Table ofContents

 

 

 

**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 thequarterly period ended  ****June 30, 2008**

** **

**or**

 

| **o** | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE EXCHANGE ACT** |
|-------|--------------------------------------------------------------------------------|

 

**For the transition period from          to**

 

**CommissionFile Number:  ****000-50572**

 

**SOUTHWESTCASINO CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

| **2001 Killebrew Drive, Suite 350, Minneapolis, MN 55425**       |
|-----------------------------------------------------------------------|
| (Address  of principal executive offices)   (Zip Code) |
|                                                                  |   |   |   |   |

** **

**952-853-9990**

(Registrant’stelephone number, including area code)

 

 

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. YES  x    NOo

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)  YES  o   NO  x

 

Number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date: **30,349,997** as of August 1, 2008.

 

 

 

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Table of Contents

** **

**SOUTHWEST CASINO CORPORATION**

 

**FORM 10-Q**

**June 30,2008**

 

**TABLEOF CONTENTS**

 
| PART I.   | FINANCIAL  INFORMATION                                                                                                        |   |   |
|----------------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1.        | Financial  Statements                                                                                                         |   | 1      |
|           | Consolidated Balance Sheet June 30, 2008  (Unaudited) and December 31, 2007                                         |   | 2      |
|           | Consolidated  Statements of Operations (Unaudited) for the Three and Six Months ended  June 30, 2008 and 2007       |   | 3      |
|           | Consolidated  Statements of Cash Flows (Unaudited) for the Six Months ended June 30,  2008 and 2007                 |   | 4      |
|           | Consolidated  Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months  ended June 30, 2008 |   | 5      |
|           | Notes  to Unaudited Consolidated Financial Statements                                                                         |   | 6      |
| ITEM 2.        | Management’s  Discussion and Analysis or Plan of Operation                                                               |   | 23     |
| ITEM 4T.       | Controls and  Procedures                                                                                                      |   | 33     |
|           |                                                                                                                          |   |   |
| PART II.  | OTHER INFORMATION                                                                                                             |   | 34     |
| ITEM 1.        | Legal Proceedings                                                                                                             |   | 34     |
| ITEM  1A.      | Risk  Factors                                                                                                                 |   | 36     |
| ITEM 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                  |   | 42     |
| ITEM 4.        | Submission of  Matters to a Vote of Security Holders                                                                          |   | 43     |
| ITEM  6.       | Exhibits                                                                                                                      |   | 43     |
| SIGNATURE PAGE |                                                                                                                          | 44     |

 

*In this Form 10-Q, referencesto “Southwest,” “the company,” “we,” “our” or “us,” unless the contextotherwise requires, refer to Southwest Casino Corporation and its consolidatedsubsidiaries.*

 

 

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Table of Contents

 

**PART I— FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 
| **FINANCIAL STATEMENTS**                                                                                               | 1      |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| Consolidated Balance Sheet June 30, 2008  (Unaudited), and December 31, 2007                                 | 2      |
| Consolidated Statements of Operations (Unaudited) for  the Three and Six Months ended June 30, 2008 and 2007 | 3      |
| Consolidated Statement of Cash Flows (Unaudited) for  the Six Months ended June 30, 2008 and 2007                 | 4      |
| Consolidated Statement of Stockholders’ Equity  (Unaudited) for the Six Months ended June 30, 2008           | 5      |
| Notes  to Unaudited Consolidated Financial Statements                                                                  | 6      |

 

1

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Table of Contents

 

**SOUTHWEST CASINO CORPORATION**

**ConsolidatedBalance Sheets**

**June 30,2008 (unaudited) and December 31, 2007**

 
| ** **                                                                                                                                                                                                                                         | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                                                                                                                                                             |       |        |       |        |       |
| CURRENT ASSETS                                                                                                                                                                                                                                     |       |        |       |        |       |
| Cash and Cash Equivalents                                                                                                                                                                                                                          |       | $           | 2,549,130  |        | $          | 1,892,401 |   |
| Accounts Receivable                                                                                                                                                                                                                                |       | 36,560      |       | 54,582      |       |
| Accounts Receivable - Related Parties                                                                                                                                                                                                              |       | 10,811      |       | 41,572      |       |
| Inventories                                                                                                                                                                                                                                        |       | 147,242     |       | 141,041     |       |
| Prepaid Expenses and Other Current Assets                                                                                                                                                                                                          |       | 460,677     |       | 679,583     |       |
| Total Current Assets                                                                                                                                                                                                                               |       | $           | 3,204,420  |        | $          | 2,809,179 |   |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                                                                                                                                             |       |        |       |        |       |
| Leasehold Improvements                                                                                                                                                                                                                             |       | 15,495,329  |       | 15,389,750  |       |
| Furniture and Equipment                                                                                                                                                                                                                            |       | 5,356,919   |       | 5,280,282   |       |
| Accumulated Depreciation                                                                                                                                                                                                                           |       | (11,507,178 | )          | (10,835,938 | )          |
| Net Property and Equipment                                                                                                                                                                                                                         |       | $           | 9,345,070  |        | $          | 9,834,094 |   |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| OTHER ASSETS                                                                                                                                                                                                                                       |       |        |       |        |       |
| Other Assets                                                                                                                                                                                                                                       |       | 326,480     |       | 33,374      |       |
| Investment in Unconsolidated Subsidiary                                                                                                                                                                                                            |       | 5,676,768   |       | 7,218,720   |       |
| Total Other Assets                                                                                                                                                                                                                                 |       | $           | 6,003,248  |        | $          | 7,252,094 |   |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| TOTAL ASSETS                                                                                                                                                                                                                                       |       | $           | 18,552,738 |        | $          | 19,895,367 |   |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                         |       |        |       |        |       |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| CURRENT LIABILITIES                                                                                                                                                                                                                                |       |        |       |        |       |
| Accounts Payable                                                                                                                                                                                                                                   |       | $           | 662,765    |        | $          | 659,284 |   |
| Accounts Payable - Related Parties                                                                                                                                                                                                                 |       | 7,199       |       | 25,000      |       |
| Accrued Expenses                                                                                                                                                                                                                                   |       | 870,909     |       | 1,085,797   |       |
| Accrued Liabilities - Related Parties                                                                                                                                                                                                              |       | 82,467      |       | 122,467     |       |
| Notes Payable                                                                                                                                                                                                                                      |       | 450,000     |       | 450,000     |       |
| Current Portion of Long-Term Liabilities                                                                                                                                                                                                           |       | 1,673,698   |       | 1,005,940   |       |
| Accrued Interest Payable                                                                                                                                                                                                                           |       | 60,157      |       | 55,465      |       |
| Total Current Liabilities                                                                                                                                                                                                                          |       | $           | 3,807,195  |        | $          | 3,403,953 |   |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                                                                                                                              |       |        |       |        |       |
| Long-Term Liabilities Net of Current Portion                                                                                                                                                                                                       |       | $           | 6,865,132  |        | $          | 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,  30,656,997 and 27,817,953 Shares Issued at June 30, 2008 and  December 31, 2007 and 30,299,997 and 27,460,953 Outstanding at  June 30, 2008 and December 31, 2007 |       | 30,658      |       | 27,819      |       |
| Additional Paid-in Capital                                                                                                                                                                                                                         |       | 23,844,998  |       | 21,496,064  |       |
| Accumulated Deficit                                                                                                                                                                                                                                |       | (15,672,945 | )          | (11,196,534 | )          |
|                                                                                                                                                                                                                                               |       | 8,202,711   |       | 10,327,349  |       |
| Less Treasury Stock (357,000 shares redeemed)                                                                                                                                                                                                      |       | (322,300    | )          | (322,300    | )          |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| Total Stockholders’ Equity                                                                                                                                                                                                                    |       | 7,880,411   |       | 10,005,049  |       |
|                                                                                                                                                                                                                                               |       |        |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                    |       | $           | 18,552,738 |        | $          | 19,895,367 |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

2

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**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Operations**

**Forthe Three and Six Months Ended June 30, 2008 and 2007**

 

 
| ** **                                                                                       | ** ** | **For the three**      | ** ** | **For the three**           | ** ** | **For the six**        | ** ** | **For the six**        | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                       | ** ** | **months ended**       | ** ** | **months ended**       | ** ** | **months ended**       | ** ** | **months ended**       | ** ** |
| ** **                                                                                       | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **NET REVENUES**                                                                                 | ** ** | ** **             | ** ** | ** **                  | ** ** | ** **             | ** ** | ** **             | ** ** |
| Casino                                                                                           |       | $                      | 3,484,482  |                        | $          | 3,743,884              |       | $                      | 6,985,813  |   | $ | 7,125,276 |   |
| Food & Beverage/Hotel                                                                   |       | 104,528                |       | 130,865                     |       | 194,411                |       | 230,320                |       |
| Management and Consulting                                                                        |       | 150,000                |       | 1,501,628                   |       | 300,000                |       | 3,131,451              |       |
| Entertainment                                                                                    |       | 25,284                 |       | 29,546                      |       | 25,284                 |       | 29,546                 |       |
| Other                                                                                            |       | 34,331                 |       | 50,246                      |       | 70,861                 |       | 81,805                 |       |
|                                                                                             |       | 3,798,625              |       | 5,456,169                   |       | 7,576,369              |       | 10,598,398             |       |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **EXPENSES**                                                                                     | ** ** | ** **             | ** ** | ** **                  | ** ** | ** **             | ** ** | ** **             | ** ** |
| Casino                                                                                           |       | $                      | 2,881,600  |                        | $          | 2,892,150              |       | $                      | 5,669,330  |   | $ | 5,744,793 |   |
| Food & Beverage/Hotel                                                                   |       | 337,387                |       | 339,988                     |       | 663,352                |       | 649,688                |       |
| Corporate Expense                                                                                |       | 919,198                |       | 821,234                     |       | 1,826,166              |       | 2,124,819              |       |
| Project Development Costs                                                                        |       | —                 |       | 84,295                      |       | —                 |       | 252,571                |       |
| Entertainment                                                                                    |       | 76,018                 |       | 53,432                      |       | 84,225                 |       | 68,837                 |       |
| Depreciation and Amortization                                                                    |       | 347,797                |       | 487,744                     |       | 713,111                |       | 1,028,377              |       |
|                                                                                             |       | 4,562,000              |       | 4,678,843                   |       | 8,956,184              |       | 9,869,085              |       |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **INCOME (LOSS) FROM OPERATIONS**                                                                |       | $                      | (763,375   | )                           | $          | 777,326                |       | $                      | (1,379,815 | ) | $ | 729,313 |   |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **OTHER INCOME (EXPENSE)**                                                                       | ** ** | ** **             | ** ** | ** **                  | ** ** | ** **             | ** ** | ** **             | ** ** |
| Interest Income                                                                                  |       | $                      | 253        |                        | $          | 652                    |       | $                      | 471        |   | $ | 3,221 |   |
| Interest Expense                                                                                 |       | (244,826               | )          | (203,374                    | )          | (447,342               | )          | (452,823               | )          |
| Gain (Loss) on Disposition of Property and Equipment                                             |       | —                 |       | —                      |       | 1,250                  |       |                   |       |
| Write-off of Acquisition and Financing Costs                                                     |       | —                 |       | (126,650                    | )          | (217,329               | )          | (126,650               | )          |
| Other                                                                                            |       | (4,333                 | )          |                        |       | (8,194                 | )          |                   |       |
|                                                                                             |       | (248,906               | )          | (329,372                    | )          | (671,144               | )          | (576,252               | )          |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **Income (loss) before income taxes, income (loss)  in earnings of unconsolidated subsidiaries** | ** ** | (1,012,281             | )          | 447,954                     | ** ** | (2,050,959             | )          | 153,061                | ** ** |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| Income taxes                                                                                     |       |                   |       | —                      |       | —                 |       |                   |       |
| Loss of Unconsolidated Subsidiaries, Net of Tax Benefit                                          |       | (2,087,021             | )          | (96,437                     | )          | (2,425,452             | )          | (216,608               | )          |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **NET INCOME (LOSS)**                                                                            |       | $                      | (3,099,302 | )                           | $          | 351,517                |       | $                      | (4,476,411 | ) | $ | (63,547 | ) |
|                                                                                             |       |                   |       |                        |       |                   |       |                   |       |
| **Income (loss) per share - basic**                                                              |       | $                      | (0.11      | )                           | $          | 0.01                   |       | $                      | (0.16      | ) | $ | (0.00 | ) |
| **Income (loss) per share - diluted**                                                            |       | $                      | (0.11      | )                           | $          | 0.01                   |       | $                      | (0.16      | ) | $ | (0.00 | ) |
| **Weighted average common shares outstanding -  basic**                                          |       | 27,917,680             |       | 27,286,443                  |       | 27,689,316             |       | 26,026,331             |       |
| **Weighted average common shares outstanding -  diluted**                                        |       | 27,917,680             |       | 29,394,824                  |       | 27,689,316             |       | 26,026,331             |       |

 

SeeNotes to Unaudited Consolidated Financial Statements

 

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**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Cash Flows**

**Forthe Six Months Ended June 30, 2008 and 2007**

 
| ** **                                                                                                         | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Cash Flows from Operating Activities:                                                                              |       |      |       |       |       |
| Net Income (Loss)                                                                                                  |       | $         | (4,476,411 | )          | $          | (63,547 | ) |
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by  Operating Activities:                          |       |      |       |       |       |
| Depreciation and Amortization                                                                                      |       | 713,111   |       | 1,028,377  |       |
| Amortization of Loan Costs                                                                                         |       | 62,677    |       | 56,619     |       |
| Write-off of Acquisition and Financing Costs                                                                       |       | 217,329   |       | 126,650    |       |
| (Gain) Loss on Disposition of Property and Equipment                                                               |       | (1,250    | )          |       |       |
| Payroll taxes on bonuses and accrued compensation paid in common  stock and warrants                               |       | (84,164   | )          |       |       |
| Stock Based Compensation Expense                                                                                   |       | 287,651   |       | 138,942    |       |
| Loss of Unconsolidated Subsidiary                                                                                  |       | 2,425,452 |       | 216,608    |       |
| Change in Current Assets and Liabilities,                                                                          |       |      |       |       |       |
| (Increase) Decrease in Receivables                                                                                 |       | 18,022    |       | (261,313   | )          |
| (Increase) Decrease in Receivables - Related Parties                                                               |       | 30,761    |       |       |       |
| (Increase) Decrease in Inventories                                                                                 |       | (6,201    | )          | 9,707      |       |
| (Increase) Decrease in Prepaid Expenses and Other Current Assets                                                   |       | 188,907   |       | 7,144      |       |
| Increase (Decrease) in Accounts Payable                                                                            |       | 24,787    |       | 161,694    |       |
| Increase (Decrease) in Accounts Payable - Related Parties                                                          |       | 7,199     |       |       |       |
| Increase (Decrease) in Accrued Expenses                                                                            |       | (74,888   | )          | (136,922   | )          |
| Increase (Decrease) in Accrued Interest Payable                                                                    |       | 4,692     |       | (5,927     | )          |
| Net Cash Provided (Used) by Operating Activities                                                                   |       | $         | (662,326   | )          | $          | 1,278,032 |   |
|                                                                                                               |       |      |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                               |       |      |       |       |       |
| Purchase of Property and Equipment                                                                                 |       | (323,757  | )          | (179,086   | )          |
| Proceeds from Sale of Property and Equipment                                                                       |       | 25,000    |       | —     |       |
| Payment of Costs Associated with Management and Consulting Contracts                                               |       | —    |       | (306,450   | )          |
| Receipt (Payment) of Deposit                                                                                       |       | 60,000    |       | (2,713     | )          |
| Investment in Unconsolidated Subsidiary                                                                            |       | (883,500  | )          | (2,527,195 | )          |
| Net Cash Used in Investing Activities                                                                              |       | $         | (1,122,257 | )          | $          | (3,015,444 | ) |
|                                                                                                               |       |      |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                               |       |      |       |       |       |
| Payments on Short-Term Notes Payable                                                                               |       | $         | —     |       | $          | (446,292 | ) |
| Proceeds from Long-Term Borrowings, net                                                                            |       | 1,534,500 |       |       |       |
| Principal Payments on Long-Term Borrowings                                                                         |       | (503,479  | )          | (1,224,996 | )          |
| Proceeds from Issuance of Common Stock upon Exercise of Warrants                                                   |       | 88,728    |       |       |       |
| Proceeds from Issuance of Common Stock and Warrants                                                                |       | 1,540,552 |       | 4,054,369  |       |
| Redemption of Common Stock                                                                                         |       | —    |       | (322,300   | )          |
| Payment of Financing Costs                                                                                         |       | (1,660    | )          |       |       |
| Payment of Financing Costs Written-Off                                                                             |       | (217,329  | )          | (437,100   | )          |
| Other                                                                                                              |       |      |       | (8,900     | )          |
| Net Cash Provided by Financing Activities                                                                          |       | $         | 2,441,312  |       | $          | 1,614,781 |   |
|                                                                                                               |       |      |       |       |       |
| Net Increase in Cash and Cash Equivalents                                                                          |       | 656,729   |       | (122,631   | )          |
|                                                                                                               |       |      |       |       |       |
| CASH AND CASH EQUIVALENTS                                                                                          |       |      |       |       |       |
| Beginning of Period                                                                                                |       | 1,892,401 |       | 1,531,260  |       |
| End of Period                                                                                                      |       | $         | 2,549,130  |       | $          | 1,408,629 |   |
|                                                                                                               |       |      |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                                   |       |      |       |       |       |
| Interest Paid                                                                                                      |       | $         | 378,942    |       | $          | 402,131 |   |
| Income Taxes Paid                                                                                                  |       | $         | 1,100      |       | $          | 37,858 |   |
|                                                                                                               |       |      |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                                             |       |      |       |       |       |
|                                                                                                               |       |      |       |       |       |
| Capital assets acquired with acounts payable                                                                       |       | $         | 66,083     |       | $          | 12,703 |   |
| Financing costs included in accounts payable                                                                       |       | $         | 13,606     |       | $          | 68,358 |   |
| Costs associated with issuing common stock included in accounts payable                                            |       | $         | 16,344     |       | $          | 13,465 |   |
| 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     |       |       |   |
| Bonuses and accrued compensation paid in exchange for issuance of  common stock and warrants, net of payroll taxes |       | $         | 95,836     |       |       |   |
| Financing costs netted from proceeds from issuing common stock                                                     |       | $         | 25,447     |       |       |   |
| Placement agent fees paid in exchange for issuance of common stock  and warrants                                   |       | $         | 88,992     |       |       |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

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**SOUTHWEST CASINO CORPORATION**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**Forthe Six Months Ended June 30, 2008**

 
| ** **                                                       | ** ** | **Treasury Stock** | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|------------|------------|-------------|------------|
| ** **                                                       | ** ** | **Number of**      | ** ** | ** **       | ** ** | **Number of**  | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Shares**         | ** ** | **Amount**       | ** ** | **Shares**     | ** ** | **Amount** | ** ** | **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 |   |
| ** **                                                       |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| Issuance of Common Stock and Warrants, Net                       |       |               |       |             |       | 2,693,589      |       | $          | 2,694      |        | $          | 1,617,351 |   |   |   | $ | 1,620,045 |   |
|                                                             |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| Exercise of Warrants and Issuance of Common Stock                |       |               |       |             |       | 145,455        |       | 145        |       | 88,582      |       |   |   | 88,727 |   |
| ** **                                                       |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| Stock-Based Compensation Expense Related to Options and Warrants |       |               |       |             |       |           |       |       |       | 287,651     |       |   |   | 287,651 |   |
| ** **                                                       |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| Issuance of Warrants in Connection With Debt Issuance            |       |               |       |             |       |           |       |       |       | 355,350     |       |   |   | 355,350 |   |
|                                                             |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| Net Loss                                                         |       |               |       |             |       |           |       |       |       |        |       | (4,476,411 | ) | (4,476,411 | ) |
|                                                             |       |               |       |             |       |           |       |       |       |        |       |   |   |   |   |
| **BALANCE June 30, 2008**                                   |       | (357,000           | )          | (322,300         | )          | 30,656,997     |       | 30,658     |       | 23,844,998  |       | (15,672,945 | ) | 7,880,411 |   |
|                                                                  |            |                    |            |                  |            |                |            |            |            |             |            |  |  |  |  |  |  |  |  |  |

 

See Notes to Unaudited Consolidated Financial Statements

 

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Tableof Contents

 

**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

**NOTE 1 — BASIS OFPRESENTATION**

** **

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 includedin the annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States has been condensed oromitted. For further information, please refer to the annual auditedconsolidated financial statements of the Company, and the related notesincluded within the Company’s Annual Report on Form 10-KSB for the yearended 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.

 

**NOTE2 — MANAGEMENT FINANCIAL PLANS**

 

The Company completed a debt financing for $1.55million in March 2008, see Note 9.  On June 17, 2008, theCompany sold 2.7 million shares of common stock and warrants to purchase 2.2million shares of common stock resulting in proceeds of approximately $1.54million, see Note 5.  During the sixmonths ended June 30, 2008 the Company has used $883,500 to make anadditional investment in North Metro, see Note 7 and $450,000 to pay in fullthe Company’s line of credit on July 1, 2008, see Note 8.  The Company will be required to seekadditional debt or equity financing during 2008 to fund operations as well asto repay debt beginning in February 2009.

 

**NOTE 3 — STOCK OPTIONS AND AWARDS**

 

Stock option plans:

 

On July 15, 2004, Southwest Casino and HotelCorp. shareholders approved the Southwest Casino and Hotel Corp. 2004 StockIncentive Plan that had been adopted by the company’s Board of Directorseffective June 1, 2004.  Under the terms of the reorganizationcompleted July 22, 2004, Southwest Casino Corporation assumed the rightsand obligations of Southwest Casino and Hotel Corp. under this plan.  Theplan permits Southwest Casino Corporation to issue incentive awards to allemployees of Southwest Casino Corporation or any of its subsidiaries and anynon-employee directors, consultants or independent contractors of the Companyor 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 by shareholder approval in June 2007,which increased the number of shares of Southwest Casino Corporation commonstock reserved for issuance under the plan from 1,500,000 to 3,000,000.

 

In addition to the assumption of the 2004 StockIncentive Plan, Southwest Casino Corporation assumed outstanding non-planoptions to acquire shares of Southwest Casino and Hotel Corp. common stock aspart 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 Expense Information under SFAS 123(R)

 

Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(“SFAS 123(R)”) requires companies to estimate the fair value ofshare-based payment awards on the date of grant using an option-pricing model.The value of the portion of the award that is ultimately expected to vest isrecognized as expense over the requisite service periods in the Company’sconsolidated statement of operations.

 

The effect of stock options issued to employees,directors and consultants was to increase the net loss for the three and sixmonths ended June 30, 2008 by $95,752 and $232,651, respectively and basicloss per share by $0.003 and $0.008, respectively.  The effect of stock options issued was to decreasenet earnings for the three months ended June 30, 2007 and increase the netloss for the six months ended June 30, 2007 by $44,221 and $88,525,respectively and basic and diluted earnings per share and basic loss per shareby $0.002 and $0.003, respectively.

 

Options are granted to employees and directors atprices equal to the market value of the stock on the dates the options aregranted. The options granted have terms of 5 to 10 years from the grant dateand granted options typically vest quarterly over a one to three yearperiod.  The fair value of each option is amortized into compensationexpense over the period the option vests.The Company has 

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

estimated fair value of all stock options as of thedate of grant by applying the Black-Scholes pricing valuation model.  Theapplication of this valuation model involves assumptions that are judgmentaland sensitive in the determination of compensation expense.  The keyassumptions used in determining the fair value of options during the six monthsended June 30, 2008 were:

 
| ** **                              | ** ** | **Six months ended  June 30, 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’s securities began tradingpublicly in July 2004, however the volume and trading activity was minimaluntil 2007.  As a result the Company used the average volatility for thelook back period (which is the expected 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 Company weighted the volatility using 80%of the peer group and 20% of the Company’s calculated volatility.  TheCompany applied the simplified formula for computing the expected termassumptions for employee and director options in accordance with StaffAccounting Bulletin (“SAB”) No. 107 and as modified in SAB No. 110. The Company applied 0% to the dividend yield as the Company has not approved orissued dividends in the past and there are no plans to do so.  Therisk-free interest rate was selected based upon yields of U.S. Treasury issueswith a term equal to the expected life of the option being valued.  SFAS123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Pre-vesting forfeitures were estimated to be zero basedprimarily on historical experience.  If pre-vesting forfeitures occur inthe future, the Company will record the benefit related to those forfeitures asthe forfeitures occur.

 

Status of optionsduring the six months ended June 30, 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 June 30, 2008             |       | 4,367,500                |       | $                                     | 0.58       |                                     |       |                           |       |   |
|                                      |       |                     |       |                                  |       |                                     |       |                           |       |
| Options outstanding at June 30, 2008 |       | 4,367,500                |       | $                                     | 0.58       |                                     | 6.8  years |                           | $          | 1,397,600 |   |
| Options exercisable at June 30, 2008 |       | 2,890,938                |       | $                                     | 0.62       |                                     | 4.5  years |                           | $          | 809,426 |   |

 

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on Southwest CasinoCorporation closing stock price of $0.90 on June 30, 2008, that the optionholders would have received had all option holders exercised their options asof that date.  As of June 30, 2008, the Company’s unrecognizedshare-based compensation related to stock options issued to employees anddirectors was approximately $430,229.  This cost is expected to beexpensed over a weighted average period of three years.

 

Included in the Status of options table above are:

 

·                  On March 20, 2008, the Board of Directors awarded options topurchase an aggregate of 1,092,500 shares of the Company’s common stock toexecutive officers and employees of the Company.  All of the options weregranted under the Company’s 2004 StockIncentive Plan.  The options have a 10-year term and an exercise price of$0.48 per share, the closing market price for one share of the Company’s commonstock on the date of grant.  The options were immediately exercisable withrespect to 25% of the shares awarded and become exercisable with respect to theremaining shares in equal installments on the last day of each fiscal quarterover a three-year period.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

·                  Also on March 20, 2008, the Board of Directors granted options topurchase 675,000 shares of the Company’s common stock to the independentmembers of the Board.  These options were also 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 on the date of grant.  The options becomeexercisable in equal installments on the last day of each fiscal quarterbeginning on the last day of the fourth quarter of 2008 (the first quarterafter the options granted to our independent directors on January 10, 2006are 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 on the date of grant.  These options becomeexercisable upon Southwest’s achievement of certain goals related to theservices provided by the consultant to Southwest.  During the three months ended June 30,2008, 50,000 options became exercisable upon execution of the Company’s amendedconsulting and management contract with Palace Resorts in June 2008, seeNote 6.

 

In accordance with SFAS 123(R) paragraph 7,the Company evaluated the services being provided and determined the fair valueof the equity award issued was the more reliable measure of fair value.

 

The Company has estimated the fair value of theseoptions as of the date of grant by applying the Black-Scholes pricing valuationmodel.  The application of this valuation model involves assumptions thatare judgmental and sensitive in the determination of compensationexpense.  The key assumptions used in determining the fair value ofoptions 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, 2007 throughMarch 20, 2008.  The Company’s securities began trading publicly in July 2004,however the volume and trading activity was minimal until 2007.  As aresult the Company used the average volatility for the look back period (whichis the contractual term of the options) for the companies considered in thepeer group and history for the Company from 2007 to March 20, 2008 (thedate of grant).  The Company weighted the volatility using 80% of the peergroup and 20% of the Company’s calculated 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 $21,000 and $24,000 during thethree and six months ended June 30, 2008.

 

No tax benefit has been recorded on share basedcompensation expense for the three and six-month periods ended June 30,2008 and 2007.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

**NOTE 4 — WARRANTS**

** **

Status of warrants:

 
| ** **                                        | ** ** | **Warrants  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
| Warrants outstanding as of December 31, 2007 |       | 5,946,102                 |       | $                                     | 0.63       |   |
| Granted                                           |       | 4,543,865                 |       | $                                     | 0.62       |   |
| Exercised                                         |       | (145,455                  | )          | $                                     | 0.61       |   |
| Cancelled                                         |       | 0                         |       |                                  |       |
| Warrants outstanding as of June 30, 2008     |       | 10,344,512                |       | $                                     | 0.62       |   |

 

Issuance of Debt

 

The Company secured debt financing in March 2008,see Note 9.  The Company issued five-year fully exercisable warrants topurchase an aggregate of 2,300,000 shares of its common stock at an exerciseprice of $0.39 per share to the shareholder co-signers and guarantors,including Mr. Druck, Mr. Fox and Mr. Halpern (officers of theCompany and guarantors of the debt).  The $0.39 per share exercise priceof these warrants represented the average closing market price of one share ofSouthwest Casino Corporation’s common stock over the 5 trading days precedingthe closing of the loan transaction.  Warrant holders also received theright to have the shares of Southwest Casino Corporation common stockpurchasable 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 for this transaction in accordance withEITF Issue No. 00 — 18 “Accounting Recognition for Certain Transactionsinvolving Equity Instruments Granted to Other Than Employees”.   TheCompany has estimated the fair value of the warrants as of the date of grant byapplying the Black-Scholes pricing valuation model.  The application ofthis valuation model involves assumptions that are judgmental and sensitive inthe 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 10, 2008.  The Company became public in July 2004,however the volume and trading activity was minimal until 2007.  As aresult the Company used the average volatility for the look back period (whichis the contractual term of the warrant) for the companies considered in thepeer group and history for the Company from 2007 to March 10, 2008 (thedate of grant).  The Company weighted the volatility using 80% of the peergroup and 20% of the Company’s calculated volatility.   The Companyapplied 0% to the dividend yield as the Company has not approved or issueddividends. The exercise price of the warrants was based upon the market valueof the Company’s common stock as reported on the Over the Counter BulletinBoard for SWCC.OB.  As the Company has not registered the underlyingshares of common stock the Company has applied a 20% discount to the marketprice of a freely traded share due to therestrictive nature of the award.   Therisk-free interest rate was selected based upon yields of U.S. Treasury issueswith a term equal to the contractual life of the warrants being valued.

 

The fair value of the warrants in the amount of$355,350 was credited to additional paid in capital and the debit is recordedon the consolidated balance sheet as a deferred financing cost included inOther Assets.  The deferred financing cost is being amortized to interestexpense over the term of the loan using the effective interest method (properlymatching the debt financing cost over the term 

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

of the loan). The Company recognized amortization expense (charged to interestexpense) of $43,884 and $58,845 during the three and six months ended June 30,2008.

 

Issuance of equity

 

In connection with the Securities Purchase Agreement (“SPA”)entered into on June 17, 2008, the Company issued warrants to purchase2,045,344 shares of common stock to the investors and warrants to purchase anadditional 198,521 shares of common stock to the placement agent in thatoffering, see Note 5.

 

**NOTE 5 — SALE OF UNREGISTERED SECURITIES**

 

On June 17, 2008, Southwest entered into aSecurities Purchase Agreement with certain institutional and other accreditedinvestors, as defined in Rule 501 of Regulation D promulgated under theSecurities Act of 1933, as amended, pursuant to which Southwest sold in aprivate placement an aggregate of 2,693,589 shares of its common stock withaccompanying warrants to purchase 2,154,873 shares of its common stock at aprice of $0.65 per unit, with each unit consisting of one share of common stockand a warrant to purchase .8 shares of common stock.  The warrants areexercisable for a period of five years at an exercise price of $0.85 pershare.  Southwest received net proceeds from this offering ofapproximately $1,540,552, after the deduction of estimated offering expensesand other non-cash transactions as reported in the supplemental disclosure ofnon-cash investing and financing activities in the Consolidated Statement ofCash Flow.

 

The Securities Purchase Agreement provides that ifSouthwest determines to file a registration statement for its equitysecurities, participants in this offering will have the right to requestinclusion of their common stock and shares of common stock issuable uponexercise of their warrants in the registration statement (piggy-backregistration rights).

 

If Southwest issues common stock or securitiesconvertible into common stock at an effective price below $0.65 per sharebefore the 6 month anniversary of the date on which the shares sold in thisoffering can be sold in the public market under an effective registrationstatement or under SEC Rule 144 (the “Effective Date”), Southwest willissue additional shares of common stock to participants in this offering suchthat they receive the same purchase price per share as investors in thesubsequent offering (a full ratchet adjustment).

 

Southwest agreed that if it sells additional shares ofcommon stock before the 6 month anniversary of the Effective Date on terms lessfavorable to the Company than the terms of the Securities Purchase Agreement,the terms of the Securities Purchase Agreement will be amended to incorporatethose less favorable terms.  Also, if Southwest sells any debt or equitysecurity convertible into its common stock before the 6 month anniversary ofthe Effective Date, investors in this offering may elect to exchange some orall of the common shares acquired in this offering for the convertiblesecurities sold in the subsequent offering on a dollar-for-dollar basis. If an investor elects to exchange their common shares, they will retain theright to purchase 50 percent of the corresponding shares subject to the warrantreceived in this offering.

 

The number of shares issuable upon exercise of thewarrants and the exercise price of the warrants are adjustable upon theoccurrence of certain events, including stock splits, combinations andreclassifications.  Until the 4 month anniversary of the Effective Date,if Southwest issues any security with an effective price per share less thanthe $0.85 per share exercise price of the warrants, the per share exerciseprice will be reduced to that lower effective price per share and the number ofshares issuable upon exercise of the warrant will be increased so that theaggregate exercise proceeds for each warrant remains the same.  At anytime that a registration statement covering the resale of the common sharesissuable upon exercise of the warrant is not effective, warrant holders mayexercise the warrant through a “cashless” or “net” exercise.  Warrantholders are not permitted to exercise their warrants to the extent theirownership of Southwest common stock would exceed 9.99% of the company’soutstanding common stock.

 

The company’s placement agent agreed to accept thecash portion of its placement agent commission in common stock and warrants onthe same terms as the investors, which resulted in the placement agentreceiving 136,911 shares of common stock and warrants to purchase an aggregateof 109,529 shares of common stock.  In addition, the placement agent receiveda warrant to purchase 88,992 shares of common stock that is exercisable for aperiod of five years at an exercise price of $1.00 per share.

 

The following officers and directors of Southwestparticipated in the private placement on the same terms as the other investors:James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, Presidentand Chief Operating Officer; Jeffrey S. Halpern, Vice President of GovernmentAffairs; Tracie L. Wilson, Chief Financial Officer, and Gus A. Chafoulias,Director.  Each of Mr. Druck, Mr. Fox, Mr. Halpern and Ms. Wilsonparticipated by investing the net proceeds of $95,836 (after taxes and otherwithholding) from deferred bonuses and compensation owed to them by theCompany, resulting in a reduction in the Company’s outstanding liabilities tothese officers of $180,000.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

In addition, each of Mr. Druck, Mr. Fox, Mr. Halpern,Ms. Wilson, Mr. Chafoulias and the other members of Southwest’s Boardof Directors entered into a Lock-up Agreement with Southwest under which theyagreed not to sell or transfer any of their Southwest securities (exceptcertain exempt transactions) until after the four month anniversary of theEffective Date. Other than with respect to the Securities Purchase Agreement,there are no material relationships between Southwest, on the one hand, and anyof the other investors in the private placement, on the other hand.

 

The securities that were issued in this privateplacement were not registered under the Securities Act of 1933, as amended, andmay not be offered or sold in the United States absent registration or anapplicable exemption from the registration requirements of the SecuritiesAct.  Pursuant to the Securities Purchase Agreement, Southwest and theinvestor parties have made other covenants and representations and warrantiesregarding matters that are customarily included in financings of thisnature.  If certain of its obligations are not met, Southwest has agreedto make pro-rata cash payments as liquidated damages to each investor.

 

**NOTE6 — MODIFICATION AND EXTENSION OF CONSULTING AGREEMENT WITH PALACE RESORTS**

 

On June 25, 2008, the Company entered into aModification and Extension of Consulting Agreement (the “Agreement”) withOperadora Dominicana Macao, S.A., a subsidiary of Palace Resorts, under whichSouthwest will manage the casino at the Moon Palace Casino, Golf and Spa Resortin Punta Cana, Dominican Republic.  The casino will be part of a1700-room, all-inclusive luxury resort that Palace Resorts is constructing onthe far eastern tip of the Dominican Republic.  Southwest has beenconsulting with Palace Resorts on the design, development and operation of thecasino since September 2007.

 

Under the new Agreement, Southwest will continue toassist Palace Resorts in all phases of design, game selection, training andequipping the casino as a consultant and then manage the casino for five yearsafter it opens in late 2008 or early 2009.  As manager, Southwest will beresponsible for all aspects of casino operations including equipping andmaintaining the casino, internal controls and accounting, budgeting, casinoemployment, security and compliance.  Southwest will work with PalaceResorts to market the casino and the resort as a gaming destination. Southwest previously received a consulting fee of $50,000 per month under aConsulting Agreement that would have terminated in August 2008. Under the Modification and Extension of Consulting Agreement, Southwest willcontinue to receive a $50,000 monthly consulting fee until the casino opens.

 

Beginning in the first full calendar month after thecasino opens, Southwest will receive management fees equal to 5 percent of netcasino revenue (as defined in the Agreement).  If the 5 percent managementfee is less than $100,000 in any month, Southwest will receive a minimummanagement fee of $100,000.  The amount by which the 5 percent managementfee is less than $100,000 in any month will then be deducted from themanagement fee due in any month when 5 percent of net casino revenue exceeds$100,000.  All amounts due to Southwest in excess of $100,000 per monthwill be paid to Southwest by Palace Resorts after delivery and acceptance ofthe annual audit of the casino operations.

 

Southwest or Palace Resorts may terminate theAgreement if (a) any payment is not made within 10 days of the due date, (b) anymaterial default is not cured within 30 days after notice, (c) uponbankruptcy or insolvency of the other party, (d) Southwest loses anylicense required to perform its services under the agreement, or (e) afterreview, Palace determines that Southwest does not have adequate insurance inplace.  Palace Resorts may also terminate the Agreement if, after thesecond full year of operations, net casino revenues are more than 30 percentbelow budget or if at the end of a 6-month period the casino’s win percentagefor certain games is 25 percent or more below the reported win percentage forthe Las Vegas strip.

 

Southwest has agreed to indemnify Palace Resortsagainst claims rising from its bad faith, willful misconduct, willfulnegligence or fraud.

 

**NOTE7 — NORTH METRO HARNESS INITIATIVE, 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.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

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 theirproportionate voting interest.  Financial rights include allocation of netprofits, losses and distributions.  Governance rights include all of amember’s rights 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 June 30, 2008, Southwestand MTR each hold 50% of the voting rights.  Financial and governancerights are determined in accordance with the Member Control Agreement dated June 8,2004.

 

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

 

Under North Metro’s Member Control Agreement and theterms of its construction financing, North Metro may make tax distributions tomembers on a quarterly and annual basis to pay income taxes of the members withrespect to the net income of North Metro.  Tax distributions to the members shall be madein proportion to each member’s respective share of the taxable income of NorthMetro.

 

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.

 

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

 

*Accountingfor 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 June 30, 2008, the Company hasprovided approximately 43 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.  Under the equity method, the Company’s investment in North Metroas of June 30, 2008 was $5,676,768, which is recorded on the Company’sconsolidated balance sheet.

 

As of June 30, 2008, the Company has contributed$8,204,474 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 Control Agreementafter satisfying all conditions of senior credit agreements, payment of membertaxes and payment of the $1.6 million advance discussed below.  Inaddition to the agreed upon capital contributions, before the Minnesota RacingCommission granted racing licenses to North Metro, the Company advanced$1,656,051 for costs related to North Metro that exceeded the Company’s agreedpre-license capital contribution of $1,000,000.  The $1,656,051pre-licensing advance, together with interest, will only be paid back to theCompany out of first available cash from operations (and then after certaindistributions to the members for income tax purposes and payments due under theCredit Agreement with Black Diamond, see Subordination Agreement describedbelow under “North Metro Financing Agreement”).  The pre-licensingadvances to North Metro are characterized as a membership preferredcontribution made by the Company under the North Metro Harness Initiative, LLCMember Control Agreement dated June 8, 2004.  The Company treatsthese payments as an additional investment in North Metro.  The Companyhas combined the advances (accounted for as a membership preferredcontribution) and its capital contributions into an investment in anunconsolidated subsidiary on its financial statements.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

The following represents summarized balance sheetinformation for North Metro:

 
| ** **         | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------|------------|------------------------|------------|----------------------------|------------|
| North Metro:       |       |                   |       |                       |       |
| Total Assets       |       | $                      | 59,376,657 |                       | $          | 51,556,814 |   |
| Total  Liabilities |       | $                      | 44,340,080 |                       | $          | 33,051,334 |   |

 

Thefollowing represents North Metro’s income statement and the Company’scalculation of the loss of unconsolidated subsidiary net of tax benefit:

 
| ** **                                             | ** ** | **Three months  ended  June 30, 2008** | ** ** | **Three months  ended  June 30, 2007** | ** ** | **Six months  ended  June 30, 2008** | ** ** | **Six months  ended  June 30, 2007** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Revenues                                               |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Pari-mutuel                                            |       | $                                           | 531,724    |                                        |       |                                      | $          | 531,724                                   |       |   |   |
| Card Club                                              |       | 21,212                                      |       |                                        |       | 21,212                                    |       |                                      |       |
| Food and Beverage                                      |       | 610,119                                     |       |                                        |       | 610,119                                   |       |                                      |       |
| Other                                                  |       | 53,131                                      |       |                                        |       | 68,417                                    |       |                                      |       |
| Total                                                  |       | $                                           | 1,216,186  |                                        | $          | 23,159                                    |       | $                                         | 1,231,472  |   | $ | 48,461 |   |
|                                                   |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Expenses                                               |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Food and beverage cost of goods sold                   |       | $                                           | 246,925    |                                        |       |                                      | $          | 246,925                                   |       |   |   |
| Purse expense                                          |       | 176,724                                     |       |                                        |       | 176,724                                   |       |                                      |       |
| Salary and benefits                                    |       | 1,739,030                                   |       |                                        |       | 2,000,321                                 |       |                                      |       |
| Other general and administrative costs                 |       | 2,056,754                                   |       | $                                           | 216,035    |                                      | 2,485,320  |                                      | $          | 481,678 |   |
| Depreciation and amortization                          |       | 238,438                                     |       |                                        |       | 238,438                                   |       |                                      |       |
| Interest expense                                       |       | 932,357                                     |       |                                        |       | 934,649                                   |       |                                      |       |
| Total                                                  |       | $                                           | 5,390,228  |                                        | $          | 216,035                                   |       | $                                         | 6,082,377  |   | $ | 481,678 |   |
|                                                   |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Net (loss)                                             |       | $                                           | (4,174,042 | )                                           | $          | (192,876                                  | )          | $                                         | (4,850,904 | ) | $ | (433,217 | ) |
|                                                   |       |                                        |       |                                        |       |                                      |       |                                      |       |
| 50% share of net (loss)                                |       | $                                           | (2,087,021 | )                                           | (96,437    | )                                         | $          | (2,425,452                                | )          | (216,608 | ) |
| Net tax benefit                                        |       |                                        |       | —                                      |       |                                      |       | —                                    |       |
| (Loss) of unconsolidated subsidiary net of tax benefit |       | $                                           | (2,087,021 | )                                           | $          | (96,437                                   | )          | $                                         | (2,425,452 | ) | $ | (216,608 | ) |

 

In 2006, North Metro formed a wholly-owned subsidiarythat acquired a nearby motel in December 2006 for a total cost ofapproximately $545,000 that North Metro continues to operate in 2008 and isused to house personnel involved in the care of horses at the track during thelive racing season. The motel has 15 rooms available to rent.

 

Southwest did not record a tax benefit related toNorth Metro’s losses during the three and six months ended June 30, 2008and 2007, see Note 12.

 

At June 30, 2008, North Metro’s assets consistedprincipally of cash, property, plant and equipment and related deposits andfinancing costs. Liabilities consisted primarily of payables, accrued interestand other accruals and borrowings under its financing agreement discussedbelow.

 

On April 11, 2008, Running Aces Harness Parkopened for live harness racing.   OnJune 30, 2008 after the last live harness race of the 50th dayof live racing, as required by Minnesota law, North Metro opened the card room.

 

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, see amendment no. 2described below increasing the amount to $42.3 million.  As part of theloan agreement, the members of North Metro agreed to complete aggregate membershipcontributions of $20.8 million prior to closing the loan. Total assets of NorthMetro at June 30, 2008 are approximately $59.2 million.  As of June 30,2008, Southwest contributed $9.9 million of the total amount of $22.7 millioncontributed by the members.  As of June 30,2008, the principal amount outstanding under the credit agreement isapproximately $40.9 million.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

Certain amounts included in the total of $22.7 millioncontributed by the members relate to non-construction costs that were funded bythe members.  The Company contributed $1,133,500 subsequent to the loanclosing from April 20, 2007, thru the end of June 30, 2008.

 

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 (projectedprincipal payments beginning on December 31, 2008). North Metro will alsobe required 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, except forthe Company’s guaranty of up to $1 million (plus certain costs) of the loanentered into on July 1, 2008.

 

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.

 

AdditionalMembership Contribution, Pledge, Subordination and Sponsor Support Agreementsof Southwest

 

While the CreditAgreement does not provide for recourse against Southwest in the case of adefault by North Metro other than the Company’s guaranty of up to $1 million(plus certain costs) entered into on July 1, 2008, Southwest has pledgedits membership interest in North Metro and North Metro pledged its membershipinterest in North Metro Hotel, LLC as security for repayment of the loan underthe terms of a Pledge Agreement with Black Diamond (the “Pledge Agreement”).

 

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.

 

Amendment No. 1 to Credit Agreement:

 

Effective April 3, 2008, North Metro entered intoLimited Waiver and Amendment No. 1 to the Credit Agreement.  TheLimited Waiver extends the time period for obtaining an audit (made necessaryby a change to an audit firm identified by the lender) for the fiscal yearended December 31, 2007 from March 31, 2008 to May 30,2008.  The failure to deliver the audit on May 30, 2008 would be animmediate event of default, as defined in the agreement.  The requisiteaudit was delivered on or before May 30, 2008. The amendment to the creditagreement also allows for the following:  (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, North Metro paid an amendment fee of$104,250.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

Amendment No. 2to Credit Agreement and Limited Guaranty:

 

On July 1, 2008, North Metro entered intoAmendment No. 2 to its Credit Agreement dated as of April 20,2007.  The Credit Agreement provides financing for the construction andopening of Running Aces Harness Park by North Metro.  Amendment No. 2amends the Credit Agreement to, among other things, (1) increase the totalamount of the financing by $600,000 from $41.7 million to $42.3 million, (2) increasethe interest rate applicable to the financing by 0.30%, and (3) temporarilyreduce North Metro’s requirements for available cash from $1,250,000 to$750,000.  The available cash requirement will increase incrementally overfive months, returning to $1,250,000 as of November 30, 2008.  Theincrease in the loan amount and reduction in the available cash requirementwere needed due to the expense of completing 50 days of live harness racingbefore North Metro could open its 50-table card room, as required under statelaw.  The card room opened on June 30, 2008.

 

In connection with Amendment No. 2, on July 1,2008, the Company entered into a Limited Guaranty in favor of Black Diamond, asagent under the Credit Agreement.  Under the Limited Guaranty, SouthwestCasino Corporation and Southwest Casino and Hotel Corp. agree to guaranty amaximum of $1 million (plus certain costs) of the $42.3 million in financingprovided to North Metro under the Credit Agreement, as amended.  Thelimited guaranty will remain in full force and effect until the earlier of June 30,2010 or the date on which the North Metro financing is repaid in full.

 

As a condition to entry into Amendment No. 2,Southwest Casino and Hotel Corp. and MTR-Harness, Inc., the other 50percent member in North Metro Harness Initiative, LLC, were required to make anaggregate of $615,000 in additional membership contributions to North Metro, ofwhich we made $500,000.  These additional membership contributions weremade on or about June 20, 2008.

 

Reservation of Rights Notice:

 

North Metro has at times failed to comply with certaincovenants under the Credit Agreement, including an ongoing minimum cashavailability requirement and a minimum EBITDA requirement for the quarter endedJune 30, 2008.  The Agent hasnotified North Metro that this constitutes an event of default under the loanagreement and that the lenders are reserving all rights and remedies availableto them under the Credit Agreement. North Metro will work with the lenders to resolve failure to satisfy thecovenant and resulting default, but do not know what form such resolution willtake or if one can be reached.  Duringthe period that North Metro is not in compliance with the Credit Agreement, theinterest required to be paid by North Metro on outstanding loan amounts is 2%higher than the rate that would otherwise apply.

 

**NOTE8 — 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.  Under the amendment, threeprincipal 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 entered into in March 2008(see Note 9) each of the three principal officers agreed to increase their$150,000 personal guarantees to $250,000.  As of April 30, 2008, theCompany extended the maturity date of the $450,000 line of credit to June 30,2008.  As of June 30, 2008, $450,000 was outstanding under theRevolving Credit facility and was subsequently, on July 1, 2008, paid infull as the line of credit terminated on June 30, 2008.

 

The interest rate was Prime +1%, and not less than7.5%.  As of June 30, 2008 the interest rate was 7.5%.

 

**NOTE 9 — MARCH 2008 DEBTISSUANCE**

 

Crown Bank Loan:

 

On March 7, 2008, the Company entered into aseries of eight promissory notes ranging in size from $100,000 to $300,000 withCrown Bank of Minneapolis, Minnesota.  Under the Notes, Crown Bank loanedthe Company an aggregate $1.55 million. The Company paid a 1% originationfee of $15,500 that resulted in net proceeds of $1,534,500 to the Company. Each of the Notesaccrues interest at a floating rate of prime plus 1.5 percent, with aminimum interest rate of 7.0 percent (currently 7.0%).  The effectiveinterest rate on this loan, after giving effect to the warrant considerationdiscussed 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 in 12 equal monthlyinstallments with the final payment due January 11, 2010.  TheCompany may prepay any outstanding amounts under the Notes at any time withoutpremium or penalty.

 

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**SOUTHWEST CASINO CORPORATION**

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

**JUNE 30, 2008**

 

Future minimum principal payments required as of June 30,2008 are:

 
| July 1, 2008 — June 30, 2009    |   | $ | 645,833 |   |
|------------------------------------------------|--------|---|---------|--------|
| July 1, 2009 — January 11, 2010 |   | $ | 904,167 |   |

 

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 individual note that shareholderco-signed.  As a condition to entering into the Notes, Crown Bank requiredJames Druck, Chief Executive Officer, Thomas Fox, President and Chief OperatingOfficer, and Jeffrey Halpern, Vice President of Government Affairs of theCompany to increase their previously existing $150,000 personal guarantees ofthe Company’s outstanding $450,000 line of credit to $250,000 and extend thoseguarantees to cover both the line of credit and the promissory notes throughtheir respective repayment terms.

 

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.  TheCompany valued the warrants in connection with the financing transaction, seeNote 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.

 

The Company used 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 $85,817 to make the estimated interest-only paymentsdue under the notes through January 11, 2009.

 

**NOTE10 — PROMOTIONAL ALLOWANCES**

 

Revenue does not include the retail amount of rooms,food, and beverages provided gratuitously to customers, which was $604,000   and $562,000 for the six months ended June 30,2008 and 2007, respectively and was approximately $307,000 and $289,000 for thethree months ended June 30, 2008 and 2007, respectively.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

**NOTE11 — 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 per share reflect the effect of allpotentially dilutive common shares outstanding by dividing net earnings by theweighted-average of all common and potentially dilutive sharesoutstanding.  The Company had a net loss for the three and six monthsended June 30, 2008 and the six months ended June 30, 2007; thereforea calculation of loss per share on a fully diluted basis would be anti-dilutiveand no reconciliation is needed for those periods, see Notes 3 and 4.

 

The following is a reconciliation of basic and dilutedearnings per share:

 
| ** **                                                     | ** ** | **Net Earnings** | ** ** | **Weighted  Average  Equity** | ** ** | **Earnings  Per Share** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                     | ** ** | **(Numerator)**       | ** ** | **(Denominator)**             | ** ** | ** **                   | ** ** |
| ** **                                                     | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** |
| **Three months ended June 30, 2007:** |       |                  |       |                          |       |                         |       |
| Basic Earnings per Share                                       |       | $                     | 351,517    |                          | 27,286,443 |                         | $          | 0.01 |   |
| Effect of Dilutive Securities:                                 |       |                  |       |                          |       |                         |       |
| Outstanding Options and Warrants                               |       |                  |       | 2,108,381                     |       |                         |       |
|                                                           |       | $                     | 351,517    |                          | 29,394,824 |                         | $          | 0.01 |   |

 

Options and warrants to purchase approximately1,672,000 shares of common stock at an exercise price of $1.00 per share werenot included in the computation of diluted earnings per share for the threemonths ended June 30, 2007 because the exercise price was greater than theaverage market price of the common stock for the period.  All of theseoptions and warrants were outstanding as of June 30, 2007.

 

**NOTE12 — INCOME TAXES**

 

The Company adopted Statement of Financial AccountingStandards Interpretation No. 48 “ *Accountingfor Uncertainty in Income Taxes*” (“Interpretation No. 48)effective January 1, 2007.  Interpretation No. 48 clarifies theaccounting for uncertain tax positions in accordance with SFAS 109, “Accountingfor Income Taxes.”  Pursuant to Interpretation No. 48, the Company isrequired to recognize in its financial statements the largest tax benefit of atax position that is “more-likely-than-not” to be sustained on audit, basedsolely on the technical merits of the position as of the reporting date. Onlytax positions that meet the “more-likely-than-not” threshold at that date maybe recognized.  The term “more-likely-than-not” means a likelihood of morethan 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 June 30, 2008.

 

The Company’s tax returns for the tax years 2004through 2006 remain subject to examination by major tax jurisdictions. However, as the Company has net operating losses from prior years these taxreturns can also be examined once these net operating losses are utilized infuture tax filings.

 

Management evaluated its probable ability to utilizedeferred tax assets arising from net operating loss carry forwards, deferredtax assets and other ordinary items and determined that a valuation allowancewas appropriate during the three and six months ended June 30, 2008 and2007.   As a result of this evaluation, a tax benefit during thethree and six months ended June 30, 2008 and 2007 was notrecognized.  As of June 30, 2008, the Company’s deferred tax asset iszero.

 

**NOTE13 — RELATED PARTY TRANSACTIONS**

 

The Company has a liability to certain officers andstockholders for unpaid compensation and expenses of $82,467 as of June 30,2008, relating to periods prior to December 31, 2003.  The Company paid, in June 2008, amountsowed for unpaid compensation of $40,000 to one officer in exchange forsecurities, see Note 5.

 

The following officers and directors of Southwest participatedin the private placement of common stock with accompanying warrants that closedon June 17, 2008, see Note 5: James B. Druck, Chief Executive Officer andDirector; Thomas E. Fox, President and Chief Operating Officer; Jeffrey S.Halpern, Vice President of Government Affairs; Tracie L. Wilson, ChiefFinancial Officer, and Gus A. Chafoulias, Director.  Each of Mr. Druck,Mr. Fox, Mr. Halpern and Ms. Wilson participated by investingthe net proceeds of $95,836 (after taxes and other withholding) from deferredbonuses and compensation owed to them by the Company, resulting in a reductionin the Company’s outstanding liabilities to these officers of $180,000.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

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.

 

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 9.

 

On April 24, 2008, Gus Chafoulias, a member ofthe Company’s Board of Directors, obtained two letters of credit in theaggregate amount of $473,742.50 to release 50% of cash deposits made by NorthMetro in connection with the development of its racetrack and card room, seeNote 7.  Southwest has agreed toreimburse Mr. Chafoulias for all costs incurred in connection withobtaining these letters of credit and to provide him additional compensation tobe determined, but that will not exceed compensation that would be paid in asimilar transaction with an unrelated third party.

 

During the six months ended June 30, 2007, theCompany paid Berc & Fox Limited $7,653 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 theCompany received payment from North Metro in February 2008.

 

Virginia Skruppy is a part-time employee of NorthMetro. Ms. Skruppy is the wife of Tom Fox, our President.  The Company anticipates that her earnings in2008 will not exceed $20,000.

 

As of June 30, 2008 the Company has a receivabledue from North Metro of approximately $11,000 for reimbursement of salary,benefits and travel and a payable to North Metro of approximately $7,000. During the six months ended June 30, 2008 the Company receivedreimbursement from North Metro of salary, benefit and travel costs of $62,825.

 

**NOTE14 — PROJECT DEVELOPMENT COSTS**

 

The Company continues to pursue additional gamingopportunities and as a result continues to incur project developmentexpenses.  For the three and six months ended June 30, 2008 developmentexpenses were $0 and for the three and six months ended June 30, 2007 was$84,295 and $252,571, respectively.

 

**NOTE 15 — SEGMENT INFORMATION**

 

North Metro doing businessas “Running Aces Harness Park” began operations on April 11, 2008, seeNote 7.  North Metro is broke-out as aseparate operating segment in accordance with Statement of Financial Accounting Standards No. 131*“Disclosures about Segments of an Enterpriseand Related Information*”.

 

Segment information related to the three months ended June 30,2008 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Unconsolidated  Joint Venture  (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 3,648,625  |                   | $          | 150,000                  |       |                                             |       |       |       | $ | 3,798,625 |   |
| Segmented profit (loss) before income taxes |       | (150,236               | )          | (862,045               | )          |                     |       | $                                                | (2,087,021 | )          | (3,099,302 | ) |
| Segmented assets                            |       | 11,200,131             |       | 1,521,195              |       | 3,000                    |       | 5,676,768                                        |       | 18,401,094 |       |
|                                             |            |                        |            |                        |            |                          |            |                                                  |            |            |            |  |  |  |  |

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

Segmentinformation related to the three months ended June 30, 2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Unconsolidated Joint Venture (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 3,954,541  |                   | $          | 1,501,628                |       |                                           |       |       |       | $ | 5,456,169 |   |
| Segmented profit (loss) before income taxes |       | 103,662                |       | 428,587                |       | $                        | (84,295    | )                                              | $          | (96,437    | )          | 351,517 |   |
| Segmented assets                            |       | 12,296,434             |       | 1,340,942              |       | 10,000                   |       | 7,364,607                                      |       | 21,011,983 |       |
|                                             |            |                        |            |                        |            |                          |            |                                                |            |            |            |  |  |  |  |  |

 

Segment informationrelated to the six months ended June 30, 2008 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Unconsolidated Joint Venture (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 7,276,369  |                   | $          | 300,000                  |       |                                           |       |       |       | $ | 7,576,369 |   |
| Segmented profit (loss) before income taxes |       | (170,844               | )          | (1,880,115             | )          |                     |       | $                                              | (2,425,452 | )          | (4,476,411 | ) |
| Segmented assets                            |       | 11,200,131             |       | 1,521,195              |       | 3,000                    |       | 5,676,768                                      |       | 18,401,094 |       |
|                                             |            |                        |            |                        |            |                          |            |                                                |            |            |            |  |  |  |  |

 

Segment information related to the six months ended June 30,2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Unconsolidated Joint Venture (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 7,466,947  |                   | $          | 3,131,451                |       |                                           |       |       |       | $ | 10,598,398 |   |
| Segmented profit (loss) before income taxes |       | (162,521               | )          | 568,153                |       | $                        | (252,571   | )                                              | $          | (216,608   | )          | (63,547 | ) |
| Segmented assets                            |       | 12,296,434             |       | 1,340,942              |       | 10,000                   |       | 7,364,607                                      |       | 21,011,983 |       |
|                                             |            |                        |            |                        |            |                          |            |                                                |            |            |            |  |  |  |  |  |

 

During the three and six months ended June 30,2008 the Company recognized revenues of $0 and during the three and six monthsended June 30, 2007 recognized revenues of $1,501,628 and $3,131,451, respectively,included in the operating segment Casino Management which related to theCompany’s management contract with the Cheyenne and Arapaho Tribes of Oklahomawhich terminated effective August 17, 2007.

 

**NOTE 16 — 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 generateearnings from the operation of its harness track and card room which justopened for live harness racing on April 11, 2008 and the card room openedon the evening of June 30, 2008.  There were no other financialinstruments with significant differences between the carrying amount and thefair value due to the short maturity of the instruments.

 

**NOTE 17 — COMMITMENTS ANDCONTINGENCIES**

 

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.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

The Company has entered into employment agreementswith certain other key employees of the Company. The agreements provide forcertain benefits to the employee as well as severance if the employee isterminated without cause or due to a “constructive termination” as defined inthe agreements.  The severance amounts depend upon the term of theagreement and 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 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.  The Company paid out bonuses of $140,000 in June 2008 inexchange for common stock and warrants (after payroll taxes and otherwithholdings) in connection with the sale of securities in June 2008, seeNote 5.  Unpaid bonuses in the amount of$35,000 are reflected as a liability at June 30, 2008.

 

Guarantees:

 

In connection with Amendment No. 2 to the NorthMetro Credit Agreement, on July 1, 2008, the Company entered into aLimited Guaranty in favor of Black Diamond, as agent under the CreditAgreement, see Note 7.  The Company owns a 50 percent membership interestin North Metro.  Under the Limited Guaranty, Southwest Casino Corporationand Southwest Casino and Hotel Corp. agree to guaranty a maximum of $1 millionplus certain costs of the $42.3 million in financing provided to North Metrounder the Credit Agreement, as amended.  The limited guaranty will remainin full force and effect until the earlier of June 30, 2010 or the date onwhich the North Metro financing is repaid in full.

 

As a condition to its class B racing license from theMinnesota Racing Commission, North Metro must maintain a bond in the principalamount of $500,000 payable to the state of Minnesota conditioned on North Metro’spayment of all fees, taxes, and other money due and payable under Minnesotalaw, including horse owner’s purses and payouts on winning pari-mutueltickets.  Effective April 11, 2008,Southwest entered into an agreement to indemnify the surety of the bond for upto $250,000.  Before April 11, 2008,North Metro’s racing bond had been secured by a $500,000 cash deposit.  Southwest had provided $250,000 of that$500,000 deposit

 

Financial consulting services:

 

The Company will be required to pay an additionalconsulting fee to the Company’s investor relations advisor, Strategic GrowthInternational (“SGI”), of $100,000 or $200,000 if they assist 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 GamingManagement Agreement*

 

UntilAugust 17, 2007, Southwest Casino and Hotel Corp. managed the Lucky Star —Concho and Lucky Star —Clinton casinos in Concho and Clinton, Oklahoma, underthe terms of a management agreement with the Cheyenne and Arapaho Tribes ofOklahoma.

 

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 us for alleged breach of the Third Amended andRestated Gaming Management Agreement, as amended, under which we then managedtwo casinos for the Tribes.  On November 2, 2007, Southwest filed acounterclaim in this proceeding alleging a breach of the Gaming ManagementAgreement by the tribal Governor. The three-member arbitration panel for thisproceeding was appointed in February 2008.  After a scheduling conferencewith the arbitration panel on March 11, 2008, we submitted our formalCross-Complaint to the arbitration panel on April 22, 2008 and the Tribessubmitted its formal complaint on April 23, 2008.  Discovery is nowproceeding in this matter.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

Inthe arbitration demand and formal complaint, the Governor alleged wrongfulmanagement practices and that Southwest breached the management agreement byinterfering with or attempting to influence internal affairs or governmentaldecisions of the Tribes in connection with its efforts to extend Southwest’sgaming management relationship with the Tribes, which terminated on August 17,2007.

 

TheGovernor originally sought termination of the management contract and $10million in damages and continues to pursue a claim for damages against theCompany.  The Company does not believe it improperly interfered with orattempted to influence internal governmental decisions of the Tribes orimproperly managed the casinos and the Company is vigorously defending itselfin this arbitration proceeding. Under Southwest’s Gaming Management Agreementwith the Tribes, the Company was permitted to oppose, publicly or privately,any action by the Tribes that it believed was not in the best interest of theTribal gaming operations. The Company believes that all of the actions theCompany has taken on behalf of the gaming operations the Company managed or aspart of its efforts to extend the gaming management relationship with theTribes are consistent with that provision.

 

Inthe Company’s Cross-Complaint, the Company alleges that the Governor of theTribes breached the Management Agreement by refusing to negotiate in good faithfor an extension and expansion of the gaming management relationship betweenSouthwest and the Tribes.  The Company asserts that the ManagementAgreement required the Tribes to negotiate this extension and expansion afterthe Company led the Tribes’ successful efforts to negotiate and enter into acompact for expanded gaming with the State of Oklahoma in April 2005.

 

TheCompany does not expect any material adverse consequence from this action.Accordingly, no provision has been made in the financial statements for anysuch losses.  We do expect to incuradditional legal and administrative costs in connection with this arbitration.  In accordance with our accounting policies,we do not accrue for estimated future legal and related defense costs, butrather record these costs as period costs when the services are rendered

 

*Theft and Distribution ofSurveillance Video from Lucky Star Clinton casino*

 

On August 24, 2007,Southwest Casino and Hotel Corp., as exclusive manager of the Lucky Starcasinos of the Cheyenne and Arapaho Tribes of Oklahoma, filed a lawsuit againstDoris Thunderbull, Darrell Flyingman, in his individual capacity, and John DoesNo. 1 and 2 alleging theft (conversion) of confidential surveillance videofrom the Lucky Star — Clinton casino and subsequent copyright infringement anddefamation in connection with the posting of the stolen video on the websiteYouTube.com and widespread distribution of DVDs containing the video by mail.The Company initially sought an emergency temporary restraining order barringfurther distribution of the video. That request was denied on August 27,2007 and the Company withdrew its request for the restraining order on September 24,2007. The Company’s claims on behalf of the Tribes for conversion, copyrightinfringement, tortious interference with contract, defamation, and conspiracyagainst the defendants remain pending in the Federal District Court for theDistrict of Oklahoma.

 

On January 14, 2008,Mr. Flyingman, as Governor of the Tribes and not in his individualcapacity, filed a declaratory judgment action in Cheyenne and Arapaho TrialCourt asserting that the Tribes, not Southwest, owned the surveillance footageand the copyright in it, an assertion that the Company did not contest. On February 13,2008, the Federal District Court issued a stay of the proceedings before itpending resolution of the Tribal court proceeding. After briefing, oralargument in this matter was held on April 4, 2008 and, on April 10,2008, the Trial Court judge ruled in favor of the Tribes. The Company did notappeal this decision. The effect of this decision on the pending federal courtlitigation is not known at this time.

 

*OtherLitigation Matters*

 

In addition to the matters described above, theCompany is involved in various claims, legal actions and other complaintsarising in the ordinary course of business.  In the opinion of management,any losses that may occur from these matters are adequately covered byinsurance or are provided for in our financial statements and the ultimateoutcome of these other matters will not have a material effect on the Company’sfinancial position or results of operations.

 

**NOTE 18 — NEW ACCOUNTINGPRONOUNCEMENTS**

 

The Company adopted Statement of Financial AccountingStandards Interpretation No. 48 “*Accountingfor Uncertainty in Income Taxes*” (“Interpretation No. 48”)effective January 1, 2007, see Note 12.

 

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**SOUTHWEST CASINO CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**JUNE 30, 2008**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years.  This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements.  The statement did not have an impact on theCompany’s consolidated financialstatement disclosures during the six months ended June 30,2008.  On February 12, 2008 a FASB Staff Bulletin “FSP FAS 157 -2”was issued which defers the effective date of FAS 157 to fiscal years beginningafter November 15, 2008, and applies to nonfinancial assets andnonfinancial liabilities.  The Company is evaluating the potential impactof FSP FAS 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 tomeasure many financial instruments and certain other items at fair value. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007,provided the entity also elects to apply the provisions of FASB Statement No. 157,Fair Value Measurements.  The statement did not have an impact on theCompany’s consolidated financial statements during the six months ended June 30,2008.

 

In November 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of ARB No. 51*(SFAS 160).SFAS 160 establishes accounting and reporting standards for entities thathave equity investments that are not attributable directly to the parent,called noncontrolling interests or minority interests. Specifically,SFAS 160 states where and how to report noncontrolling interests in theconsolidated statements of financial position and operations, how to accountfor changes in noncontrolling interests, and provides disclosure requirements.SFAS 160 is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption is prohibited.SFAS 160 shall be applied prospectively as of the beginning of the fiscalyear in which SFAS 160 is initially applied, except for the presentationand disclosure requirements. The presentation and disclosure requirements shallbe applied retrospectively for all periods presented. The Company does notanticipate any significant change in financial reporting to result fromissuance of this statement.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”(SFAS 141R). SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures the identifiable assets and goodwillacquired, liabilities assumed and noncontrolling interests. SFAS 141R alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination.  SFAS 141R will beeffective for the Company on January 1, 2009, and will be applied to anybusiness combination with an acquisition date, as defined therein, that issubsequent to the effective date.

 

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 AcceptedAccounting Principles*.”  This statement will be effective 60days after the United States Securities and Exchange Commission approvesamendments to AU Section 411, *TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples*.”  The Company does not anticipate any significantchange in financial reporting to result from issuance of this statement.

 

In June 2008, the Securities and ExchangeCommission issued an amendment to rules requiring companies that arenon-accelerated filers to include in their annual reports, pursuant to rules implementingSection 404b of the Sarbanes Oxley Act of 2002, an attestation report oftheir independent auditors on internal control over financial reporting forfiscal years ending on or after December 15, 2008.  Under the amendments, a non-accelerated filerwill be required to file the auditor’s attestation report on internal controlover financial reporting when it files an annual report for a fiscal yearending on or after December 15, 2009.

 

**NOTE 19 – SUBSEQUENT EVENTS**

 

Effective July 14, 2008, the Company issued50,000 shares of common stock to a non-management employee upon partialexercise of a non-qualified stock option to purchase 150,000 shares of commonstock at a price of $0.12 per share that was originally issued by SouthwestCasino and Hotel Corp. in 2003 and assumed by the Company in its July 2004reorganization.

 

On August 13, 2008, theCompany received a payment in the amount of $227,396.41 from the Otoe-MissouriaTribe of Oklahoma to reimburse expenses incurred by the Company when workingwith the Tribe in 2006.

 

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**Item 2.  Management’s Discussionand Analysis or Plan of Operation**

 

The following is a discussion and analysis of thefinancial position and operating results of Southwest Casino Corporation(referred to in this discussion, together with its consolidated subsidiarieswhere appropriate, as “Southwest Casino”, “Southwest”, the “Company”, “we”, “our”and “us”) for the three and six months ended June 30, 2008 and 2007.

 

***Summary ofConsolidated Operating Results:***

 

For the three months ended June 30, 2008 and2007, we had a net loss of $3,099,302 on revenues of $3,798,625 compared to netearnings of $351,517 on revenues of $5,456,169 for the same period in2007.  This amounts to a basic loss of $0.11 per share and basic anddiluted earnings of $0.01 per share during the three months ended June 30,2008 and 2007, respectively.

 

The change in net earnings (loss) of approximately$3,450,000 was due to our share of the loss of our unconsolidated subsidiary,North Metro Harness Initiative, LLC, of $2,087,000, and a decrease in revenuesof approximately $1,658,000 due to the conclusion of our management contractwith the Cheyenne and Arapaho Tribes of Oklahoma.

 

For the six months ended June 30, 2008 and 2007,we had a net loss of $4,476,411 on revenues of $7,576,369 compared to a netloss of $63,547 on revenues of $10,598,398 for the same period in 2007. This amounts to a basic loss of $0.16 and $0.00 per outstanding share duringthe six months ended June 30, 2008 and 2007, respectively.

 

The increase in the net loss of approximately$4,413,000 was due primarily to our share of the loss of our unconsolidatedsubsidiary (North Metro) of $2,425,000, and a decrease in revenues ofapproximately $3,022,000, offset by a decrease in operating expenses ofapproximately $913,000.

 

***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 2007. Until August 17, 2007 we managed two Native American gaming operations — LuckyStar - Concho and Lucky Star - Clinton — for the Cheyenne and Arapaho Tribes ofOklahoma.  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 opened on June 30, 2008after Running Aces completed 50 days of live racing (as required by Minnesotastatue).

 

On June 25, 2008, we entered into a Modificationand Extension of Consulting Agreement (the “Agreement”) with OperadoraDominicana Macao, S.A., a subsidiary of Palace Resorts, under which we willmanage the casino at the Moon Palace Casino, Golf and Spa Resort in Punta Cana,Dominican Republic for five years once the casino opens.  The casino willbe part of a 1700-room, all-inclusive luxury resort that Palace Resorts isconstructing on the far eastern tip of the Dominican Republic.  Southwesthas been consulting with Palace Resorts on the design, development and operationof the casino since September 2007.

 

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 financingand in June 2008 additional equity financing to fund our currentoperations including project development costs.  We will need to raiseadditional debt or equity financing in 2008 for operations, project developmentand 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 about Segments of an Enterprise andRelated Information*” paragraph 17.  We have grouped thefollowing properties into the following three operating segments that aredescribed in further detail below:

 

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

 

**Casino Management and Consulting:**

 

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”. We have contracted with Palace Resorts to consulton the development and opening of the casino that is part of their new resortin Punta Cana and to manage the casino once it opens.

 

**Lucky Star - Concho**

 

We earned management fees of $0 during the three andsix months ended June 30, 2008 and $862,922 and $1,779,527 during thethree and six months ended June 30, 2007, respectively, from Lucky Star -Concho.

 

**Lucky Star - Clinton**

 

We earned management fees of $0 during the three andsix months ended June 30, 2008 and $638,706 and $1,351,924 during thethree and six months ended June 30, 2007, respectively, from Lucky Star -Clinton.

 

**Palace Resorts**

 

On June 25, 2008, we entered into a Modificationand Extension of Consulting Agreement (the “Agreement”) with OperadoraDominicana Macao, S.A., a subsidiary of Palace Resorts, under which we willmanage the casino at the Moon Palace Casino, Golf and Spa Resort in Punta Cana,Dominican Republic.  The casino will be part of a 1700-room, all-inclusiveluxury resort that Palace Resorts is constructing on the far eastern tip of theDominican Republic.  Southwest has been consulting with Palace Resorts onthe design, development and operation of the casino since September 2007.

 

Under the new Agreement, we will continue to assistPalace Resorts in all phases of design, game selection, training and equippingthe casino as a consultant and then manage the casino for five years after itopens in late 2008 or early 2009.  As manager, we will be responsible forall aspects of casino operations including equipping and maintaining thecasino, internal controls and accounting, budgeting, casino employment,security and compliance.  We will work with Palace Resorts to market thecasino and the resort as a gaming destination.  We previously received aconsulting fee of $50,000 per month under a Consulting Agreement that wouldhave terminated in August 2008.  Under the Modification and Extensionof Consulting Agreement, we will continue to receive a $50,000 monthlyconsulting fee until the casino opens. We recognized revenue of $150,000 and $300,000 during the three and sixmonths ended June 30, 2008 from these consulting services.

 

Beginning in the first full calendar month after thecasino opens, we will receive management fees equal to 5 percent of net casinorevenue (as defined in the Agreement).  If the 5 percent management fee isless than $100,000 in any month, we will receive a minimum management fee of$100,000.  The amount by which the 5 percent management fee is less than$100,000 in any month will then be deducted from the management fee due in anymonth when 5 percent of net casino revenue exceeds $100,000.  All amountsdue to Southwest in excess of $100,000 per month will be paid to Southwest byPalace Resorts after delivery and acceptance of the annual audit of the casinooperations.

 

Southwest or Palace Resorts may terminate theAgreement if (a) any payment is not made within 10 days of the due date, (b) anymaterial default is not cured within 30 days after notice, (c) uponbankruptcy or insolvency of the other party, (d) we lose any licenserequired to perform our services under the agreement, or (e) after review,Palace determines that we do not have adequate insurance in 

 

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place.  Palace Resorts may also terminate theAgreement if, after the second full year of operations, net casino revenues aremore than 30 percent below budget or if at the end of a 6-month period thecasino’s win percentage for certain games is 25 percent or more below thereported win percentage for the Las Vegas strip.

 

We have agreed to indemnify Palace Resorts againstclaims rising from our bad faith, willful misconduct, willful negligence orfraud in performing our obligations under the Agreement.

 

**Casinooperations**:

 

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

** **
| ** **                         | ** ** | **Three Months   Ended  June 30, 2008** | ** ** | **Three Months   Ended   June 30, 2007** | ** ** | **Percentage  Change  Favorable    (Unfavorable)** | ** ** | **Six Months   Ended  June 30, 2008** | ** ** | **Six Months   Ended   June 30, 2007** | ** ** | **Percentage  Change  Favorable   (Unfavorable)** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| Casino revenues                    |       | $                                                 | 3,484,482  |                                                    | $          | 3,558,985                                               |       | (2.1                                            | )%         | $                                                     | 6,985,813  |                                              | $          | 6,731,498 |   | 3.8 | % |
| Total revenues                     |       | 3,621,859                                         |       | 3,731,612                                               |       | (2.9                                                    | )%         | 7,249,603                                       |       | 7,030,041                                             |       | 3.1                                               | %          |
| Income (loss) before income taxes+ |       | (98,135                                           | )          | 265,992                                                 |       | (136.9                                                  | )%         | (107,729                                        | )          | 149,052                                               |       | (172.3                                            | )%         |
| Income (loss) margin*              |       | (2.7                                              | )%         | 7.1                                                     | %          |                                                    |       | (1.5                                            | )%         | 2.1                                                   | %          |                                              |       |
|                                    |            |                                                   |            |                                                         |            |                                                         |            |                                                 |            |                                                       |            |                                                   |            |  |  |  |  |

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+                             Loss before income taxes is determined byreducing total revenues by, among other things, interest expense on our capitallease at the Gold Rush and depreciation and amortization expenses.  Thecapital lease was carried onour Consolidated Balance Sheet in the amount ofapproximately $6.8 million as of June 30, 2008.  Interest expense was$163,953 and $186,488 for the three months ended June 30, 2008 and 2007,respectively and $333,896 and $377,776 for the six months ended June 30,2008 and 2007, respectively.  Depreciation and amortization expense was$332,721 and $358,758 for the three months ended June 30, 2008 and 2007,respectively and $682,560 and $741,668 for the six months ended June 30,2008 and 2007, respectively.

 

*                             The loss margin is calculated by dividingloss before income taxes by total revenues.

 

For the three monthsended June 30, 2008, GR/GD’s total casino revenues decreased by 2.1% overthe same period in the prior year, despite the Cripple Creek market decliningby 7.9% during this same time period.  Webelieve the smoking ban that came into effect on January 1, 2008 is havinga significant negative effect on the market. In addition, three large casinos in Cripple Creek challenged the smokingban in the 2nd quarter and two of them allowed smoking in portionsof their casino for nearly the entire month of June.  We believe this action has driven customerswho smoke to the other casinos who that allow smoking, which is having anadverse effect on our business.  Ouroperating margin is lower than the prior year due to decreased revenues andincreased operating expenses of $120,000 that were previously absorbed by ourUncle Sam’s casino, which we sold in July 2007.

 

In addition, on May 31,2008, a large competitor opened a casino with more than 650 slot machines andseveral table games.  This new casinoadded about 15% more gaming positions to a market that declined in terms ofrevenue growth, year-over-year.  Theadded supply has reduced the GR/GD’s fair share of market revenue by about 115basis points.

 

For the six months ended June 30,2008, GR/GD’s total casino revenues increased 3.8% despite the Cripple Creekmarket declining 10.8% during the same time period.  We believe the smoking ban that came intoeffect on January 1, 2008 is having a significant negative effect on themarket.  We are pleased that we were able to counter the negative impactsof the smoking ban during the six months ended June 30, 2008 by addressingneeds of our customers in innovative ways that have helped us increase revenuesyear over year in a declining market.  However,three large casinos in Cripple Creek challenged the smoking ban in the 2ndquarter and two of them have allowed smoking in portions of their casino fornearly the entire month of June.  Webelieve this action has driven customers who smoke to the other casinos thatallow smoking, which is having an adverse effect on our business and maycontinue to adversely effect our business in future periods.  Our operating margin is lower than the prioryear due to increased operating expenses (certain marketing and accountingexpenses) of approximately $240,000 that were previously absorbed by our UncleSam’s casino, which we sold in July 2007. The increased operating expenses were offset by an increase in revenuesof approximately $219,000.

 

We continue to analyzeour customers’ patronage patters and will continue to take steps to mitigatethe impact of the smoking ban and the new casino but we can make no assuranceson the impact for the remainder of 2008.

 

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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 ourGold 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. That now continues for GR/GD.

 

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  June 30, 2007** | ** ** | **Six Months   Ended  June 30, 2007** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| Total revenues             |       | 190,206                                           |       | 404,183                                         |       |
| (Loss) before income taxes |       | (138,813                                          | )          | (269,696                                        | )          |

 

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.

 

**North Metro Harness Initiative,LLC**

 

North Metro Harness Initiative, LLC, in whichSouthwest and MTR-Harness, Inc., an affiliate of MTR Gaming Group, Inc.each own a 50 percent membership interest, owns and operates Running AcesHarness Park, a harness racing track and card room facility on approximately180 acres of land in Columbus Township, Anoka County, Minnesota.  RunningAces Harness Park opened with its first day of live harness racing on April 11,2008.  The 50-table card room that ispart of the facility opened on June 30, 2008 after Running Aces completed50 days of live harness racing, as required by Minnesota law.

 

Running Aces Harness Park offers pari-mutuel wageringon a 5/8-mile harness racetrack with capacity for more than 2,000 track,restaurant and card room patrons.  TheRunning Aces card room offers 50 tables of poker and non-banked casino cardgames.  Running Aces’ 25 poker tablesdeal games including Texas Hold-‘em, Omaha and 7-card stud. Players can choosefrom a variety of games at the 25 casino card game tables including blackjack,Fortune Pai Gow Poker, Ultimate Texas Hold ‘em, 3-card poker and 4-cardpoker.  In addition to live harnessracing and cards, after the April 25, 2008 passage of a law permittingRunning Aces to simulcast races from all breeds of horses, Running Aces offerssimulcast wagering on horse races by all breeds that are broadcast into the facility.

 

On April 20, 2007, North Metro entered into aCredit Agreement with Black Diamond Commercial Finance, L.L.C., as Agent forthe lenders, under which it agreed to borrow $41.7 million to financeconstruction and initial operations of Running Aces Harness Park.  In connection with this Credit Agreement,Southwest entered into a Pledge Agreement and a Sponsor Support Agreement withthe Agent.  Under the Pledge Agreement,Southwest has pledged its membership interest in North Metro to the lenders assecurity for repayment of the loan. Under the Sponsor Support Agreement, Southwest agreed to contributeadditional equity to North Metro if the proceeds of the loan are insufficientto complete construction and open (as defined in the Credit Agreement) RunningAces Harness Park.

 

Effective April 3, 2008, North Metro entered intoLimited Waiver and Amendment No. 1 to the Credit Agreement.  The Limited Waiver extended the time periodfor obtaining an audit (made necessary by a change to an audit firm identified bythe lender) for the fiscal year ended December 31, 2007 from March 31,2008 to May 30, 2008 and the audit was completed within that time.  The amendment to the credit agreement alsoallows for the following:  (1) thelenders will subordinate liens on assets up to $2.1 million related toequipment financing with an unrelated third party, and (2) North Metro isallowed to issue letters of credit to replace certain cash deposits totalingapproximately $1.3 million.  Asconsideration, North Metro paid an amendment fee of $104,250.

 

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The Second Amendment, dated July 1, 2008,increased the total amount of the loan to $42.3 million and reduced therequirement that North Metro maintain minimum cash availability of $1.25million to a requirement that North Metro maintain minimum cash availabilityof: $750,000 through August 29, 2008; $850,000 from August 30 to September 29,2008; $950,000 from September 30 to October 30, 2008; $1,100,000 fromOctober 31, 2008 to November 29, 2008; and $1,250,000 after November 29,2008.  In connection with the secondamendment to the Credit Agreement, we entered into a limited guaranty underwhich we agreed to repay up to $1 million (plus certain costs) of the NorthMetro loan if North Metro is unable to repay. As a condition to entry intoAmendment No. 2, Southwest and MTR-Harness, Inc., the other 50percent member in North Metro Harness Initiative, LLC, were required to make anaggregate of $615,000 in additional membership contributions to North Metro, ofwhich Southwest provided $500,000.  We made these additional membershipcontributions on or about June 20, 2008.

 

North Metro has at times failed to comply with certaincovenants under the Credit Agreement, including a minimum cash availabilityrequirement and a minimum EBITDA requirement for the quarter ended June 30,2008.  The Agent has notified North Metrothat this constitutes an event of default under the loan agreement and that thelenders are reserving all rights and remedies available to them under theCredit Agreement.  North Metro will workwith the lenders to resolve failure to satisfy the covenant and resultingdefault, but do not know what form such resolution will take or if one can bereached.  During the period that NorthMetro is not in compliance with the Credit Agreement, the interest paid byNorth Metro on outstanding loan amounts is 2% higher than the rate that wouldotherwise apply.

 

The following tablesummarizes the results of operations for North Metro for the three months endedJune 30, 2008, the first period of operations (operations began on April 11,2008):

 
| ** **                                             | ** ** | **Three months ended  June 30, 2008** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| Revenues                                               |       |                                       |       |
| Pari-mutuel                                            |       | $                                          | 531,724    |   |
| Card Club                                              |       | 21,212                                     |       |
| Food and Beverage                                      |       | 610,119                                    |       |
| Other                                                  |       | 53,131                                     |       |
| Total                                                  |       | $                                          | 1,216,186  |   |
|                                                   |       |                                       |       |
| Expenses                                               |       |                                       |       |
| Food and beverage cost of goods sold                   |       | $                                          | 246,925    |   |
| Purse expense                                          |       | 176,724                                    |       |
| Salary and benefits                                    |       | 1,739,030                                  |       |
| Other general and administrative costs                 |       | 2,056,754                                  |       |
| Depreciation and amortization                          |       | 238,438                                    |       |
| Interest expense                                       |       | 932,357                                    |       |
| Total                                                  |       | $                                          | 5,390,228  |   |
|                                                   |       |                                       |       |
| Net (loss)                                             |       | $                                          | (4,174,042 | ) |
|                                                   |       |                                       |       |
| 50% share of net (loss)                                |       | $                                          | (2,087,021 | ) |
| Net tax benefit                                        |       | —                                     |       |
| (Loss) of unconsolidated subsidiary net of tax benefit |       | $                                          | (2,087,021 | ) |

 

Southwest did not record a tax benefit related toNorth Metro’s losses during the three months ended June 30, 2008.

 

On April 11, 2008, Running Aces Harness Parkopened for live harness racing.   OnJune 30, 2008 after the last live harness race of the 50th dayof live racing, as required by Minnesota law, North Metro opened the cardroom.  The loss is primarily due to thestart-up costs of operations for live racing and the card room.

 

***Project Development*** costs for the three months ended June 30,2008 and 2007 were $0 and $84,295, respectively.  Project Development costs for the sixmonths ended June 30, 2008 and 2007 were $0 and $252,571,respectively.  The 2007 amounts related primarily to costs associated withthe management contract with the Cheyenne and Arapaho Tribes, see abovediscussion under “Casino Management.  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 $919,198 and $821,234 during thethree months ended June 30, 2008 and 2007, respectively, an increase of$97,964.******Corporate expenseswere $1,826,166 and $2,124,819 during the six months ended June 30, 2008and 2007, respectively, a decrease of $298,653.

 

The increase of approximately $98,000 in our corporateexpenses during the three months ended June 30, 2008 over the same periodin the prior year is primarily due to an increase of approximately $54,000 dueto stock based compensation expense for options granted to employees, officers,directors and consultants in March 2008, consulting expenses ofapproximately $68,000, increased legal and accounting expenses of approximately$53,000 offset by a reduction of approximately $84,000 in salary and benefitexpense.

 

The decrease of approximately $299,000 in corporateexpenses during the six months ended June 30, 2008 over the same period inthe prior year is primarily due to decreased salary and benefit expense ofapproximately $348,000.  During March 2007 the board of directorsapproved discretionary performance bonuses of approximately $385,000 and in March 2008the board of directors approved the issuance of 1,867,500 stock options toofficers, employees, independent directors and a consultant (see Part INote 3 to our Financial Statements in Item 1 within this Form 10-Q). Our stock option compensation expense increased by approximately $144,000during the six months ended June 30, 2008 over the same period in theprior year.  We had additional reductionsof approximately $107,000 to salary expense in 2008.

 

***Interest Expense*** was $244,826 and $203,374 for the threemonths ended June 30, 2008 and 2007, respectively, an increase ofapproximately $41,452.  Interest Expense was $447,342 and $452,823 for the six monthsended June 30, 2008 and 2007, respectively, a decrease of approximately$5,481.  The increase during the three months ended June 30, 2008 isprimarily due to interest on our $1.55 million term loan secured in March 2008.

 

***Write off ofacquisition and financing costs*** of $217,329 during the six months ended June 30,2008 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.  During thethree and six months ended June 30, 2007 we wrote-off $126,650 of acquisitioncosts as an acquisition agreement to acquire a casino terminated.

 

***Loss ofunconsolidated subsidiary, net of tax benefit*** represents our share of the losses ofNorth Metro, which were $2,087,021 and 96,437 for the three months ended June 30,2008 and 2007, respectively and $2,425,452 and $216,608 during the six monthsended June 30, 2008 and 2007, respectively.  North Metro doingbusiness as Running Aces Harness Park opened on April 11, 2008 and openedthe card room on the evening of June 30, 2008 after completion of the 50thday of live racing.  See above discussionrelated to North Metro Harness Initiative, LLC.

 

***Effective tax rate. *** Forthe three and six months ended June 30, 2008 and 2007, we did not record atax benefit for the net loss as a result of our evaluation of deferred taxassets and our ability to utilize the deferred tax assets in the future. We recorded a 100% valuation allowance against the deferred tax assets at June 30,2008 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 June 30, 2008 and December 31,2007, our deferred tax asset is zero.

 

***Liquidity and Capital 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 and equity financing in June 2008,described below.  We will need to raise additional debt or equityfinancing in 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 and equity financing to fund our current operationsincluding project development costs.   We closed on a bank loan of $1.55million on March 7, 2008.  The interest rate is the prime rate plus1.5% with a minimum interest rate of 7%.  The effective interest rate onthis loan, after giving effect to the warrant consideration issued inconnectionwith it, isapproximately 24.5 percent (see Part I Note 4 to our Financial Statementsin Item 1 within this Form 10-Q).  We are required to make interestonly payments through January 2009 after which we will repay theoutstanding principal balance and accrued interest in 12 equal monthlyinstallments.  Eight shareholders of the Company, including a member ofour board of directors, cosigned one of eight promissory notes for between$100,000 and $300,000 that comprise the $1.55 million loan.  Our threeprincipal executive officers guaranteed portions of this loan as well as our$450,000 operating line of credit.  As consideration for the co-signaturesand personal guarantees we issued warrants to purchase 2,300,000 shares of ourcommon stock (one warrant share for each dollar guaranteed or cosigned) at anexercise price of $0.39 per share to each co-signer and guarantor.  Thewarrants have a five-year term.

 

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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 six monthsended June 30, 2008.

 

On June 17, 2008, Southwest entered into aSecurities Purchase Agreement with certain institutional and other accreditedinvestors, as defined in Rule 501 of Regulation D promulgated under theSecurities Act of 1933, as amended, pursuant to which Southwest sold in aprivate placement an aggregate of 2,693,589 shares of its common stock withaccompanying warrants to purchase 2,154,873 shares of its common stock at aprice of $0.65 per unit, with each unit consisting of one share of common stockand a warrant to purchase .8 shares of common stock.  The warrants areexercisable for a period of five years at an exercise price of $0.85 pershare.  Southwest received net proceeds from this offering ofapproximately $1,540,552, after the deduction of estimated offering expensesand other non-cash transactions as reported in the supplemental disclosure ofnon-cash investing and financing activities in the Consolidated Statement ofCash Flow (see Part I Note 5 to our Financial Statements in Item 1 withinthis Form 10-Q).  From the proceedswe used $500,000 to fund contributions at North Metro related to Amendment No. 2to the credit agreement, $450,000 to pay the line of credit in full on July 1,2008, with the remaining funds being used for working capital.

 

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 six monthsended June 30, 2008 was $662,326 compared to net cash provided byoperating activities of $1,278,032 during the six months ended June 30,2007.  The negative change in cash from operations was approximately$1,940,000 and is primarily due to an increase in our net loss of $2,050,959excluding our loss from our unconsolidated subsidiary (North Metro) of$2,425,452 (see discussion of cash used in investing activities below relatedto our contributions to North Metro).

 

Net cash used in investing activities for the sixmonths ended June 30, 2008 and 2007 was $1,122,257 and $3,015,444,respectively, a decrease of approximately $1,893,000.  The decrease in useof cash between the periods was due primarily to a decrease in our investmentin North Metro of approximately $1,644,000.  North Metro closed itsconstruction financing in April 2007, resulting in less required fundingfrom the members of North Metro.  We contributed $883,500 and $2,527,195during the six months ended June 30, 2008 and 2007, respectively.  The amount contributed during the six monthsended June 30, 2008 relate to non-construction activities requiringfunding by the members of North Metro.

 

Net cash provided by financing activities for the sixmonths ended June 30, 2008 and 2007 was $2,441,312 and $1,614,781,respectively.  During the six months ended June 30, 2008 and 2007 wehad the following financing activities:

 

·                  In June 2008 we completed an equity financing resulting inproceeds of approximately $1,540,000 and in January and February 2007we completed an equity financing resulting in proceeds of approximately$4,054,000.

 

·                  We made payments of approximately $503,000 on long-term borrowingscompared to approximately $1,225,000 during the six months ended June 30,2008 and 2007, respectively.  The decrease was due to full repayment of a$2.5 million term loan with Crown Bank on April 30, 2007.  No principal payments were due on the $1.55million term loan secured in March 2008.

 

·                  During the six months ended June 30, 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 June 30, 2008.

 

·                  We made payments of approximately $217,000 and $437,000 related tofinancing and acquisition costs during the six months ended June 30, 2008and 2007, respectively.  The financing costs incurred in 2008 arediscussed above and the financing and acquisition costs incurred in 2007related to an acquisition that ultimately did not close.

 

·                  We made payments of approximately $0 and $446,000 during the six monthsended June 30, 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, 2008and was extended in April 2008 to June 30, 2008.  Under theamendment, three principal officers of the Company each agreed to increase theirpersonal 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 Term Note below) each of the three principal officers agreed to increasetheir previously existing $150,000 personal guarantees to $250,000.  As ofJune 30, 2008, $450,000 is outstanding under the Revolving Creditfacility.  The line of credit was paid in full on July 1, 2008 as theline of credit terminated on June 30, 2008.

 

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

 

***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 June 30, 2008 was approximately $182,000.

 

***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 jurisdictions in the United States havereported overall declining casino and related revenues in recent months.  Changesin consumer 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 believe the smoking ban is having a significant negative effecton the market, although the initial impact on our casinos appearedlimited.  In June, three large casinos inCripple Creek challenged the smoking ban and two have continued to allowsmoking in portions of their casino.  Webelieve this action has driven customers who smoke to the other casinos thatallow smoking, which is having an adverse effect on our business, although theextent and duration of that impact is unclear.

 

**PoliticalUncertainties:**

 

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

 

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

 

***SignificantAccounting Policies and Estimates:***

 

We prepare our Consolidated Financial Statements inconformity with accounting principles generally accepted in the UnitedStates.  Certain of our accounting policies, including, but not limitedto, the estimated lives assigned to our assets, the determination of bad debt,asset impairment, valuation of stock option or warrant awards, and incometaxes, require that we apply significant judgment in defining the appropriateassumptions for calculating financial estimates.

 

By their nature, these judgments are subject to aninherent degree of uncertainty.  Our judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate.  We cannot assure you that ouractual results will not differ from our estimates.  For a discussion ofour significant accounting policies and estimates, please refer to Management’sDiscussion and Analysis or Plan of Operation and Notes to ConsolidatedFinancial Statements presented in the 2007 Financial Statements included in ourAnnual Report on Form 10-KSB.

 

***New AccountingPronouncement*****:**

 

We adopted Statement of Financial Accounting StandardsInterpretation No. 48 “*Accounting forUncertainty in Income Taxes*” (“Interpretation No. 48”)effective January 1, 2007, which did not have a significant impact to ourfinancial statements.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years.  This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements.  This Statement did not effect our consolidatedfinancial statements as of June 30, 2008.  On February 12, 2008a FASB Staff Bulletin “FSP FAS 157 -2” was issued which defers the effectivedate of FAS 157 to fiscal years beginning after November 15, 2008, andapplies to nonfinancial assets and nonfinancial liabilities.  We areevaluating the potential impact of FSP FAS 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 financial instrumentsand certain other items at fair value. This Statement is effective as of thebeginning 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.  This Statement did not effect our consolidated financialstatements as of June 30, 2008.

 

In November 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of ARB No. 51*(SFAS 160).SFAS 160 establishes accounting and reporting standards for entities thathave equity investments that are not attributable directly to the parent,called noncontrolling interests or minority interests. Specifically,SFAS 160 states where and how to report noncontrolling interests in theconsolidated statements of financial position and operations, how to accountfor changes in noncontrolling interests, and provides disclosure requirements.SFAS 160 is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption is prohibited.SFAS 160 shall be applied prospectively as of the beginning of the fiscalyear in which SFAS 160 is initially applied, except for the presentationand disclosure requirements. The presentation and disclosure requirements shallbe applied retrospectively for all periods presented. The Company does notanticipate any significant change in financial reporting to result fromissuance of this statement.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”(SFAS 141R). SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures the identifiable assets and goodwillacquired, liabilities assumed and noncontrolling interests. SFAS 141R alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination.  SFAS 141R will beeffective for the Company on January 1, 2009, and will be applied to anybusiness combination with an acquisition date, as defined therein, that issubsequent to the effective date.

 

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.*

 

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In May 2008, the FASB released SFAS No. 162,“*The Hierarchy of Generally AcceptedAccounting Principles*.”  This statement will be effective 60days after the United States Securities and Exchange Commission approvesamendments to AU Section 411, *TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples*.”  We do not anticipate any significant change inour financial reporting to result from issuance of this statement.

 

In June 2008, the Securities and ExchangeCommission issued an amendment to rules requiring companies that arenon-accelerated filers to include in their annual reports, pursuant to rules implementingSection 404b of the Sarbanes Oxley Act of 2002, an attestation report oftheir independent auditors on internal control over financial reporting forfiscal years ending on or after December 15, 2008.  Under the amendments, a non-accelerated filerwill be required to file the auditor’s attestation report on internal controlover financial reporting when it files an annual report for a fiscal yearending on or after December 15, 2009.

 

***Forward-LookingStatements:***

 

This Quarterly Report on Form 10-Q contains “forward-lookingstatements” intended to qualify for the safe harbor from liability establishedby the Private Securities Litigation Reform Act of 1995.  You can identifythese statements by the fact that they do not relate strictly to historical orcurrent facts. These statements often contain words such as “may,” “will,” “project,”“might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,”“continue” or “pursue,” or the negative or other variations of those words orcomparable terminology. In particular, they include statements relating to,among other things, future actions, new projects, strategies, futureperformance, the outcome of contingencies such as legal proceedings and futurefinancial results. We have based these forward-looking statements on ourcurrent expectations and projections about future events.

 

We caution the reader that forward-looking statementsinvolve risks and uncertainties that cannot be predicted or quantified and,consequently, actual results may differ materially from those expressed orimplied 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-term access to debt or equity financing;

 

·                  cost of available and feasible debt or equity financing;

 

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

 

·                  the effects of competition, including a new casino in Cripple Creek, COand the location of competitors and operating and market competition;

 

·                  the effect of economic, credit and capital market conditions on theeconomy in general, and on gaming companies in particular; our ability torecoup costs of capital investments through higher revenues;

 

·                  success of our customer tracking and customer loyalty programs;

 

·                  abnormal gaming holds;

 

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

 

·                  construction factors, including delays, zoning issues, environmental restrictions,soil and water conditions, weather and other hazards, site access matters andbuilding permit issues;

 

·                  the effects of environmental and structural building conditionsrelating to the Company’s properties; and

 

·                  changes in laws (including increased tax rates), regulations oraccounting standards, third-party relationships and approvals, and decisions ofcourts, regulators and governmental bodies.

 

·                  our international consulting agreement and any future internationaloperations will require us to understand and comply with the gaming regulationsand operate in economic environments that are new to us and may differsignificantly from the regulatory and economic models in which we currentlyoperate.

 

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

 

***Risk Factors***

 

Inaddition to the influences identified in this Quarterly Report on Form 10-Qand our other public filings, Item 1A to this Report states several importantfactors that could cause our actual results to differ materially from thoseanticipated by us or that are reflected in any of our forward-lookingstatements.

 

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**Item 4t.  Controls andProcedures**

 

**Disclosure Controls and Procedures.**

 

Our management is responsible for establishingdisclosure 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 andprocedures include controls and procedures designed to ensure that informationwe are required to disclose in the reports we file or submit under the Act is accumulatedand communicated to our management, including our principal executive andprincipal financial officers, as appropriate to allow timely decisionsregarding required disclosure.

 

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 ourdisclosure controls and procedures as of June 30, 2008 and concluded thatthose controls and procedures were effective as of that date.

 

**Management’s Report on InternalControl over Financial Reporting**.

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934. Our internal control system was designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial reporting and the preparation offinancial statements for external purposes, in accordance with generallyaccepted accounting principles. Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Our management, including our Chief Executive Officer,who serves as our principal executive officer, and our President and ChiefOperating Officer, who serves as our principal financial officer, conducted anevaluation of the effectiveness of internal control over financial reportingusing the criteria set forth by the Committee of Sponsoring Organizations ofthe Treadway Commission in Internal Control — Integrated Framework.  Basedon its evaluation, our management concluded that our internal control overfinancial reporting was effective as of June 30, 2008.

 

There have not been any changes in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act) that occurred during thefiscal quarter ended June 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

This report shall not be deemed to be filed forpurposes of Section 18 of the Securities Exchange Act of 1934, orotherwise subject to the liabilities of that section, and is not incorporatedby reference into any filing of the Company, whether made before or after thedate hereof, regardless of any general incorporation language in such filing.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

*Alleged Breach of GamingManagement Agreement*

 

UntilAugust 17, 2007, Southwest Casino and Hotel Corp. managed the Lucky Star —Concho and Lucky Star —Clinton casinos in Concho and Clinton, Oklahoma, underthe terms of a management agreement with the Cheyenne and Arapaho Tribes ofOklahoma.

 

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 us for alleged breach of the Third Amended andRestated Gaming Management Agreement, as amended, under which we then managedtwo casinos for the Tribes.  On November 2, 2007, we filed acounterclaim in this proceeding alleging a breach of the Gaming ManagementAgreement by the tribal Governor. The three-member arbitration panel for thisproceeding was appointed in February 2008.  After a schedulingconference with the arbitration panel on March 11, 2008, we submitted ourformal Cross-Complaint to the arbitration panel on April 22, 2008 and theTribes submitted its formal complaint on April 23, 2008.  We are nowproceeding with discovery in this matter.

 

Inthe arbitration demand and formal complaint, the Governor alleged wrongfulmanagement practices and that Southwest breached the management agreement byinterfering with or attempting to influence internal affairs or governmentaldecisions of the Tribes in connection with our efforts to extend our gamingmanagement relationship with the Tribes, which terminated on August 17,2007.

 

TheGovernor originally sought termination of the management contract and $10million in damages and continues to pursue a claim for damages againstus.  We do not believe we improperly interfered with or attempted toinfluence internal governmental decisions of the Tribes or improperly managedthe casinos and we are vigorously defending Southwest in this arbitrationproceeding. Under our Gaming Management Agreement with the Tribes, we werepermitted to oppose, publicly or privately, any action by the Tribes that webelieved was not in the best interest of the Tribal gaming operations. Webelieve that all of the actions we have taken on behalf of the gamingoperations we managed or as part of our efforts to extend our gaming managementrelationship with the Tribes are consistent with that provision.

 

Inour Cross-Complaint, we allege that the Governor of the Tribes breached theManagement Agreement by refusing to negotiate in good faith for an extensionand expansion of the gaming management relationship between Southwest and theTribes.  We assert that the Management Agreement required the Tribes tonegotiate this extension and expansion after we led the Tribes’ successfulefforts to negotiate and enter into a compact for expanded gaming with theState of Oklahoma in April 2005.

 

Wedo not expect any material adverse consequence from this action.  Accordingly, no provision has been made inour financial statements for any such loss. We do expect to incur additional legal and administrative costs inconnection with this arbitration.  Inaccordance with our accounting policies, we do not accrue for estimated futurelegal and related defense costs, but rather record these costs as period costswhen the services are rendered.

 

*Theft and Distribution ofSurveillance Video from Lucky Star Clinton casino*

 

On August 24, 2007,Southwest Casino and Hotel Corp., as exclusive manager of the Lucky Starcasinos of the Cheyenne and Arapaho Tribes of Oklahoma, filed a lawsuit againstDoris Thunderbull, Darrell Flyingman, in his individual capacity, and John DoesNo. 1 and 2 alleging theft (conversion) of confidential surveillance videofrom the Lucky Star — Clinton casino and subsequent copyright infringement anddefamation in connection with the posting of the stolen video on the websiteYouTube.com and widespread distribution of DVDs containing the video by mail.We initially sought an emergency temporary restraining order barring furtherdistribution of the video. That request was denied on August 27, 2007 andwe withdrew our request for the restraining order on September 24, 2007.Our claims on behalf of the Tribes for conversion, copyright infringement,tortious interference with contract, defamation, and conspiracy against thedefendants remain pending in the Federal District Court for the District ofOklahoma.

 

On January 14, 2008,Mr. Flyingman, as Governor of the Tribes and not in his individualcapacity, filed a declaratory judgment action in Cheyenne and Arapaho TrialCourt asserting that the Tribes, not Southwest, owned the surveillance footageand the copyright in it, an assertion that we do not contest. On February 13,2008, the Federal District Court issued a stay of the proceedings before itpending resolution of the Tribal court proceeding. After briefing, oralargument in this matter was held on April 4, 2008 and, on April 10,2008, the Trial Court judge ruled in favor of the Tribes. We did not appealthis decision. The effect of this decision on the pending federal courtlitigation is not known at this time.

 

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*Other Litigation Matters*

 

In addition to the matters described above, we areinvolved in various claims, legal actions and other complaints arising in theordinary 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.

 

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** **

**Item 1A. ****RiskFactors**

 

Inaddition to the influences identified elsewhere in this report and our AnnualReport on Form 10-KSB filed March 31, 2008, as well as our otherpublic filings, there are several important factors that could cause our actualresults to differ materially from those anticipated by us or that are reflectedin any of our forward-looking statements.  These factors, which may impactthe success of our operations and our ability to achieve our goals, include thefollowing:

 

**1.             Risks related to our financial condition:**

 

***We no longer receive revenue fromour prior Oklahoma management agreement***.  Our Gaming Management Agreement with theCheyenne and Arapaho Tribes of Oklahoma terminated on August 17,2007.  We have not received any revenuefrom management of the Lucky Star — Concho and Lucky Star — Clinton casinossince that date.  Before August 17,2007, revenue from this management agreement was a significant source of ouroperating revenue.  Failure to replacethe revenue previously generated from this management agreement would have amaterial adverse effect our financial condition.

 

***We have an accumulated deficitand uncertainty with respect to achieving future profitability***.  We have incurred substantial operating lossessince inception and had an accumulated deficit of approximately $15.6****millionas of June 30, 2008.  These lossesare primarily the result of expenses related to our ongoing pursuit of newgaming opportunities, including the development of the Running Aces HarnessPark by North Metro Harness Initiative, LLC, and operating losses.  We cannot provide you any assurance that wewill be able to achieve profitability on a quarterly or annual basis in futureperiods.  Our future operating resultswill depend upon a number of factors, including (a) the continuation andfuture profitability of our Colorado casinos; (b) our ability to establishnew gaming opportunities; (c) our ability to maintain our current gaminglicenses and to obtain additional gaming licenses for new or expanded gamingfacilities; and (d) our ability to successfully identify, secure licensingand maintain all necessary approvals and funding related to any additionalfuture gaming opportunities.

 

***We have a continuing need foradditional capital***.  We anticipate that we will need substantialadditional funding to provide working capital to meet current and futureobligations, including operating expenses and any obligations we may have tocontribute additional capital to North Metro Harness Initiative, LLC.  We will also need additional funding for anyadditional gaming projects we may choose to pursue.  Failure to meet ourcapital commitments related to the harness racetrack and card room could leadto a dilution of our ownership interest in that project.  Moreover, ouroperating plans and financing needs are subject to change depending on, amongother things, market conditions and opportunities; land, equipment or otherasset-based financing that may be available in connection with our developmentof gaming facilities; cash flow from operations, if any; and the number of newgaming projects that we pursue.  Whileadditional funds may be provided through borrowings from institutionalinvestors or project partners, equipment leasing or other forms of debt orequity financing, we do not have any unconditional commitments relating toadditional financing and we cannot assure you that additional financing will beavailable when needed.  Even if financingis available when required, we cannot assure you that it will be on termsfavorable to us and our security holders in terms of cost or dilution.

 

**2.****                                     ****Risks related to ourownership interest in the North Metro Harness Initiative racetrack and cardroom (Running Aces Harness Park):**

 

***Running Aces Harness Park, in which we own a 50% membership interest,is a new business and we cannot assure you that it will be successful.***  *** ***Running Aces Harness Parkbegan horseracing operations on April 11, 2008 and opened its 50-tablecard room on June 30, 2008.  RunningAces is a new gaming venture in which we have made a substantial investment ofmanagement time and financial resources. As a new gaming venture, the success of Running Aces is subject to allof the risks described in these “*RiskFactors*”, as well as all risks associated with starting a newbusiness venture.  These new businessrisks include, but are not limited to (a) hiring and training qualifiedpersonnel, (b) establishing adequate and cost-effective operatingprocedures, (c) competing effectively against other area gaming orentertainment options, and (d) effective marketing and capture ofcustomers.  If Running Aces does notprogress as planned, we may not receive distributions from its operations, mayhave to contribute additional capital to North Metro, and could see the valueof our investment in North Metro reduced, any of which would materially andadversely affect our business and operating results.

 

***It islikely that we will be required to contribute additional capital to NorthMetro.***  Costs associated with the development ofRunning Aces Harness Park, opening and initial operations of the facility, andhosting the first live harness racing meet were higher than expected.  Revenue from initial operations of the cardroom have not been sufficient to cover these additional costs as well as thecost of ongoing operations and satisfy the terms and conditions of North Metro’sconstruction financing.  For this reason,we believe it is likely that we will be required to make additional equitycontributions to North Metro.  Failure tomake needed equity contributions to North Metro could lead to dilution ofownership interest in North Metro or, if other sources of capital for theproject are not available on acceptable terms, lead to a reduction in the valueof our investment in North Metro and, potentially, a default under North Metro’sconstruction financing.

 

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In addition, under the Sponsor Support Agreementamong Southwest Casino Corporation, Southwest Casino and Hotel Corp. and thelenders to North Metro, Southwest is obligated to make additional capitalcontributions to North Metro as necessary to achieve “Project Opening,” asdefined in the Credit Agreement.  Thereis no limit on the amount of the contributions that Southwest could be requiredto make under this agreement.  As of thedate of this filing, North Metro has not achieved Project Opening and Southwestremains obligated to provide additional membership contributions.

 

***Wecould forfeit our membership interest in Running Aces Harness Park if NorthMetro defaults on its construction loan.*** Southwest has pledged its membership interests in North Metro to thelenders of North Metro’s construction loan. If North Metro defaults on its loan, those lenders could have the rightto foreclose on Southwest’s membership interests in North Metro, thus causingSouthwest to forfeit its ownership of Running Aces Harness Park.

 

***Wecould be liable for up to $1 million, plus certain costs, if North Metrodefaults on its construction loan****.* Southwest has guaranteed up to $1 million(plus certain costs) of the North Metro construction loan and, if North Metrois unable to repay the loan, Southwest may be required to repay up to $1million (plus certain costs) to the lenders.

 

***North Metro has, at times, been in default under its construction loanand is likely to be in default in the future.***  North Metro has at times failed to comply with certaincovenants under the Credit Agreement, including an ongoing minimum cashavailability requirement and a minimum EBITDA requirement for the quarter endedJune 30, 2008.  North Metro’slenders have notified North Metro that this constitutes an event of defaultunder the loan agreement and that the lenders are reserving all rights andremedies available to them under the Credit Agreement.  North Metro will work with the lenders toresolve any failure to satisfy the covenant and resulting default, but do notknow what form such resolution will take or if one can be reached.  During the period that North Metro is not incompliance with the Credit Agreement, the interest to be paid by North Metro onoutstanding loan amounts is 2% higher than the rate that would otherwise apply.

 

We cannot assure you that North Metro and itslenders will reach a satisfactory resolution of any failure to comply with theterms of the Credit Agreement or resulting default.  We cannot assure you that North Metro willnot be in default under its credit agreement again in the future, that NorthMetro will be able to cure any default under its credit agreement for which acure period is available in a timely manner or, alternatively, that North Metrowill be able to secure the lenders’ agreement to waive or amend provisions ofthe credit agreement to resolve any default. If North Metro is unable to reach a satisfactory resolution to anydefault, the lenders may have the right to foreclose on our ownership interestin North Metro and require us to repay up to $1 million (plus certain costs) ofthe loan, which would have a material adverse effect on Southwest.  The foreclosure, with or without payment underthe $1 million guaranty, would materially adversely affect our business, ourprospects and our ability to raise necessary capital to support our currentoperations.

 

***MTR Gaming Group, Inc.,the parent company of MTR-Harness, Inc., the other 50 percent member ofNorth Metro, is unable to increase its capital investment in North Metro andhas announced that it no longer considers its ownership interest in North Metroa strategic asset*****.**  Under the North Metro Harness Initiative, LLCMember Control Agreement, Southwest and MTR must each approve any additionalmembership contributions to North Metro. At June 30, 2008, MTR had invested the maximum amount in NorthMetro that is permitted by its senior secured lenders and cannot invest morewithout their approval.  In addition, MTRannounced on July 30, 2008 that it no longer considered North Metro a “strategicasset”.  MTR has stated publicly that itis looking to sell non-strategic assets. If MTR were to fail to make needed, required or agreed upon capital contributionsto North Metro, North Metro may not have the financial resources required tooperate its racetrack and card room.  IfNorth Metro is unable to operate its racetrack and card room, and alternativefinancing was not available and agreed to, we would not receive any cash orprofit from the operation of the facility, North Metro could default on itsfinancing arrangements, North Metro’s lenders could foreclose on our ownershipinterest in North Metro and we could be required to repay up to $1 million (pluscertain costs) to those lenders, all of which would decrease the value of ourinvestment in North Metro and materially adversely affect our business andprospects.  The foreclosure, with or withoutpayment under the $1 million guaranty, would materially adversely affect ourbusiness, our prospects and our ability to raise necessary capital to supportour current operations.

 

***It is unlikelythat North Metro will provide significant cash distributions to us for severalyears due to restrictions under the construction financing agreements for theNorth Metro Harness Initiative racetrack and card room*****.** Under the terms of the construction loan for North Metro, operating cashflow from North Metro must first be used to repay the construction loan. NorthMetro will not be permitted to make distributions to its owners (other thanannual distributions for payment of income taxes that we may be able to retainif our operating losses from prior periods eliminate any tax obligations duringcurrent periods), including Southwest, unless it exceeds performance thresholdsstated in the loan agreements. As a result, we do not believe North Metro willbe a significant source of cash distributions to us for several years, if ever.

 

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***Delays indeveloping North Metro’s racetrack and card room caused by legal challenges toNorth Metro’s racing licenses increased the cost of the project*****.** Legal challenges caused significant delays in developing the North Metroproject.  These delays caused the costsof developing the facility to increase significantly due to, among otherthings, higher purchase prices for real property, fluctuating interest ratesand borrowing costs, rising construction and labor costs, rising energy prices,and general inflation.  These increasedcosts significantly increased the ultimate development costs for the NorthMetro facility and will delay and reduce the amount of profit, if any,generated by North Metro and available for distribution to us.

 

***Actions by theMinnesota state legislature may reduce the value of our investment in NorthMetro*****.**  If any legislation should pass that excludesNorth Metro from any gaming expansions afforded to Canterbury Park, NativeAmerican tribes or other gaming operators, it would have a material adverseeffect on North Metro’s operations. Similarly, any expansion of gaming in Minnesota, whether Native Americangaming or otherwise, that excludes North Metro could also have a materialadverse effect on North Metro and its business. For example, legislation was introduced and subsequently withdrawn inthe Minnesota legislature to expand the scope of gaming to permit slot machines(commonly referred to as a “racino”) at Canterbury Park, the other Class Alicensed pari-mutuel wagering racetrack in the state, without affording NorthMetro the same opportunity for 5 years. In addition, the legislature has considered, but has not adopted, asignificant tax on card room revenue that, if passed, would reducesignificantly net revenue generated by North Metro.

 

**3.             Risks related to our internationalconsulting and management services:**

 

***Our consulting andmanagement contract for a casino in the Dominican Republic involves risks.*** We currently provide consulting servicesand will provide management services for a new casino being developed in theDominican Republic.  Our ability toprovide those services and generate revenue from those services is subject tosignificant risks related to (a) the gaming regulatory framework of theDominican Republic, (b) our ability to adapt to the different regulatoryand gaming environment in the Dominican Republic while remaining in compliancewith the requirements of the gaming regulatory authorities in the jurisdictionsin which we currently operate, as well as other applicable federal, state, orlocal laws in the United States and the Dominican Republic, (c) ourability to operate in a jurisdiction where English is not the primary languageof our employees and regulators, (d) potential political or economicinstability in the Dominican Republic, and (e) the extreme weatherconditions in the region.

 

***The decisions ofsovereign governments could have a material adverse effect on our internationalconsulting and management services business.***** **Sovereign governments, including the DominicanRepublic, may establish laws or regulations that will be deleterious to ourability to provide such services or that will affect our ability, as a foreigncorporation, to operate in their country. Governments have also, from time to time, established foreign exchangecontrols that could have a material adverse effect on our business, financial condition,and results of operations.  Because wewill receive management fees based on a percentage of the revenue of a casino,any action by a foreign government harmful to the business of a casino weserve, even if it does not directly impact our ability to provide consultingand management services, may reduce the revenue generated through theconsulting or management services we provide.

 

***Palace Resorts, towhom we provide consulting and management services in the Dominican Republic,has the right to terminate our consulting and management services contractunder certain circumstances***.  Under theterms of our agreement to provide consulting and management services, PalaceResorts, the owner of the casino, may terminate our services if (a) wefail to meet performance criteria stated contract (b) we fail to obtain ormaintain any license required to provide our services or to operate the casino,(b) a material breach or default by Southwest that is not timely cured, (c) insolvencyor bankruptcy, or (d) we fail to maintain insurance satisfactory to PalaceResorts.

 

**4.             Regulatory risks related to ourparticipation in the gaming industry:**

 

***We, and the gaming industry as awhole, are heavily regulated and any change in the regulatory environment couldhave a material adverse effect on our business and operations***. The gaming industry is highly regulated at the federal and state levels. Theprocess of complying with all applicable government regulations is complex andrequires us to expend substantial time and resources. We cannot assure you thatwe will be able to comply on a continuous or timely basis with all applicableregulations, and delays in compliance, or failure to comply, could have amaterial adverse effect on our business, financial condition, results ofoperations and our ability to maintain and obtain needed licenses. Changes inexisting regulations or the adoption of new regulations at the federal level orin the states in which we operate or pursue new opportunities could delay orprevent our compliance with those regulations. Our failure to comply withapplicable laws or regulations, whether federal, state or local, could resultin, among other things, the termination or suspension of some of ouroperations, both of which would have a material adverse effect on our business.

 

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***We face risks in connection withobtaining, maintaining and renewing gaming licenses required for the conduct ofour business***. The development and management of gaming facilities are subject to extensivelicensing requirements and we cannot assure you that we will be able to obtainor maintain all necessary licenses, approvals and other clearances fromregulatory authorities having jurisdiction over our gaming facilities. Although we, and our affiliates, have obtained the governmental licenses,permits and approvals we believe are necessary for the continued operation ofour Colorado casinos and development of a harness racing track and poker roomin Minnesota, we cannot assure you that we will be able to maintain or renewthe necessary licenses, approvals and other clearances required for ouroperations.

 

***All licenses that have been ormay be obtained by us or our affiliates are subject to various conditions andin many cases will be subject to renewal***. A failure to comply with gaming regulations or the conditions of any license wehold could have an adverse effect upon our ability to secure, maintain or renewour gaming licenses.  We were fined $50,000 by the Colorado Division ofGaming in June 2004 for failure to properly maintain and reviewstatistical data on slot machine performance after receiving a warning letterregarding this deficiency and failing to comply with its recommended action forcorrection of the deficiency. We entered into a Stipulation and Agreement withthe Colorado Limited Gaming Control Commission in which we admitted that wefailed to comply with the applicable gaming regulations and agreed to take correctiveaction immediately. As part of these proceedings, James Druck, in his capacityas Manager of the facility in question, without any admission of guilt, agreedto take the steps required to insure our compliance in this matter and,further, agreed to pay the sum of $5,000 to Colorado’s Limited Gaming Fund asreimbursement for expenses incurred by Colorado in this investigation.  Itis difficult to predict with any certainty whether, and to what extent, thisoccurrence may have a material adverse effect on our business or adverselyaffect our ability and the ability of our key personnel to obtain or retainrequired licenses in Colorado. In addition, we must disclose this violation toother jurisdictions in which we hold or apply for gaming licenses. It isdifficult to predict what impact, if any, that disclosure may have on ourability to obtain or maintain licenses in those jurisdictions.

 

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

 

***We face intense competition inthe gaming industry***.  The gaming industry, including thedevelopment, operation and management of racetracks and other types offacilities, is highly competitive, especially given the rapid rate at which theindustry is expanding. For example, a number of management companies may make proposalsto a particular tribe for the development and management of a single Indiangaming facility, and any gaming facilities developed or managed by us willcompete with a rapidly expanding number of other gaming facilities of varyingquality and size, including gaming facilities that are part of national orregional chains, and other forms of gaming and entertainment. Many of ourcompetitors have substantially greater financial and personnel resources thanwe do. Competition in the future may also be affected by overbuilding of gamingfacilities in our markets, which can adversely affect patronage levels. Giventhe current regulatory climate and limited number of lucrative gamingopportunities available, competition is likely to become more intense in thefuture.

 

***Changes in the Cripple Creek,Colorado gaming market may negatively impact the performance of our Gold RushHotel and Casino and the Gold Digger’s Casino*****. **A new casino offering approximately 700 gamingdevices opened in Cripple Creek, Colorado on May 31, 2008.  Our ability to maintain and grow our Coloradooperations is largely dependent on our ability to increase our market share ina highly competitive environment.  Theopening of this new casino will increase the level of competition in thismarket.  At this time, we cannot predictthe short or long term effects of the opening of this facility on our Coloradooperations.

 

The Governor of Colorado signed a bill that removedthe exemption for casinos from the state’s 2006 smoking ban, effective January 1,2008.  We believe the smoking ban ishaving a significant negative effect on the Cripple Creek gaming market.  In addition, during June 2008, threelarge casinos in Cripple Creek challenged the smoking ban and two havecontinued to allow smoking in portions of their casino.  We believe this action has driven customerswho smoke to the other casinos that allow smoking, which is having an adverseeffect on our business, although the extent and duration of that impact isunclear.

 

***We face risks associated with ourpursuit of new gaming projects***.  We have pursued, are pursuing, and willcontinue to pursue new gaming projects that involve substantial pre-developmentcommitments of time and money with no assurance we will receive the approvalsneeded to develop and operate the proposed gaming facility. A number of theseprojects require legislation or voter approval, which not only increases thecost of such projects but also increases the risk the project will not beapproved and extends the time required to obtain licenses, complete developmentand begin operations.  Gaming projectsmay be controversial in some areas and face significant opposition fromcompetitors or individuals and groups opposed to gaming on moral grounds.  In addition to increasing the costs anddifficulties in obtaining required approvals for gaming projects, theseopponents may also use litigation to try to delay or block new projects.  For example, after we received all requiredapprovals to develop a harness racetrack in Anoka County, Minnesota, a groupopposed to gaming on moral grounds delayed the start of construction for almosttwo years by filing two separate lawsuits in attempts to block the project.

 

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***We will continue to facelegislative and judicial hurdles and adverse legislative and judicial changes***.  The legislative and judicialenvironments related to gaming are dynamic and change rapidly. Any federal,state or local action, adverse legislation, or judicial or regulatory rulingthat limits gaming or constricts the scope of our gaming operations could havea material adverse effect on the gaming industry or our operations and financialcondition.

 

***We face risks related to thenature of the gaming industry, including adverse economic and politicalconditions and changes in the legislative and land use regulatory climate***. Similar to investment in other entertainment enterprises, adverse changes ingeneral and local economic conditions may adversely impact investments in thegaming industry.  Examples of economic conditions subject to changeinclude, among others, (a) competition in the form of other gamingfacilities and entertainment opportunities; (b) changes in regional andlocal population and disposable income; (c) unanticipated increases inoperating costs; (d) restrictive changes in zoning and similar land uselaws and regulations, or in health, safety and environmental laws, rules andregulations; (e) risks inherent in owning, financing and developing realestate as part of our casino operations; (f) the inability to secureproperty and liability insurance to fully protect against all losses, or toobtain such insurance at reasonable costs; (g) seasonality; (h) changesor cancellations in local tourist, recreational or cultural events; and (i) changesin travel patterns or preferences (which may be affected by increases ingasoline prices, changes in airline schedules and fares, strikes, weatherpatterns or relocation or construction of highways, among other factors).

 

**6.             Additional Risks:**

 

***The success of our currentoperations and our future growth potential are dependent upon key personnel***. Our success depends to a significant extent upon the efforts and abilities ofour executive officers, James B. Druck and Thomas E. Fox.  Each of these individuals has developedrelationships and experience in the gaming industry that are integral to oursuccess. We have entered into employment agreements with Messrs. Druck andFox. We do not maintain key man life insurance on either of theseindividuals.  The loss of the services ofone or both of these individuals could have a material adverse effect on ourbusiness and current and proposed operations.

 

***The success of our currentoperations and our future growth potential are dependent upon our relationshipwith and the performance of certain third parties***. The successful operation of our various proposed gaming facilities will bedependent to a significant extent on the efforts of third parties.  Forexample, (a) with respect to the harness racing track and card room we aredeveloping in Minnesota, the success of that project will depend to a greatextent on the expertise of our 50/50 partner in that venture, MTR-Harness, Inc.,an affiliate of MTR Gaming Group, Inc., in managing racing facilities aswell as the ability of our financing sources to meet their commitments to us; (b) withrespect to any other project pursued by us, we may need to form partnerships orsecure third party funding in order to meet the financial requirements thatwill likely transcend our own financial resources; and (c) with respect toany facility located on Indian land, we will not own the facility and willdepend on the performance by a tribe of its obligations under the applicablemanagement agreement. The failure of any third party to perform its contractualobligations to us could have a material adverse effect on our business andoperations.  In addition, depending upon the structure of any particularjoint venture, we may be held responsible for the acts or omissions of ourco-venturers.

 

***We face risks related to thediminishing control of our existing management***. Our directors and executive officers currently beneficially own (together withtheir spouses, on a fully-diluted basis and including shares that may bereceived in connection with the exercise of outstanding options and warrants)approximately 28.6%****of the outstanding shares of our common stock. By virtue ofthe forgoing, our directors and executive officers will have limited votinginfluence in connection with the election of our future directors and thecontrol of our business and affairs.

 

***We have the right to redeem yourstock under certain circumstances and the redemption price could be less thanyour original investment.***** **Under our Articles of Incorporation, wehave the right to redeem any outstanding share of our common or preferred stockif our Board of Directors determines that the continued ownership of thoseshares may cause any regulatory authority to deny or refuse to approve anygaming license or gaming contract.  Inaccordance with our Articles of Incorporation, the redemption price will equalthe lesser of (i) the cash equivalent of the shareholder’s investment inthe Corporation or (ii) the current market price for the shares on thedate the shareholder is found to be unsuitable.

 

***We have the ability to issueshares of preferred stock that may reduce the value of our common shares andyour rights as a common shareholder***.  Our shareholders have authorized the issuanceof up to 30 million shares of preferred stock with rights and preferences to bedetermined by our Board of Directors.  Noshares of preferred stock are outstanding and we do not have a current intentto issue any shares of preferred stock, although we reserve the right to do soin the future.  It is not possible todetermine the actual effect of the authorization and issuance of the preferredstock on the rights of Southwest shareholders until our Board determines therights of the holders of a series of preferred stock.  However, such effects might include, amongother effects:

 

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

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

 

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

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

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

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

 

Inaddition, any particular issuance or series of preferred stock could, dependingon the terms, make it more difficult or discourage any attempt to obtaincontrol of Southwest by means of a merger, tender offer, proxy contest or othermeans.  Issuance of preferred stock couldhave the effect of diluting the stock ownership of persons seeking control ofour company, and the possibility of such dilution could have a deterrent effecton persons seeking to acquire control. The Board also could, although it has nopresent intention of so doing, authorize the issuance of preferred stock to aholder who might thereby obtain sufficient voting power to assure that anyproposal to effect certain business combinations or amend our Articles ofIncorporation or Bylaws would not receive the required shareholder approval.Accordingly, the power to issue shares of preferred stock could enable theBoard to make it more difficult to replace incumbent directors and to accomplishbusiness combinations opposed by the incumbent Board.

 

***Because our common stock istraded on the OTC Bulletin Board, your ability to sell shares in the secondarytrading market may be limited***. Our common stock trades on the over-the-counter market on the OTC BulletinBoard.  Consequently, the liquidity of our common stock is impaired, notonly in the number of shares that are bought and sold, but also through delaysin the timing of transactions, and limited coverage by security analysts andthe news media, if any, of our company.  As a result, prices for shares ofour common stock may be lower and more volatile than might otherwise prevail ifour common stock was quoted on the Nasdaq Stock Market or traded on a nationalsecurities exchange like The New York Stock Exchange or American StockExchange.

 

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

 

Inaddition, because our common stock is not listed on Nasdaq or any nationalsecurities exchange and currently trades at less than $5.00 per share, tradingin our common stock is subject to Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers must take certain steps prior to selling a “pennystock,” which steps include:

 

·                  obtainingfinancial and investment information from the investor;

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

·                  providingthe investor a written identification of the shares being offered and the quantityof the shares.

 

Ifthe broker-dealer does not follow these penny stock rules, the investor has noobligation to purchase the shares.  The application of these comprehensiverules will make it more difficult for broker-dealers to sell our commonstock and our shareholders, therefore, may have difficulty selling their sharesin the secondary trading market.

 

***Our stock price may be volatile and your investment in our common stockcould suffer a decline in value*****. **Themarket price of our common stock may fluctuate significantly in response to anumber of factors, some of which are beyond our control.  These factors include:

 

·                  governmentregulatory action affecting our operations;

·                  actualor anticipated fluctuation in our operating results;

·                  generalmarket conditions for the gaming industry;

·                  broadmarket fluctuations; and

·                  economicconditions in the United States or abroad.

 

***We do not intendto pay any cash dividends in the foreseeable future.****** *** We do not intend to pay any cash dividends in theforeseeable future and, therefore, any return on your investment in our commonstock must come from increases in the fair market value and trading price ofour common stock.  In addition, we haveentered into debt financing agreements that prohibit us from paying dividendsat this time and may enter into similar agreements in the future.

 

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**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

On June 17, 2008, Southwest Casino Corporation(“Southwest”) entered into a Securities Purchase Agreement with certaininstitutional and other accredited investors, as defined in Rule 501 ofRegulation D promulgated under the Securities Act of 1933, as amended, underwhich Southwest sold in a private placement an aggregate of 2,693,589 shares ofits common stock with accompanying warrants to purchase 2,154,873 shares of itscommon stock at a price of $0.65 per unit, with each unit consisting of oneshare of common stock and a warrant to purchase .8 shares of common stock.  The warrants are exercisable for a period offive years at an exercise price of $0.85 per share.  Southwest received net proceeds from thisoffering of approximately $1,644,336.00, after the deduction of estimatedoffering expenses.

 

The Securities Purchase Agreement provides that ifSouthwest determines to file a registration statement for its equitysecurities, participants in this offering will have the right to requestinclusion of their common stock and shares of common stock issuable uponexercise of their warrants in the registration statement (piggy-backregistration rights).

 

If Southwest issues common stock or securitiesconvertible into common stock at an effective price below $0.65 per sharebefore the 6 month anniversary of the date on which the shares sold in thisoffering can be sold in the public market under an effective registrationstatement or under SEC Rule 144 (the “Effective Date”), Southwest willissue additional shares of common stock to participants in this offering suchthat they receive the same purchase price per share as investors in thesubsequent offering (a full ratchet adjustment).

 

Southwest agreed that if it sells additional sharesof common stock before the 6-month anniversary of the Effective Date on termsless favorable to the Company than the terms of the Securities PurchaseAgreement, the terms of the Securities Purchase Agreement will be amended toincorporate those less favorable terms. Also, if Southwest sells any debt or equity security convertible intoits common stock before the 6-month anniversary of the Effective Date,investors in this offering may elect to exchange some or all of the commonshares acquired in this offering for the convertible securities sold in thesubsequent offering on a dollar-for-dollar basis.  If an investor elects to exchange theircommon shares, they will retain the right to purchase 50 percent of thecorresponding shares subject to the warrant received in this offering.

 

The number of shares issuable upon exercise of thewarrants and the exercise price of the warrants are adjustable upon theoccurrence of certain events, including stock splits, combinations andreclassifications.  Until the 4-monthanniversary of the Effective Date, if Southwest issues any security with aneffective price per share less than the $0.85 per share exercise price of thewarrants, the exercise price will be reduced to that lower effective price pershare and the number of shares issuable upon exercise of the warrant will beincreased so that the aggregate exercise proceeds for each warrant remains thesame.  At any time that a registrationstatement covering the resale of the common shares issuable upon exercise ofthe warrant is not effective, warrant holders may exercise the warrant througha “cashless” or “net” exercise.  Warrantholders are not permitted to exercise their warrants to the extent theirownership of Southwest common stock would exceed 9.99% of the company’soutstanding common stock.

 

The company’s placement agent agreed to accept thecash portion of its placement agent commission in common stock and warrants onthe same terms as the investors, which resulted in the placement agentreceiving 136,911 shares of common stock and warrants to purchase an aggregateof 109,529 shares of common stock.  Inaddition, the placement agent received a warrant to purchase 88,992****shares of common stock thatis exercisable for a period of five years at an exercise price of $1.00 pershare.

 

The following officers and directors of Southwestparticipated in the private placement on the same terms as the other investors:James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, Presidentand Chief Operating Officer; Jeffrey S. Halpern, Vice President of GovernmentAffairs; Tracie L. Wilson, Chief Financial Officer, and Gus A. Chafoulias,Director.  Each of Mr. Druck, Mr. Fox,Mr. Halpern and Ms. Wilson participated by investing the net proceeds(after taxes and other withholding) from deferred bonuses owed to them by theCompany, resulting in a reduction in the Company’s outstanding liabilities tothese officers of $165,000.

 

In addition, each of Mr. Druck, Mr. Fox, Mr. Halpern,Ms. Wilson, Mr. Chafoulias and the other members of Southwest’s Boardof Directors entered into a Lock-up Agreement with Southwest under which theyagreed not to sell or transfer any of their Southwest securities (exceptcertain exempt transactions) until after the four month anniversary of theEffective Date. Other than with respect to the Securities Purchase Agreement,there are no material relationships between Southwest, on the one hand, and anyof the other investors in the private placement, on the other hand.

 

The securities that were issued in this privateplacement were not registered under the Securities Act of 1933, as amended, andmay not be offered or sold in the United States absent registration or anapplicable exemption from the registration requirements of the SecuritiesAct.  Pursuant to the Securities PurchaseAgreement, Southwest and the investor parties have made other covenants andrepresentations and warranties regarding matters that are customarily includedin financings of this nature.  If certainof its obligations are not met, Southwest has agreed to make pro-rata cashpayments as liquidated damages to each investor.

 

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The offer and sale of the securities was made to alimited number of institutional and other accredited investors in reliance uponexemptions from the registration requirements pursuant to Section 4(2) underthe Securities Act of 1933, as amended, and Regulation D promulgatedthereunder.  There was no generalsolicitation or advertising with respect to the private placement and each ofthe purchasers provided written representations of an intent to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution of the securities.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

Weheld our annual meeting of shareholders at our corporate offices on June 2,2008.  At that meeting our shareholderselected five directors, all of whom had previously served as Southwestdirectors and confirmed the selection of Eide Bailly LLP as our independentregistered public accounting firm and auditors for the fiscal year ending December 31,2008.  The votes on each of these matters were as**** ****follows:

 

Electionof Directors:

 

| ** **             | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** |
|------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------------|
| **David H. Abramson**  |       | 18,819,554 |       | 45,770      |       | 177,148     |       | 0                    |
| **Gus A. Chafoulias**  |       | 18,815,554 |       | 49,770      |       | 177,148     |       | 0                    |
| **James B. Druck**     |       | 18,819,554 |       | 45,770      |       | 177,148     |       | 0                    |
| **Jim Holmes**         |       | 18,819,754 |       | 45,570      |       | 177,148     |       | 0                    |
| **Gregg P. Schatzman** |       | 18,816,954 |       | 48,370      |       | 177,148     |       | 0                    |

 

Proposal#2, to confirm the selection of Eide Bailly LLP as public accountants andindependent auditors for the fiscal year ending December 31, 2007.

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** |
|------------|------------|-------------|------------|-------------|------------|----------------------|
| 18,673,663 |       | 11,000      |       | 355,465     |       | 0                    |

 

**Item6.  Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                   | ** ** | **Method of Filing**                                           |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|
| 10.1             |       | Form of Securities Purchase Agreement dated as  of June 17, 2008 by and among Southwest Casino Corporation and the  purchasers named therein                            |       | Filed as Exhibit 10.1  to Current Report on Form 8-K filed June 23, 2008 |
| 10.2             |       | Form of Warrant dated June 16, 2007 issued  by Southwest Casino Corporation to each of the purchasers party to the  Securities Purchase Agreement                       |       | Filed as Exhibit 10.2  to Current Report on Form 8-K filed June 23, 2008 |
| 10.3             |       | Form of Lock-up Agreement dated June 17,  2008 by and among Southwest Casino Corporation and certain directors and  executive officers                                  |       | Filed as Exhibit 10.3  to Current Report on Form 8-K filed June 23, 2008 |
| 10.4             |       | Modification and Extension of Consulting Agreement  between Southwest Casino Corporation and Operadora Dominicana Macao, S.A.  dated June 25, 2008.                          |       | Filed as Exhibit 10.1  to Current Report on Form 8-K filed July 1, 2008  |
| 31.1             |       | Certification of Chief Executive Officer Pursuant to  SEC Rule 13a-14.                                                                                                       |       | Filed herewith                                                           |
| 31.2             |       | Certification of Principal Financial and Accounting  Officer Pursuant to SEC Rule 13a-14                                                                                     |       | Filed herewith                                                           |
| 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.                    |       | Filed herewith                                                           |
| 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. |       | Filed herewith                                                           |

 

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#### ** **

#### **SIGNATURES**

#### ** **

In accordance with the requirements of the Securitiesand Exchange Act of 1934, as amended, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

| **August 14, 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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