Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x** | ** ** | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2008**

 

**or**

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

 

**For the transition periodfrom        to        **

 

**Commission File Number:  ****000-50572**

 

**SOUTHWESTCASINO CORPORATION**

(Exactname of registrant 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**

(Addressof 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. YES  x    NO  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)  YES   o   NO   x

 

Number of shares outstandingof each of the issuer’s classes of common stock as of the latest practicabledate: **30,349,997** as of November 7,2008.

 

 

 

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**SOUTHWEST CASINO CORPORATION**

 

**FORM 10-Q**

**September 30, 2008**

 

**TABLE OF CONTENTS**

 
| **PART I.** | **FINANCIAL  INFORMATION**                                                                                                          | ** ** |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| ITEM 1.          | Financial Statements                                                                                                                | 1          |
|             | Consolidated Balance Sheet  September 30, 2008 (Unaudited) and December 31, 2007                                          | 2          |
|             | Consolidated Statements of Operations  (Unaudited) for the Three and Nine Months ended September 30, 2008  and 2007       | 3          |
|             | Consolidated  Statements of Cash Flows (Unaudited) for the Nine Months ended  September 30, 2008 and 2007                 | 4          |
|             | Consolidated  Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months  ended September 30, 2008 | 5          |
|             | Notes to  Unaudited Consolidated Financial Statements                                                                               | 6          |
| ITEM 2.          | Management’s Discussion and Analysis or  Plan of Operation                                                                     | 25         |
| ITEM 4T.         | Controls and Procedures                                                                                                             | 37         |
|             |                                                                                                                                |       |
| PART II.    | OTHER INFORMATION                                                                                                                   | 38         |
| ITEM 1.          | Legal Proceedings                                                                                                                   | 38         |
| ITEM 1A.         | Risk Factors                                                                                                                        | 39         |
| ITEM 6.          | Exhibits                                                                                                                            | 44         |
| SIGNATURE PAGE   | 45                                                                                                                                  |

 

*In this Form 10-Q,references to “Southwest,” “the company,” “we,” “our” or “us,” unless thecontext otherwise requires, refer to Southwest Casino Corporation and itsconsolidated subsidiaries.*

 

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**PART I — FINANCIAL INFORMATION**

 

**Item1.  Financial Statements.**

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

 

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**SOUTHWESTCASINO CORPORATION**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                                                   | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                                                                                                                                                                       | ** ** | ** **  | ** ** | ** **  | ** ** |
| CURRENT ASSETS                                                                                                                                                                                                                                               |       |        |       |        |       |
| Cash and Cash Equivalents                                                                                                                                                                                                                                    |       | $           | 1,817,835  |        | $          | 1,892,401 |   |
| Accounts Receivable                                                                                                                                                                                                                                          |       | 51,613      |       | 54,582      |       |
| Accounts Receivable - Related Parties                                                                                                                                                                                                                        |       | —      |       | 41,572      |       |
| Inventories                                                                                                                                                                                                                                                  |       | 148,837     |       | 141,041     |       |
| Prepaid Expenses and Other Current Assets                                                                                                                                                                                                                    |       | 564,267     |       | 679,583     |       |
| Total Current Assets                                                                                                                                                                                                                                         |       | $           | 2,582,552  |        | $          | 2,809,179 |   |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                                                                                                                                                       |       |        |       |        |       |
| Leasehold Improvements                                                                                                                                                                                                                                       |       | 15,498,074  |       | 15,389,750  |       |
| Furniture and Equipment                                                                                                                                                                                                                                      |       | 5,568,346   |       | 5,280,282   |       |
| Accumulated Depreciation                                                                                                                                                                                                                                     |       | (11,838,817 | )          | (10,835,938 | )          |
| Net Property and Equipment                                                                                                                                                                                                                                   |       | $           | 9,227,603  |        | $          | 9,834,094 |   |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| OTHER ASSETS                                                                                                                                                                                                                                                 |       |        |       |        |       |
| Other Assets                                                                                                                                                                                                                                                 |       | 276,890     |       | 33,374      |       |
| Investment in Unconsolidated Subsidiary                                                                                                                                                                                                                      |       | —      |       | 7,218,720   |       |
| Total Other Assets                                                                                                                                                                                                                                           |       | $           | 276,890    |        | $          | 7,252,094 |   |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                 |       | $           | 12,087,045 |        | $          | 19,895,367 |   |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                    |       |        |       |        |       |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| CURRENT LIABILITIES                                                                                                                                                                                                                                          |       |        |       |        |       |
| Accounts Payable                                                                                                                                                                                                                                             |       | $           | 776,515    |        | $          | 659,284 |   |
| Other Liabilities - Related Parties                                                                                                                                                                                                                          |       | 26,391      |       | 25,000      |       |
| Accrued Expenses                                                                                                                                                                                                                                             |       | 1,180,658   |       | 1,085,797   |       |
| Accrued Liabilities - Related Parties                                                                                                                                                                                                                        |       | 82,467      |       | 122,467     |       |
| Notes Payable                                                                                                                                                                                                                                                |       | —      |       | 450,000     |       |
| Current Portion of Long-Term Liabilities                                                                                                                                                                                                                     |       | 1,940,685   |       | 1,005,940   |       |
| Accrued Interest Payable                                                                                                                                                                                                                                     |       | 60,157      |       | 55,465      |       |
| Total Current Liabilities                                                                                                                                                                                                                                    |       | $           | 4,066,873  |        | $          | 3,403,953 |   |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                                                                                                                                        |       |        |       |        |       |
| Long-Term Liabilities Net of Current  Portion                                                                                                                                                                                                                |       | $           | 6,343,420  |        | $          | 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, 30,706,997 and 27,817,953 Shares Issued at  September 30, 2008 and December 31, 2007 and 30,349,997 and  27,460,953 Outstanding at September 30, 2008 and December 31, 2007 |       | 30,708      |       | 27,819      |       |
| Additional Paid-in Capital                                                                                                                                                                                                                                   |       | 23,958,069  |       | 21,496,064  |       |
| Accumulated Deficit                                                                                                                                                                                                                                          |       | (21,989,725 | )          | (11,196,534 | )          |
|                                                                                                                                                                                                                                                         |       | 1,999,052   |       | 10,327,349  |       |
| Less Treasury Stock (357,000 shares  redeemed)                                                                                                                                                                                                               |       | (322,300    | )          | (322,300    | )          |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| Total Stockholders’ Equity                                                                                                                                                                                                                              |       | 1,676,752   |       | 10,005,049  |       |
|                                                                                                                                                                                                                                                         |       |        |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                              |       | $           | 12,087,045 |        | $          | 19,895,367 |   |

 

See Notes to Unaudited Consolidated Financial Statements

 

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** **

**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Operations**

**For theThree and Nine Months Ended September 30, 2008 and 2007**

 
| ** **                                                                            | ** ** | **For the three months**     | ** ** | **For the three months**     | ** ** | **For the nine months**      | ** ** | **For the nine months**      | ** **  |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                            | ** ** | **ended September 30, 2008** | ** ** | **ended September 30, 2007** | ** ** | **ended September 30, 2008** | ** ** | **ended September 30, 2007** | ** **  |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **NET  REVENUES**                                                                     |       |                                        |       |                                        |       |                                        |       |                                        |        |
| Casino                                                                                |       | $                                           | 3,546,797  |                                        | $          | 4,094,313                                   |       | $                                           | 10,532,610  |   | $ | 11,219,589 |   |
| Food &  Beverage/Hotel                                                       |       | 139,120                                     |       | 170,860                                     |       | 333,531                                     |       | 401,180                                     |        |
| Management and  Consulting                                                            |       | 150,000                                     |       | 434,658                                     |       | 450,000                                     |       | 3,566,109                                   |        |
| Entertainment                                                                         |       | 84,231                                      |       | 38,261                                      |       | 109,515                                     |       | 67,807                                      |        |
| Other                                                                                 |       | 93,505                                      |       | 42,525                                      |       | 164,366                                     |       | 124,330                                     |        |
|                                                                                  |       | 4,013,653                                   |       | 4,780,617                                   |       | 11,590,022                                  |       | 15,379,015                                  |        |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **EXPENSES**                                                                          |       |                                        |       |                                        |       |                                        |       |                                        |        |
| Casino                                                                                |       | $                                           | 2,750,831  |                                        | $          | 2,964,218                                   |       | $                                           | 8,420,161   |   | 8,709,011 |   |
| Food &  Beverage/Hotel                                                       |       | 362,075                                     |       | 386,956                                     |       | 1,025,427                                   |       | 1,036,644                                   |        |
| Corporate Expense                                                                     |       | 912,206                                     |       | 803,589                                     |       | 2,738,372                                   |       | 2,928,408                                   |        |
| Project  Development Costs                                                            |       |                                        |       | 99,112                                      |       |                                        |       | 351,683                                     |        |
| Entertainment                                                                         |       | 280,752                                     |       | 103,207                                     |       | 364,977                                     |       | 172,044                                     |        |
| Impairment Loss -  Management Contract                                                |       |                                        |       | 400,435                                     |       |                                        |       | 400,435                                     |        |
| Depreciation and  Amortization                                                        |       | 340,284                                     |       | 378,465                                     |       | 1,053,395                                   |       | 1,406,842                                   |        |
|                                                                                  |       | 4,646,148                                   |       | 5,135,982                                   |       | 13,602,332                                  |       | 15,005,067                                  |        |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **INCOME  (LOSS) FROM OPERATIONS**                                                    |       | $                                           | (632,495   | )                                           | $          | (355,365                                    | )          | $                                           | (2,012,310  | ) | $ | 373,948 |   |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **OTHER  INCOME (EXPENSE)**                                                           |       |                                        |       |                                        |       |                                        |       |                                        |        |
| Interest Income                                                                       |       | $                                           | 92         |                                        | $          | 16                                          |       | $                                           | 563         |   | 3,237 |   |
| Interest Expense                                                                      |       | (231,927                                    | )          | (187,410                                    | )          | (679,269                                    | )          | (640,233                                    | )           |
| Gain (Loss) on  Disposition of Property and Equipment                                 |       | 3,200                                       |       | 7,420                                       |       | 4,450                                       |       | 7,420                                       |        |
| Gain on  Disposition of Casino                                                        |       |                                        |       | 452,426                                     |       |                                        |       | 452,426                                     |        |
| Write-off of  Acquisition and Financing Costs                                         |       |                                        |       | (476,723                                    | )          | (217,329                                    | )          | (603,373                                    | )           |
| Settlement                                                                            |       | 227,396                                     |       |                                        |       | 227,396                                     |       |                                        |        |
| Other                                                                                 |       | (6,278                                      | )          |                                        |       | (14,472                                     | )          |                                        |        |
|                                                                                  |       | (7,517                                      | )          | (204,271                                    | )          | (678,661                                    | )          | (780,523                                    | )           |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **Loss  before income taxes, loss in earnings  of  unconsolidated subsidiaries** |       | (640,012                                    | )          | (559,636                                    | )          | (2,690,971                                  | )          | (406,575                                    | )           |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| Income Taxes                                                                          |       |                                        |       |                                        |       |                                        |       |                                        |        |
| Loss of  Unconsolidated Subsidiaries                                                  |       | (1,033,764                                  | )          | (96,096                                     | )          | (3,459,216                                  | )          | (312,704                                    | )           |
| Impairment of  Investment in Unconsolidated Subsidiary                                |       | (4,643,004                                  | )          |                                        |       | (4,643,004                                  | )          |                                        |        |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **NET LOSS**                                                                          |       | $                                           | (6,316,780 | )                                           | $          | (655,732                                    | )          | $                                           | (10,793,191 | ) | $ | (719,279 | ) |
|                                                                                  |       |                                        |       |                                        |       |                                        |       |                                        |        |
| **Loss per  share - basic**                                                           |       | $                                           | (0.21      | )                                           | $          | (0.02                                       | )          | $                                           | (0.38       | ) | $ | (0.03 | ) |
| **Loss per  share - diluted**                                                         |       | $                                           | (0.21      | )                                           | $          | (0.02                                       | )          | $                                           | (0.38       | ) | $ | (0.03 | ) |
| **Weighted  average common shares outstanding - basic**                               |       | 30,342,388                                  |       | 27,286,443                                  |       | 28,580,129                                  |       | 26,571,292                                  |        |
| **Weighted  average common shares outstanding - diluted**                             |       | 30,342,388                                  |       | 27,286,443                                  |       | 28,580,129                                  |       | 26,571,292                                  |        |

 

See notes to Unaudited Consolidated Financial Statements

 

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**SOUTHWESTCASINO CORPORATION**

**Consolidated Statements of Cash Flows**

**For thePeriod Ended September 30, 2008 and 2007**

 
| ** **                                                                                                          | ** ** | **2008**   | ** **  | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| ** **                                                                                                          | ** ** | ** ** | ** **  | ** ** | ** ** |
| Cash Flows  from Operating Activities:                                                                              |       |       |        |       |       |
| Net Income  (Loss)                                                                                                  |       | $          | (10,793,191 | )          | $          | (719,279 | ) |
| Adjustments  to Reconcile Net Income (Loss) to                                                                      |       |       |        |       |       |
| Net Cash  Provided by Operating Activities:                                                                         |       |       |        |       |       |
| Depreciation  and Amortization                                                                                      |       | 1,053,395  |        | 1,406,842  |       |
| Amortization  of Loan Costs                                                                                         |       | 109,477    |        | 58,019     |       |
| Impairment  Loss - Management Contract                                                                              |       | —     |        | 400,435    |       |
| Write-off of  Acquisition and Financing Costs                                                                       |       | 217,329    |        | 603,373    |       |
| (Gain) Loss  on Disposition of Property and Equipment                                                               |       | (4,450     | )           | (7,420     | )          |
| Payroll  taxes on Bonuses and Accrued Compensation Paid in Common Stock and Warrants                                |       | (84,164    | )           |       |       |
| Stock Based  Compensation Expense                                                                                   |       | 394,772    |        | 209,429    |       |
| Loss of  Unconsolidated Subsidiary                                                                                  |       | 3,459,216  |        | 312,704    |       |
| Impariment  of Investment in Unconsolidated Subsidiary                                                              |       | 4,643,004  |        |       |       |
| Gain on Disposition  of Casino                                                                                      |       | —     |        | (452,426   | )          |
| Change in  Current Assets and Liabilities,                                                                          |       |       |        |       |       |
| (Increase)  Decrease in Receivables                                                                                 |       | 2,969      |        | 112,879    |       |
| (Increase)  Decrease in Receivables - Related Parties                                                               |       | 41,572     |        |       |       |
| (Increase)  Decrease in Inventories                                                                                 |       | (7,796     | )           | 43,358     |       |
| (Increase)  Decrease in Prepaid Expenses and Other Current Assets                                                   |       | 167,984    |        | (263,530   | )          |
| Increase  (Decrease) in Accounts Payable                                                                            |       | 13,099     |        | (188,088   | )          |
| Increase  (Decrease) in Accounts Payable - Related Parties                                                          |       | 26,391     |        |       |       |
| Increase  (Decrease) in Accrued Expenses                                                                            |       | 234,861    |        | 106,960    |       |
| Increase  (Decrease) in Accrued Interest Payable                                                                    |       | 4,692      |        | (5,927     | )          |
| Net Cash  Provided By Operating Activities                                                                          |       | $          | (520,840    | )          | $          | 1,617,329 |   |
|                                                                                                                |       |       |        |       |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                                               |       |       |        |       |       |
| Purchase of  Property and Equipment                                                                                 |       | (426,342   | )           | (276,476   | )          |
| Proceeds  from Sale of Property and Equipment                                                                       |       | 25,000     |        | —     |       |
| Payment of  Costs Associated with Management Contract                                                               |       | —     |        | (438,741   | )          |
| Receipt  (Payment) of Deposit                                                                                       |       | 1,025      |        | (3,318     | )          |
| Proceeds  from Disposition of Casino                                                                                |       | —     |        | 490,018    |       |
| Investment  in Unconsolidated Subsidiary                                                                            |       | (883,500   | )           | (2,555,195 | )          |
| Net Cash  Used in Investing Activities                                                                              |       | $          | (1,283,817  | )          | $          | (2,783,712 | ) |
|                                                                                                                |       |       |        |       |       |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                                               |       |       |        |       |       |
| Payments on  Short-Term Notes Payable                                                                               |       | $          | (450,000    | )          | $          | (446,292 | ) |
| Proceeds  from Long-Term Borrowings, net                                                                            |       | 1,534,500  |        |       |       |
| Principal  Payments on Long-Term Borrowings                                                                         |       | (758,200   | )           | (1,471,418 | )          |
| Proceeds  from Issuance of Common Stock upon Exercise of Warrants                                                   |       | 94,728     |        |       |       |
| Proceeds  from Issuance of Common Stock and Warrants                                                                |       | 1,540,552  |        | 3,980,511  |       |
| Redemption  of Common Stock                                                                                         |       | —     |        | (322,300   | )          |
| Payment of  Financing Costs                                                                                         |       | (14,160    | )           |       |       |
| Payment of  Financing Costs Written-Off                                                                             |       | (217,329   | )           | (558,864   | )          |
| Net Cash  Provided (Used) by Financing Activities                                                                   |       | $          | 1,730,091   |       | $          | 1,181,637 |   |
|                                                                                                                |       |       |        |       |       |
| Net Increase  in Cash and Cash Equivalents                                                                          |       | (74,566    | )           | 15,254     |       |
|                                                                                                                |       |       |        |       |       |
| CASH AND  CASH EQUIVALENTS                                                                                          |       |       |        |       |       |
| Beginning of  Period                                                                                                |       | 1,892,401  |        | 1,531,260  |       |
| End of  Period                                                                                                      |       | $          | 1,817,835   |       | $          | 1,546,514 |   |
|                                                                                                                |       |       |        |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                                                                   |       |       |        |       |       |
| Interest  Paid                                                                                                      |       | $          | 564,066     |       | $          | 588,141 |   |
| Income Taxes  Paid                                                                                                  |       | $          | 1,100       |       | $          | 42,346 |   |
|                                                                                                                |       |       |        |       |       |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH  INVESTING AND  FINANCING ACTIVITIES                                      |       |       |        |       |       |
|                                                                                                                |       |       |        |       |       |
| Capital  assets acquired with acounts payable                                                                       |       | $          | 182,866     |       | $          | 136,270 |   |
| Financing  costs included in accounts payable                                                                       |       | $          | —      |       | $          | 14,776 |   |
| Costs  associated with issuing common stock included in accounts payable                                            |       | $          | 16,344      |       |       |   |
| 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                                    |       | $          | 41,192      |       |       |   |
| 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**

**Consolidated Statements of Changes in Stockholders’Equity**

**For the Period Ended September 30, 2008**

 
| ** **                                                        | ** ** | **Treasury Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** ** | ** ** | ** **               | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|--------------------------|------------|
| ** **                                                        | ** ** | **Number of**      | ** ** | ** **            | ** ** | **Number of** | ** ** | ** ** | ** ** | **Additional**           | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Shares**              | ** ** | **Amount**            | ** ** | **Shares**         | ** ** | **Amount** | ** ** | **Paid-in Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| **BALANCE  December 31, 2007**                               |       | (357,000                | )          | $                     | (322,300   | )                  | 27,817,953 |       | $          | 27,819                   |       | $ | 21,496,064 |   | $ | (11,196,534 | ) | $ | 10,005,049 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Issuance of  Common Stock and Warrants, Net                       |       |                    |       |                  |       | 2,693,589          |       | $          | 2,694      |                     | $          | 1,617,351 |   |   |   | $ | 1,620,045 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Exercise of  Options and Warrants and Issuance of Common Stock    |       |                    |       |                  |       | 195,455            |       | 195        |       | 94,532                   |       |   |   | 94,727 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Stock-Based  Compensation Expense Related to Options and Warrants |       |                    |       |                  |       |               |       |       |       | 394,772                  |       |   |   | 394,772 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Issuance of  Warrants in Connection With Debt Issuance            |       |                    |       |                  |       |               |       |       |       | 355,350                  |       |   |   | 355,350 |   |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| Net Loss                                                          |       |                    |       |                  |       |               |       |       |       |                     |       | (10,793,191 | ) | (10,793,191 | ) |
|                                                              |       |                    |       |                  |       |               |       |       |       |                     |       |   |   |   |   |
| **BALANCE  September 30, 2008**                              |       | (357,000                | )          | (322,300              | )          | 30,706,997         |       | 30,708     |       | 23,958,069               |       | (21,989,725 | ) | 1,676,752 |   |
|                                                                   |            |                         |            |                       |            |                    |            |            |            |                          |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to Unaudited Consolidated Financial Statements

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

**NOTE 1 —BASIS OF PRESENTATION**

 

The unaudited consolidatedfinancial statements of Southwest Casino Corporation, a Nevada corporation (the“Company” or “Southwest”), have been prepared pursuant to the rules andregulations of the United States Securities and Exchange Commission (“SEC”)applicable to interim financial information.  Accordingly, certaininformation normally included in the annual financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshas been condensed or omitted. For further information, please refer to theannual audited consolidated financial statements of the Company, and therelated notes included within the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2007, filed with the SEC on March 31,2008.

 

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

 

**NOTE 2 —MANAGEMENT FINANCIAL PLANS**

 

The Company completed a debtfinancing for $1.55 million in March 2008, see Note 9.  On June 17,2008, the Company sold 2.7 million shares of common stock and warrants topurchase 2.2 million shares of common stock resulting in proceeds ofapproximately $1.54 million, see Note 5.  During the nine months ended September 30,2008 the Company used $883,500 to make an additional investment in North Metro,see Note 7, and $450,000 to pay in full the Company’s line of credit on July 1,2008, see Note 8.  The Company will be required to seek additional debt orequity financing during 2008 to fund operations. If the Company were to raisecapital through an equity financing, any sale of equity is likely to require usto issue a significant number of shares and warrants to purchase shares toparticipants in the June 17, 2008 financing under the anti-dilution provisionsof that financing, thus causing further dilution, see Note 5.  During the Company’s quarterly Board ofDirectors meeting on November 11, 2008, the Board of Directors andmanagement approved a plan to significantly reduce operating expenditures andpreserve the Company’s available cash flow during 2009 by reducing salarypayments and other operating expenditures. In addition, the Company will need to restructure its outstanding debt orbegin to make principal payments on it beginning in February 2009, seeNote 9.

 

**NOTE 3 —STOCK OPTIONS AND AWARDS**

 

Stock option plans:

 

On July 15, 2004,Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino andHotel Corp. 2004 Stock Incentive Plan that had been adopted by the company’sBoard of Directors effective June 1, 2004.  Under the terms of thereorganization completed July 22, 2004, Southwest Casino Corporationassumed the rights and obligations of Southwest Casino and Hotel Corp. underthis plan.  The plan permits Southwest Casino Corporation to issueincentive awards to all employees of Southwest Casino Corporation or any of itssubsidiaries and any non-employee directors, consultants or independentcontractors of the Company or any of its subsidiaries. Incentive awards underthe plan include “incentive options” under Section 422 of the InternalRevenue Code of 1986, “non-statutory stock options” that do not qualify for “incentiveoption” treatment, stock appreciation rights, restricted stock awards,performance units and stock bonuses.  The plan was amended by shareholderapproval in June 2007, which increased the number of shares of SouthwestCasino Corporation common stock reserved for issuance under the plan from1,500,000 to 3,000,000.

 

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

 

Valuation and ExpenseInformation under SFAS 123(R)

 

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

 

The effect of stock optionsissued to employees, directors and consultants was to increase the net loss forthe three and nine months ended September 30, 2008 by $79,621 and$312,272, respectively and basic loss per share by $0.003 and $0.011,respectively.  The effect of stock options issued was to increase the netloss for the three and nine months ended September 30, 2007 by $42,987 and$131,512, respectively and basic loss per share by $0.002 and $0.005, respectively.

 

Options are granted toemployees and directors at prices equal to the market value of the stock on thedates the options are granted. The options granted have terms of 5 to 10 yearsfrom the grant date and granted options typically vest quarterly over a one tothree year period.  The fair value of each option is amortized intocompensation expense over the period the option vests. The Company hasestimated the fair value of all stock options as of the date of grant byapplying the Black-Scholes pricing valuation model.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

The application of thisvaluation model involves assumptions that are judgmental and sensitive in thedetermination of compensation expense.  The key assumptions used indetermining the fair value of options during the nine months ended September 30,2008 were:

 
| ** **                              | ** ** | **Nine months ended  September 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 theexpected price volatility using a pro-rata percentage of both historicalinformation for a peer group as well as historical information for the Companyfrom January 4, 2007 through March 20, 2008.  The Company’ssecurities began trading publicly in July 2004, however the volume andtrading activity was minimal until 2007.  As a result the Company used theaverage volatility for the look back period (which is the expected term of theoptions) for the companies considered in the peer group and history for the Companyfrom 2007 to March 20, 2008 (the date of grant).  The Companyweighted the volatility using 80% of the peer group and 20% of the Company’scalculated volatility.  The Company applied the simplified formula forcomputing the expected term assumptions for employee and director options inaccordance with Staff Accounting Bulletin (“SAB”) No. 107 and as modifiedin SAB No. 110.  The Company applied 0% to the dividend yield as theCompany has not approved or issued dividends in the past and there are no plansto do so.  The risk-free interest rate was selected based upon yields ofU.S. Treasury issues with a term equal to the expected life of the option beingvalued.  SFAS 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Pre-vesting forfeitures were estimated to be zerobased primarily on historical experience.  If pre-vesting forfeituresoccur in the future, the Company will record the benefit related to thoseforfeitures as the forfeitures occur.

 

Status of options during thenine months ended September 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                     |       | —                   |       |                                  |       |                                     |       |                           |       |
| Exercised                                       |       | (50,000                  | )          | $                                     | 0.12       |                                     |       |                           |       |   |
| Balance  at September 30, 2008             |       | 4,317,500                |       | $                                     | 0.58       |                                     |       |                           |       |   |
|                                            |       |                     |       |                                  |       |                                     |       |                           |       |
| Options  outstanding at September 30, 2008 |       | 4,317,500                |       | $                                     | 0.58       |                                     | 6.5 years  |                           |       | — |   |
| Options  exercisable at September 30, 2008 |       | 2,969,635                |       | $                                     | 0.63       |                                     | 5.2 years  |                           |       | — |   |
|                                                 |            |                          |            |                                       |            |                                          |            |                                |            |  |  |  |

 

As the closing stock priceof $0.17 at September 30, 2008 was less than the weighted average exerciseprice for both options outstanding and options exercisable there was nointrinsic value. As of September 30, 2008, the Company’s unrecognizedshare-based compensation related to stock options issued to employees anddirectors was approximately $350,607.  This cost is expected to beexpensed over a weighted average period of three years. See Note 21, SubsequentEvents, regarding *Repricing of Employee Stock Options.*

 

Effective July 14,2008, the Company issued 50,000 shares of common stock to a non-managementemployee upon partial exercise of a non-qualified stock option to purchase150,000 shares of common stock at a price of $0.12 per share that wasoriginally issued by Southwest Casino and Hotel Corp. in 2003 and assumed bythe Company in its July 2004 reorganization.

 

Included in the Status ofoptions table above are:

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

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

 

·                  Consulting option grant:

 

The Board of Directorsawarded two non-qualified options to purchase 50,000 shares of Southwest commonstock each to a consultant to the company on March 20, 2008.  Theseoptions were also granted under the company’s 2004 Stock Incentive Plan, have a10-year term, and an exercise price of $0.48 per share, the closing marketprice for one share of the Company’s common stock on the date of grant. These options become exercisable upon Southwest’s achievement of certain goalsrelated to the services provided by the consultant to Southwest.  Duringthe three months ended June 30, 2008, 50,000 options became exercisableupon execution of the Company’s amended consulting and management contract withPalace Resorts in June 2008, see Note 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 estimatedthe fair value of these options as of the date of grant by applying theBlack-Scholes pricing valuation model.  The application of this valuationmodel involves assumptions that are judgmental and sensitive in thedetermination of compensation expense.  The key assumptions used indetermining the fair value of options were:

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

 

The Company estimated theexpected price volatility using a pro-rata percentage of both historicalinformation for a peer group as well as historical information for the Companyfrom January 4, 2007 through March 20, 2008.  The Company’ssecurities began trading publicly in July 2004, however the volume andtrading activity was minimal until 2007.  As a result the Company used theaverage volatility for the look back period (which is the contractual term ofthe options) for the companies considered in the peer group and history for theCompany from 2007 to March 20, 2008 (the date of grant).  The Companyweighted the volatility using 80% of the peer group and 20% of the Company’scalculated volatility.   The Company applied 0% to the dividend yieldas the Company has not approved or issued dividends. The risk-free interestrate was selected based upon yields of U.S. Treasury issues with a term equalto the contractual life of the option being valued.  These options are notforfeitable once vested as such the contractual life is used.

 

The Company is expensing thecompensation cost of these options over the expected vesting period based uponthe performance conditions and will reassess the likelihood of performance ateach reporting date.  The Company expensed approximately $4,700 and$28,700 during the three and nine months ended September 30, 2008.

 

No tax benefit has beenrecorded on share based compensation expense for the three and nine-month periodsended September 30, 2008 and 2007.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 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  September 30, 2008 |       | 10,344,512                |       | $                                          | 0.62       |   |

 

TheCompany recognized $27,500 and $82,500 for the three and nine months ended September 30,2008, respectively related to compensation expense for investor and financialconsulting services.

 

Issuanceof Debt

 

The Company secured debtfinancing in March 2008, see Note 9.  The Company issued five-yearfully exercisable warrants to purchase an aggregate of 2,300,000 shares of itscommon stock at an exercise price of $0.39 per share to the shareholderco-signers and guarantors, including Mr. Druck, Mr. Fox and Mr. Halpern(officers of the Company and guarantors of the debt).  The $0.39 per shareexercise price of these warrants represented the average closing market priceof one share of Southwest Casino Corporation’s common stock over the 5 tradingdays preceding the closing of the loan transaction.  Warrant holders alsoreceived the right to have the shares of Southwest Casino Corporation commonstock purchasable upon exercise of their warrants included in any registrationstatement that Southwest Casino Corporation may file in the future (“piggy-backrights”) under the terms of a separate Registration Rights Agreement dated March 10,2008.

 

The Company accounts fortransactions in which services are received in exchange for equity instrumentsissued based on the fair value of such services received from non-employees orof the equity instruments issued, whichever is more reliably measured, inaccordance with SFAS No. 123R and Emerging Issues Task Force (“EITF”)Issue No. 96-18, “Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.”  Additionally, the company has accounted for this transactionin accordance with EITF Issue No. 00 — 18 “Accounting Recognition forCertain Transactions involving Equity Instruments Granted to Other ThanEmployees”.   The Company has estimated the fair value of thewarrants as of the date of grant by applying the Black-Scholes pricingvaluation model.  The application of this valuation model involvesassumptions that are judgmental and sensitive in the determination ofexpense.  The key assumptions used in determining the fair value of the warrantsgranted 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 theexpected price volatility using a pro-rata percentage of both historicalinformation for a peer group as well as historical information for the Companyfrom January 4, 2007 through March 10, 2008.  The Company becamepublic 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 contractual term of the warrant) for the companiesconsidered in the peer group and history for the Company from 2007 to March 10,2008 (the date of grant).  The Company weighted the volatility using 80%of the peer group and 20% of the Company’s calculated volatility.  The Company applied 0% to the dividend yield as the Company has not approved orissued dividends. The exercise price of the warrants was based upon the marketvalue of the Company’s common stock as reported on the Over the CounterBulletin Board for SWCC.OB.  As the Company has not registered theunderlying shares of common stock the Company has applied a 20% discount to themarket price of a freely traded share due to the restrictive nature of theaward.   The risk-free interest rate was selected based upon yieldsof U.S. Treasury issues with a term equal to the contractual life of thewarrants being valued.

 

The fair value of thewarrants in the amount of $355,350 was credited to additional paid in capitaland the debit is recorded on the consolidated balance sheet as a deferred financingcost included in Other Assets.  The deferred financing cost is beingamortized to interest expense over the term of the loan using the effectiveinterest method (properly matching the debt financing cost over the termof the loan).  The Company 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

recognized amortizationexpense (charged to interest expense) of $44,657 and $103,502 during the threeand nine months ended September 30, 2008.

 

Issuance of equity

 

In connection with theSecurities Purchase Agreement (“SPA”) entered into on June 17, 2008, theCompany issued warrants to purchase 2,045,344 shares of common stock to theinvestors and warrants to purchase an additional 198,521 shares of common stockto the placement agent in that offering, see Note 5.

 

**NOTE 5 —SALE OF UNREGISTERED SECURITIES**

 

On June 17, 2008,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, pursuantto which Southwest sold in a private placement an aggregate of 2,693,589 sharesof its common stock with accompanying warrants to purchase 2,154,873 shares ofits common 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 commonstock.  The warrants are exercisable for a period of five years at anexercise price of $0.85 per share.  Southwest received net proceeds fromthis offering of approximately $1,540,552, after the deduction of estimatedoffering expenses and other non-cash transactions as reported in thesupplemental disclosure of non-cash investing and financing activities in theConsolidated Statement of Cash Flow.

 

The Securities PurchaseAgreement provides that if Southwest determines to file a registrationstatement for its equity securities, participants in this offering will havethe right to request inclusion of their common stock and shares of common stockissuable upon exercise of their warrants in the registration statement(piggy-back registration rights).

 

If Southwest issues commonstock or securities convertible into common stock at an effective price below$0.65 per share before the 6 month anniversary of the date on which the sharessold in this offering can be sold in the public market under an effectiveregistration statement or under SEC Rule 144 (the “Effective Date”),Southwest will issue additional shares of common stock to participants in thisoffering such that they receive the same purchase price per share as investorsin the subsequent offering (a full ratchet adjustment).

 

Southwest agreed that if itsells additional shares of common stock before the 6 month anniversary of theEffective Date on terms less favorable to the Company than the terms of theSecurities Purchase Agreement, the terms of the Securities Purchase Agreementwill be amended to incorporate those less favorable terms.  Also, ifSouthwest sells any debt or equity security convertible into its common stockbefore the 6 month anniversary of the Effective Date, investors in thisoffering may elect to exchange some or all of the common shares acquired inthis offering for the convertible securities sold in the subsequent offering ona dollar-for-dollar basis.  If an investor elects to exchange their commonshares, they will retain the right to purchase 50 percent of the correspondingshares subject to the warrant received in this offering.

 

The number of sharesissuable upon exercise of the warrants and the exercise price of the warrantsare adjustable upon the occurrence of certain events, including stock splits,combinations and reclassifications.  Until the 4 month anniversary of theEffective Date, if Southwest issues any security with an effective price pershare less than the $0.85 per share exercise price of the warrants, the pershare exercise price will be reduced to that lower effective price per shareand 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 registration statement covering the resale ofthe common shares issuable upon exercise of the warrant is not effective,warrant holders may exercise the warrant through a “cashless” or “net”exercise.  Warrant holders are not permitted to exercise their warrants tothe extent their ownership of Southwest common stock would exceed 9.99% of thecompany’s outstanding common stock.

 

The company’s placementagent agreed to accept the cash portion of its placement agent commission incommon stock and warrants on the same terms as the investors, which resulted inthe placement agent receiving 136,911 shares of common stock and warrants topurchase an aggregate of 109,529 shares of common stock.  In addition, theplacement agent received a warrant to purchase 88,992 shares of common stockthat is exercisable for a period of five years at an exercise price of $1.00per share.

 

The following officers anddirectors of Southwest participated in the private placement on the same termsas the other investors: James B. Druck, Chief Executive Officer and Director;Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, VicePresident of Government Affairs; Tracie L. Wilson, Chief Financial Officer, andGus A. Chafoulias, Director.  Each of Mr. Druck, Mr. Fox, Mr. Halpernand Ms. Wilson participated by investing the net proceeds of $95,836(after taxes and other withholding) from deferred bonuses and compensation owedto them by the Company, resulting in a reduction in the Company’s outstandingliabilities to these officers of $180,000.

 

In addition, each of Mr. Druck,Mr. Fox, Mr. Halpern, Ms. Wilson, Mr. Chafoulias and theother members of Southwest’s Board of Directors entered into a Lock-upAgreement with Southwest under which they agreed not to sell or transfer any oftheir Southwest securities (except 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

certain exempt transactions)until after the four month anniversary of the Effective Date. Other than withrespect to the Securities Purchase Agreement, there are no materialrelationships between Southwest, on the one hand, and any of the otherinvestors in the private placement, on the other hand.

 

The securities that wereissued in this private placement were not registered under the Securities Actof 1933, as amended, and may not be offered or sold in the United States absentregistration or an applicable exemption from the registration requirements ofthe Securities Act.  Pursuant to the Securities Purchase Agreement,Southwest and the investor parties have made other covenants and representationsand warranties regarding matters that are customarily included in financings ofthis nature.  If certain of its obligations are not met, Southwest hasagreed to make pro-rata cash payments as liquidated damages to each investor.

 

**NOTE 6 —MODIFICATION AND EXTENSION OF CONSULTING AGREEMENT WITH PALACE RESORTS**

 

On June 25, 2008, theCompany entered into a Modification and Extension of Consulting Agreement (the “Agreement”)with Operadora Dominicana Macao, S.A., a subsidiary of Palace Resorts, underwhich Southwest will manage the casino at the Moon Palace Casino, Golf and SpaResort in 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 to assist Palace Resorts in all phases of design, gameselection, training and equipping the casino as a consultant and then managethe casino for five years after it opens in late 2008 or early 2009.  Asmanager, Southwest will be responsible for all aspects of casino operationsincluding equipping and maintaining the casino, internal controls andaccounting, budgeting, casino employment, security and compliance. Southwest will work with Palace Resorts to market the casino and the resort asa gaming destination.  Southwest previously received a consulting fee of$50,000 per month under a Consulting 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 fullcalendar month after the casino opens, Southwest will receive management feesequal to 5 percent of net casino revenue (as defined in the Agreement). If the 5 percent management fee is less than $100,000 in any month, Southwestwill receive a minimum management fee of $100,000.  The amount by whichthe 5 percent management fee is less than $100,000 in any month will then bededucted from the management fee due in any month when 5 percent of net casinorevenue exceeds $100,000.  All amounts due to Southwest in excess of$100,000 per month will be paid to Southwest by Palace Resorts after deliveryand acceptance of the annual audit of the casino operations.

 

Southwest or Palace Resortsmay terminate the Agreement if (a) any payment is not made within 10 daysof the due date, (b) any material default is not cured within 30 daysafter notice, (c) upon bankruptcy or insolvency of the other party, (d) Southwestloses any license 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 toindemnify Palace Resorts against claims rising from its bad faith, willfulmisconduct, willful negligence or fraud.

 

**NOTE 7 —IMPAIRMENT OF INVESTMENT IN NORTH METRO HARNESS INITIATIVE, LLC (“North Metro”)**

 

*Organization**:*

 

North Metro was formed on June 16,2003 for the purpose of developing, owning, and operating a horse race trackand card room in Columbus, Minnesota on the north side of the Twin Citiesmetropolitan area.  On June 8, 2004, Southwest Casino and Hotel Corp.(“Southwest”) sold a 50% interest in North Metro to MTR-Harness Inc. (“MTR”), awholly owned subsidiary of MTR Gaming, Inc. for $10,000, and a commitmentto make additional contributions as discussed below.

 

Under the North Metro MemberControl Agreement dated June 8, 2004, MTR was required to contribute$7,500,000, upon satisfaction of certain conditions and Southwest was requiredto contribute $2,500,000.  Amounts contributed in excess of the amountsstated in the Member Control Agreement were agreed upon by Southwest and MTR asmanaging members of the Company.  These amounts were contributed on anequal basis.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

As specified in the Company’sMember Control Agreement, membership interests include financial rights,governance rights and voting rights.  Voting rights are assigned tomembers based on their proportionate voting interest.  Financial rightsinclude allocation of net profits, losses and distributions.  Governancerights include all of a member’s rights other than financial rights and theright to assign financial rights.  A member of the Company may only assigngovernance and voting rights to another party with the consent of the remainingmembers, which consent may be withheld in any member’s sole and absolutediscretion.  If a member assigns membership rights to another party andthe other member or members do not consent to the assignee becoming asubstitute member, the assignee will only be entitled to receive thosedistributions and allocations that would have been made to the assigning memberand the assignee will not have any voting or governance rights.  As of September 30,2008, Southwest and MTR each held 50% of the voting rights, see Note 20regarding subsequent event and below “Subsequent Event”.  Financial andgovernance rights are determined in accordance with the Member ControlAgreement dated June 8, 2004.

 

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

 

Under North Metro’s MemberControl Agreement and the terms of its construction financing, North Metro maymake tax distributions to members on a quarterly and annual basis to pay incometaxes of the members with respect to the net income of North Metro.  Taxdistributions to the members shall be made in proportion to each member’srespective share of the taxable income of North Metro.

 

North Metro was formallyorganized as a limited liability company on June 16, 2003.  Prior tothat date, agreements were consummated and amounts related to the businesspurpose of the Company were directly incurred and paid by Southwest or entitiesrelated to Southwest.

 

North Metro is doingbusiness in Minnesota under the name “Running Aces Harness Park”.

 

*SubsequentEvent:*

 

On October 19, 2008,Southwest entered into agreements with Black Diamond Commercial Finance, L.L.C.(“Black Diamond”), as Agent for certain lenders to North Metro, under whichSouthwest transferred its 50 percent membership interest in North Metro (the “MembershipInterest”). In the transaction, Southwest sold its Membership Interest to BlackDiamond, as agent for the lenders, and received the following:

 

·                  an agreement not to sue Southwest under theterms of a $1 million Limited guaranty by Southwest of North Metro’s debt andto terminate that limited guaranty upon satisfaction of certain conditions;

 

·                  an option to repurchase the 50 percentmembership interest in July 2009 for $1.00 plus buying a $7.5 millionlast-out, subordinate, participating interest in North Metro’s then outstandingdebt to Black Diamond and the lenders; and

 

·                  retention of Southwest’s right to receive$2.3 million in distributions before North Metro makes distributions (otherthan tax distributions) to its members.

 

In addition, Southwestagreed to provide consulting and transition services to Black Diamond for fourmonths for a fee of $50,000 per month.

 

North Metro had been indefault under certain obligations under the Credit Agreement since July 2008and in October 2008 was no longer able to make the required interestpayments due under the loan.

 

Under the Limited LiabilityCompany Membership Interest Purchase Agreement between Southwest and BlackDiamond dated October 19, 2008 (the “Purchase Agreement”), Southwest soldits 50% membership interest to Black Diamond, as Agent for the Lenders.Southwest had pledged the Membership Interest as security for the constructionand start-up financing when North Metro entered into the Credit Agreement, seediscussion below under “North Metro Financing”. Under the Purchase Agreement,Southwest received the purchase price of $1.00 along with a right to repurchasethe Membership Interest in July 2009 for $1.00 plus buying a $7.5 millionlast out, non-voting, fully subordinated participation interest in North Metro’sthen outstanding debt to Black Diamond and the Lenders. Southwest also retainedits right to receive distributions in the amount of $2,357,072 for cashcontributions, advances and loans by Southwest to North Metro that exceededSouthwest’s required membership contributions. This amount is to be repaid toSouthwest before any distributions to the owners of North Metro (exceptdistributions for payment of taxes on the income of North Metro). Under theCredit Agreement, payment of distributions, including the amount retained bySouthwest, is prohibited unless Running Aces exceeds certain financialperformance thresholds.

 

The transfer of theMembership Interest remains subject to the terms of the North Metro HarnessInitiative, LLC Member Control Agreement (the “Member Control Agreement”),including the provisions of the Member Control Agreement regarding transfer ofmembership interests.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

Southwest also receivedrelief under a $1 million Limited Guaranty by Southwest of North Metro’sobligations under the Credit Agreement under a Limited Covenant Not to Sue andRelease of Limited Guaranty dated October 19, 2008 (the “Covenant andRelease”). Under the terms of the Covenant and Release, Black Diamond, asAgent, agreed not to sue to enforce the $1 million limited guarantee so long asSouthwest is not in default in its obligations in connection with the sale ofthe Membership Interest and the Consulting Agreement described below.  In addition, the Covenant and Releaseprovides that the $1 million guarantee will terminate and be of no furtherforce or effectonceBlack Diamond, as Agent, receives full rights as a member of North Metro underthe terms of the Member Control Agreement in for the Membership Interestpurchased from Southwest and Southwest has performed its obligations under thefour-month Consulting Agreement described below.

 

Southwest also entered intoa Settlement Agreement with Black Diamond, as Agent, on October 19, 2008,under which Southwest and Black Diamond agreed to enter into the transactionsdescribed herein. In addition, Southwest agreed to release Black Diamond fromany and all claims Southwest may have or have had against Black Diamond up toand including October 19, 2008. In accordance with the terms of theSettlement Agreement, this release will be null and void if Black Diamondattempts to enforce against Southwest the $1 million limited guaranty that isthe subject of the Covenant and Release.

 

In addition, Southwest andBlack Diamond entered into a Consulting Agreement on October 19, 2008 (the“Consulting Agreement”) under which Southwest will provide consulting andtransition services to Black Diamond in connection with Black Diamond’sacquisition of the Membership Interest. Under the Consulting Agreement,Southwest will continue to provide leadership, management and consultingservices at Running Aces and work to transition the provision of those servicesto Black Diamond and personnel selected by Black Diamond. In consideration ofSouthwest’s providing these services, Black Diamond has agreed to pay Southwestconsulting fees of $50,000 per month for four months.

 

*Accountingfor North Metro*:

 

As of September 30,2008, the Company had provided approximately 43 percent of the financialsupport, but retained its 50 percent decision making power in accordance withthe Member Control Agreement.  The Company has accounted for itsinvestment in North Metro under the equity method of accounting in accordance withAccounting Principles Bulletin No. 18 “*TheEquity Method of Accounting for Investments in Common Stock*” (“APB#18”).

 

As of September 30,2008, the Company had contributed $8,204,474 in consideration of its membershipinterests in North Metro and a priority preferred contribution of $1,656,051(plus accrued interest) for costs related to North Metro that exceeded theCompany’s agreed pre-license capital contribution of $1,000,000.  The$1,656,051 pre-licensing advance, together with interest, would only be paidback to the Company out of first available cash from operations (and then aftercertain distributions to the members for income tax purposes and payments dueunder the Credit Agreement with Black Diamond, see Subordination Agreementdescribed below under “North Metro Financing Agreement”).  Thepre-licensing advances to North Metro are characterized as a membershippreferred contribution made by the Company under the North Metro HarnessInitiative, LLC Member Control Agreement dated June 8, 2004.  The Companytreats these payments as an additional investment in North Metro.  TheCompany has combined the advances (accounted for as a membership preferredcontribution) and its capital contributions into an investment in anunconsolidated subsidiary on its financial statements.

 

The following representssummarized balance sheet information for North Metro:

 
| ** **        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| North Metro:      |       |                             |       |                            |       |
| Total Assets      |       | $                                | 58,830,034 |                            | $          | 51,556,814 |   |
| Total Liabilities |       | $                                | 45,860,983 |                            | $          | 33,051,334 |   |

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

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

 
| ** **                                            | ** ** | **Three months  ended  September 30,  2008** | ** ** | **Three months  ended  September 30,  2007** | ** ** | **Nine months  ended  September 30,  2008** | ** ** | **Nine months  ended  September 30,  2007** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Total Revenues                                        |       | $                                                      | 5,382,559  |                                                   | $          | 31,844                                                |       | $                                                     | 6,614,032  |   | $ | 80,305 |   |
| Total Costs and Expenses                              |       | $                                                      | 7,450,087  |                                                   | $          | 224,035                                               |       | $                                                     | 13,532,464 |   | $ | 705,713 |   |
| Net loss                                              |       | $                                                      | (2,067,528 | )                                                      | $          | (192,191                                              | )          | $                                                     | (6,918,432 | ) | $ | (625,408 | ) |
| 50% share of net loss                                 |       | $                                                      | (1,033,764 | )                                                      | (96,096    | )                                                     | $          | (3,459,216                                            | )          | (312,704 | ) |
| Net tax benefit                                       |       |                                                   |       | —                                                 |       |                                                  |       | —                                                |       |
| Loss of unconsolidated subsidiary net of  tax benefit |       | $                                                      | (1,033,764 | )                                                      | $          | (96,096                                               | )          | $                                                     | (3,459,216 | ) | $ | (312,704 | ) |

 

Southwest did not record atax benefit related to North Metro’s losses during the three and nine monthsended September 30, 2008 and 2007, see Note 13.

 

At September 30, 2008,North Metro’s assets consisted principally of cash, property, plant andequipment and related deposits and financing costs. Liabilities consistedprimarily of payables, accrued interest and other accruals and borrowings underits financing agreement discussed below.

 

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

 

Reconciliation of theCompany’s investment in North Metro as of September 30, 2008:

 
| Balance as of December 31, 2007                                                  |   | $          | 7,218,720 |   |
|---------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| 50% share of net loss from January 1,  2008 through September 30, 2008      |   | (3,459,216 | )         |
| Contributions by Southwest from  January 1, 2008 through September 30, 2008 |   | 883,500    |      |
| Balance at September 30, 2008 prior to  impairment analysis and subsequent sale  |   | 4,643,004  |      |
| Impairment of the Company’s investment in  North Metro                           |   | (4,643,004 | )         |
| Adjusted balance as of September 30,  2008                                       |   | —     |      |

 

In accordance with APB #18paragraph 19, regarding a loss in the value of the investment that is otherthan temporary, the Company recognized an impairment loss of its investment inNorth Metro of $4.6 million as a result of the on-going default by North Metrounder its Credit Agreement, continuing losses and Southwest’s ultimatesale/transfer of its membership interest on October 19, 2008, describedabove under “subsequent event”.

 

As part of the agreements,Southwest retained its right to receive distributions in the amount of$2,357,072 for cash contributions, advances and loans by Southwest to NorthMetro that exceeded Southwest’s required membership contributions. This amountis to be repaid to Southwest before any distributions to the owners of NorthMetro (except distributions for payment of taxes on the income of North Metro).Under the Credit Agreement, payment of distributions, including the amountretained by Southwest, is prohibited unless Running Aces exceeds certainfinancial performance thresholds and is subordinate to debt service requiredunder the Credit Agreement.  Southwest’sretained interest in future distributions of $2.4 million is limited to NorthMetro’s ability to make distributions under its Credit Agreement and is onlypayable if certain financial performance thresholds are met., Thus Southwesthas not recognized any value for this right and has accounted for it similar toa gain contingency under Financial Accounting Standards Board (“FASB”) No. 5“*Accounting for Contingencies*”.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

The following table ispresented to illustrate the impact on the loss per share as a result of thelosses in North Metro and the impairment and subsequent sale/transfer theCompany’s equity investment in North Metro

 
| ** **                                                    | ** ** | **Three months ended  September 30, 2008** | ** ** | **Three months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2008** | ** ** | **Nine months ended  September 30, 2007** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Loss in unconsolidated subsidiary                             |       | $                                                              | 1,033,764  |                                                           | $          | 96,096                                                        |       | $                                                             | 3,459,216  |   | $ | 312,704 |   |
| Impairment of investment in unconsolidated  subsidiary        |       | $                                                              | 4,643,004  |                                                           |       |                                                          | $          | 4,643,004                                                     |       |   |   |
| Total losses attributed to unconsolidated  subsidiary         |       | $                                                              | 5,676,768  |                                                           | $          | 96,096                                                        |       | $                                                             | 8,102,220  |   | $ | 312,704 |   |
|                                                          |       |                                                           |       |                                                           |       |                                                          |       |                                                          |       |
| Loss per share – basic and diluted                       |       | $                                                              | 0.19       |                                                           | $          | 0.003                                                         |       | $                                                             | 0.28       |   | $ | 0.01 |   |
| Weighted average shares outstanding – basic  and diluted |       | 30,342,388                                                     |       | 27,286,443                                                     |       | 28,580,129                                                    |       | 26,571,292                                                    |       |

 

North Metro Financing

 

On April 20, 2007,North Metro entered into a Credit Agreement (the “Credit Agreement”) with BlackDiamond Commercial Finance, L.L.C. (“Black Diamond”) as agent and lender. Underthe terms of the Credit Agreement, North Metro borrowed $41.7 million toconstruct, equip and open its harness racetrack and card room facility inColumbus, Minnesota on the north side of the Minneapolis — St. Paulmetropolitan area, see amendment no. 2 described below increasing the amount to$42.3 million.  As part of the loan agreement, the members of North Metroagreed to complete aggregate membership contributions of $20.8 million prior toclosing the loan. Total assets of North Metro at September 30, 2008 areapproximately $58.8 million.  As of September 30, 2008, Southwestcontributed $9.9 million of the total amount of $22.7 million contributed bythe members.  As of September 30, 2008, the principal amountoutstanding under the credit agreement is approximately $42.1 million.

 

Certain amounts included inthe total of $22.7 million contributed by the members related tonon-construction costs that were funded by the members.  The Companycontributed $1,133,500 after the loan closed on April 20, 2007 thru September 30,2008.

 

Under the Credit Agreementas amended thru September 30, 2008, the initial advance of loan proceedswas followed by additional advances based on progress in building and openingthe racetrack and card room facility. North Metro made monthly payments of interest only based on a floatingindex rate plus 4 percent or on a 1-month, 2-month or 3-month LIBOR rate plus 6percent, at North Metro’s option. After “project opening” (as defined in theagreement and which occurred October 3, 2008), interest rates reduced tothe applicable index rate plus 2.5 percent or the applicable LIBOR rate plus4.5 percent, again at North Metro’s option. The interest rate margins of 2.5% and 4.5% were increased by 0.3% underAmendment Number 2 discussed below. North Metro was also required to pay a fee equal to 4.5% per annum onany unused portion of the credit facility. Principal payments of $104,250 wereto be due on the last day of each fiscal quarter beginning the first fullquarter after the project opening occurred on October 3, 2008, or March 31,2009. North Metro will also be required to prepay the loan in an amount equalto 50 percent of North Metro’s excess cash flow for each fiscal year, asdefined in the Credit Agreement, beginning with the fiscal year ended December 31,2008,. Final payment equal to all outstanding principal and accrued interest isdue April 20, 2014.

 

Under the Credit Agreementas amended thru September 30, 2008, North Metro may prepay the loan, inwhole or in part, at any time, subject to the payment of certain fees andcosts. The loan is secured by substantially all of the assets of North Metro.The Credit Agreement does not provide for recourse against the members of NorthMetro, except for the Company’s guaranty of up to $1 million (plus certaincosts) of the loan entered into on July 1, 2008.

 

The Credit Agreement, asamended thru September 30, 2008, 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.

 

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

 

Southwest entered into thefollowing agreements in connection with the North Metro Credit Agreement:

 

·                  Southwestpledged its membership interest in North Metro and North Metro pledged itsmembership interest in North Metro Hotel, LLC as security for repayment of theloan under the terms of separate Pledge Agreements with Black Diamond (each a “PledgeAgreement”).

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

·                  Southwestagreed that repayment of a $1.65 million membership preferred capitalcontribution to North Metro plus accrued interest, which North Metro was torepay to Southwest out of the first available revenue from operations, will besubordinated to the payments due under the loan agreements under aSubordination Agreement with Black Diamond (the “Subordination Agreement”) .

 

·                  Southwestentered into a Sponsor Support Agreement (the “Support Agreement”) under whichSouthwest may be required under certain circumstances to contribute additionalcapital to North Metro if financings and equity investments are insufficient tocomplete construction and open the facility.

 

Amendment No. 1 toCredit Agreement:

 

Effective April 3,2008, North Metro entered into Limited Waiver and Amendment No. 1 to theCredit Agreement.  The Limited Waiver extends the time period forobtaining 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.  The failure to deliver the audit on May 30,2008 would be an immediate event of default, as defined in the agreement. The requisite audit was delivered on or before May 30, 2008. The amendmentto the credit agreement also allows for the following:  (1) BlackDiamond will subordinate its 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.  As consideration, North Metro paid anamendment fee of $104,250.

 

Amendment No. 2 toCredit Agreement and Limited Guaranty:

 

On July 1, 2008, NorthMetro entered into Amendment 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 AmendmentNo. 2, on July 1, 2008, the Company entered into a Limited Guarantyin favor of Black Diamond, as agent under the Credit Agreement, see discussionabove regarding “subsequent event”.  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 was to 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.  In connection with the transfer of Southwest’smembership interest in North Metro to Black Diamond on October 19, 2008,Black Diamond entered into an agreement not to sue Southwest in connection withthis limited guarantee and to terminate the guarantee upon satisfaction ofcertain conditions.

 

As a condition to entry intoAmendment No. 2, Southwest Casino and Hotel Corp. and MTR-Harness, Inc.,the other 50 percent member in North Metro Harness Initiative, LLC, wererequired to make an aggregate of $615,000 in additional membershipcontributions to North Metro, of which the Company made $500,000.  Theseadditional membership contributions were made on or about June 20, 2008.

 

Reservation of Rights Notice:

 

North Metro has at timesfailed to comply with certain covenants under the Credit Agreement, includingan ongoing minimum cash availability requirement and a minimum EBITDArequirement for the quarter ended June 30, 2008 and September 30,2008.  The Agent notified North Metro that this constitutes an event ofdefault under the loan agreement and that the lenders are reserving all rightsand remedies available to them under the Credit Agreement.  Through October 19,2008, Southwest and North Metro worked with the lenders to resolve North Metro’sfailure to satisfy the covenant and resulting defaults.  On October 19, 2008, Southwesttransferred its membership interest in North Metro to Black Diamond, as agentfor the lenders, see above discussion of “subsequent event” regarding Southwestand its agreements with Black Diamond.

 

**NOTE 8 —LINE OF CREDIT**

 

On April 16, 2007, theCompany entered into the Third Amendment to the Revolving Credit and Term LoanAgreement with Crown Bank.  The amendment extended the maturity date ofthe $450,000 revolving line of credit to April 30, 2008.  Under theamendment, three principal officers of the Company each agreed to increasetheir personal guarantees of the line of credit from $100,000 to $150,000 plusexpenses.  In 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

connection with a new loanwith Crown Bank entered into in March 2008 (see Note 9) each of the threeprincipal officers agreed to increase their $150,000 personal guarantees to$250,000.  As of April 30, 2008, the Company extended the maturitydate of the $450,000 line of credit to June 30, 2008.  As of September 30,2008, no amounts were outstanding under the Revolving Credit facility as theline of credit terminated on June 30, 2008.

 

The interest rate was Prime+1%, and not less than 7.5%.

 

**NOTE 9 — MARCH 2008DEBT ISSUANCE**

 

Crown Bank Loan:

 

On March 7, 2008, theCompany entered into a series of eight promissory notes ranging in size from$100,000 to $300,000 with Crown Bank of Minneapolis, Minnesota.  Under the Notes, Crown Bank loaned the Companyan aggregate $1.55 million. The Company paid a 1% origination fee of $15,500that resulted in net proceeds of $1,534,500 to the Company.  Each of the Notes accrues interest at afloating rate of prime plus 1.5 percent, with a minimum interest rate of 7.0percent (currently 7.0%).  The effective interestrate on this loanas of March 7, 2008, after giving effect to the warrantconsideration discussed below and in Note 4, was approximately 24.5percent.  Under the Notes, the Companywill make monthly payments of interest only until January 11, 2009.  Beginning February 11, 2009, the Company mustrepay the outstanding principal balance and accrued interest in 12 equalmonthly installments with the final payment due January 11, 2010.  The Company may prepay any outstanding amountsunder the Notes at any time without premium or penalty.

 

Future minimum principalpayments required as of September 30, 2008 are:

 
| October 1, 2008 — September 30,  2009 |   | $ | 1,033,333 |   |
|------------------------------------------------------|--------|---|-----------|--------|
| October 1, 2009 — January 11,  2010   |   | $ | 516,666   |   |

 

Each of the Notes isco-signed by a shareholder of the Company.  Each of these co-signers isfully obligated to Crown Bank and individually liable for the principal amountand any accrued and unpaid interest and costs outstanding under the individualnote that shareholder co-signed.  As a condition to entering into theNotes, Crown Bank required James Druck, Chief Executive Officer, Thomas Fox,President and Chief Operating Officer, and Jeffrey Halpern, Vice President ofGovernment Affairs of the Company to increase their previously existing$150,000 personal guarantees of the Company’s outstanding $450,000 line of creditto $250,000 and extend those guarantees to cover both the line of credit andthe promissory notes through their respective repayment terms.

 

The promissory notes containcustomary events of default, including, without limitation, payment defaults,insolvency or bankruptcy, death or incompetency of a co-signer, businesstermination, misrepresentation, monetary judgment defaults and other materialchanges.

 

In consideration ofco-signing the promissory notes or increasing and extending personal guaranteesto cover the promissory notes, the Company issued five-year fully exercisablewarrants to purchase an aggregate of 2,300,000 shares of its common stock at anexercise price of $0.39 per share to the shareholder co-signers and Mr. Druck,Mr. Fox and Mr. Halpern.  Each co-signer received a warrant topurchase one share of Southwest Casino Corporation common stock for each $1.00in principal amount of the promissory note co-signed by that shareholder. In consideration of the increase in the amount and extension of the term oftheir respective guarantees, Mr. Druck, Mr. Fox and Mr. Halperneach received warrants to purchase one share of Southwest Casino Corporationcommon stock for each $1.00 of guarantee, or 250,000 shares each.  The$0.39 per share exercise price of these warrants represented the averageclosing market price of one share of Southwest Casino Corporation’s commonstock over the 5 trading days preceding the closing of the loantransaction.  Warrant holders also received the right to have the sharesof Southwest Casino Corporation common stock purchasable upon exercise of theirwarrants 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 ofco-signing the promissory notes, the Company also entered into a PledgeAgreement with the co-signers and guarantors under which it pledged its sharesof Southwest Casino and Hotel Corp. to the co-signers and guarantors to secureany liabilities or obligations they may incur under the promissory notes. The co-signers’ and guarantors’ right to recovery under the Pledge Agreement islimited to the actual costs paid by the co-signers or guarantors and subject toa prior security interest in the membership interests of North Metro HarnessInitiative, LLC that Southwest Casino & Hotel owns, as well as the termsof the North Metro Harness Initiative, LLC Member Control Agreement, see Note7.

 

The Company, the co-signers,and Messrs. Druck, Fox and Halpern also entered into a ContributionAgreement dated March 10, 2008.  Under the Contribution Agreement,the Company agreed to reimburse to any co-signer or guarantor any amount paidin connection with the 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

promissory notes for reasonother than Southwest’s inability to pay.  If Southwest is unable to repaythe notes, each of the co-signers and Mr. Druck, Mr. Fox and Mr. Halpernagreed in the Contribution Agreement to indemnify each other so that anypayments made by co-signers or guarantors will be made in proportion to theoriginal principal amount of the promissory note co-signed or personalguarantee given to the total amount of all promissory note and loan guarantees.

 

The Company used theproceeds from the loan transaction for general working capital, includingadditional membership contributions to North Metro Harness Initiative, LLC ifrequired under the terms of the construction financing for that facility oragreed to between the members of North Metro Harness Initiative.  TheCompany has reserved from the proceeds of the loan $85,817 to make theestimated interest-only payments due under the notes.

 

**NOTE 10 — PROMOTIONALALLOWANCES**

 

Revenue does not include theretail amount of rooms, food, and beverages provided gratuitously to customers,which was $923,000 and $881,000 for the nine months ended September 30,2008 and 2007, respectively and was approximately $319,000 and $319,000 for thethree months ended September 30, 2008 and 2007, respectively.

 

**NOTE 11 —SETTLEMENT WITH OTOE MISSOURIA TRIBE**

 

On August 13, 2008, theCompany received a payment in the amount of $227,396 from the Otoe-MissouriaTribe of Oklahoma to reimburse expenses incurred by the Company when workingwith the Tribe in 2006.  This amount isincluded in the Consolidated Statement of Operations in Other Income (Expense)as settlement income as the amounts were previously expensed in fiscal 2006.

 

**NOTE 12 —LOSS PER SHARE**

 

For all periods, basic lossper share is calculated by dividing the loss by the weighted-average number ofcommon shares outstanding.  Diluted earnings per share reflect the effectof all potentially dilutive common shares outstanding by dividing net earningsby the weighted-average of all common and potentially dilutive sharesoutstanding.  The Company had a net loss for the three and nine monthsended September 30, 2008 and 2007; therefore a calculation of loss pershare on a fully diluted basis would be anti-dilutive and no reconciliation isneeded for those periods, see Notes 3 and 4.

 

**NOTE 13 —INCOME TAXES**

 

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

 

TheCompany accounts for interest and penalties as interest expense in theStatement of Operations.

 

TheCompany does not have any unrecorded tax benefits as of September 30,2008.

 

The Company’s tax returnsfor the tax years 2004 through 2006 remain subject to examination by major taxjurisdictions.  However, as the Company has net operating losses fromprior years these tax returns can also be examined once these net operatinglosses are utilized in future tax filings.

 

Management evaluated itsprobable ability to utilize deferred tax assets arising from net operating losscarry forwards, deferred tax assets and other ordinary items and determinedthat a valuation allowance was appropriate during the three and nine monthsended September 30, 2008 and 2007.   As a result of thisevaluation, a tax benefit during the three and nine months ended September 30,2008 and 2007 was not recognized.  As of September 30, 2008, theCompany’s deferred tax asset is zero.

 

**NOTE 14 —RELATED PARTY TRANSACTIONS**

 

The Company has a liabilityto certain officers and stockholders for unpaid compensation and expenses of$82,467 as of September 30, 2008, relating to periods prior to December 31,2003.  The Company paid, in June 2008, amounts owed for unpaidcompensation of $40,000 to one officer in exchange for securities, see Note 5.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

The following officers anddirectors of Southwest participated in the private placement of common stockwith accompanying warrants that closed on June 17, 2008, see Note 5: JamesB. Druck, Chief Executive Officer and Director; Thomas E. Fox, President andChief 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.

 

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

 

James B. Druck, ChiefExecutive Officer and Director; Thomas E. Fox, President and Chief OperatingOfficer; Jeffrey S. Halpern, Vice President of Government Affairs; and Gus A.Chafoulias, Director each participated in our Crown Bank financing transactionin March 2008 and received warrants, see Note 9.

 

On April 24, 2008, GusChafoulias, a member of the Company’s Board of Directors, obtained two lettersof credit in the aggregate amount of $473,742.50 to release 50% of cashdeposits made by North Metro in connection with the development of itsracetrack and card room, see Note 7.  Southwest has agreed to reimburse Mr. Chafouliasfor all costs incurred in connection with obtaining these letters of credit andto provide him additional compensation to be determined, but that will notexceed compensation that would be paid in a similar transaction with anunrelated third party.

 

The operations of Berc &Fox were acquired in January 2007 by Virchow Krause, Ltd.  ThomasFox, our President, is a shareholder and officer in Berc & FoxLimited.  In 2007, as a result of the sale of Berc & Fox Limited,certain furniture and equipment were acquired from Berc & Fox Limitedby the Company in the amount of $25,000 during fiscal year 2007 and was paid toBerc & Fox in March 2008.  During February 2008 thisfurniture and equipment was sold to North Metro for $25,000 and the Companyreceived payment from North Metro in February 2008.

 

An officer of the Company’swife is a part-time employee of North Metro. The Company anticipates that herearnings in 2008 will not exceed $20,000.

 

As of September 30,2008 the Company has a payable to North Metro of approximately $26,000. During the nine months ended September 30, 2008 the Company receivedreimbursement from North Metro of salary, benefit and travel costs of $62,825.

 

**NOTE 15 —PROJECT DEVELOPMENT COSTS**

 

The Company continues topursue additional gaming opportunities and as a result continues to incurproject development expenses.  For the three and nine months ended September 30,2008 development expenses were $0 and for the three and nine months ended September 30,2007 was $99,112 and $351,683, respectively.

 

**NOTE 16 —SEGMENT INFORMATION**

 

North Metro doing businessas “Running Aces Harness Park” began operations on April 11, 2008, seeNote 7.  As of September 30, 2008 the investment in North Metro wasreduced to zero, see Note 7.  North Metrois broke-out as a separate operating segment due to its materiality to theconsolidated financial statements and upon review of Statement of FinancialAccounting Standards No. 131 *“Disclosuresabout Segments of an Enterprise and Related Information*”.

 

Segment information relatedto the three months ended September 30, 2008 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Unconsolidated  Joint Venture  (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 3,863,653  |                   | $          | 150,000                                                    |       |       |       | $ | 4,013,653 |   |
| Segmented profit (loss) before income taxes |       | (21,978                | )          | (618,034               | )          | $                                                          | (5,676,768 | )          | (6,316,780 | ) |
| Segmented assets                            |       | 11,393,005             |       | 694,040                |       | —                                                     |       | 12,087,045 |       |
|                                             |            |                        |            |                        |            |                                                            |            |            |            |  |  |  |  |

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

Segment information relatedto the three months ended September 30, 2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Unconsolidated Joint  Venture (North  Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 4,345,959  |                   | $          | 434,658                                                    |       |       |       | $ | 4,780,617 |   |
| Segmented profit (loss) before income taxes |       | 813,141                |       | (1,372,777             | )          | $                                                          | (96,096    | )          | (655,732   | ) |
| Segmented assets                            |       | 12,395,694             |       | 352,966                |       | 7,296,511                                                  |       | 20,045,171 |       |
|                                             |            |                        |            |                        |            |                                                            |            |            |            |  |  |  |  |

 

Segment information relatedto the nine months ended September 30, 2008 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Unconsolidated  Joint Venture  (North Metro)** | ** ** | **Total**  | ** **  |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|------------|-------------|
| Revenues                                    |       | $                      | 11,140,022 |                   | $          | 450,000                                                    |       |       |        | $ | 11,590,022 |   |
| Segmented profit (loss) before income taxes |       | (192,882               | )          | (2,498,089             | )          | $                                                          | (8,102,220 | )          | (10,793,191 | ) |
| Segmented assets                            |       | 11,393,005             |       | 694,040                |       | —                                                     |       | 12,087,045 |        |
|                                             |            |                        |            |                        |            |                                                            |            |            |             |  |  |  |  |

 

Segment information relatedto the nine months ended September 30, 2007 follows:

 
| ** **                                  | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Unconsolidated  Joint Venture  (North Metro)** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Revenues                                    |       | $                      | 11,812,906 |                   | $          | 3,566,109                                                  |       |       |       | $ | 15,379,015 |   |
| Segmented profit (loss) before income taxes |       | 650,620                |       | (1,057,195             | )          | $                                                          | (312,704   | )          | (719,279   | ) |
| Segmented assets                            |       | 12,395,694             |       | 352,966                |       | 7,296,511                                                  |       | 20,045,171 |       |
|                                             |            |                        |            |                        |            |                                                            |            |            |            |  |  |  |  |

 

During the three and ninemonths ended September 30, 2008 the Company recognized revenues of $0 andduring the three and nine months ended September 30, 2007 recognizedrevenues of $434,658 and $3,566,109, respectively, included in the operatingsegment Casino Management which related to the Company’s management contractwith the Cheyenne and Arapaho Tribes of Oklahoma which terminated effective August 17,2007.

 

**NOTE 17 —FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

There were no financialinstruments with significant differences between the carrying amount and thefair value due to the short maturity of the instruments.

 

**NOTE 18 —COMMITMENTS AND CONTINGENCIES**

 

In 2004, the Companypurchased player tracking software and slot accounting software from IGT. On December 29, 2005, the Company entered into an agreement with IGT tofinance $460,324 of the purchase price for this system over 48 months withinterest rate equal to the prime rate, which was 5.25% at March 31,2008.  In addition, the Company agreed to purchase additional software for$200,000, which will allow the Company to offer bonusing to itscustomers.  The purchase is contingent upon IGT receiving necessaryapprovals for the bonusing system from the Colorado Division of Gaming.

 

Under the Company’semployment agreements with James B. Druck, CEO, Thomas E. Fox, President andCOO, and Jeffrey S. Halpern, Vice President of Government Affairs, which wereeffective July 1, 2004, these executives can elect to continue theiremployment in a reduced capacity, with continuing medical benefits and a salaryequal to their base pay at the time of termination for 12 months and not lessthan $25,000 after 12 months if the Company terminates the executive’semployment without cause or in connection with a change in control of theCompany (as defined in the employment agreement) or if the executive terminateshis employment with the Company for good cause (as defined in the employmentagreement).  The initial term of these agreements expired July 1,2006, after which the agreement renewed and will continue to renewautomatically for additional one-year terms unless terminated.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

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

 

Bonuses:

 

On March 27, 2007 theboard of directors approved performance bonuses to officers and employees ofthe Company in the amount of $385,000, which amount was recorded as an expenseeffective that date.  Of that amount, the Company paid $210,000 during theyear ended December 31, 2007.  Bonuses in the amount of $175,000 wereto be paid on or after July 1, 2007 when management determines the Companyhas sufficient financial resources for payment.  The Company made anon-cash payment of bonuses of $140,000 in June 2008 in exchange forcommon stock and warrants (after payroll taxes and other withholdings) inconnection with the sale of securities in June 2008, see Note 5. Unpaid bonuses in the amount of $35,000 are reflected as a liability at September 30,2008.

 

Guarantees:

 

In connection with AmendmentNo. 2 to the North Metro Credit Agreement, on July 1, 2008, the Companyentered into a Limited Guaranty in favor of Black Diamond, as agent under theCredit Agreement.  In connection with thetransfer of Southwest’s membership interest in North Metro to Black Diamond on October 19,2008, Black Diamond entered into an agreement not to sue Southwest inconnection with this limited guarantee and to terminate the guarantee uponsatisfaction of certain conditions (see Note 7).

 

As a condition to NorthMetro’s class B racing license from the Minnesota Racing Commission, North Metromust maintain a bond in the principal amount of $500,000 payable to the stateof Minnesota conditioned on North Metro’s payment of all fees, taxes, and othermoney due and payable under Minnesota law, including horse owner’s purses andpayouts on winning pari-mutuel tickets.  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 hadbeen secured by a $500,000 cash deposit.  Southwest had provided $250,000of that $500,000 deposit.

 

Financial consultingservices:

 

The Company will be requiredto pay an additional consulting fee to the Company’s investor relationsadvisor, Strategic Growth International (“SGI”), of $100,000 or $200,000 ifthey assist the Company in completing an equity or debt financing that meetsstandards stated in the agreement.  In addition, if the Company issueswarrants as part of such a debt financing, it will also issue warrants topurchase 100,000 shares of its common stock to SGI if warrants are issued tothe lender, on the same terms as the 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.  From May 19, 2007 to August 17,2007, the Company managed the Lucky Star – Concho and Lucky Star – Clintoncasinos under Amendment No. 11 to the Third Amended and Restated GamingManagement agreement between Southwest and the Cheyenne and Arapaho Tribes ofOklahoma, which extended that agreement for up to two years.  On August 17, 2007, the Supreme Court ofthe Cheyenne and Arapaho Tribes declared Amendment No. 11 invalid.  Also on August 17, 2007, the NationalIndian Gaming Commission (“NIGC”) reversed its prior approval of Amendment No. 11.  On August 24, 2007, the NIGC rejectedour challenge to its decision to reverse that approval.  The Company has not received management feesfrom the Cheyenne and Arapaho Tribes since August 17, 2007

 

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 the Company for alleged breach of the ThirdAmended and Restated Gaming Management Agreement under which the Company thenmanaged two casinos for the Tribes.  On November 2, 2007, the Companyfiled a counterclaim in this proceeding alleging a breach of the GamingManagement Agreement by the tribal Governor. The three-member arbitration panelfor this proceeding was appointed in February 2008.  After ascheduling conference with the arbitration panel on March 11, 2008, theCompany submitted our formal Cross-Complaint to the arbitration panel on April 22,2008 and the Tribes submitted its formal complaint on April 23,2008.  The Company is now proceeding 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 the Company’s efforts to extend thegaming management relationship with the Tribes, which terminated on August 17,2007.

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

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 is vigorously defending this allegation inthis arbitration proceeding. Under the Company’s Gaming Management Agreementwith the Tribes, the Company was permitted to oppose, publicly or privately,any action by the Tribes that the Company believed was not in the best interestof the Tribal gaming operations. The Company believes that all of the actionstaken on behalf of the gaming operations the Company managed or as part of theCompany’s efforts to extend the gaming management relationship with the Tribesare consistent with that provision.

 

OnAugust 18, 2008, an accounting firm hired by the Tribes to act as awitness on behalf of the Tribes in this arbitration proceeding issued a reportin which they concluded that the claims made by the Tribes in their arbitrationcomplaint are supported by evidence in the records of the Tribes and the LuckyStar casinos.

 

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 a compactfor expanded gaming with the State of Oklahoma in April 2005.  The Company is seeking $30 million in damagesfrom the Tribes for their breach of the Management Agreement.

 

TheCompany does not expect any material adverse consequence from this action.Accordingly, no provision has been made in the financial statements for anysuch losses.  However, the Companyexpects to incur significant legal expenses to defend the Governor’s claimsagainst the Company and pursue the Company’s counterclaims.

 

*Theft andDistribution of Surveillance 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 the 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 conspiracy againstthe defendants remain pending in the Federal District Court for the District ofOklahoma.

 

OnJanuary 14, 2008, Mr. Flyingman, as Governor of the Tribes and not inhis individual capacity, filed a declaratory judgment action in the Cheyenneand Arapaho Trial Court asserting that the Tribes, not Southwest, owned thesurveillance footage and the copyright in it, an assertion that the Companydoes not contest. On February 13, 2008, the Federal District Court issueda stay of the proceedings before it pending resolution of the Tribal courtproceeding. After briefing, oral argument in this matter was held on April 4,2008 and, on April 10, 2008, the Trial Court judge ruled in favor of theTribes. The Company did not appeal this decision.

 

On August 28, 2008,the defendants filed a motion seeking summary judgment on two of the six countsin the Company’s Federal District Court complaint that relate to ownership ofthe surveillance tape and to stay all other claims pending resolution in tribalcourt.  On September 15, 2008, theCompany filed a motion to dismiss claims in the Federal District Court casethat relate to the ownership of the surveillance tape including the claims forconversion, copyright infringement, and conspiracy, and asserting that thedismissal of these claims makes the defendant’s motion for summary judgmentmoot.  The Company did not move todismiss the defamation claim and sought to continue to pursue that action inFederal Court.  On October 27, 2008,the Federal District Court denied the Company’s motion to dismiss and requestedthat the Company respond substantively to the defendant’s motion for summaryjudgment, which the Company did on November 6, 2008.

 

*Other Litigation Matters*

* *

In addition to the mattersdescribed above, the Company is involved in various claims, legal actions andother complaints arising in the ordinary course of business.  In theopinion of management, any losses that may occur from these matters areadequately covered by insurance or are provided for in our financial statementsand the ultimate outcome of these other matters will not have a material effecton the Company’s financial position or results of operations.

 

**NOTE 19 —NEW ACCOUNTING PRONOUNCEMENTS**

 

The Company adoptedStatement of Financial Accounting Standards Interpretation No. 48 “*Accounting for Uncertainty in Income Taxes*”(“Interpretation No. 48”) effective January 1, 2007, see Note 12.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years.  This statement definesfair value, establishes a framework for measuring fair value and expands therelated disclosure requirements.  The statement did not have an impact onthe Company’s 

 

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**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

consolidated financialstatement disclosures during the nine months ended September 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.  On October 10,2008, a FASB Staff Bulletin “FSP FAS 157-3” was issued that clarifies theapplication of FAS 157 in a market that is not active.  The Company is evaluating the potential impactof FSP FAS 157 — 2 and 157-3.

 

In February 2007, theFASB released SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115”. *This Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value. This Statement iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. Early adoption is permitted as of the beginningof a fiscal year that begins on or before November 15, 2007, provided theentity also elects to apply the provisions of FASB Statement No. 157, FairValue Measurements.  The statement did not have an impact on the Company’sconsolidated financial statements during the six months ended September 30,2008.

 

In November 2007, theFASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51*(SFAS 160). SFAS 160 establishes accounting and reporting standardsfor entities that have equity investments that are not attributable directly tothe parent, called noncontrolling interests or minority interests.Specifically, SFAS 160 states where and how to report noncontrollinginterests in the consolidated statements of financial position and operations,how to account for changes in noncontrolling interests, and provides disclosurerequirements. SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008 (thatis, January 1, 2009, for entities with calendar year-ends). Earlieradoption is prohibited. SFAS 160 shall be applied prospectively as of thebeginning of the fiscal year in which SFAS 160 is initially applied,except for the presentation and disclosure requirements. The presentation anddisclosure requirements shall be applied retrospectively for all periodspresented. The Company does not anticipate any significant change in financialreporting to result from issuance of this statement.

 

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

 

In May 2008, the FASBreleased SFAS No. 162, “*The Hierarchyof Generally Accepted Accounting Principles*.”  This statementwill be effective 60 days after the United States Securities and ExchangeCommission approves amendments to AU Section 411, *The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles*.”  The Company doesnot anticipate any significant change in financial reporting to result fromissuance of this statement.

 

In June 2008, theSecurities and Exchange Commission issued an amendment to rules requiringcompanies that are non-accelerated filers to include in their annual reports,pursuant to rules implementing Section 404b of the Sarbanes Oxley Actof 2002, an attestation report of their independent auditors on internalcontrol over financial reporting for fiscal years ending on or after December 15,2008.  Under the amendments, a non-accelerated filer will be required tofile the auditor’s attestation report on internal control over financialreporting when it files an annual report for a fiscal year ending on or after December 15,2009.

 

**NOTE 20 —SEASONALITY**

 

The operations of allcasinos owned by the Company are affected by seasonal factors, includingholidays, weather and travel conditions.

 

**NOTE 21 —SUBSEQUENT EVENTS**

 

*Membershipinterest in North Metro:*

 

The Company entered intoagreements with Black Diamond on October 19, 2008 relating to Southwest’sinterest in North Metro which are described in detail in Note 7.  The Company wrote down its entire investmentin North Metro to zero at September 30, 2008, see Note 7.

 

*Adoption of cash management plan:*

 

On November 11, 2008,the Board of Directors and management of the Company approved a plan tosignificantly reduce operating expenditures during 2009 in order to preservethe Company’s limited operating cash. See Note 2.  Southwest’s foundersand executive officers, 

 

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** **

**SOUTHWESTCASINO CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER 30, 2008**

 

James Druck, CEO, ThomasFox, President and COO, and Jeffrey Halpern, Vice President, have each agreedto reduce their salary payments by 50% effective January 1, 2009.  In addition, all other corporate andmanagement employees will have their salary payments reduced by an average of25%.  Wage reductions will not apply tofloor personnel in the Company’s Cripple Creek, Colorado casinos.  Southwest will accrue the unpaid portion ofemployees’ wages for payment when cash is available in the future.

 

*Repricing of employee stockoptions:*

 

Effective, November 11,2008, and in connection with the cash management plan discussed above, theboard approved the repricing of options held by employees and independent boardmembers, excluding options granted to the three founders of the Company(currently the CEO, President and COO and Vice President of GovernmentAffairs).  The exercise price ofapproximately, 2,282,500 outstanding options will be reduced to $0.20 per sharewhile retaining all other terms of the original award.  The outstanding options had exercise pricesin excess of $0.48 per share.  Thesemeasures were taken to provide employees incentive to remain with the Companyin light of the significant salary payment reductions and other operatingexpense reductions that will take effect January 1, 2009.  See discussion above regarding adoption of acash management plan.  The Company is inthe process of reviewing the accounting related to repricing these options andwill record the impact during the three months ended December 31, 2008.

 

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**Item2.  Management’s Discussion and Analysis or Plan of Operation**

 

The following is adiscussion and analysis of the financial position and operating results ofSouthwest Casino Corporation (referred to in this discussion, together with itsconsolidated subsidiaries where appropriate, as “Southwest Casino”, “Southwest”,the “Company”, “we”, “our” and “us”) for the three and nine months ended September 30,2008 and 2007.

 

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

 

For the three months ended September 30,2008, we had a net loss of $6,316,780 on revenues of $4,013,653 compared to anet loss of $655,732 on revenues of $4,780,617 for the same period in2007.  This amounts to a basic loss of $0.21 and $0.02 per share duringthe three months ended September 30, 2008 and 2007, respectively.

 

The increase in the net lossof $5,661,048 is primarily due to our share of the loss of our unconsolidatedsubsidiary, North Metro Harness Initiative, LLC (“North Metro”), of $1,033,764and the impairment of our investment in North Metro of $4,643,004 recognized inthe quarter ended September 30, 2008.

 

For the nine months ended September 30,2008 and 2007, we had a net loss of $10,793,191 on revenues of $11,590,022compared to a net loss of $719,279 on revenues of $15,379,015 for the sameperiod in 2007.  This amounts to a basic loss of $0.38 and $0.03 peroutstanding share during the nine months ended September 30, 2008 and2007, respectively.

 

The increase in the net lossof approximately $10,073,912 was due primarily to our share of the loss of ourunconsolidated subsidiary (North Metro) of $3,459,216, an impairment loss inour investment in North Metro of $4,643,004, a decrease in revenues ofapproximately $3,788,993, offset by a decrease in operating expenses ofapproximately $1,402,735.

 

***Overview:***

 

Our principal business isthe management, operation and development of gaming facilities in emerging andestablished gaming jurisdictions.  Currently, we operate two casinos inCripple Creek, Colorado — Gold Rush Hotel and Casino and Gold Digger’sCasino.  We also operated Uncle Sam’s Casino in Cripple Creek, Coloradountil June 2007.  Until August 17, 2007 we managed two NativeAmerican gaming operations — Lucky Star - Concho and Lucky Star - Clinton — forthe Cheyenne and Arapaho Tribes of Oklahoma.  We owned a 50% membershipinterest in North Metro Harness Initiative, LLC (“North Metro”) prior to October 19,2008 (see Part I Note 7 to our Financial Statements in Item 1 within this Form 10-Q). North Metro opened its harness racetrack at its Running Aces Harness Park inColumbus, Minnesota on the north side of the Minneapolis — St. PaulMetropolitan area on April 11, 2008.  A 50-table card room that ispart of Running Aces opened on June 30, 2008 after Running Aces completed50 days of live racing (as required by Minnesota statue).

 

On June 25, 2008, weentered into a Modification and Extension of Consulting Agreement (the “Agreement”)with Operadora Dominicana Macao, S.A., a subsidiary of Palace Resorts, underwhich we will manage the casino at the Moon Palace Casino, Golf and Spa Resortin Punta Cana, Dominican Republic for five years once the casino opens. The casino will be part of a 1700-room, all-inclusive luxury resort that PalaceResorts is constructing on the far eastern tip of the Dominican Republic. Southwest has been consulting with Palace Resorts on the design, developmentand operation of the casino since September 2007.

 

From May 19, 2007 to August 19,2007, we managed 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 ofmanagement fees from this management contract, in March 2008 we securedadditional debt financing and in June 2008 additional equity financing tofund our current operations including project development costs.  We willneed to raise additional debt or equity financing in 2008 for operations,project development and debt service.

 

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

 

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***Operating segments:***

 

Our executive officersreview operating results, assess performance and make decisions related to theallocation of resources on a property by property basis; however, certain propertiesare combined into one operating segment for financial reporting purposes asthey meet the criteria for aggregation under Statement of Financial AccountingStandards No. 131 *“Disclosures aboutSegments of an Enterprise and Related Information*” paragraph17.  We have also separated out our investment in North Metro due to itssignificance to the financial statements. We have grouped the following properties into the following threeoperating segments that are described 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                                       |       |                                  |       |                                       |

 

**CasinoManagement and Consulting:**

 

We managed two casinos forthe Cheyenne and Arapaho Tribes of Oklahoma under the Third Amended andRestated Gaming Management Agreement dated June 16, 1995 between us andthe Cheyenne and Arapaho Tribes of Oklahoma (the “Tribes”) until August 17,2007, see above discussion under “overview”. We have contracted with PalaceResorts to consult on the development and opening of the casino that is part oftheir new resort in Punta Cana and to manage the casino once it opens.

 

**Lucky Star- Concho**

 

We earned management fees of$0 during the three and nine months ended September 30, 2008 and $266,457and $2,045,984 during the three and nine months ended September 30, 2007,respectively, from Lucky Star - Concho.

 

**Lucky Star- Clinton**

 

We earned management fees of$0 during the three and nine months ended September 30, 2008 and $168,201and $1,520,125 during the three and nine months ended September 30, 2007,respectively, from Lucky Star - Clinton.

 

**PalaceResorts**

 

On June 25, 2008, weentered into a Modification and Extension of Consulting Agreement (the “Agreement”)with Operadora Dominicana Macao, S.A., a subsidiary of Palace Resorts, underwhich we 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, wewill continue to assist Palace Resorts in all phases of design, game selection,training and equipping the casino as a consultant and then manage the casinofor five years after it opens in late 2008 or early 2009.  As manager, wewill be responsible for all aspects of casino operations including equippingand maintaining the casino, internal controls and accounting, budgeting, casinoemployment, security and compliance.  We will work with Palace Resorts tomarket the casino and the resort as a gaming destination.  We previouslyreceived a consulting fee of $50,000 per month under a Consulting Agreementthat would have terminated in August 2008.  Under the Modificationand Extension of Consulting Agreement, we will continue to receive a $50,000monthly consulting fee until the casino opens.  We recognized revenue of$150,000 and $450,000 during the three and nine months ended September 30,2008 from these consulting services.

 

Beginning in the first fullcalendar month after the casino opens, we will receive management fees equal to5 percent of net casino revenue (as defined in the Agreement).  If the 5percent management fee is less than $100,000 in any month, we will receive aminimum management fee of $100,000.  The amount by which the 5 percentmanagement fee is less than $100,000 in any month will then be deducted fromthe management fee due in any month when 5 percent of net casino revenueexceeds $100,000.  All amounts due to Southwest in excess of $100,000 permonth will be paid to Southwest by Palace Resorts after delivery and acceptanceof the annual audit of the casino operations.

 

Southwest or Palace Resortsmay terminate the Agreement if (a) any payment is not made within 10 daysof the due date, (b) any material default is not cured within 30 daysafter notice, (c) upon bankruptcy or insolvency of the other party, (d) welose any license required to perform our services under the agreement, or (e) afterreview, Palace determines that we do not have adequate insurance inplace.  Palace Resorts may alsoterminate the Agreement if, after the second full year of operations, netcasino revenues are more than 30 percent below budget or if at the end of a6-month period the casino’s win percentage for certain games is 25 percent ormore below the reported win percentage for the Las Vegas strip.

 

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We have agreed to indemnifyPalace Resorts against claims rising from our bad faith, willful misconduct,willful negligence or fraud in performing our obligations under the Agreement.

 

**Casinooperations**.

 

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

 
| ** **                         | ** ** | **Three Months  Ended  September 30,  2008** | ** ** | **Three Months  Ended  September 30,  2007** | ** ** | **Percentage  Change  Favorable  (Unfavorable)** | ** ** | **Nine Months  Ended  September 30,  2008** | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** | **Percentage  Change  Favorable  (Unfavorable)** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|
| Casino revenues                    |       | $                                            | 3,546,797  |                                         | $          | 4,035,628                                        |       | (12.1                                       | )%         | $                                           | 10,532,610 |                                             | $          | 10,767,126 |   | (2.2 | )% |
| Total revenues                     |       | 3,726,230                                    |       | 4,241,304                                    |       | (12.1                                            | )%         | 10,975,833                                  |       | 11,271,345                                  |       | (2.6                                             | )%         |
| Income (loss) before income taxes+ |       | 124,075                                      |       | 504,286                                      |       | (75.4                                            | )%         | 16,346                                      |       | 653,338                                     |       | (97.5                                            | )%         |
| Income (loss) margin*              |       | 3.3                                          | %          | 12.4                                         | %          |                                             |       | 0.2                                         | %          | 5.8                                         | %          |                                             |       |
|                                    |            |                                              |            |                                              |            |                                                  |            |                                             |            |                                             |            |                                                  |            |  |  |  |  |

 

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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.  The capital lease was carried on ourConsolidated Balance Sheet in the amount of approximately $6.6 million as of September30, 2008.  Total interest expense was$155,000 and $183,000 for the three months ended September 30, 2008 and 2007,respectively and $489,000 and $561,000 for the nine months ended September 30,2008 and 2007, respectively.  Depreciation and amortization expense was$331,000 and $350,000 for the three months ended September 30, 2008 and 2007,respectively and $1.0 million and $1.1 million for the nine months ended September30, 2008 and 2007, respectively.

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

 

For the three months ended September30, 2008, GR/GD’s total casino revenues decreased by 12.1% over the same periodin the prior year, while the Cripple Creek market declined by 7.0% during thissame time period.  We believe the smokingban that came into effect on January 1, 2008 is having a significant negativeeffect on the market.  In addition, threelarge casinos in Cripple Creek challenged the smoking ban in the second quarterand two of them allowed smoking in portions of their casino for the entirethird quarter.  We believe this actionhas driven customers who smoke to the other casinos that allow smoking, whichis having an adverse effect on our business. Our operating margin is lower thanthe prior year due to decreased revenues and increased operating expenses of$40,000 that were previously absorbed by our Uncle Sam’s casino, which we soldin July 2007.

 

In addition, on May 31,2008, a large competitor opened a casino with nearly 700 slot machines and 8table games.  This new casino added about15% more gaming positions to a market that declined in terms of revenue growth,year-over-year.  The added supply hasreduced the GR/GD’s fair share of market revenue by about 115 basis points.

 

For the nine months ended September30, 2008, GR/GD’s total casino revenues decreased 2.2% while the Cripple Creekmarket declined 9.0% during the same time period.  We believe the smoking ban that came into effecton January 1, 2008 is having a significant negative effect on the market.  We are pleased that we were able to partiallycounter the negative impacts of the smoking ban during the nine months ended September30, 2008 by addressing needs of our customers in innovative ways that havehelped us mitigate some of the revenue loss year over year in a decliningmarket.  However, three large casinos inCripple Creek challenged the smoking ban in the second quarter and two of themhave allowed smoking in portions of their casino for the entire third quarter.  We believe this action has driven customerswho smoke to the other casinos that allow smoking, which is having an adverseeffect on our business and may continue to adversely affect our business infuture periods.  Our operating margin islower than the prior year due to increased operating expenses (certainmarketing and accounting expenses) of approximately $280,000 that werepreviously absorbed by our Uncle Sam’s casino, which we sold in July 2007.

 

We continue to analyze ourcustomers’ patronage patterns and will continue to take steps to mitigate theimpact of the smoking ban and the new casino but we can make no assurances onthe impact for the remainder of 2008.

 

On November 4, 2008,Colorado voters approved Amendment 50 to the State’s Constitution. Thisamendment allows voters in Cripple Creek, Colorado, where Southwest operatesthe Gold Rush Hotel & Casino and Gold Digger’s casino, to hold a referendumin which they can approve an increase in the casino betting limit from $5 to$100, allow casinos to offer craps an roulette, and allow casinos to remainopen 24 hours per day (currently, all Colorado casinos must close between 2:00 a.m.and 8:00 a.m.  We expect the city to holda vote on these new gaming options during the next several months.  We cannot predict at this time whether votersin Cripple Creek are likely to approve a change in the gaming rules.  The Colorado Division of Gaming has stated iflocal voters approve any of the expanded gaming opportunities permitted underAmendment 50, casinos will not be permitted to implement those changes until July2009.  We are currently evaluating thelikelihood that

 

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Cripple Creek will approvenew gaming rules and, if approved, how we can best take advantage of them atthe Gold Rush and Gold Digger’s casinos.

 

We closed Uncle Sam’s casinoon July 29, 2007.  We transferredapproximately eight employees to our GR/GD properties.  Thus, certain salaries and expenses previouslyincurred by Uncle Sam’s have been included with operations of the GR/GDproperties since the closure of Uncle Sam’s.  Additionally, we offered incentives to theplayers/customers who played at Uncle Sam’s to migrate their play to our GoldRush and Gold Digger’s casinos.  Weestimated that we retained approximately 40% - 70% of the revenues from formerUncle Sam’s customers who now play at the Gold Rush and Gold Diggers casinos.  The Gold Rush and Gold Diggers casinos hadavailable capacity to absorb the players from Uncle Sam’s.  We no longer use the Uncle Sam’s brand name inour operations.  However, since inceptionwe have used an integrated players club for all three Cripple Creek casinoswhereby the player could redeem points earned at one casino at any of thecasinos. That now continues for GR/GD.

 

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

 

**Uncle Sam’sCasino**:

 
| ** **                 | ** ** | **Three Months  Ended  September 30,  2007** | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** |
|----------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Total revenues             |       | 60,514                                                 |       | 464,697                                               |       |
| Profit before income taxes |       | 370,728                                                |       | 101,032                                               |       |

 

On June 25, 2007, we enteredinto an agreement with the landlord to purchase the leased real property onwhich we operated Uncle Sam’s Casino in Cripple Creek, Colorado.  On June 26, 2007, we entered into an agreementto assign our rights under the purchase agreement and the operating lease.  On July 29, 2007, we closed Uncle Sam’s Casinoand, on July 31, 2007, we assigned our rights under the purchase agreement andlease and received an assignment fee of approximately $487,000.  We recorded a gain on the disposition of thecasino of $452,426 during the three months ended September 30, 2007 recorded onthe Consolidated Statement of Operations in Other Income (Expense).

 

**North MetroHarness Initiative, LLC**

 

Before October 19, 2008,Southwest owned a 50 percent membership interest in North Metro HarnessInitiative, LLC, which owns and operates Running Aces Harness Park, a harnessracing track and card room facility on approximately 180 acres of land inColumbus Township, Anoka County, Minnesota.  Running Aces Harness Park opened with itsfirst day of live harness racing on April 11, 2008.  The 50-table card room that is part of thefacility opened on June 30, 2008 after Running Aces completed 50 days of liveharness racing, as required by Minnesota law.

 

During the quarter and ninemonths ended September 30, 2008, Southwest recognized losses of $1,033,764 and$3,459,216, equal to 50 percent of the overall losses at Running Aces duringthose periods, in connection with our 50 percent ownership in North Metro.  On October 19, 2008, we transferred our 50percent ownership interest in North Metro to Black Diamond Commercial Finance,L.L.C., as agent for the lenders under the construction and start-up financefor development of Running Aces Harness Park. Due to this transfer, we wrote off the entire remaining $4,643,004 valueof our investment in North Metro as of September30, 2008.  The operating losses andwrite-down of the investment resulted in losses to Southwest of $5,676,768during the third quarter of 2008. 

 

*Sale ofmembership interest*

 

On October 19, 2008, weentered into agreements with Black Diamond Commercial Finance, L.L.C. (“BlackDiamond”), as Agent for certain lenders to North Metro, under which wetransferred our 50 percent membership interest in North Metro (the “MembershipInterest”). In the transaction, Southwest sold its Membership Interest to BlackDiamond, as agent for the lenders, for $1.00 and received the following:

 

·                  an agreement not to sue Southwest under theterms of a $1 million Limited guaranty by Southwest of North Metro’s debt andto terminate that limited guaranty upon satisfaction of certain conditions;

 

·                  an option to repurchase the 50 percentmembership interest in July 2009 for $1.00 plus buying a $7.5 million last-out,subordinate, participating interest in North Metro’s then outstanding debt toBlack Diamond and the lenders; and

 

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·                  retention of Southwest’s right to receive$2.3 million in distributions before North Metro makes distributions (otherthan tax distributions) to its members.

 

In addition, we agreed toprovide consulting and transition services to Black Diamond for four months fora fee of $50,000 per month.

 

North Metro had been indefault under certain obligations under the Credit Agreement since July 2008and in October 2008 was no longer able to make the required interestpayments due under the loan.

 

Under the Limited LiabilityCompany Membership Interest Purchase Agreement between Southwest and BlackDiamond dated October 19, 2008 (the “Purchase Agreement”), Southwest soldits 50% membership interest to Black Diamond, as Agent for the Lenders.Southwest had pledged the Membership Interest as security for the constructionand start-up financing when North Metro entered into the Credit Agreement.Under the Purchase Agreement, Southwest received the purchase price of $1.00along with a right to repurchase the Membership Interest in July 2009 for$1.00 plus buying a $7.5 million last out, non-voting, fully subordinatedparticipation interest in North Metro’s then outstanding debt to Black Diamondand the Lenders. Southwest also retained its right to receive distributions inthe amount of $2,357,072 for cash contributions, advances and loans bySouthwest to North Metro that exceeded Southwest’s required membershipcontributions. This amount is to be repaid to Southwest before anydistributions to the owners of North Metro (except distributions for payment oftaxes on the income of North Metro). Under the Credit Agreement, payment ofdistributions, including the amount retained by Southwest, is prohibited unlessRunning Aces exceeds certain financial performance thresholds.

 

The transfer of theMembership Interest remains subject to the terms of the North Metro HarnessInitiative, LLC Member Control Agreement (the “Member Control Agreement”),including the provisions of the Member Control Agreement regarding transfer ofmembership interests.

 

Southwest also receivedrelief under a $1 million Limited Guaranty by Southwest of North Metro’sobligations under the Credit Agreement under a Limited Covenant Not to Sue andRelease of Limited Guaranty dated October 19, 2008 (the “Covenant andRelease”). Under the terms of the Covenant and Release, Black Diamond, asAgent, agreed not to sue to enforce the $1 million limited guarantee so long asSouthwest is not in default in its obligations in connection with the sale ofthe Membership Interest and the Consulting Agreement described below. Inaddition, the Covenant and Release provides that the $1 million guarantee willterminate and be of no further force or effectonce Black Diamond, as Agent, receives fullrights as a member of North Metro under the terms of the Member ControlAgreement in for the Membership Interest purchased from Southwest and Southwesthas performed its obligations under the four-month Consulting Agreementdescribed below.

 

Southwest also entered intoa Settlement Agreement with Black Diamond, as Agent, on October 19, 2008,under which Southwest and Black Diamond agreed to enter into the transactionsdescribed herein. In addition, Southwest agreed to release Black Diamond fromany and all claims Southwest may have or have had against Black Diamond up toand including October 19, 2008. In accordance with the terms of theSettlement Agreement, this release will be null and void if Black Diamondattempts to enforce against Southwest the $1 million limited guaranty that isthe subject of the Covenant and Release.

 

As part of the agreements,we retained our right to receive distributions in the amount of $2,357,072 forcash contributions, advances and loans by Southwest to North Metro thatexceeded our required membership contributions. This amount is to be repaid tous before any distributions to the owners of North Metro (except distributionsfor payment of taxes on the income of North Metro).  Under the North Metro Credit Agreement(discussed below), payment of distributions, including the amount retained byus, is prohibited unless Running Aces exceeds certain financial performancethresholds and is subordinate to debt service required under the CreditAgreement.  We retained interest infuture distributions of $2.4 million is limited to North Metro’s ability tomake distributions under its Credit Agreement and is only payable if certainfinancial performance thresholds are met, as such we have not recognized anyvalue for this right and have accounted for it similar to a gain contingencyunder Financial Accounting Standards Board (“FASB”) No. 5 “*Accounting for Contingencies*”.

 

In addition, Southwest andBlack Diamond entered into a Consulting Agreement on October 19, 2008 (the“Consulting Agreement”) under which Southwest will provide consulting andtransition services to Black Diamond in connection with Black Diamond’sacquisition of the Membership Interest. Under the Consulting Agreement,Southwest will continue to provide leadership, management and consultingservices at Running Aces and work to transition the provision of those servicesto Black Diamond and personnel selected by Black Diamond. In consideration ofSouthwest’s providing these services, Black Diamond has agreed to pay Southwestconsulting fees of $50,000 per month for four months.

 

*Accountingfor North Metro*:

 

As of September 30,2008, we provided approximately 43 percent of the financial support, butretained its 50 percent decision making power in accordance with the MemberControl Agreement.  We accounted for our investment in North Metro underthe equity method of accounting in accordance with Accounting PrinciplesBulletin No. 18 “*The Equity Method ofAccounting for Investments in Common Stock*” (“APB #18”).

 

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As of September 30,2008, we had contributed $8,204,474 in consideration of our membershipinterests in North Metro and a priority preferred contribution of $1,656,051for costs related to North Metro that exceeded the our agreed pre-licensecapital contribution of $1,000,000.  The $1,656,051 pre-licensing advance,together with interest, would only be paid back to us out of first availablecash from operations (and then after certain distributions to the members forincome tax purposes and payments due under the Credit Agreement with BlackDiamond).  The pre-licensing advances to North Metro are characterized asa membership preferred contribution made by us under the North Metro HarnessInitiative, LLC Member Control Agreement dated June 8, 2004.  Wetreat these payments as an additional investment in North Metro.  We havecombined the advances (accounted for as a membership preferred contribution)and its capital contributions into an investment in an unconsolidatedsubsidiary on our financial statements.

 

The following representssummarized balance sheet information for North Metro:

 
| ** **        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| North Metro:      |       |                             |       |                            |       |
| Total Assets      |       | $                                | 58,830,034 |                            | $          | 51,556,814 |   |
|              |       |                             |       |                            |       |
| Total Liabilities |       | $                                | 45,860,983 |                            | $          | 33,051,334 |   |

 

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

 
| ** **                                            | ** ** | **Three months  ended  September 30,  2008** | ** ** | **Three months  ended  September 30,   2007** | ** ** | **Nine months  ended  September 30,  2008** | ** ** | **Nine months  ended  September 30,  2007** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Total Revenues                                        |       | $                                                      | 5,382,559  |                                                         | $          | 31,844                                                |       | $                                                     | 6,614,032  |   | $ | 80,305 |   |
| Total Costs and Expenses                              |       | $                                                      | 7,450,087  |                                                         | $          | 224,035                                               |       | $                                                     | 13,532,464 |   | $ | 705,713 |   |
| Net loss                                              |       | $                                                      | (2,067,528 | )                                                            | $          | (192,191                                              | )          | $                                                     | (6,918,432 | ) | $ | (625,408 | ) |
| 50% share of net loss                                 |       | $                                                      | (1,033,764 | )                                                            | (96,096    | )                                                     | $          | (3,459,216                                            | )          | (312,704 | ) |
| Net tax benefit                                       |       |                                                   |       | —                                                       |       |                                                  |       | —                                                |       |
| Loss of unconsolidated subsidiary net of  tax benefit |       | $                                                      | (1,033,764 | )                                                            | $          | (96,096                                               | )          | $                                                     | (3,459,216 | ) | $ | (312,704 | ) |

 

We did not record a taxbenefit related to North Metro’s losses during the three and nine months ended September 30,2008 and 2007.

 

At September 30, 2008,North Metro’s assets consisted principally of cash, property, plant andequipment and related deposits and financing costs. Liabilities consistedprimarily of payables, accrued interest and other accruals and borrowings underits financing agreement discussed below.

 

On April 11, 2008,Running Aces Harness Park opened for live harness racing.  On June 30, 2008 after the last liveharness race of the 50 th day of live racing, as required by Minnesotalaw, North Metro opened the card room.

 

Reconciliation of ourinvestment in North Metro as of September 30, 2008:

 
| Balance as of December 31, 2007                                                  |   | $          | 7,218,720 |   |
|---------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| 50% share of net loss from January 1,  2008 through September 30, 2008      |   | (3,459,216 | )         |
| Contributions by Southwest from  January 1, 2008 through September 30, 2008 |   | 883,500    |      |
| Balance at September 30, 2008 prior to  impairment analysis and subsequent sale  |   | 4,643,004  |      |
| Impairment of the Company’s investment in  North Metro                           |   | (4,643,004 | )         |
| Adjusted balance as of September 30,  2008                                       |   | —     |      |

 

In accordance with APB #18paragraph 19, regarding a loss in the value of the investment that is otherthan temporary, we recognized an impairment loss of our investment in NorthMetro of $4.6 million as a result of the on-going default by North Metro underits Credit Agreement, continuing losses and Southwest’s ultimate sale/transferof our membership interest on October 19, 2008.

 

*North Metro Financing*

 

On April 20, 2007,North Metro entered into a Credit Agreement with Black Diamond CommercialFinance, L.L.C., as Agent for the lenders, under which it agreed to borrow$41.7 million to finance construction and initial operations of Running AcesHarness Park.  In connection with this Credit Agreement, Southwest enteredinto a Pledge Agreement and a Sponsor Support Agreement with the Agent. Under the Pledge Agreement, Southwest pledged its membership interest in NorthMetro to the lenders as security for repayment of the loan.  Under theSponsor 

 

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Support Agreement, Southwestagreed to contribute additional equity to North Metro if the proceeds of theloan are insufficient to complete construction and open (as defined in theCredit Agreement) Running Aces Harness Park.

 

Effective April 3,2008, North Metro entered into Limited Waiver and Amendment No. 1 to theCredit Agreement.  The Limited Waiver extended the time period forobtaining 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 also allows 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.  As consideration, North Metro paid anamendment fee of $104,250.

 

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 second amendment to the Credit Agreement, weentered into a limited guaranty under which we agreed to repay up to $1 million(plus certain costs) of the North Metro loan if North Metro is unable to repay.As a condition to entry into Amendment No. 2, Southwest and MTR-Harness, Inc.,the other 50 percent member in North Metro Harness Initiative, LLC, wererequired to make an aggregate of $615,000 in additional membership contributionsto North Metro, of which Southwest provided $500,000.  We made theseadditional membership contributions on or about June 20, 2008.

 

North Metro has at timesfailed to comply with certain covenants under the Credit Agreement, includingan ongoing minimum cash availability requirement and a minimum EBITDArequirement for the quarters ended June 30, 2008 and September 30,2008.  The Agent notified North Metro that this constitutes an event ofdefault under the loan agreement and that the lenders are reserving all rightsand remedies available to them under the Credit Agreement.  Through October 19,2008, Southwest and North Metro worked with the lenders to resolve North Metro’sfailure to satisfy the covenant and resulting defaults.  On October 19, 2008, Southwesttransferred its membership interest in North Metro to Black Diamond, as agentfor the lenders.

 

***Project Development*** costs for the three months ended September 30, 2008 and 2007 were$0 and $99,112, respectively.  Project Development costs for the ninemonths ended September 30, 2008 and 2007 were $0 and $351,683,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 minimal projectdevelopment costs in the remainder of 2008.

 

***Corporate expenses*** were $912,206 and $803,589 during the three months ended September 30,2008 and 2007, respectively, an increase of $108,617. Corporate expenses were$2,738,372 and $2,928,408 during the nine months ended September 30, 2008and 2007, respectively, a decrease of $190,036.

 

The increase ofapproximately $109,000 in our corporate expenses during the three months ended September 30,2008 over the same period in the prior year is primarily due to legal expenseof approximately $107,000 related to on-going litigation matters with theCheyenne & Arapaho Tribes (see Part I Note 18 to our FinancialStatements in Item 1 within this Form 10-Q).

 

The decrease of approximately$190,000 in corporate expenses during the nine months ended September 30,2008 over the same period in the prior year is primarily due to decreasedsalary and benefit expense of approximately $481,000 offset by an increase instock option compensation expense of approximately $181,000 and additionallegal and accounting expenses of approximately $146,000.  During March 2007the board of directors approved discretionary performance bonuses ofapproximately $385,000 and in March 2008 the board of directors approvedthe issuance of 1,867,500 stock options to officers, employees, independentdirectors and a consultant (see Part I Note 3 to our Financial Statementsin Item 1 within this Form 10-Q).  Our stock option compensationexpense increased by approximately $181,000 during the nine months ended September 30,2008 over the same period in the prior year.  We had additional reductionsof approximately $96,000 to salary expense in 2008. In addition legalaccounting expenses increased by approximately $146,000 primarily related toon-going litigation matters with the Cheyenne & Arapaho Tribes (see Part INote 18 to our Financial Statements in Item 1 within this Form 10-Q).

 

***Interest Expense*** was $231,927 and $187,410 for the three months ended September 30,2008 and 2007, respectively, an increase of $44,517.  Interest Expense was$679,269 and $640,233 for the nine months ended September 30, 2008 and2007, respectively, an increase of $39,036.  The increase during the threeand nine months ended September 30, 2008 is primarily due to interest onour $1.55 million term loan secured in March 2008.

 

***Write off of acquisition and financing costs*** of $217,329 during the nine months ended September 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 the three and nine months ended September 30,2007 we wrote-off 

 

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$476,723 and $603,373,respectively of acquisition and financing costs as an acquisition and financingagreement to acquire a casino terminated.

 

***Settlement income*** of $227,396 relates to a payment received in August 2008 from theOtoe-Missouria Tribe of Oklahoma to reimburse expenses incurred by the Companywhen working with the Tribe in 2006. This amount is included in the Consolidated Statement of Operations inOther Income (Expense) as settlement income during the three months ended September 30,2008 as the amounts were previously expensed in fiscal year 2006.

 

***Loss of unconsolidated subsidiary, net of tax benefit*** represents our share of the losses of NorthMetro, which were $1,033,764 and 96,096 for the three months ended September 30,2008 and 2007, respectively and $3,459,216 and $312,704 during the nine monthsended September 30, 2008 and 2007, respectively (see above discussionunder North Metro).

 

***Impairment of investment in unconsolidated subsidiary*** represents our impairment of our investmentof North Metro of $4,643,004 recognized as of September 30, 2008 (seeabove discussion under North Metro).

 

***Effective tax rate. ***For the three and nine months ended September 30,2008 and 2007, we did not record a tax benefit for the net loss as a result ofour evaluation of deferred tax assets and our ability to utilize the deferredtax assets in the future.  We recorded a 100% valuation allowance againstthe deferred tax assets at September 30, 2008 and December 31, 2007because of the termination of our management agreement with the Cheyenne andArapaho Tribes, effective August 17, 2007 and net losses since thetermination.  As of September 30, 2008 and December 31, 2007,our deferred tax asset is zero.

 

***Liquidity and Capital Resources:***

 

We continue to generate cashflow from our casino operations in Colorado and our consulting agreement withPalace Resorts.  We use the cash flows generated to pay off debt inaccordance with our agreements, fund reinvestment in our Colorado propertiesfor both refurbishment and replacement of assets, and to pursue additionalgrowth opportunities.  On October 19, 2008 we also entered into a fourmonth consulting agreement with Black Diamond (see above discussion under NorthMetro).  As the existing cash flows wereinadequate to fund our cash requirements, we secured additional debt financingin March 2008 and equity financing in June 2008, describedbelow.  We will need to raise additional debt or equity financing in 2008.

 

Due to the loss of revenueresulting from the termination of our management contract with the Cheyenne andArapaho Tribes of Oklahoma (see above discussion under the operating segment “CasinoManagement”) we secured additional debt and equity financing to fund ourcurrent operations including project development costs.  We closed on a bank loan of $1.55 million on March 7,2008.  The interest rate is the prime rate plus 1.5% with a minimuminterest rate of 7%.  The effective interest rate on this loan, aftergiving effect to the warrant consideration issued in connection with it, isapproximately 24.5 percent (see Part I Note 9 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 of ourboard of directors, cosigned one of eight promissory notes for between $100,000and $300,000 that comprise the $1.55 million loan.  Our three principalexecutive officers guaranteed portions of this loan as well as our $450,000operating line of credit.  As consideration for the co-signatures andpersonal 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.

 

During January and February 2008,we pursued a financing alternative to the bank loan discussed above. Wewere unable to agree upon the terms with the lender and we ultimately chose notto continue negotiations with the lender. We incurred costs in connection withthis financing of approximately $217,000 that were expensed during the ninemonths ended September 30, 2008.

 

On June 17, 2008,Southwest entered into a Securities Purchase Agreement with certain institutionaland other accredited investors, as defined in Rule 501 of Regulation Dpromulgated under the Securities Act of 1933, as amended, pursuant to whichSouthwest sold in a private placement an aggregate of 2,693,589 shares of itscommon 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 commonstock.  The warrants are exercisable for a period of five years at anexercise price of $0.85 per share.  Southwest received net proceeds fromthis offering of approximately $1,540,552, after the deduction of estimatedoffering expenses and other non-cash transactions as reported in thesupplemental disclosure of non-cash investing and financing activities in theConsolidated Statement of Cash Flow (see Part I Note 5 to our FinancialStatements in Item 1 within this Form 10-Q).  From the proceeds weused $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.

 

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

 

Net cash used in operatingactivities during the nine months ended September 30, 2008 was $520,840compared to net cash provided by operating activities of $1,617,329 during thenine months ended September 30, 2007.  The negative change in cashfrom operations was $2,138,169 and is primarily due to our loss from operationsof $2,012,310 during the nine months ended September 30, 2008 compared toincome from operations of $373,948 during the nine months ended September 30,2007, an increase of $2,486,258.

Net cash used in investingactivities for the nine months ended September 30, 2008 and 2007 was$1,283,817 and $2,783,712, respectively, a decrease of $1,499,895.  Thedecrease in use of cash between the periods was due primarily to a decrease inour contributions to North Metro of $1,671,695.  North Metro closed itsconstruction financing in April 2007, resulting in less required fundingfrom the members of North Metro.  We contributed $883,500 and $2,555,195during the nine months ended September 30, 2008 and 2007,respectively.  The amount contributed during the nine months ended September 30,2008 relate to non-construction activities requiring funding by the members ofNorth Metro.

 

Net cash provided byfinancing activities for the nine months ended September 30, 2008 and 2007was $1,730,091 and $1,181,637, respectively.  During the nine months endedSeptember 30, 2008 and 2007 we had the following financing activities:

 

·                  In June 2008 we completed an equityfinancing resulting in proceeds of approximately $1,540,000 and in January andFebruary 2007 we completed an equity financing resulting in proceeds ofapproximately $3,980,000.

 

·                  We completed a debt financing and securedproceeds of $1,534,500 during the nine months ended September 30, 2008.

 

·                  We received proceeds of $94,728 upon theexercise of warrants during the nine months ended September 30, 2008.

 

·                  We made payments of approximately $758,000 onlong-term borrowings compared to approximately $1,471,000 during the ninemonths ended September 30, 2008 and 2007, respectively.  The decreasewas 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 $1.55 million term loansecured in March 2008.

 

·                  During the nine months ended September 30,2007 we paid costs of approximately $322,000 related to the redemption of357,000 shares of common stock in accordance with Article XI of ourArticles of Incorporation effective January 22, 2007.  The shares wereredeemed at a price of $0.90 per share based upon the closing stock price ofour common stock as reported on January 22, 2007.  We recorded theredemption as a reduction to stockholder’s equity for the buy back ofshares.  The shares of common stock are included in Treasury Stock in theConsolidated Statements of Changes in Stockholders’ Equity as of September 30,2008.

 

·                  We made payments of approximately $217,000and $559,000 related to financing and acquisition costs during the nine monthsended September 30, 2008 and 2007, respectively.  The financing costsincurred in 2008 are discussed above and the financing and acquisition costsincurred in 2007 related to an acquisition that ultimately did not close.

 

·                  We made payments of $450,000 and $446,292during the nine months ended September 30, 2008 and 2007 related to ourline of credit.

 

***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 increasetheir personal guarantees of the line of credit from $100,000 to $150,000 plusexpenses.  In connection with a new loan with Crown Bank entered into in March 2008(see Term Note below) each of the three principal officers agreed to increasetheir previously existing $150,000 personal guarantees to $250,000.  As ofSeptember 30, 2008, no amounts were outstanding under the Revolving Creditfacility as the line of credit terminated on June 30, 2008.

 

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

 

***Equipment Loan.***  On December 23, 2005, we negotiated a loan of $460,324 topay off outstanding payables in connection with the installation of a playertracking system at our casinos in Cripple Creek, Colorado. The loan is for aterm of 48 months with interest equal to the prime rate, which is 5.00% as of September 30,2008.  The outstanding balance as of September 30, 2008 wasapproximately $153,000.

 

***Seasonality:***

 

We believe that theoperations of all casinos owned by us is affected by seasonal factors,including holidays, weather and travel conditions.

 

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

 

**GeneralEconomic Conditions:**

 

Consumer demand for thegaming products and related amenities we offer may be particularly sensitive todownturns in the economy.  Almost all gaming jurisdictions in the UnitedStates have reported overall declining casino and related revenues in recentmonths.  Changes in consumer preferences or discretionary consumerspending brought about by factors such as general economic conditions, real orperceived reduction in disposable consumer income, fears of recession andchanges in consumer confidence in the economy could reduce customer demand forour product, thus harming our operations.

 

**CompetitivePressures:**

 

Many casino operators areeither entering or expanding in our markets, including a major new casino whichopened in May 2008 in the Cripple Creek, Colorado market, therebyincreasing competition. As companies have completed new or expanded projects,supply has sometimes grown at a faster pace than demand, and competition hasincreased significantly. Furthermore, several operators, including Southwest,have plans for additional developments or expansions in our markets.

 

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

 

The Governor of Coloradosigned a bill that removed the exemption for casinos from the state’s 2006smoking ban, effective January 1, 2008.  We believe the smoking banis having a significant a negative effect on the market, although the initialimpact on our casinos appeared limited.  In June 2008, three largecasinos in Cripple Creek challenged the smoking ban and allowed smoking inportions of their casinos throughout the third quarter of 2009.  Webelieve this action has drove customers who smoke to the other casinos thatallow smoking and had an adverse effect on our business, although the extentand duration of that impact is unclear.

 

**PoliticalUncertainties:**

 

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

 

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

 

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

 

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

 

By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Our judgmentsare based on our historical experience, terms of existing contracts, ourobservance of trends in the industry, information provided by our customers andinformation available from other outside sources, as appropriate.  Wecannot assure you that our actual results will not differ from ourestimates.  For a discussion of our significant accounting policies andestimates, please refer to Management’s Discussion and Analysis or Plan ofOperation and Notes to Consolidated Financial Statements presented in the 2007Financial Statements included in our Annual Report on Form 10-KSB.

 

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

 

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

 

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In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years.  This statement definesfair value, establishes a framework for measuring fair value and expands therelated disclosure requirements.  This Statement did not effect ourconsolidated financial statements as of September 30, 2008.  On February 12,2008 a FASB Staff Bulletin “FSP FAS 157 -2” was issued which defers theeffective date of FAS 157 to fiscal years beginning after November 15,2008, and applies to nonfinancial assets and nonfinancial liabilities.  On October 10, 2008, A FASB Staff Bulletin,“FSP 157-3” was issued that clarifies the application of FAS 157 in a marketthat is not active.  We are evaluatingthe potential impact of FSP FAS 157 — 2 and 157-3.

 

In February 2007, theFASB released SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115”*.  This Statementpermits entities to choose to measure many financial instruments and certainother items at fair value. This Statement is effective as of the beginning ofan entity’s first fiscal year that begins after November 15, 2007. Earlyadoption is permitted as of the beginning of a fiscal year that begins on orbefore November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, Fair Value Measurements.  ThisStatement did not effect our consolidated financial statements as of September 30,2008.

 

In November 2007, theFASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51*(SFAS 160). SFAS 160 establishes accounting and reporting standardsfor entities that have equity investments that are not attributable directly tothe parent, called noncontrolling interests or minority interests.Specifically, SFAS 160 states where and how to report noncontrollinginterests in the consolidated statements of financial position and operations,how to account for changes in noncontrolling interests, and provides disclosurerequirements. SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008 (thatis, January 1, 2009, for entities with calendar year-ends). Earlieradoption is prohibited. SFAS 160 shall be applied prospectively as of thebeginning of the fiscal year in which SFAS 160 is initially applied,except for the presentation and disclosure requirements. The presentation anddisclosure requirements shall be applied retrospectively for all periodspresented. The Company does not anticipate any significant change in financialreporting to result from issuance of this statement.

 

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

 

In May 2008, the FASBreleased SFAS No. 162, “*The Hierarchyof Generally Accepted Accounting Principles*.”  This statementwill be effective 60 days after the United States Securities and ExchangeCommission approves amendments to AU Section 411, *The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles*.”  We do notanticipate any significant change in our financial reporting to result fromissuance of this statement.

 

In June 2008, theSecurities and Exchange Commission issued an amendment to rules requiringcompanies that are non-accelerated filers to include in their annual reports,pursuant to rules implementing Section 404b of the Sarbanes Oxley Actof 2002, an attestation report of their independent auditors on internal controlover financial reporting for fiscal years ending on or after December 15,2008.  Under the amendments, a non-accelerated filer will be required tofile the auditor’s attestation report on internal control over financialreporting when it files an annual report for a fiscal year ending on or after December 15,2009.

 

***Forward-Looking Statements:***

 

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

 

We caution the reader thatforward-looking statements involve risks and uncertainties that cannot bepredicted or quantified and, consequently, actual results may differ materiallyfrom those expressed or implied in the forward-looking statements. These risksand uncertainties include, 

 

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but are not limited to, thefollowing factors as well as other factors described from time to time in our reportsfiled with the Securities and Exchange Commission:

 

·                  we have an immediate need for debt or equityfinancing;

·                  cost of available and feasible debt or equityfinancing;

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

·                  the effects of competition, including a newcasino in Cripple Creek, CO and the location of competitors and operating andmarket competition;

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

·                  success of our customer tracking and customerloyalty programs;

·                  abnormal gaming holds;

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

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

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

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

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

 

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

 

***Risk Factors***

 

In addition to theinfluences identified in this Quarterly Report on Form 10-Q and our otherpublic filings, Item 1A to this Report states several important factors thatcould cause our actual results to differ materially from those anticipated byus or that are reflected in any of our forward-looking statements.

 

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**Item 4t.  Controls and Procedures**

 

**DisclosureControls and Procedures.**

 

Our management isresponsible for establishing disclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, designed to ensure that informationrequired to be disclosed in the reports we file or submit under the Act isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms.  These disclosure controls andprocedures include controls and procedures designed to ensure that informationwe are required to disclose in the reports we file or submit under the Act isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, as appropriate to allow timelydecisions regarding 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 September 30, 2008 and concludedthat those controls and procedures were effective as of that date.

 

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

 

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

 

Our management, includingour Chief Executive Officer, who serves as our principal executive officer, andour President and Chief Operating Officer, who serves as our principalfinancial officer, conducted an evaluation of the effectiveness of internalcontrol over financial reporting using the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission in Internal Control —Integrated Framework.  Based on its evaluation, our management concludedthat our internal control over financial reporting was effective as of September 30,2008.

 

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

 

This report shall not bedeemed to be filed for purposes of Section 18 of the Securities ExchangeAct of 1934, or otherwise subject to the liabilities of that section, and isnot incorporated by reference into any filing of the Company, whether madebefore or after the date hereof, regardless of any general incorporationlanguage in such filing.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

*Alleged Breach of GamingManagement Agreement*

 

Until August 17, 2007, Southwest Casino andHotel Corp. managed the Lucky Star — Concho and Lucky Star —Clinton casinos inConcho and Clinton, Oklahoma, under the terms of a management agreement withthe Cheyenne and Arapaho Tribes of Oklahoma. From May 19, 2007 to August 17,2007, we managed the Lucky Star — Concho and Lucky Star — Clinton casinos underAmendment No. 11 to the Third Amended and Restated Gaming Managementagreement between Southwest and the Cheyenne and Arapaho Tribes of Oklahoma,which extended that agreement for up to two years. On August 17, 2007, theSupreme Court of the Cheyenne and Arapaho Tribes declared Amendment No. 11invalid. Also on August 17, 2007, the National Indian Gaming Commission (“NIGC”)reversed its prior approval of Amendment No. 11. On August 24, 2007,the NIGC rejected our challenge to its decision to reverse that approval. Wehave not received management fees from the Cheyenne and Arapaho Tribes since August 17,2007

 

On July 24, 2007, the Governor of the Cheyenneand Arapaho Tribes of Oklahoma delivered notice to Southwest that on July 13,2007 he had initiated an arbitration proceeding against us for alleged breachof the Third Amended and Restated Gaming Management Agreement under which wethen managed two casinos for the Tribes.  On November 2, 2007, wefiled a counterclaim in this proceeding alleging a breach of the GamingManagement Agreement by the tribal Governor. The three-member arbitration panelfor this proceeding was appointed in February 2008.  After ascheduling conference with the arbitration panel on March 11, 2008, wesubmitted our formal Cross-Complaint to the arbitration panel on April 22,2008 and the Tribes submitted its formal complaint on April 23,2008.  We are now proceeding with discovery in this matter.

 

In the arbitration demand and formal complaint, theGovernor alleged wrongful management practices and that Southwest breached themanagement agreement by interfering with or attempting to influence internalaffairs or governmental decisions of the Tribes in connection with our effortsto extend our gaming management relationship with the Tribes, which terminatedon August 17, 2007.

 

The Governor originally sought termination of themanagement contract and $10 million in damages and continues to pursue a claimfor damages against us.  We do not believe we improperly interfered withor attempted to influence internal governmental decisions of the Tribes orimproperly managed the casinos and we are vigorously defending Southwest inthis arbitration proceeding. Under our Gaming Management Agreement with theTribes, we were permitted to oppose, publicly or privately, any action by theTribes that we believed was not in the best interest of the Tribal gamingoperations. We believe that all of the actions we have taken on behalf of thegaming operations we managed or as part of our efforts to extend our gamingmanagement relationship with the Tribes are consistent with that provision.

 

On August 18, 2008, an accounting firm hired bythe Tribes to act as a witness on behalf of the Tribes in this arbitrationproceeding issued a report in which they concluded that the claims made by theTribes in their arbitration complaint are supported by evidence in the recordsof the Tribes and the Lucky Star casinos.

 

In our Cross-Complaint, we allege that the Governorof the Tribes breached the Management Agreement by refusing to negotiate ingood faith for an extension and expansion of the gaming management relationshipbetween Southwest and the Tribes.  We assert that the Management Agreementrequired the Tribes to negotiate this extension and expansion after we led theTribes’ successful efforts to negotiate and enter into a compact for expandedgaming with the State of Oklahoma in April 2005. We are seeking $30million in damages from the Tribes for their breach of the ManagementAgreement. On November 14, 2008 we submitted to the arbitration panel a Motionfor Summary Judgment in our favor on our counterclaim and a Motion to Dismissthe Governor’s claims against us.

 

We do not expect any material adverse consequencefrom this action. Accordingly, no provision has been made in the financialstatements for any such losses. However, we expect to incur significant legalexpenses to defend the Governor’s claims against us and pursue ourcounterclaims. A portion of the proceeds of this Offering will be used to paysome or all of these expenses.

 

*Theft andDistribution of Surveillance Video from Lucky Star Clinton casino*

 

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

 

OnJanuary 14, 2008, Mr. Flyingman, as Governor of the Tribes and not inhis individual capacity, filed a declaratory judgment action in the Cheyenneand Arapaho Trial Court asserting that the Tribes, not Southwest, owned thesurveillance footage and the copyright in it, an assertion that we do notcontest. On February 13, 2008, the Federal District Court issued a stay ofthe proceedings before it pending resolution of the

 

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Tribalcourt proceeding. After briefing, oral argument in this matter was held on April 4,2008 and, on April 10, 2008, the Trial Court judge ruled in favor of theTribes. We did not appeal this decision.

 

On August 28, 2008, the defendants filed a motionseeking summary judgment on two of the six counts in our Federal District Courtcomplaint that relate to ownership of the surveillance tape and to stay allother claims pending resolution in tribal court. On September 15, 2008, wefiled a motion to dismiss claims in the Federal District Court case that relateto the ownership of the surveillance tape including the claims for conversion,copyright infringement, and conspiracy, and asserting that the dismissal ofthese claims makes the defendant’s motion for summary judgment moot. We did notmove to dismiss the defamation claim and sought to continue to pursue thataction in Federal Court. On October 27, 2008, the Federal District Courtdenied our motion to dismiss and requested that we respond substantively to thedefendant’s motion for summary judgment, which we did on November 6, 2008.

 

*Other Litigation Matters*

* *

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

 

**Item 1A. ****Risk Factors**

 

**RISK FACTORS**

** **

*Inaddition to the influences identified elsewhere in this report and our AnnualReport on form 10-KSB filed March 31, 2008, as well as our other publicfilings, there are many important factors that could cause our actual resultsto differ materially from those anticipated by us or that are reflected in ourforward-looking statements  Thesefactors, which may impact the success of our operations and our ability toachieve our goals, include the risks identified below. The following risks anduncertainties are not the only ones facing Southwest. Additional risks anduncertainties of which we are unaware or which we currently believe areimmaterial could also materially adversely affect our business, financialcondition or results of operations.*

 

**Risks Related to Our Business and FinancialCondition**

 

**1.             Risks related to our financialcondition:**

 

***We have animmediate and continuing need for additional capital***. We have an immediate need for substantialadditional funding to provide working capital to meet current and futureobligations and to continue our operations. We will also need additionalfunding for any additional gaming projects we may choose to pursue. Moreover, our operating plans and financing needs are subject to changedepending on, among other things, market conditions and opportunities; land,equipment or other asset-based financing that may be available in connectionwith our development of gaming facilities; cash flow from operations, if any;and the number of new gaming projects that we pursue. We do not have anycommitments relating to additional financing and we cannot assure you thatadditional financing will be available when needed. Even if financing isavailable, we cannot assure you that it will be on terms favorable to us andour security holders in terms of cost or dilution. In addition to dilutioncaused by the sale of additional equity, any sale of our equity is likely torequire us to issue a significant number of shares and warrants to purchaseshares to participants in our June 2008 Private placement under the anti-dilutionprovisions of our agreements with them, causing further dilution. The failureto raise sufficient capital in the near future would have a material adverseeffect on our financial condition and our ability to remain in business.

 

***Our operatingexpenses exceed our current income.***We incurredsubstantial losses in the first nine months of 2008 and are likely to continueto incur substantial losses in subsequent reporting periods. Additionally,during the third quarter of 2008 we transferred our membership interest inNorth Metro Harness Initiative, LLC to Black Diamond Commercial Finance, L.L.C.and eliminated the entire value of our investment in North Metro from ourfinancial statements. The Gold Rush Hotel & Casino and Gold Digger’scasino in Cripple Creek, Colorado contribute to our operating cash flow at thecorporate level and we receive consulting fees earned under our agreement tohelp develop and then manage a new casino in the Dominican Republic and, for fourmonths, under a consulting agreement related to North Metro Harness Initiative,LLC. We cannot assure you that Gold Rush and Gold Digger’s will continue toprovide operating cash flow at the corporate level or that the cash flow theygenerate will be of the same magnitude that the corporate level currentlyreceives. The cash flow generated from these sources is not currentlysufficient to meet our cash flow requirements. Thus, we must continue toreceive revenue from our current sources and develop new sources of revenue aswell as raise additional funding in the near future until such time as revenuefrom operations is sufficient to meet our cash flow requirements. Failure to doso will have a material adverse affect on our financial condition and our abilityto remain in business.

 

***We do not know what impact thecurrent unprecedented volatility in worldwide credit and equity markets willhave on our ability to raise needed capital.***During September and October 2008we have seen unprecedented turmoil in equity and credit markets, includingrecord setting losses in the stock markets, dramatic decreases of liquidity inthe credit markets, bank failures, hedge fund closures and massive marketintervention by the United States and foreign governments. Because of theunprecedented nature of these market events, and because the markets remainhighly-volatile today, we cannot predict what effect these events will have onour ability to raise capital required to continue

 

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our operations. If we are unable to raise sufficientcapital in the near future, it will have a material adverse effect on ourfinancial condition and our ability to remain in business.

 

***We have outstanding bank debtunder a series of demand promissory notes that the bank has the right to callat any time.***Southwesthas outstanding debt totaling $1.55 million under a series of eight promissorynotes with Crown Bank that have each been co-signed by a shareholder ofSouthwest Casino Corporation. Under the terms of these notes, we are scheduledto pay accrued interest only through January 11, 2009. Beginning February 11,2009, we must then repay the entire balance of principal and accrued interestover 12 monthly payments. However, because these are “demand” promissory notes,the bank has the right to demand repayment in full at any time. If the bankwere to demand immediate repayment of these notes, we would not have sufficientfunds to do so and this would have a material adverse effect on our financialcondition and our ability to remain in business. Furthermore, withoutadditional working capital financing, our current operating cash flow will notbe sufficient to repay this obligation in accordance with its terms.

 

***We have anaccumulated deficit and uncertainty with respect to achieving futureprofitability***. Wehave incurred substantial operating losses since inception and had anaccumulated deficit of approximately $22.0 million as of September 30,2008. These losses are primarily the result of expenses related to our ongoingpursuit of new gaming opportunities, including the development of and operatinglosses at Running Aces Harness Park owned by North Metro Harness Initiative,LLC, the write-off our investment in North Metro, and operating losses fromprior periods. We cannot provide you any assurance that we will be able toachieve profitability on a quarterly or annual basis in future periods. Ourfuture operating results will depend upon a number of factors, including (a) thecontinuation and future profitability of our Colorado casinos; (b) ourability to maintain our consulting and management relationship with PalaceResorts and to successfully operate their casino in the Dominican Republic, (c) ourability to establish new gaming opportunities; (d) our ability to maintainour current gaming licenses and to obtain additional gaming licenses for new orexpanded gaming facilities; (e) our desire and ability to re-acquire ourformer ownership interest in North Metro Harness Initiative, LLC; and (f) ourability to successfully identify, secure licensing and maintain all necessaryapprovals and funding related to any additional future gaming opportunities.

 

***We no longerreceive revenue from our prior Oklahoma management agreement***. Our Gaming Management Agreement with theCheyenne and Arapaho Tribes of Oklahoma terminated on August 17, 2007. Wehave not received any revenue from management of the Lucky Star – Concho andLucky Star – Clinton casinos since that date. Before August 17, 2007,revenue from this management agreement was the primary source of our corporateoperating revenue. To date, we have not succeeded in replacing the revenuegenerated from this management agreement. Continued failure to replace thatrevenue would have a material adverse effect our financial condition and ourability to remain in business.

 

***The Cheyenne andArapaho Tribes of Oklahoma have initiated an arbitration proceeding against usin which the seek $10 million in damages.***In July 2007, the Governor of theCheyenne and Arapaho Tribes of Oklahoma initiated arbitration proceedingsagainst Southwest Casino and Hotel Corp. seeking to terminate our then in forcemanagement agreement with the Tribes and $10 million in damages. The Governorcontinues to pursue the damage claim against us and we are now in the discoveryphase of this proceeding. The hearing in this matter is scheduled for June 2009.We expect to incur significant legal expenses to defend the claims against usand pursue our counterclaims. If the Governor was to prevail in this proceedingand Southwest ordered to pay significant damages to the Tribes, it would have amaterial adverse affect on our finances and, if too large, could adverselyimpact our ability to remain in business.

 

**2.****                                     ****Risks related to the NorthMetro Harness Initiative racetrack and card room:**

 

***We could beliable for up to $1 million, plus certain costs, if we fail to perform underthe agreements related to the transfer of our membership interest in NorthMetro****.*On July 1,2008, we entered into a limited guaranty of up to $1 million (plus certaincosts) of the North Metro Harness Initiative, LLC construction loan. On October 19,2008, we transferred our membership interest in North Metro to Black DiamondCommercial Finance, L.L.C. as agent for the construction lenders. In connectionwith that transfer we entered into a Limited Covenant Not to Sue andTermination of Limited Guaranty under which Black Diamond, as Agent, agreed notto seek enforcement of the $1 million guaranty as long as we complied with theterms of the agreements transferring the membership interest and our four-monthconsulting agreement with Black Diamond. If we default in performance under thoseagreements (for example, if Black Diamond is unable to secure full memberrights in connection with the membership interest acquired from us or if wefail to provide the contracted for consulting services), Southwest may berequired to repay up to $1 million (plus certain costs) to the lenders, whichwould have a material adverse affect on our financial results and our abilityto remain in business.

 

***We may not be able to raisesufficient capital to exercise our right to repurchase our former membershipinterest in North Metro Harness Initiative, LLC***. We do not currently possess financialresources with which we can exercise our right to repurchase our 50 percentmembership interest in North Metro Harness Initiative, LLC during July 2009.If we determine that repurchasing that ownership interest in North Metro is inthe best interest of Southwest, we cannot assure you that will be able raisecapital or otherwise acquire financial resources with which to repurchase thatownership interest or that, if we are able to raise capital or otherwiseacquire financial resources with which to re-acquire that right that we will beable to do on terms that you believe are in the best interest of Southwest andits shareholders. In addition, any effort to re-acquire our former ownershipinterest in North Metro through a sale of common stock or securitiesconvertible into common stock is likely to be highly dilutive to ourshareholders. For that reason, we cannot provide you any assurance that we willre-acquire an ownership position in North Metro.

 

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***If we are able to re-acquire our50 percent ownership interest in North Metro, we will not control who owns theremaining 50 percent of the company***. We hold a right to re-acquire, in July 2009,the 50 percent membership interest in North Metro Harness Initiative, LLC thatwe transferred to Black Diamond Commercial Finance, L.L.C. on October 19,2008. Under the terms of the North Metro Harness Initiative, LLC Member ControlAgreement, if we continued to own our prior membership interest in North Metro,we would have had a right of first refusal on any proposed transfer ofmembership interest in North Metro and any transfer of membership interest to athird party would have required our approval before that entity could acquirefull rights as a member of North Metro. Because we no longer hold a membershipinterest in North Metro, we no longer have a right of first refusal or theability to deny membership rights to any entity that acquires an ownershipinterest in North Metro. For that reason, if we re-acquire our former ownershipinterest in North Metro in July 2009, we may have to accept new entitieswith whom we are unfamiliar as our co-owners of North Metro. In addition, thethen owners of the other membership interests in North Metro may have toconsent to our repurchase of our former membership interest. If a change in theownership of North Metro occurs and we exercise our right to re-acquire ourformer 50 percent membership interest, we will need to develop workingrelationships with these entities and, to an extent that we cannot know at thistime, may depend on these entities for operational and financial support ofNorth Metro. If we reacquire our ownership interest in North Metro and areunable to develop working relationships, or if the other 50 percent owner orowners of North Metro fail to provide the support that we believe is needed,North Metro may be adversely affected and that could have a material adverseeffect on Southwest and its business.

 

**3.****            ****Risks related to our international consulting andmanagement services:**

 

***Our consulting and management contract for acasino in the Dominican Republic involves risks.***We currently provide consulting services and will provide management servicesfor a new casino being developed in the Dominican Republic. Our ability toprovide those services and generate revenue from those services is subject tosignificant risks related to (a) the ability of Palace Resorts to completethe development of the resort and the casino and otherwise perform itsobligations under our consulting and management agreement, (b) the gamingregulatory framework of the Dominican Republic, (c) our ability to adaptto a different regulatory and gaming environment in the Dominican Republicwhile remaining in compliance with the requirements of the gaming regulatoryauthorities in the jurisdictions in which we currently operate, as well asother applicable federal, state, or local laws in the United States and theDominican Republic, (d) our ability to operate in a jurisdiction whereEnglish is not the primary language of our employees and regulators, (e) potentialpolitical or economic instability in the Dominican Republic, and (f) theextreme weather conditions in the region.

 

***The decisions of sovereign governments couldhave a material adverse effect on our international consulting and managementservices business.***Sovereign governments,including the Dominican Republic, may establish laws or regulations thatnegatively effect to our ability to provide such services or that will affectour ability, as a foreign corporation, to operate in their country. Governmentshave also, from time to time, established foreign exchange controls that couldhave a material adverse effect on our business, financial condition, andresults of operations. Because we will receive management fees based on apercentage of the revenue of a casino, any action by a foreign governmentharmful to the business of a casino we serve, even if it does not directlyimpact our ability to provide consulting and management services, may reducethe revenue generated through the consulting or management services we provide.

 

***Palace Resorts, to whom we provide consultingand management services in the Dominican Republic, has the right to terminateour consulting and management services contract under certain circumstances***.Under the terms of our agreement to provide consulting and management services,Palace Resorts, 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 our participation in thegaming industry:**

 

***We, and thegaming industry as a whole, are heavily regulated and any change in theregulatory environment could have a material adverse effect on our business andoperations***. 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.

 

***We face risks inconnection with obtaining, maintaining and renewing gaming licenses requiredfor the conduct of our business***.  The development and management of gaming facilities are subjectto extensive licensing requirements and we cannot assure you that we will beable to obtain or maintain all necessary licenses, approvals and otherclearances from regulatory authorities having jurisdiction over our gamingfacilities.  Although we, and our affiliates, have obtained thegovernmental licenses, permits and approvals we believe are necessary for thecontinued operation of our Colorado casinos these licenses must be renewed onan annual or bi-annual basis. We cannot assure you that we will be able tomaintain or renew the necessary licenses, approvals and other clearancesrequired for our operations.

 

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***All licensesthat have been or may be obtained by us or our affiliates are subject tovarious conditions and in many cases will be subject to renewal***.  A failure to comply with gamingregulations or the conditions of any license we hold could have an adverseeffect upon our ability to secure, maintain or renew our gaming licenses. We were fined $50,000 by the Colorado Division of Gaming in June 2004 forfailure to properly maintain and review statistical data on slot machineperformance after receiving a warning letter regarding this deficiency andfailing to comply with its recommended action for correction of the deficiency.We entered into a Stipulation and Agreement with the Colorado Limited GamingControl Commission in which we admitted that we failed to comply with theapplicable gaming regulations and agreed to take corrective action immediately.As part of these proceedings, James Druck, in his capacity as Manager of thefacility in question, without any admission of guilt, agreed to take the stepsrequired to insure our compliance in this matter and, further, agreed to paythe sum of $5,000 to Colorado’s Limited Gaming Fund as reimbursement forexpenses incurred by Colorado in this investigation.  It is difficult topredict with any certainty whether, and to what extent, this occurrence mayhave a material adverse effect on our business or adversely affect our abilityand the ability of our key personnel to obtain or retain required licenses inColorado. In addition, we must disclose this violation to other jurisdictionsin which we hold or apply for gaming licenses. It is difficult to predict whatimpact, if any, that disclosure may have on our ability to obtain or maintainlicenses in those jurisdictions.

 

**5.****            ****Risks related to the gaming industry generally:**

 

***We face intensecompetition in the gaming industry***. The gaming industry, including the development, operation andmanagement of racetracks and other types of facilities, is highly competitive,especially given the rapid rate at which the industry is expanding. Forexample, a number of management companies may make proposals to a particulartribe for the development and management of a single Indian gaming facility,and any gaming facilities developed or managed by us will compete with arapidly expanding number of other gaming facilities of varying quality andsize, including gaming facilities that are part of national or regional chains,and other forms of gaming and entertainment. Many of our competitors havesubstantially greater financial and personnel resources than we do. Competitionin the future may also be affected by overbuilding of gaming facilities in ourmarkets, which can adversely affect patronage levels. Given the currentregulatory climate and limited number of lucrative gaming opportunitiesavailable, competition is likely to become more intense in the future.

 

***Changes in theCripple Creek, Colorado gaming market may negatively impact the performance ofour Gold Rush Hotel and Casino and the Gold Digger’s Casino*****.**A new casinooffering approximately 700 gaming devices opened in Cripple Creek, Colorado on May 31,2008. Our ability to maintain and grow our Colorado operations is largelydependent on our ability to increase our market share in a highly competitiveenvironment. The opening of this new casino will increase the level ofcompetition in this market. At this time, we cannot predict the short or longterm effects of the opening of this facility on our Colorado operations.

 

In addition, Coloradobanned smoking on casino floors effective January 1, 2008. We expect thisban will have some negative impact on business volume in the Cripple Creekmarket. We cannot predict the impact of this smoking ban on the Gold Rush andGold Digger’s casinos at this time.

 

***We face risksassociated with our pursuit 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 projects may be controversial in some areas andface significant opposition from competitors or individuals and groups opposedto 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.

 

***We will continueto face legislative and judicial hurdles and adverse legislative and judicialchanges***. The legislative and judicial environments related to gaming are dynamic andchange rapidly. Any federal, state or local action, adverse legislation, orjudicial or regulatory ruling that limits gaming or constricts the scope of ourgaming operations could have a material adverse effect on the gaming industryor our operations and financial condition.

 

***We face risksrelated to the nature of the gaming industry, including adverse economic andpolitical conditions and changes in the legislative and land use regulatoryclimate***. Adverse changes in general and local economic conditions have adverselyimpacted investments in the gaming industry during 2008, including our operations. Gaming revenue is down in almost all markets nationwide, including Colorado. Inaddition, the availability of capital to acquire or expand gaming facilities iscurrently limited, thus increasing acquisition costs and limiting enterprisevalues in the industry. Examples of economic conditions that impact ouroperations and are subject to change include, among others, (a) competitionin the form of other gaming facilities and entertainment opportunities; (b) changesin regional and local population and disposable income; (c) unanticipatedincreases in operating costs; (d) restrictive changes in zoning andsimilar land use laws and regulations, or in health, safety and environmentallaws, rules and regulations; (e) risks inherent in owning, financingand developing real estate as part of our casino operations; (f) theinability to secure property and liability insurance to fully protect againstall losses, or to obtain such insurance at reasonable costs; (g) seasonality;(h) changes or cancellations in local tourist, recreational or culturalevents; and (i) changes in travel patterns or preferences (which may beaffected by increases in gasoline prices, changes in airline schedules andfares, strikes, weather patterns or relocation or construction of highways,among other factors).

 

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**6.****            ****Additional Risks:**

 

***The success ofour current operations and our future growth potential are dependent upon keypersonnel***. Our success depends to a significant extent upon the efforts and abilities ofour executive officers, James B. Druck and Thomas E. Fox. Each of theseindividuals has developed relationships and experience in the gaming industrythat are integral to our success. We have entered into employment agreementswith Messrs. Druck and Fox. We do not maintain key man life insurance oneither of these individuals. The loss of the services of one or both of theseindividuals could have a material adverse effect on our business and currentand proposed operations.

 

***The success ofour current operations and our future growth potential are dependent upon ourrelationship with and the performance of certain third parties***.  The successful operation of ourvarious proposed gaming facilities will be dependent to a significant extent onthe efforts of third parties.  For example, (a) with respect to ourconsulting and management agreement for a casino in the Dominican Republic, wedepend on the ability of Palace Resorts to finance and develop the casino andto finance, develop and operate the larger resort of which the casino is apart, (c) with respect to any other project pursued by us, we may need toform partnerships or will need to secure third party funding in order to meetthe financial requirements that will transcend our own financial resources; and(d) with respect to any facility located on Native American land, we willnot own the facility and will depend on the performance by a tribe of itsobligations under the applicable management agreement. The failure of any thirdparty to perform its contractual obligations to us could have a materialadverse effect on our business and operations.  In addition, dependingupon the structure of any particular joint venture, we may be held responsiblefor the acts or omissions of our co-venturers.

 

***We face risksrelated to the diminishing control of our existing management***.  Our directors and executive officerscurrently beneficially own (together with their spouses, on a fully-dilutedbasis and including shares that may be received in connection with the exerciseof outstanding options and warrants) approximately 28.6%****of theoutstanding shares of our common stock. By virtue of the forgoing, ourdirectors and executive officers will have limited voting influence inconnection with the election of our future directors and the control of ourbusiness and affairs.

 

***We have theright to redeem your stock under certain circumstances and the redemption pricecould be less than your original investment.***Under our Articlesof Incorporation, we have theright to redeem any outstanding share of our common or preferred stock if ourBoard of Directors determines that the continued ownership of those shares maycause any regulatory authority to deny or refuse to approve any gaming licenseor gaming contract. In accordance with our Articles of Incorporation, theredemption price will equal the lesser of (i) the cash equivalent of theshareholder’s investment in the Corporation or (ii) the current marketprice for the shares on the date the shareholder is found to be unsuitable.

 

***We have theability to issue shares of preferred stock that may reduce the value of ourcommon shares and your rights as a common shareholder***. Our shareholders have authorized theissuance of up to 30 million shares of preferred stock with rights andpreferences to be determined by our Board of Directors. We have an immediateneed for capital and may designate and may issue shares of preferred stock inorder to raise needed funds. The effects of any issuance of preferred stockmight include, among other effects:

 

·                  restrictions on the payment of dividends toholders of common stock;

·                  dilution of voting power to the extent thatholders of preferred stock are given voting rights;

·                  dilution of equity interest and voting powerif the preferred stock is convertible into common stock;

·                  restrictions upon any distribution of assetsto the holders of common stock upon liquidation or dissolution, andrestrictions upon the amounts of merger consideration payable to the holders ofcommon stock upon a merger or acquisition of Southwest, until the satisfactionof any liquidation preference granted to the holders of preferred stock;

·                  redemption rights for holders of preferredstock that may restrict the availability of revenue for other corporate uses,including the payment of dividends; and

·                  special voting rights for holders ofpreferred stock in connection with major corporate actions such as mergers,acquisitions or other transactions.

 

In addition, any particular issuance or series ofpreferred stock could, depending on the terms, make it more difficult ordiscourage any attempt to obtain control of Southwest by means of a merger,tender offer, proxy contest or other means. 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 toaccomplish business combinations opposed by the incumbent Board.

 

***Because ourcommon stock is traded on the OTC Bulletin Board, your ability to sell sharesin the secondary trading market may be limited***.  Our common stock trades on theover-the-counter market on the OTC Bulletin Board.  Consequently, theliquidity of our common stock is impaired, not only in the number of sharesthat are bought and sold, but also through delays in the timing oftransactions, and limited coverage by security analysts and the news media, ifany, of our company.  As a result, prices for shares of our common stockmay be lower and more

 

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volatile than might otherwise prevail if our commonstock was quoted on the Nasdaq Stock Market or traded on a national securitiesexchange like The New York Stock Exchange or American Stock Exchange.

 

***Because ourshares are “penny stocks,” you may have difficulty selling them in thesecondary trading market***.  Federal regulations under the Securities Exchange Act of 1934regulate the trading of so-called “penny stocks,” which are generally definedas any security not listed on a national securities exchange or Nasdaq, pricedat less than $5.00 per share and offered by an issuer with limited net tangibleassets and revenues.  Since our common stock currently trades on the OTCBulletin Board at less than $5.00 per share, our common stock is a “penny stock”and may not be traded unless a disclosure schedule explaining the penny stockmarket and associated risks is delivered to a potential purchaser before anytrade.

 

In addition, because our common stock is not listedon Nasdaq or any national securities exchange and currently trades at less than$5.00 per share, trading in our common stock is subject to Rule 15g-9under the Exchange Act.  Under this rule, broker-dealers must take certainsteps prior to selling a “penny stock,” which steps include:

 

·                  obtaining financial and investmentinformation from the investor;

·                  obtaining a written suitability questionnaireand purchase agreement signed by the investor; and

·                  providing the investor a writtenidentification of the shares being offered and the quantity of the shares.

 

If the broker-dealer does not follow these pennystock rules, the investor has no obligation to purchase the shares.  Theapplication of these comprehensive rules will make it more difficult forbroker-dealers to sell our common stock and our shareholders, therefore, mayhave difficulty selling their shares in the secondary trading market.

 

***Our stock price may be volatileand your investment in our common stock could suffer a decline in value*****.**The market price of our common stock mayfluctuate significantly in response to a number of factors, some of which arebeyond our control. These factors include:

 

·                  government regulatory action affecting ouroperations;

·                  actual or anticipated fluctuation in ouroperating results;

·                  general market conditions for the gaming industry;

·                  broad market fluctuations; and

·                  economic conditions in the United States orabroad.

 

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

 

**Item 6.  Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                        | ** ** | **Method of Filing**                                                             |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|
| 10.1             |       | Limited  Liability Company Interest Purchase Agreement dated October 19, 2008 by  and among Southwest Casino and Hotel Corp. and Black Diamond Commercial  Finance, L.L.C., as Agent                              |       | Filed as Exhibit 10.1 to Current Report on Form 8-K filed  October 23, 2008 |
| 10.2             |       | Limited  Covenant Not to Sue and Release of Limited Guaranty dated October 19,  2008 among Southwest Casino Corporation, Southwest Casino and Hotel Corp. and  Black Diamond Commercial Finance, L.L.C., as Agent |       | Filed as Exhibit 10.2 to Current Report on Form 8-K filed  October 23, 2008 |
| 10.3             |       | Settlement  Agreement dated October 19, 2008 among Southwest Casino Corporation,  Southwest Casino and Hotel Corp. and Black Diamond Commercial Finance,  L.L.C., as Agent                                        |       | Filed as Exhibit 10.3 to Current Report on Form 8-K filed  October 23, 2008 |
| 10.4             |       | Consulting Agreement dated  October 19, 2008 among Southwest  Casino and Hotel Corp. and Black Diamond Commercial Finance, L.L.C., as Agent                                                                       |       | Filed as Exhibit 10.4 to Current Report on Form 8-K filed  October 23, 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**

 

Inaccordance with the requirements of the Securities and Exchange Act of 1934, asamended, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| November 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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