member Control Agreement.

 

The Company, the co-signers, and Messrs. Druck,Fox and Halpern also entered into a Contribution Agreement dated March 10,2008.  Under the Contribution Agreement, the Company agreed to reimburseto any co-signer or guarantor any amount paid in connection with the promissorynotes for reason other than Southwest’s inability to pay.  If Southwest isunable to repay the notes, each of the co-signers and Mr. Druck, Mr. Foxand Mr. Halpern agreed in the Contribution Agreement to indemnify eachother so that any payments made by co-signers or guarantors will be made inproportion to the original principal amount of the promissory note co-signed orpersonal guarantee given to the total amount of all promissory note and loanguarantees.

 

14

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

The Company intends to use the proceeds from the loantransaction for general working capital, including additional membershipcontributions to North Metro Harness Initiative, LLC if required under theterms of the construction financing for that facility or agreed to between themembers of North Metro Harness Initiative.  The Company has reserved fromthe proceeds of the loan $96,875 to make the estimated interest-only paymentsdue under the notes through January 11, 2009.

 

**NOTE 9 –EARNINGS (LOSS) PER SHARE**

 

For all periods, basic earnings (loss) per share iscalculated by dividing earnings (loss) by the weighted-average number of commonshares outstanding.  Diluted earnings pershare reflect the effect of all potentially dilutive common shares outstandingby dividing net earnings by the weighted-average of all common and potentiallydilutive shares outstanding.  The Companyhad a net loss for the three months ended March 31, 2008 and 2007;therefore a calculation of loss per share on a fully diluted basis would beanti-dilutive, thus stock options and warrants to purchase 12,613,602 and8,596,102 common shares were not included in the calculation of loss per sharefor 2008 and 2007, but were outstanding at March 31, 2008 and 2007, seeNotes 3 and 4.

 

**NOTE 10 –INCOME TAXES**

 

The Company adoptedStatement of Financial Accounting Standards Interpretation No. 48 “*Accounting for Uncertainty in Income Taxes*” (“InterpretationNo. 48) effective January 1, 2007. Interpretation No. 48 clarifies the accounting for uncertain taxpositions in accordance with SFAS 109, “Accounting for Income Taxes.”  Pursuant to Interpretation No. 48, theCompany is required to recognize in its financial statements the largest taxbenefit 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 a likelihood of more than 50 percent.

 

The Company accounts forinterest and penalties as interest expense in the Statement of Operations.

 

The Company does not haveany unrecorded tax benefits as of March 31, 2008.

 

The Company’s tax returnsfor the tax years 2003 through 2006 remain subject to examination by major taxjurisdictions.  However, as the Companyhas net operating losses from prior years these tax returns can also beexamined once these net operating losses 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 months ended March 31,2008 and 2007 based upon the uncertainty and ultimate termination of theCompany’s management contract with the Cheyenne and Arapaho Tribes on August 17,2007.   As a result of this evaluation, atax benefit during the three months ended March 31, 2008 and 2007 was not recognized.  As of March 31, 2008, the Company’sdeferred tax asset is zero.

 

**NOTE 11 – RELATED PARTY TRANSACTIONS**

 

In addition to $140,000 of unpaid bonuses to officers,see Note 15, the Company has a liability to certain officers and stockholdersfor unpaid compensation and expenses of $122,467 as of March 31, 2008,relating to periods prior to December 31, 2003.

 

James B. Druck, Chief Executive Officer and Director;Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, VicePresident of Government Affairs; Gus A. Chafoulias, Director; and David H.Abramson, Director each participated in our private placement of commonstock with accompanying warrants that closed on January 24 and February 26,2007.

 

15

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

James B. Druck, Chief Executive Officer and Director;Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, VicePresident of Government Affairs; and Gus A. Chafoulias, Director eachparticipated in our Crown Bank financing transaction in March 2008 andreceived warrants, see Note 8.

 

During the three months ended March 31, 2007, theCompany paid Berc & Fox Limited $2,000 for tax services.  Theoperations of Berc & Fox were acquired in January 2007 by VirchowKrause, Ltd.  Thomas Fox, our President, is a shareholder and officer inBerc & Fox Limited.  In 2007, as a result of the sale of Berc &Fox Limited, certain furniture and equipment were acquired from Berc &Fox Limited by the Company in the amount of $25,000 during fiscal year 2007 andwas paid to Berc & Fox in March 2008.  During February 2008this furniture and equipment was sold to North Metro for $25,000 and the Companyreceived payment from North Metro in February 2008.

 

Virginia Skruppy is apart-time employee of North Metro. Ms. Skruppy is the wife of Tom Fox, ourPresident. We anticipate that her earnings in 2008 will not exceed $20,000.

 

As of March 31, 2008 the Company has a receivabledue from North Metro of approximately $22,000 for reimbursement of salary,benefits and travel.  During the three months ended March 31, 2008the Company received reimbursement from North Metro of salary, benefit andtravel costs of $41,363.

 

##### **NOTE 12 – PROJECT DEVELOPMENT COSTS**

##### ** **

The Company continues to pursue additional gamingopportunities and as a result continues to incur project developmentexpenses.  For the three months ended March 31,2008 and 2007, development expenses were $0 and $168,276, respectively.

 

**NOTE 13 – SEGMENT INFORMATION**

 

Segmentinformation related to the three months ended March 31, 2008 follows:

 
| ** **                                   | ** ** | **Casino   Operations** | ** ** | **Casino   Management** | ** ** | **Project   Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| Revenues                                     |       | $                       | 3,627,744  |                    | $          | 150,000                   |       | $          | —     |   | $ | 3,777,744 |   |
| Segmented profit (loss)  before income taxes |       | (20,608                 | )          | (1,018,070              | )          | (338,431                  | )          | (1,377,109 | )          |
| Segmented assets                             |       | 11,639,255              |       | 1,049,747               |       | 6,949,289                 |       | 19,638,291 |       |
|                                              |            |                         |            |                         |            |                           |            |            |            |  |  |  |  |

 

Segmentinformation related to the three months ended March 31, 2007 follows:

 
| ** **                                   | ** ** | **Casino   Operations** | ** ** | **Casino   Management** | ** ** | **Project   Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| Revenues                                     |       | $                       | 3,512,406  |                    | $          | 1,629,823                 |       | $          | —     |   | $ | 5,142,229 |   |
| Segmented profit (loss)  before income taxes |       | (266,183                | )          | 139,566                 |       | (288,447                  | )          | (415,064   | )          |
| Segmented assets                             |       | 12,833,030              |       | 2,603,394               |       | 6,043,848                 |       | 21,480,272 |       |
|                                              |            |                         |            |                         |            |                           |            |            |            |  |  |  |  |

 

During the three months ended March 31, 2008 and2007 the Company recognized revenues of $0 and $1,629,823, respectively,included in the operating segment Casino Management which related to ourmanagement contract with the Cheyenne and Arapaho Tribes of Oklahoma whichterminated effective August 17, 2007.

 

**NOTE 14 – FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The Company believes it is not practical to estimatethe fair value of its investment in North Metro because there is no establishedmarket for these securities and it is inappropriate to estimate future cashflows because they are dependent on the ability of North Metro to develop,construct and then generate earnings from the operation of its proposed harnesstrack and card room.  There were no other financial instruments withsignificant differences between the carrying amount and the fair value due tothe short maturity of the instruments.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

##### **NOTE 15 - COMMITMENTS AND CONTINGENCIES**

##### ** **

In 2004, the Company purchased player trackingsoftware and slot accounting software from IGT.  On December 29,2005, the Company entered into an agreement with IGT to finance $460,324 of thepurchase price for this system over 48 months with interest rate equal to theprime rate, which was 5.25% at March 31, 2008.  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’s employment agreements with JamesB. Druck, CEO, Thomas E. Fox, President and COO, and Jeffrey S. Halpern, VicePresident of Government Affairs, which were effective July 1, 2004, theseexecutives can elect to continue their employment in a reduced capacity, withcontinuing medical benefits and a salary equal to their base pay at the time oftermination for 12 months and not less than $25,000 after 12 months if theCompany terminates the executive’s employment without cause or in connectionwith a change in control of the Company (as defined in the employmentagreement) or if the executive terminates his employment with the Company forgood cause (as defined in the employment agreement).  The initial term ofthese agreements expired July 1, 2006, after which the agreement renewedand will continue to renew automatically for additional one-year terms unlessterminated.

 

The Company has entered into employment agreementswith certain other key employees of the Company. The agreements provide forcertain benefits to the employee as well as severance if the employee is terminatedwithout cause or due to a “constructive termination” as defined in theagreements.  The severance amounts depend upon the term of the agreementand can be up to six months of base salary and bonus.

 

Bonuses:

 

On March 27, 2007 the board of directors approvedperformance bonuses to officers and employees of the Company in the amount of$385,000, which amount was recorded as an expense effective that date.  Ofthat amount, the Company has paid $210,000 during the year ended December 31,2007.  Bonuses in the amount of $175,000 were to be paid on or after July 1,2007 when management determines the Company has sufficient financial resourcesfor payment.  Unpaid bonuses in the amount of $175,000 are reflected as aliability at March 31, 2008.

 

Financial consulting services:

 

The Company will be required to pay an additionalconsulting fee to the Company’s investor relations advisor of $100,000 or$200,000 if Strategic Growth International (“SGI”) assists the Company incompleting an equity or debt financing that meets standards stated in theagreement.  In addition, if the Company issues warrants as part of such adebt financing, it will also issue warrants to purchase 100,000 shares of itscommon stock to SGI if warrants are issued to the lender, on the same terms asthe warrants issued to the lender.

 

Legal Matters:

 

*Alleged Breach of Gaming Management Agreement*

 

OnJuly 24, 2007, the Governor of the Cheyenne and Arapaho Tribes of Oklahomadelivered notice to Southwest that on July 13, 2007 he had initiated anarbitration proceeding against Southwest for alleged breach of the ThirdAmended and Restated Gaming Management Agreement under which Southwest thenmanaged two casinos for the Tribes.  On November 2,2007, Southwest filed a counterclaim in this proceeding alleging a breach ofthe Gaming Management Agreement by the tribal Governor. The three-memberarbitration panel for this proceeding was appointed in February 2008.  After a scheduling conference with thearbitration panel on March 11, 2008, Southwest submitted its formalCross-Complaint to the arbitration panel on April 22, 2008 and the Tribessubmitted its formal complaint on April 23, 2008.  Southwest is now proceeding with discovery inthis matter.

 

Inthe arbitration demand, the Governor alleged that Southwest breached themanagement agreement by interfering with or attempting to influence internalaffairs or governmental decisions of the Tribes in connection with Southwest’sefforts to extend its gaming management relationship with the Tribes, whichterminated on August 17, 2007.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

TheGovernor sought termination of the agreement and $10 million in damages.  Southwest does not believe it improperlyinterfered with or attempted to influence internal governmental decisions ofthe Tribes and Southwest is vigorously defending itself in this arbitrationproceeding. Under its Gaming Management Agreement with the Tribes, Southwestwas permitted to oppose, publicly or privately, any action by the Tribes thatSouthwest believes is not in the best interest of the Tribal gaming operations.Southwest believes that all of the actions it has taken on behalf of the gamingoperations it managed or as part of its efforts to extend its gaming managementrelationship with the Tribes are consistent with that provision.

 

Inits Cross-Complaint, Southwest alleges that the Governor of the Tribes breachedthe Management Agreement by refusing to negotiate in good faith for anextension and expansion of the gaming management relationship between Southwestand the Tribes.  Southwest asserts thatthe Management Agreement required the Tribes to negotiate this extension andexpansion after Southwest led the Tribes’ successful efforts to negotiate andenter into a compact for expanded gaming with the State of Oklahoma in April 2005.

 

The Company does not expect any material adverseconsequence from this action. Accordingly, no provision has been made in thefinancial statements for any such losses.

 

# ***Theft and Distribution of SurveillanceVideo from Lucky Star Clinton casino***

# ** **

# **On August 24, 2007, Southwest Casino and HotelCorp., as exclusive manager of the Lucky Star casinos of the Cheyenne andArapaho Tribes of Oklahoma, filed a lawsuit against Doris Thunderbull, DarrellFlyingman, in his individual capacity, and John Does No. 1 and 2 allegingtheft (conversion) of confidential surveillance video from the Lucky Star –Clinton casino and subsequent copyright infringement and defamation inconnection with the posting of the stolen video on the website YouTube.com andwidespread distribution of DVDs containing the video by mail. Southwestinitially sought an emergency temporary restraining order barring furtherdistribution of the video. That request was denied on August 27, 2007 andSouthwest withdrew its request for the restraining order on September 24,2007. Southwest’s claims on behalf of the Tribes or Southwest for conversion,copyright infringement, tortious interference with contract, defamation, andconspiracy against the defendants remain pending in the Federal District Courtfor the District of Oklahoma.**

# ** **

OnJanuary 14, 2008, the Mr. Flyingman, as Governor of the Tribes andnot in his individual capacity, filed a declaratory judgment action in Cheyenneand Arapaho Trial Court asserting that the Tribes, not Southwest owned thesurveillance footage and the copyright in it, an assertion that Southwest doesnot contest. On February 13, 2008, the Federal District Court issued astay of the proceedings before it pending resolution of the Tribal courtproceeding. After briefing, oral argument in this matter was held on April 4,2008 and, on April 10, 2008, the Trial Court judge ruled in favor of theTribes. Southwest did not appeal this decision. The effect of this decision onthe pending federal court litigation is not known at this time.

 

*Other Litigation Matters*

 

Inaddition to the matters described above, we are involved in various claims, legalactions and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these matters areadequately covered by insurance or are provided for in our financial statementsand the ultimate outcome of these other matters will not have a material effecton our financial position or results of operations.

 

**NOTE 16 - NEW ACCOUNTINGPRONOUNCEMENTS**

 

The Company adopted Statement of Financial AccountingStandards Interpretation No. 48 “*Accounting for Uncertaintyin Income Taxes*” (“Interpretation No. 48”) effective January 1,2007, see Note 10.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years.  Thisstatement defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements.  The statement did not have an impact on theCompany’s consolidated financial 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH 31,2008**

 

statement disclosures during the three months ended March 31,2008.  On February 12, 2008 a FASBStaff Bulletin “FSP FAS 157 -2” was issued which defers the effective date ofFAS 157 to fiscal years beginning after November 15, 2008, and applies tononfinancial assets and nonfinancial liabilities.  We are evaluating the potential impact of FSPFAS 157 – 2.

 

In February 2007, the FASB released SFAS No. 159,“ *The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No. 115*“ This Statement permits entities to choose to measure many financialinstruments and certain other items at fair value. This Statement is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects toapply the provisions of FASB Statement No. 157, Fair ValueMeasurements.  The statement did not have an impact on the Company’sconsolidated financial statements during the three months ended March 31,2008.

 

In December 2007 the Securities and ExchangeCommission issued Staff Accounting Bulleting (“SAB”) No. 110 whichcontinues to allow companies to use the “simplified” method, as discussed inSAB No. 107 in developing an estimate of expected term of “plain vanilla”share options in accordance with Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*.

 

In May 2008, the FASB released SFAS No. 162,“*The Hierarchy of Generally Accepted AccountingPrinciples*.”  This statementwill be effective 60 days after the United States Securities and ExchangeCommission approves amendments to AU Section 411, *The Meaningof Present Fairly in Conformity with Generally Accepted Accounting Principles*.”  The Company does not anticipate anysignificant change in financial reporting to result from issuance of thisstatement.

 

**NOTE 17 –SUBSEQUENT EVENTS**

 

Extensionof Crown Bank Line of Credit

 

On April 16, 2007,the Company entered into the Third Amendment to the Revolving Credit and TermLoan Agreement with Crown Bank.  The amendment extended the maturity dateof the $450,000 revolving line of credit to April 30, 2008.  Underthe amendment, three principal officers of the Company each agreed to increasetheir personal guarantees of the line of credit from $100,000 to $150,000 plusexpenses.  In connection with a new loan with Crown Bank entered into in March 2008(see Note 8) each of the three principal officers agreed to increase their$150,000 personal guarantees to $250,000. As of March 31, 2008, no amounts are outstanding under theRevolving Credit facility.  As of April 30,2008, the Company extended the maturity date of the $450,000 line of credit toJune 30, 2008 and has drawn $450,000 under the line of credit.  

 

Related Party Transaction

 

On April 24, 2008, Gus Chafoulias, a member of the Company’s Boardof Directors, obtained two letters of credit in the aggregate amount of$473,742.50 to release 50% of cash deposits made by North Metro in connectionwith the development of its racetrack and card room. Southwest has agreed toreimburse Mr. Chafoulias for all costs incurred in connection with obtainingthese letters of credit and to provide him additional compensation to bedetermined, but that will not exceed compensation that would be paid in asimilar transaction with an unrelated third party.

 

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** **

**Item 2.  Management’s Discussionand 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 months ended March 31,2008 and 2007.

 

***Summary ofConsolidated Operating Results:***

 

For the quarter ended March 31, 2008, we had anet loss of $1,377,109 on revenues of $3,777,744 compared to a net loss of$415,064 on revenues of $5,142,229 for the same period in 2007.  This amounts to a basic loss of $0.05 and$0.02 per outstanding share during the three months ended March 31, 2008and 2007, respectively.

 

The increase in the netloss of approximately $962,000****wasdue primarily to a decrease in revenues of approximately $1,364,000, offset bya decrease in operating expenses of approximately $796,000, the write-off offinancing costs of approximately $217,000 and an increase in the loss from ourunconsolidated subsidiary (North Metro) of $218,000.

 

***Overview:***

 

Our principal business is the management, operationand development of gaming facilities in emerging and established gamingjurisdictions.  Currently, we operate two casinos in Cripple Creek,Colorado — Gold Rush Hotel and Casino and Gold Digger’s Casino.  We alsooperated Uncle Sam’s Casino in Cripple Creek, Colorado until June 2008. Until August 17, 2007 we managed two Native American gaming operations forthe Cheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star- Clinton.  We own a 50% membership interest in North Metro HarnessInitiative, LLC (“North Metro”).  North Metro opened its harness racetrackat its Running Aces Harness Park in Columbus, Minnesota on the north side ofthe Minneapolis — St. Paul Metropolitan area on April 11, 2008.  A50-table card room that is part of Running Aces will open after Running Acescompletes 50 days of live racing (as required by Minnesota statue). Underthe live racing schedule approved by the Minnesota Racing Commission, the 50thday of live races is scheduled for June 30, 2008.

 

In September 2007, we entered into a consultingagreement to work with Palace Resorts in developing and opening a casino at theMoon Palace Casino, Golf and Spa Resort now under construction in Punta Cana onthe easternmost tip of the Dominican Republic. We consult with Palace Resortsin all phases of design, game selection, training and equipping the casino thatwill be part of the 1,700-room resort that is scheduled to open in early 2009.Southwest receives a consulting fee of $50,000 per month for 10 monthsbeginning in October 2007 under the consulting agreement.  PalaceResorts provides world-class resort vacations at all-inclusive propertiesthroughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumel with the newresort under construction at Punta Cana, Dominican Republic.

 

From May 19, 2007 to August 19, 2007, wemanaged the Lucky Star — Concho and Lucky Star — Clinton casinos underAmendment No. 11 to the Third Amended and Restated Gaming Managementagreement between Southwest Casino and Hotel Corp. and the Cheyenne and ArapahoTribes of Oklahoma, which extended that agreement for up to two years.  OnAugust 17, 2007, the Supreme Court of the Cheyenne and Arapaho Tribesdeclared Amendment No. 11 invalid.  Also on August 17, 2007, theNational Indian Gaming Commission reversed its prior approval of Amendment No. 11. On August 24, 2007, the NIGC rejected our challenge to its decision and wehave not received management fees from the Cheyenne and Arapaho Tribes since August 17,2007.

 

Due to the loss of management fees from thismanagement contract, in March 2008 we secured additional debt financing tofund our current operations including project development costs.  The Company will need to raise additionaldebt or equity financing in mid-2008 for operations and debt service.

 

We continually evaluate other management, consulting,development and acquisition opportunities related to gaming that have thepotential to generate new revenue streams for us.

 

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***Operating segments:***

 

Our executive officers review operating results,assess performance and make decisions related to the allocation of resources ona property by property basis; however, certain properties are combined into oneoperating segment for financial reporting purposes as they meet the criteriafor aggregation under Statement of Financial Accounting Standards No. 131 *“Disclosures aboutSegments of an Enterprise and Related Information*” paragraph17.  We have grouped the following properties into the following twooperating segments that are described in further detail below:

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

 

**Casino Management:**

 

We managed two casinos for the Cheyenne and ArapahoTribes of Oklahoma under the Third Amended and Restated Gaming ManagementAgreement dated June 16, 1995 between us and the Cheyenne and ArapahoTribes of Oklahoma (the “Tribes”) until August 17, 2007, see abovediscussion under “overview”.

 

**Lucky Star - Concho**

 

We earned management fees of $0 and $916,605 fromLucky Star - Concho during the three months ended March 31, 2008 and 2007,respectively.

 

**Lucky Star - Clinton**

 

We earned management fees of $0 and $713,218 fromLucky Star - Clinton during the three months ended March 31, 2008 and2007, respectively.

 

**Palace Resorts**

 

In September 2007, we entered into a consultingagreement to work with Palace Resorts to develop and open a casino at the MoonPalace Casino, Golf and Spa Resort, now under construction in Punta Cana on theeasternmost tip of the Dominican Republic. Under the consulting agreement, weimmediately began assisting Palace Resorts in all phases of design, gameselection, training and equipping the casino that will be part of the1,700-room resort scheduled to open in early 2009. We receive $50,000 permonth for 10 months under the consulting agreement, which began October 2007. Palace Resorts provides world-class resort vacations at all-inclusiveproperties throughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumelwith the new resort under construction at Punta Cana, Dominican Republic. We recognized $150,000 of consulting revenue for the three months ended March 31,2008.

 

**Casino operations**:

 

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

 
| ** **                | ** ** | **Three Months   Ended  March 31, 2008** | ** ** | **Three Months   Ended   March 31, 2007** | ** ** | **Percentage Change  Favorable    (Unfavorable)** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Casino revenues           |       | $                                                  | 3,501,331  |                                                     | $          | 3,172,513                                              |       | 10.4 | % |
| Total revenues            |       | 3,627,744                                          |       | 3,298,429                                                |       | 10.0                                                   | %          |
| Loss before income taxes+ |       | 9,594                                              |       | 116,940                                                  |       | 92.0                                                   | %          |
| Loss margin*              |       | (0.3                                               | )%         | (3.6                                                     | )%         |                                                   |       |
|                           |            |                                                    |            |                                                          |            |                                                        |            |  |  |

 

+                 Loss before income taxes is determined by reducingtotal revenues by, among other things, interest expense on our capital lease atthe Gold Rush and depreciation and amortization expenses.  The capitallease was carried on 

 

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our Consolidated BalanceSheet in the amount of approximately $7.0 million as of March 31,2008.  Interest expense was $170,000 and $191,000 for the three monthsended March 31, 2008 and 2007, respectively.  Depreciation andamortization expense was $350,000 and $383,000 for the three months ended March 31,2008 and 2007, respectively.

 

*                 The loss margin is calculated by dividing loss beforeincome taxes by total revenues.

 

For the three months ended March 31, 2008, GR/GD’stotal casino revenues increased by 10.4% over the same period in the prioryear, despite the Cripple Creek market declining by 12.7% during this same timeperiod.  Our margin improved over the previous year as a result of theincreased revenues.  We believe thesmoking ban that came into effect on January 1, 2008 is having asignificant negative effect on the market. We are pleased that we have been able to counter the negative impacts ofthe smoking ban to date by addressing needs of our customers in innovative waysthat have helped us increase revenues year over year in a decliningmarket.  Additionally, during the threemonths ended March 31, 2007 we were impacted by bad weather in January andFebruary 2007 which we did not experience in the current year.  During March 2008 the Cripple Creekmarket reported a total of 4,458 gaming devices compared to 4,711 in the sameperiod in the prior year, a decrease of 5.4%. We are aware of a new casino that is being built in Cripple Creek that isprojected to open in the summer of 2008 and projected to offer approximately700 gaming devices, or ~14% of the market in terms of gaming devices (basedupon March Cripple Creek reported gaming device totals).  We are continuing to analyze our customers’patronage patterns and will continue to take steps to mitigate the impact ofthe smoking ban and the new casino but we can make no assurances on the impactfor the remainder of 2008.

 

We closed Uncle Sam’s casino on July 29,2007.  We transferred approximately eight employees to our GR/GDproperties.  Thus certain salaries and expenses previously incurred byUncle Sam’s have been included with operations of the GR/GD properties sincethe closure of Uncle Sam’s.   Additionally we offered incentives tothe players/customers who played at Uncle Sam’s to migrate their play to theGold Rush and Gold Digger’s casinos.    We estimated that weretained approximately 40% - 70% of the revenues from former Uncle Sam’scustomers who now play at the Gold Rush and Gold Diggers casinos.  TheGold Rush and Gold Diggers casinos had available capacity to absorb the playersfrom Uncle Sam’s.  We no longer use the Uncle Sam’s brand name in ouroperations.  However, since inception we have used an integrated playersclub for all three Cripple Creek casinos whereby the player could redeem pointsearned at one casino at any of the casinos.

 

We also include within the operating segment “CasinoOperations” our outdoor amphitheatre at the Gold Rush.  Revenues from theamphitheatre are less than 1% of total revenues.

 

**Uncle Sam’s Casino**:

 
| ** **               | ** ** | **Three Months   Ended   March 31, 2007** | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|
| Total revenues           |       | 213,977                                                       |       |
| Loss before income taxes |       | 130,883                                                       |       |

 

On June 25, 2007, we entered into an agreementwith the landlord to purchase the leased real property on which we operatedUncle Sam’s Casino in Cripple Creek, Colorado.  On June 26, 2007, weentered into an agreement to assign our rights under the purchase agreement andthe operating lease.  On July 29, 2007, we closed Uncle Sam’s Casinoand, on July 31, 2007, we assigned our rights under the purchase agreementand lease and received an assignment fee of approximately $487,000.

 

***Project Development*** costs for the three months ended March 31,2008 and 2007 were $0 and $168,276, respectively.  The 2007 amountsrelated primarily to costs associated with the management contract with theCheyenne and Arapaho Tribes, see above discussion under “CasinoManagement.  We expect to incur projectdevelopment costs in the remainder of 2008 similar to the levels incurred inprior years but this will vary depending on opportunities and availability offunds.

 

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***Corporate expenses*** were $906,968 and $1,303,585 during thethree months ended March 31, 2008 and 2007, respectively, a decrease of$396,617.

 

The decrease in our corporate expenses during thethree months ended March 31, 2008 over the same period in the prior yearis primarily due to decreased salary and benefit expense of approximately$300,000.  During March 2007 theboard of directors approved discretionary performance bonuses of approximately$385,000.  During March 2008 theboard of directors approved the issuance of 1,867,500 stock options toofficers, employees, independent directors and a consultant.  We recognized stock option compensationexpense of approximately $137,000 and $44,000 during the three months ended March 31,2008 and 2007, respectively (see Part I Note 3 to our Financial Statementsin Item 1 within this Form 10-Q). In addition to the $300,000 decrease in salary and benefits we did notincur license costs of approximately $56,000 with the National Indian GamingAssociation during the three months ended March 31, 2008 and we did notincur consulting expense of $15,000 during the three months ended March 31,2008 as we had during the three months ended March 31, 2007.  The performance bonus approved and recordedin March 2007 consisted of $210,000 that was paid in March 2007, and$175,000 to be paid on or after July 1, 2007 at such time as managementdetermines that we have sufficient financial resources for the payment. The $175,000 is accrued as a liability at March 31, 2008.

 

We incurred management fee expenses related to ourPunta Cana consulting contract of approximately $40,000 during the firstquarter of 2008.

 

***Interest Expense*** was $202,516 and $249,449 for the threemonths ended March 31, 2008 and 2007, respectively, a decrease ofapproximately $46,933.  The decrease is primarily due to lower interestfrom our $2.5 million term loan as the loan was fully paid in April 2007.

 

***Write off ofacquisition and financing costs*** of $217,329 during the three months ended March 31,2008 relate to the write-off of costs associated with a financing alternativeto the bank loan we secured in March 2008. We were unable to agreeupon the terms with the lender and we ultimately chose not to continuenegotiations with the lender.

 

***Loss ofunconsolidated subsidiary, net of tax benefit*** represents our share of the losses ofNorth Metro, which were $338,431 and 120,171 for the three months ended March 31,2008 and 2007, respectively.  Theincrease during the three months ended March 31, 2008 compared to the sameperiod in the prior year is due to the increased start-up expenses primarilyrelated to salaries, benefits and marketing expenses necessary to open RunningAces Harness Park on April 11, 2008.

 

***Effective tax rate. *** Forthe three months ended March 31, 2008 and 2007, we did not record a taxbenefit for the net loss as a result of our evaluation of deferred tax assetsand our ability to utilize the deferred tax assets in the future.  Werecorded a 100% valuation allowance against the deferred tax assets at March 31,2008 and December 31, 2007 because of the termination of our managementagreement with the Cheyenne and Arapaho Tribes, effective August 17, 2007and net losses since the termination.  As of March 31, 2008 and December 31,2007, our deferred tax asset is zero.

 

***Liquidity andCapital Resources:***

 

We continue to generate cash flow from our casinooperations in Colorado and our consulting agreement with Palace Resorts. We use the cash flows generated to pay off debt in accordance with ouragreements, fund reinvestment in our Colorado properties for both refurbishmentand replacement of assets, and to pursue additional growth opportunities. As the existing cash flows were inadequate to fund our cash requirements, wesecured additional debt financing in March 2008, described below.  We will need to raise additional debt orequity financing in mid-2008.

 

Due to the loss of revenue resulting from thetermination of our management contract with the Cheyenne and Arapaho Tribes ofOklahoma (see above discussion under the operating segment “Casino Management”)we secured additional debt financing to fund our current operations includingproject development costs.   We closed on a bank loan of $1.55 million on March 7,2008.  The interest rate is the prime rate plus 1.5% with a minimuminterest rate of 7%.  The effective interest rate on this loan, aftergiving effect to the warrant consideration issued in connection 

 

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with it, is approximately 24.5 percent (see Part INote 4 to our Financial Statements in Item 1 within this Form 10-Q).  We are required to make interest onlypayments through January 2009 after which we will repay the outstandingprincipal balance and accrued interest in 12 equal monthly installments. Eight shareholders of the Company, including a member of our board ofdirectors, cosigned portions of the loan.  Our three principal executiveofficers guaranteed portions of this loan as well as our $450,000 operatingline of credit.  As consideration for the co-signatures and personalguarantees we issued warrants to purchase 2,300,000 shares of our common stock(one warrant share for each dollar guaranteed or cosigned) at an exercise priceof $0.39 per share to each co-signer and guarantor.  The warrants have afive-year term.

 

During January and February 2008, we pursueda financing alternative to the bank loan discussed above. We were unableto agree upon the terms with the lender and we ultimately chose not to continuenegotiations with the lender. We incurred costs in connection with thisfinancing of approximately $217,000 that were expensed during the three monthsended March 31, 2008.

 

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

 

Net cash used in operating activities during the threemonths ended March 31, 2008 was $684,179 compared to net cash provided byoperating activities of $116,095 during the three months ended March 31,2007.  The change in cash from operationswas approximately $800,000 and is primarily due to an increase in our net lossof $962,000 with offsetting other noncash expenses and changes in currentassets and current liabilities.

 

Net cash used in investing activities for the threemonths ended March 31, 2008 and 2007 was $188,401 and $1,256,229,respectively, a decrease of approximately $1.1 million.  The decrease inuse of cash between the periods was due primarily to a decrease in ourinvestment in North Metro of approximately $1.0 million.  North Metro closed its construction financingin April 2007, resulting in less required funding from the members ofNorth Metro.  We contributed $66,000 and$1,100,000 during the three months ended March 31, 2008 and 2007,respectively.

 

Net cash provided by financing activities for thethree months ended March 31, 2008 and 2007 was $610,283 and $2,165,171,respectively.  During the three monthsended March 31, 2008 and 2007 we had the following financing activities:

 

·                  In January and February 2007 we completed an equity financingresulting in proceeds of approximately $4.0 million.

 

·                  We made payments of approximately $0.3 million on long-term borrowingscompared to approximately $0.7 million during the three months ended March 31,2008 and 2007, respectively.  Thedecrease was due to full repayment of a $2.5 million term loan with Crown Bankon April 30, 2007.

 

·                  During the three months ended March 31, 2007 we paid costs ofapproximately $322,000 related to the redemption of 357,000 shares of commonstock in accordance with Article XI of our Articles of Incorporationeffective January 22, 2007.  The shares were redeemed at a price of$0.90 per share based upon the closing stock price of our common stock asreported on January 22, 2007.  We recorded the redemption as areduction to stockholder’s equity for the buy back of shares.  The sharesof common stock are included in Treasury Stock in the Consolidated Statementsof Changes in Stockholders’ Equity as of March 31, 2008.

 

·                  We made payments of approximately $217,000 and $447,000 related tofinancing and acquisition costs during the three months ended March 31,2008 and 2007, respectively.  Thefinancing costs incurred in 2008 are discussed above and the financing and acquisitioncosts incurred in 2007 related to an acquisition that ultimately did not close.

 

·                  We made payments of approximately $450,000 and $446,000 during thethree months ended March 31, 2008 and 2007 related to our line of credit.

 

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***Line of Credit.***   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.  Under the amendment, three principal officers of the Company eachagreed to increase their personal guarantees of the line of credit from$100,000 to $150,000 plus expenses.  In connection with a new loan withCrown Bank entered into in March 2008 (see Term Note below) each of thethree principal officers agreed to increase their previously existing $150,000personal guarantees to $250,000.  As of March 31,2008, no amounts are outstanding under the Revolving Credit facility.  As of April 30, 2008, we extended the$450,000 line of credit to June 30, 2008 and have drawn $450,000 under theline of credit.

 

***Term Note***.   In March 2008, we enteredinto a $1.55 million term loan that is described above under “*Liquidity and CapitalResources*”.

 

***Equipment Loan.***  On December 23, 2005, wenegotiated a loan of $460,324 to pay off outstanding payables in connectionwith the installation of a player tracking system at our casinos in CrippleCreek, Colorado. The loan is for a term of 48 months with interest equal to theprime rate, which is 5.25% as of March 31, 2008.   Theoutstanding balance as of March 31, 2008 was approximately $210,000.

 

***Seasonality:***

 

We believe that the operations of all casinos owned byus is affected by seasonal factors, including holidays, weather and travelconditions.

 

***Effects of CurrentEconomic and Political Conditions:***

 

**General Economic Conditions:**

 

Consumer demand for the gaming products and relatedamenities we offer may be particularly sensitive to downturns in theeconomy.  Almost all gaming jurisdictionsin the United States have reported overall declining casino and relatedrevenues in recent months.  Changes inconsumer preferences or discretionary consumer spending brought about byfactors such as general economic conditions, real or perceived reduction indisposable consumer income, fears of recession and changes in consumerconfidence in the economy could reduce customer demand for our product, thusharming our operations.

 

**Competitive Pressures:**

 

Many casino operators are either entering or expandingin our markets, including a major new casino expected to open in the Summer of2008 in the Cripple Creek, Colorado market, thereby increasing competition. Ascompanies have completed new or expanded projects, supply has sometimes grownat a faster pace than demand, and competition has increased significantly.Furthermore, several operators, including Southwest, have plans for additionaldevelopments or expansions in our markets.

 

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

 

The Governor of Colorado signed a bill that removedthe exemption for casinos from the state’s 2006 smoking ban, effective January 1,2008.  We expect the extension of the ban to Colorado casinos will havesome negative impact on business volumes at our Cripple Creek properties, themagnitude of which we cannot predict at this time.

 

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** **

**Political Uncertainties:**

 

The casino entertainmentindustry is subject to political and regulatory uncertainty.  From time totime, individual jurisdictions have considered actions, legislation orreferendums that could adversely impact our operations.  The likelihood oroutcome of similar actions, legislation and referendums in the future isdifficult 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 2007Financial 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 nothave a significant impact to our financial statements.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years.  This statement definesfair value, establishes a framework for measuring fair value and expands therelated disclosure requirements.  This Statement did not effect ourconsolidated financial statements as of March 31, 2008.  On February 12,2008 a FASB Staff Bulletin “FSP FAS 157 -2” was issued which defers theeffective date of FAS 157 to fiscal years beginning after November 15,2008, and applies to nonfinancial assets and nonfinancial liabilities.  We are evaluating the potential impact of FSPFAS 157 – 2.

 

In February 2007, theFASB released SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115”*.  This Statementpermits entities to choose to measure many financial instruments and certainother items at fair value. This Statement is effective as of the beginning ofan entity’s first fiscal year that begins after November 15, 2007. Earlyadoption is permitted as of the beginning of a fiscal year that begins on orbefore November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, Fair Value Measurements.  ThisStatement did not effect our consolidated financial statements as of March 31,2008.

 

In December 2007 theSecurities and Exchange Commission issued Staff Accounting Bulleting (“SAB”) No. 110which continues to allow companies to use the “simplified” method, as discussedin SAB No. 107 in developing an estimate of expected term of “plainvanilla” share options in accordance with Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-BasedPayment*.

 

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In May 2008, the FASBreleased SFAS No. 162, “*The Hierarchy of GenerallyAccepted Accounting Principles*.” This statement will be effective 60 days after the United StatesSecurities and Exchange Commission approves amendments to AU Section 411, *The Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles*.”  We donot anticipate any significant change in our financial reporting to result fromissuance of this statement.

 

***Forward-Looking Statements:***

 

This Quarterly Report on Form 10-Qcontains “forward-looking statements” intended to qualify for the safe harborfrom liability established by the Private Securities Litigation Reform Act of1995.  You can identify these statements by the fact that they do notrelate strictly to historical or current facts. These statements often containwords such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,”“intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negativeor other variations of those words or comparable terminology. In particular,they include statements relating to, among other things, future actions, newprojects, strategies, future performance, the outcome of contingencies such aslegal proceedings and future financial results. We have based theseforward-looking statements on our current expectations and projections aboutfuture events.

 

We caution the reader that forward-lookingstatements involve risks and uncertainties that cannot be predicted orquantified and, consequently, actual results may differ materially from those expressedor implied in the forward-looking statements. These risks and uncertaintiesinclude, but are not limited to, the following factors as well as other factorsdescribed from time to time in our reports filed with the Securities andExchange Commission:

 

·                  short-termaccess to debt or equity financing;

 

·                  cost of available and feasible debt or equityfinancing;

 

·                  the effects of the smoking ban in Colorado,effective January 1, 2008 on our casinos in Cripple Creek, CO;

 

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

 

·                  the effect of economic, credit and capitalmarket conditions on the economy in general, and on gaming companies inparticular; our ability to recoup costs of capital investments through higherrevenues;

 

·                  success of our customer tracking and customerloyalty programs;

 

·                  abnormal gaming holds;

 

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

 

·                  construction factors, including delays, zoningissues, environmental restrictions, soil and water conditions, weather andother hazards, site access matters and building permit issues;

 

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

 

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

 

·                  our international consulting agreement andany future international operations will require us to understand and complywith the gaming regulations and operate in economic environments that are newto us and may differ significantly from the regulatory and economic models inwhich we currently operate.

 

Any forward-lookingstatements speak only as of the date made. We undertake no obligation topublicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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## ***Risk Factors***

## *** ***

In reviewing this quarterlyreport on Form 10-Q, 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 31,2008, which are incorporated in this document by reference.

 

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**Item4t.  Controls and Procedures**

 

**Disclosure Controlsand Procedures.**

 

Our management is responsible forestablishing disclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, designed to ensure that informationrequired to be disclosed in the reports we file or submit under the Act isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms. These disclosure controls and procedures include controls and proceduresdesigned to ensure that information we are required to disclose in the reportswe file or submit under the Act is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our Chief ExecutiveOfficer, who serves as our principal executive officer, and our President andChief Operating Officer, who serves as our principal financial officer,conducted an evaluation of the effectiveness of our disclosure controls andprocedures as of March 31, 2008 and concluded that those controls and procedureswere effective as of that date.

 

**Management’sReport on Internal Control over Financial Reporting**.

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) of the SecuritiesExchange Act of 1934. Our internal control system was designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial reporting and the preparation of financial statementsfor external purposes, in accordance with generally accepted accountingprinciples. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

Our management, includingour Chief Executive Officer, who serves as our principal executive officer, andour President and Chief Operating Officer, who serves as our principalfinancial officer, conducted an evaluation of the effectiveness of internalcontrol over financial reporting using the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission in Internal Control –Integrated Framework.  Based on itsevaluation, our management concluded that our internal control over financialreporting was effective as of March 31, 2008.

 

There have not been anychanges in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act) that occurred during thefiscal quarter ended March 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

This report shall not bedeemed to be filed for purposes of Section 18 of the Securities ExchangeAct of 1934, or otherwise subject to the liabilities of that section, and is notincorporated by reference into any filing of the Company, whether made beforeor after the date hereof, regardless of any general incorporation language insuch filing.

 

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**PART II- OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

*Alleged Breach of GamingManagement Agreement*

 

On July 24, 2007, the Governor of theCheyenne and Arapaho Tribes of Oklahoma delivered notice to Southwest that on July 13,2007 he had initiated an arbitration proceeding against us for alleged breachof the Third Amended and Restated Gaming Management Agreement under which wethen managed two casinos for the Tribes. On November 2, 2007, we filed a counterclaim in this proceedingalleging a breach of the Gaming Management Agreement by the tribal Governor.The three-member arbitration panel for this proceeding was appointed in February 2008.  After an initial scheduling conference withthe arbitration panel on March 11, 2008 we submitted our formalCross-Complaint to the arbitration panel on April 22, 2008 and the Tribessubmitted their formal complaint on April 23, 2008.

 

In the Complaint, the Governor alleged thatSouthwest breached the management agreement by interfering with or attemptingto influence internal affairs or governmental decisions of the Tribes inconnection with our efforts to extend our gaming management relationship withthe Tribes, which terminated on August 17, 2007. The Governor soughttermination of the agreement and $10 million in damages.  We do not believe we improperly interferedwith or attempted to influence internal governmental decisions of the Tribesand Southwest is vigorously defending itself in this arbitration proceeding.Under our Gaming Management Agreement with the Tribes, we were permitted to oppose,publicly or privately, any action by the Tribes that we believed was not in thebest interest of the Tribal gaming operations. We believe that all of theactions we took on behalf of the gaming operations we managed or as part of ourefforts to extend our gaming management relationship with the Tribes wereconsistent with that provision.

 

In our Cross-Complaint, We allege that theGovernor of the Tribes breached the Management Agreement by refusing tonegotiate in good faith for an extension and expansion of the gaming managementrelationship between Southwest and the Tribes. We assert that the Management Agreement required the Tribes to negotiatethis extension and expansion after we led the Tribes’ successful efforts tonegotiate and enter into a compact for expanded gaming with the State ofOklahoma in April 2005.  We are nowproceeding with discovery in this case.

 

# ***Theft and Distribution of SurveillanceVideo from Lucky Star Clinton casino***

# ** **

# **On August 24, 2007, Southwest Casino and HotelCorp., as exclusive manager of the Lucky Star casinos of the Cheyenne andArapaho Tribes of Oklahoma, filed a lawsuit against Doris Thunderbull, DarrellFlyingman, in his individual capacity, and John Does No. 1 and 2 allegingtheft (conversion) of confidential surveillance video from the Lucky Star –Clinton casino and subsequent copyright infringement and defamation inconnection with the posting of the stolen video on the website YouTube.com andwidespread distribution of DVDs containing the video by mail. We initiallysought an emergency temporary restraining order barring further distribution ofthe video. That request was denied on August 27, 2007 and we withdrew ourrequest for the restraining order on September 24, 2007. Our claims onbehalf of the Tribes or Southwest for conversion, copyright infringement,tortious interference with contract, defamation, and conspiracy against thedefendants remain pending in Federal district court.**

# ** **

On January 14, 2008, the Mr. Flyingman,as Governor of the Tribes and not in his individual capacity, filed adeclaratory judgment action in Cheyenne and Arapaho Trial Court asserting thatthe Tribes, not Southwest owned the surveillance footage and the copyright init, an assertion that we did not contest. On February 13, 2008, theFederal District Court issued a stay of the proceedings before it pendingresolution of the Tribal court proceeding. After briefing, oral argument inthis matter was held on April 4, 2008 and, on April 10, 2008, theTrial Court judge ruled in favor of the Tribes. We did not appeal thisdecision. The effect of this decision on the pending federal court litigationis not known at this time.

 

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*Other Litigation Matters*

 

In addition to the matters described above, weare involved in various claims, legal actions and other complaints arising inthe ordinary course of business.  In the opinion of management, any lossesthat may occur from these matters are adequately covered by insurance or areprovided for in our financial statements and the ultimate outcome of theseother matters will not have a material effect on our financial position orresults of operations.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

On March 10, 2008Southwest Casino Corporation issued five-year fully exercisable warrants topurchase an aggregate of 1,550,000 shares of its common stock at an exerciseprice of $0.39 per share to eight shareholders who co-signed promissory noteswith Southwest Casino & Hotel Corp. in the original principal amountof $1.55 million.  Each co-signerreceived a warrant to purchase one share of our common stock for each $1.00 inprincipal amount of the promissory note co-signed by that shareholder.  We issued identical warrants to purchase anadditional $750,000 to James Druck, our CEO, Thomas Fox, our President and COO,and Jeffrey Halpern, our Vice President of Government Affairs, in considerationof their increase in the amount and extension of the term of their respectiveguarantees of our outstanding line of credit and the promissory notes describedabove.  The $0.39 per share exerciseprice of these warrants represented the average closing market price of oneshare of Southwest Casino Corporation’s common stock over the 5 trading days precedingthe closing of the loan transaction. Warrant holders also received the right to have the shares of SouthwestCasino Corporation common stock purchasable upon exercise of their warrantsincluded in any registration statement that Southwest Casino Corporation mayfile in the future (“piggy-back rights”) under the terms of a separateRegistration Rights Agreement dated March 10, 2008.

 

We are using the proceedsfrom the loan transaction for general working capital, including additionalmembership contributions to North Metro Harness Initiative, LLC if requiredunder the terms of the construction financing for that facility or agreed tobetween the members of North Metro Harness Initiative.  We reserved from the proceeds of the loan $97,000, which Southwestestimates based on the current interest rate is the amount of the interest-onlypayments due under the notes through January 11, 2009.

 

Thewarrants issued to the shareholders who co-signed the promissory notes totaling$1.55 million described above under Item 1.01 of this Current Report on Form 8-Kwere issued by Southwest Casino Corporation in reliance upon exemptions fromthe registration requirements under the Securities Act of 1933, as amended,including Regulation D and Section 4(2), and applicable state securitieslaws.  With regard to the reliance uponthe exemptions under Regulation D and Section 4(2) under theSecurities Act, Southwest Casino Corporation made certain inquiries of theshareholder guarantors to establish that the issuance of the warrants qualifiedfor these exemptions from the registration requirements. No underwritingcommissions or discounts were paid with respect to the issuance of theWarrants.

 

**Item 6.  Exhibits**

 

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

 
| 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 the requirements ofthe Securities and Exchange Act of 1934, as amended, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| May 15, 2008 | **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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