# **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

## **FORM 10-QSB**

**(Mark One)**

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

** **

**For theTransition PeriodFrom                To**

**Commissionfile number 000-50572**

#### **SOUTHWESTCASINO CORPORATION******(Exact name of small business issuer as specified in itscharter)

 

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

**2001Killebrew Drive, Suite 350, Minneapolis, Minnesota 55425**(Address of principal executive offices)

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

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

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

State the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date:  27,286,443 as of July 31, 2007.

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

 

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**SOUTHWESTCASINO CORPORATION**

**FORM 10-QSBJune 30, 2007**

**TABLE OFCONTENTS**

 
| Description     | ** ** | ** **                                                                                                         | ** ** | ** ** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
|            |       |                                                                                                               |       |       |
| PART I.         |       | FINANCIAL INFORMATION                                                                                              |       |       |
| ITEM 1.         |       | Financial Statements                                                                                               |       | 1          |
|            |       | Consolidated Balance Sheet (Unaudited) June 30, 2007                                                               |       | 2          |
|            |       | Consolidated Statements of Operations (Unaudited) for  the Three and Six Months ended June 30, 2007 and 2006       |       | 3          |
|            |       | Consolidated Statements of Cash Flows (Unaudited) for  the Six Months ended June 30, 2007 and 2006                 |       | 4          |
|            |       | Consolidated Statement of Changes in Stockholders’  Equity (Unaudited) for the Six Months ended June 30, 2007 |       | 5          |
|            |       | Notes to Unaudited Consolidated Financial Statements                                                               |       | 6          |
| ITEM 2.         |       | Management’s  Discussion and Analysis or Plan of Operation                                                    |       | 20         |
| ITEM 3.         |       | Controls and  Procedures                                                                                           |       | 31         |
|            |       |                                                                                                               |       |       |
| PART II.        |       | OTHER INFORMATION                                                                                                  |       |       |
| ITEM 1.         |       | Legal Proceedings                                                                                                  |       | 32         |
| ITEM 4.         |       | Submission  of Matters to a Vote of Security Holders                                                               |       | 34         |
| ITEM 6.         |       | Exhibits                                                                                                           |       | 34         |
| SIGNATURE  PAGE |       | 35                                                                                                                 |

 

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

i

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**PART I— FINANCIAL INFORMATION**

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

 

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**SOUTHWEST CASINO CORPORATIONConsolidated Balance Sheets (Unaudited)June 30, 2007**
| ** **                                                                                                                          | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ASSETS                                                                                                                              |       |        |       |
|                                                                                                                                |       |        |       |
| CURRENT ASSETS                                                                                                                      |       |        |       |
| Cash and Cash  Equivalents                                                                                                          |       | $           | 1,408,629  |   |
| Accounts  Receivable                                                                                                                |       | 81,197      |       |
| Management Fees  Receivable                                                                                                         |       | 337,622     |       |
| Inventories                                                                                                                         |       | 163,509     |       |
| Prepaid Expenses                                                                                                                    |       | 577,312     |       |
| Other Current  Assets                                                                                                               |       | 64,800      |       |
| Total Current  Assets                                                                                                               |       | $           | 2,633,069  |   |
|                                                                                                                                |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                                              |       |        |       |
| Leasehold  Improvements                                                                                                             |       | 15,752,964  |       |
| Furniture and  Equipment                                                                                                            |       | 6,214,337   |       |
| Accumulated  Depreciation                                                                                                           |       | (11,725,610 | )          |
| Net Property and  Equipment                                                                                                         |       | $           | 10,241,691 |   |
|                                                                                                                                |       |        |       |
| OTHER ASSETS                                                                                                                        |       |        |       |
| Intangible  Assets                                                                                                                  |       | $           | 296,198    |   |
| Other Assets                                                                                                                        |       | 476,418     |       |
| Investment in Unconsolidated  Subsidiary                                                                                            |       | 7,364,607   |       |
| Total Other  Assets                                                                                                                 |       | $           | 8,137,223  |   |
|                                                                                                                                |       |        |       |
| TOTAL ASSETS                                                                                                                        |       | $           | 21,011,983 |   |
|                                                                                                                                |       |        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                          |       |        |       |
|                                                                                                                                |       |        |       |
| CURRENT LIABILITIES                                                                                                                 |       |        |       |
| Accounts Payable                                                                                                                    |       | $           | 810,403    |   |
| Accrued Expenses                                                                                                                    |       | 835,882     |       |
| Accrued  Liabilities - Related Parties                                                                                              |       | 122,467     |       |
| Current Portion  of Long-Term Liabilities                                                                                           |       | 996,467     |       |
| Total Current  Liabilities                                                                                                          |       | $           | 2,765,219  |   |
|                                                                                                                                |       |        |       |
| LONG-TERM LIABILITIES                                                                                                               |       |        |       |
| Long-Term  Liabilities Net of Current Portion                                                                                       |       | $           | 6,993,954  |   |
|                                                                                                                                |       |        |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                      |       |        |       |
|                                                                                                                                |       |        |       |
| STOCKHOLDERS’ EQUITY                                                                                                           |       |        |       |
| Preferred Stock,  $.001 Par Value; 30,000,000 Shares Authorized                                                                     |       | $           | —     |   |
| Common Stock,  $.001 Par Value  75,000,000 Shares Authorized, 27,643,443 Shares  Issued and 27,286,443 Outstanding at June 30, 2007 |       | 27,644      |       |
| Additional  Paid-in Capital                                                                                                         |       | 21,313,848  |       |
| Accumulated  Deficit                                                                                                                |       | (9,766,382  | )          |
|                                                                                                                                |       | 11,575,110  |       |
| Less Treasury  Stock (357,000 shares redeemed)                                                                                      |       | (322,300    | )          |
|                                                                                                                                |       |        |       |
| Total  Stockholders’ Equity                                                                                                    |       | 11,252,810  |       |
|                                                                                                                                |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $           | 21,011,983 |   |

 

See Notes toUnaudited Consolidated Financial Statements

2

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**SOUTHWEST CASINO CORPORATIONConsolidated Statements of Operations (Unaudited)For the Three and Six Months Ended June 30, 2007 and 2006**
| ** **                                                                         | ** ** | **For the three  months ended** | ** ** | **For the three  months ended** | ** ** | **For the six  months ended** | ** ** | **For the six  months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 30, 2007**                    | ** ** | **June 30, 2006**                    | ** ** | **June 30, 2007**                  | ** ** | **June 30, 2006**                  | ** ** |
| ** **                                                                         | ** ** | ** **                                     | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| **NET REVENUES**                                                                   |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Casino                                                                             |       | $                                              | 3,743,884  |                                           | $          | 3,869,351                                    |       | $                                            | 7,125,276  |   | $ | 7,370,686 |   |
| Food &  Beverage/Hotel                                                         |       | 130,865                                        |       | 142,792                                        |       | 230,320                                      |       | 258,056                                      |       |
| Management and  Consulting                                                         |       | 1,501,628                                      |       | 1,391,195                                      |       | 3,131,451                                    |       | 3,093,813                                    |       |
| Entertainment                                                                      |       | 29,546                                         |       | 6,125                                          |       | 29,546                                       |       | 6,125                                        |       |
| Other                                                                              |       | 50,246                                         |       | 34,938                                         |       | 81,805                                       |       | 90,233                                       |       |
|                                                                               |       | 5,456,169                                      |       | 5,444,401                                      |       | 10,598,398                                   |       | 10,818,913                                   |       |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **EXPENSES**                                                                       |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Casino                                                                             |       | $                                              | 2,892,150  |                                           | $          | 2,819,353                                    |       | $                                            | 5,744,793  |   | $ | 5,728,524 |   |
| Food &  Beverage/Hotel                                                         |       | 339,988                                        |       | 353,655                                        |       | 649,688                                      |       | 706,534                                      |       |
| Corporate  Expense                                                                 |       | 821,234                                        |       | 687,321                                        |       | 2,124,819                                    |       | 1,312,296                                    |       |
| Project  Development Costs                                                         |       | 84,295                                         |       | 81,115                                         |       | 252,571                                      |       | 177,483                                      |       |
| Entertainment                                                                      |       | 53,432                                         |       | 34,749                                         |       | 68,837                                       |       | 49,580                                       |       |
| Depreciation and  Amortization                                                     |       | 487,744                                        |       | 542,798                                        |       | 1,028,377                                    |       | 1,085,105                                    |       |
|                                                                               |       | 4,678,843                                      |       | 4,518,991                                      |       | 9,869,085                                    |       | 9,059,522                                    |       |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **INCOME FROM OPERATIONS**                                                         |       | $                                              | 777,326    |                                           | $          | 925,410                                      |       | $                                            | 729,313    |   | $ | 1,759,391 |   |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **OTHER INCOME (EXPENSE)**                                                         |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Interest Income                                                                    |       | $                                              | 652        |                                           | $          | 555                                          |       | $                                            | 3,221      |   | $ | 1,172 |   |
| Interest Expense                                                                   |       | (203,374                                       | )          | (262,177                                       | )          | (452,823                                     | )          | (584,523                                     | )          |
| Write-off of Acquisition  and Financing Costs                                      |       | (126,650                                       | )          |                                           |       | (126,650                                     | )          | —                                       |       |
|                                                                               |       | (329,372                                       | )          | (261,622                                       | )          | (576,252                                     | )          | (583,351                                     | )          |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **Income before income taxes,  equity in earnings of unconsolidated subsidiaries** |       | 447,954                                        |       | 663,788                                        |       | 153,061                                      |       | 1,176,040                                    |       |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Income Taxes                                                                       |       |                                           |       | (225,688                                       | )          | —                                       |       | (400,354                                     | )          |
| Loss of  Unconsolidated Subsidiaries, Net of Tax Benefit                           |       | (96,437                                        | )          | (60,523                                        | )          | (216,608                                     | )          | (100,465                                     | )          |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Income (Loss)  from Continuing Operations                                          |       | 351,517                                        |       | 377,577                                        |       | (63,547                                      | )          | 675,221                                      |       |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **NET INCOME (LOSS)**                                                              |       | $                                              | 351,517    |                                           | $          | 377,577                                      |       | $                                            | (63,547    | ) | $ | 675,221 |   |
|                                                                               |       |                                           |       |                                           |       |                                         |       |                                         |       |
| **Income (loss) per share - basic**                                                |       | $                                              | 0.01       |                                           | $          | 0.02                                         |       | $                                            | (0.00      | ) | $ | 0.03 |   |
| **Income (loss) per share -  diluted**                                             |       | $                                              | 0.01       |                                           | $          | 0.02                                         |       | —                                       |       | $ | 0.03 |   |
| **Weighted average common shares  outstanding - basic**                            |       | 27,286,443                                     |       | 19,688,656                                     |       | 26,026,331                                   |       | 19,662,545                                   |       |
| **Weighted average common shares outstanding -  diluted**                          |       | 29,394,824                                     |       | 20,845,522                                     |       | —                                       |       | 20,703,397                                   |       |

 

See Notes toUnaudited Consolidated Financial Statements

3

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**SOUTHWEST CASINO CORPORATIONConsolidated Statements of Cash Flows (Unaudited)For the Six Months Ended June 30, 2007 and 2006**
| ** **                                                               | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash Flows from  Operating Activities:                                   |       |       |       |       |       |
| Net Income  (Loss)                                                       |       | $          | (63,547    | )          | $          | 675,221 |   |
| Adjustments to  Reconcile Net Income (Loss) to                           |       |       |       |       |       |
| Net Cash  Provided by Operating Activities:                              |       |       |       |       |       |
| Depreciation and  Amortization                                           |       | 1,028,377  |       | 1,085,106  |       |
| Amortization of Loan  Costs                                              |       | 56,619     |       | 82,559     |       |
| Write-off of Acquisition  and Financing Costs                            |       | 126,650    |       |       |       |
| Stock Based Compensation  Expense                                        |       | 138,942    |       | 93,788     |       |
| Loss of  Unconsolidated Subsidiary                                       |       | 216,608    |       | 132,129    |       |
| Change in  Current Assets and Liabilities,                               |       |       |       |       |       |
| (Increase)  Decrease in Restricted Cash                                  |       | —     |       | 2,656      |       |
| (Increase)  Decrease in Receivables                                      |       | (261,313   | )          | (68,617    | )          |
| (Increase)  Decrease in Inventories                                      |       | 9,707      |       | (25,611    | )          |
| (Increase)  Decrease in Prepaid Expenses                                 |       | 11,419     |       | 71,084     |       |
| (Increase)  Decrease in Other Current Assets                             |       | (4,275     | )          |       |       |
| (Increase) Decrease  in Deferred Tax Asset                               |       | —     |       | 368,190    |       |
| Increase  (Decrease) in Accounts Payable                                 |       | 161,694    |       | (67,719    | )          |
| Increase  (Decrease) in Accrued Expenses                                 |       | (136,922   | )          | (376,648   | )          |
| Increase  (Decrease) in Accrued Interest Payable                         |       | (5,927     | )          | (3,490     | )          |
| Net Cash  Provided By Operating Activities                               |       | $          | 1,278,032  |       | $          | 1,968,648 |   |
|                                                                     |       |       |       |       |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                    |       |       |       |       |       |
| Purchase of  Property and Equipment                                      |       | (179,086   | )          | (152,089   | )          |
| Payment of Deposit                                                       |       | (2,713     | )          | 14,000     |       |
| Payment of Costs  Associated with Management Contract                    |       | (306,450   | )          |       |       |
| Investment in  Unconsolidated subsidiary                                 |       | (2,527,195 | )          | (378,501   | )          |
| Net Cash Used In  Investing Activities                                   |       | $          | (3,015,444 | )          | $          | (516,590 | ) |
|                                                                     |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                    |       |       |       |       |       |
| Net Payments on  Short-Term Notes Payable                                |       | $          | (446,292   | )          |       |   |
| Principal  Payments on Long-Term Borrowings                              |       | (1,224,996 | )          | (1,124,254 | )          |
| Proceeds from  Issuance of Common Stock upon Exercise of Warrants        |       | —     |       | 12,000     |       |
| Proceeds from  Issuance of Common Stock and Warrants                     |       | 4,054,369  |       |       |       |
| Redemption of Common  Stock                                              |       | (322,300   | )          | —     |       |
| Other                                                                    |       | (8,900     | )          |       |       |
| Payment of Deferred  Financing Costs                                     |       | (437,100   | )          |       |       |
| Payments for  liabilities owed to related parties                        |       |       |       | (110,000   | )          |
| Net Cash  Provided (Used) by Financing Activities                        |       | $          | 1,614,781  |       | $          | (1,222,254 | ) |
|                                                                     |       |       |       |       |       |
| Net Increase in  Cash and Cash Equivalents                               |       | (122,631   | )          | 229,804    |       |
|                                                                     |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS                                               |       |       |       |       |       |
| Beginning of  Period                                                     |       | 1,531,260  |       | 1,195,145  |       |
| End of Period                                                            |       | $          | 1,408,629  |       | $          | 1,424,949 |   |
|                                                                     |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION                        |       |       |       |       |       |
| Interest Paid                                                            |       | $          | 402,131    |       | $          | 531,812 |   |
| Income Taxes Paid                                                        |       | $          | 37,858     |       | $          | 22,500 |   |
|                                                                     |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF NON-CASH  INVESTING AND FINANCING ACTIVITIES |       |       |       |       |       |
|                                                                     |       |       |       |       |       |
| Capital Assets  acquired with acounts payable                            |       | $          | 12,703     |       | $          | 115,589 |   |
| Deferred  financing costs included in accounts payable                   |       | $          | 68,358     |       |       |   |
| Costs associated with  issuing common stock included in accounts payable |       | $          | 13,465     |       |       |   |

 

See Notes toUnaudited Consolidated Financial Statements

4

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**SOUTHWEST CASINO CORPORATIONConsolidated Statements of Changes in Stockholders’ Equity (Unaudited)For the Six Months Ended June 30, 2007**
| ** **                                                        | ** ** | **Treasury Stock**    | ** ** | **Common Stock** | ** ** | **Additional**             | ** ** | ** ** | ** ** | ** **           | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **Number of  Shares** | ** ** | **Amount**            | ** ** | **Number of  Shares** | ** ** | **Amount** | ** ** | **Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| **BALANCE December 31, 2006**                                     |       | —                     |       | $                     | —     |                       | 19,688,656 |       | $          | 19,689               |       | $ | 17,239,894 |   | $ | (9,702,835 | ) | $ | 7,556,748 |   |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| Issuance  of Common Stock and Warrants, net                       |       |                       |       |                  |       | 7,954,787                  |       | 7,955      |       | 3,935,012            |       |   |   | 3,942,967 |   |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| Redemption  of Common Stock                                       |       | (357,000                   | )          | (322,300              | )          |                       |       |       |       | —               |       |   |   | (322,300 | ) |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| Stock-based  compensation expense related to options and warrants |       |                       |       |                  |       |                       |       |       |       | 138,942              |       |   |   | 138,942 |   |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| Net  Income                                                       |       |                       |       |                  |       |                       |       |       |       |                 |       | (63,547 | ) | (63,547 | ) |
|                                                              |       |                       |       |                  |       |                       |       |       |       |                 |       |   |   |   |   |
| **BALANCE June 30, 2007**                                         |       | (357,000                   | )          | $                     | (322,300   | )                          | 27,643,443 |       | $          | 27,644               |       | $ | 21,313,848 |   | $ | (9,766,382 | ) | $ | 11,252,810 |   |

 

See Notes toUnaudited Consolidated Financial Statements

 

5

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)****June 30, 2007**

**NOTE 1 —BASIS OF PRESENTATION**

The unauditedconsolidated financial statements of Southwest Casino Corporation, a Nevadacorporation (the “Company”), have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) applicable tointerim financial information. Accordingly, certain information normallyincluded in the annual financial statements prepared in accordance withaccounting principles generally accepted in the United States has beencondensed or omitted. For further information, please refer to the annualaudited consolidated financial statements of the Company, and the related notesincluded within the Company’s Annual Report on Form 10-KSB for the yearended December 31, 2006, filed with the SEC on March 21, 2007.

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

**NOTE2 — MANAGEMENT FINANCIAL PLANS**

The Company has completed two closings on an equityfinancing, see Note 5. The net proceeds from the sale of securities wereapproximately $4 million. As a result of the financing agreement entered intoby North Metro, see Note 7, the Company was required to make additionalmembership contributions of approximately $2.35 million to North Metro fromJanuary 1, 2007 to the time the loan closed on April 20, 2007.  Additionally, the Company’s managementcontract with the Cheyenne and Arapaho Tribes was extended for two additionalyears on May 19, 2007.  However themanagement fees have been amended and there remains uncertainty with ourmanagement contract, see Note 8.  If themanagement contract terminates, the Company will be required to seek additionaldebt or equity financing within the next twelve months.   The Company may also seek debt and equityfinancing at various times throughout the year related to various initiatives.

**NOTE 3 —STOCK OPTIONS AND AWARDS**

Stock option plans:

On July 15, 2004, Southwest Casino and Hotel Corp.shareholders approved the Southwest Casino and Hotel Corp. 2004 Stock IncentivePlan that had been adopted by the company’s Board of Directors effective June1, 2004. Under the terms of the reorganization completed July 22, 2004,Southwest Casino Corporation assumed the rights and obligations of SouthwestCasino and Hotel Corp. under this plan. The plan permits Southwest CasinoCorporation to issue incentive awards to all employees of Southwest CasinoCorporation or any of its subsidiaries and any non-employee directors,consultants or independent contractors of the Company or any of itssubsidiaries. Incentive awards under the plan include “incentive options” underSection 422 of the Internal Revenue Code of 1986, “non-statutory stock options”that do not qualify for “incentive option” treatment, stock appreciation rights,restricted stock awards, performance units and stock bonuses. Effective June14, 2007, the shareholders approved an amendment to increase the number ofshares available for grant under the plan from 1,500,000 to 3,000,000.  Asof June 30, 2007, 925,000 options have been issued and are outstanding.  No options have been granted from July 1,2006 to present.

In addition to the assumption of the 2004 StockIncentive Plan, Southwest Casino Corporation assumed outstanding non-planoptions to acquire shares of Southwest Casino and Hotel Corp. common stock aspart of its reorganization. The Company assumed stock options to purchase1,575,000 shares of its common stock at a weighted average price of $.62 pershare.

Valuation andExpense Information under SFAS 123(R)

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

6

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s consolidated statement of operations.SFAS 123(R) supersedes the Company’sprevious accounting under the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”).

The effect of stock options issued was to decrease netearnings for the three months ended June 30, 2007 and 2006 by $44,221 and$66,080, respectively, and basic and diluted earnings per share by $0.002 and$0.003, respectively.  The effect ofstock options issued was to increase the net loss for the six months ended June30, 2007 and decrease the net earnings for the six months ended June 30, 2006by $88,525 and $85,411, respectively, and basic loss per share and basis anddiluted earnings per share by $0.003 and $0.004, respectively.

Options are granted to employeesand directors at prices equal to the market value of the stock on the dates theoptions are granted. The options granted have terms of 5 to 10 years from thegrant date and granted options typically vest quarterly over a one to threeyear period. The fair value of each option is amortized into compensationexpense over the period the option vests. We have estimated fair value of allstock options as of the date of grant applying the Black-Scholes pricingvaluation model. The application of this valuation model involves assumptionsthat are judgmental and sensitive in the determination of compensation expense.No options were granted during the six months ended June 30, 2007.

Status of options duringthe six months ended June 30, 2007
| ** **                            | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| Balance at  December 31, 2006         |       | 2,500,000                |       | $                                          | 0.65       |                                     |       |                                |       |   |
| Granted                               |       | 0                        |       |                                       |       |                                     |       |                                |       |
| Forfeited/cancelled/expired           |       | 0                        |       |                                       |       |                                     |       |                                |       |
| Exercised                             |       | 0                        |       |                                       |       |                                     |       |                                |       |
| Balance at June  30, 2007             |       | 2,500,000                |       | $                                          | 0.65       |                                     |       |                                |       |   |
|                                  |       |                     |       |                                       |       |                                     |       |                                |       |
| Options  outstanding at June 30, 2007 |       | 2,500,000                |       | $                                          | 0.65       |                                     | 5.6 years  |                                | $          | — |   |
| Options exercisable at  June 30, 2007 |       | 2,174,583                |       | $                                          | 0.65       |                                     | 5.1 years  |                                | $          | — |   |

 

As the closing stock price of $0.56 at June 30, 2007was less than the weighted average exercise price for both options outstandingand options exercisable there was no intrinsic value.  As of June 30, 2007, the Company’sunrecognized share-based compensation related to stock options wasapproximately $215,000. This cost is expected to be expensed over a weightedaverage period of one and a quarter years.

No tax benefit has been recorded on the share basedcompensation expense for the three and six month periods ended June 30, 2007and 2006.

**NOTE 4 —WARRANTS**

Status of warrants:

|                                               | ** ** | **Warrants  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|--------------------------------------------|------------|
| Warrants  outstanding as of December 31, 2006 |       | 1,837,500                 |       | $                                          | 0.56       |   |
| Granted                                       |       | 4,258,602                 |       | $                                          | 0.64       |   |
| Exercised                                     |       | 0                         |       |                                       |       |
| Cancelled                                     |       | 0                         |       |                                       |       |
| Warrants outstanding as  of June 30, 2007     |       | 6,096,102                 |       | $                                          | 0.615      |   |

 

7

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

Sale of Unregistered Securities

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

Investor RelationsServices and Financial Consulting Services

On January 17, 2007, theCompany entered into two agreements with Strategic Growth International, Inc. (“SGI”)regarding investor relations and financial consulting services. As part ofthese agreements, the Company issued to SGI warrants to purchase 800,000 sharesof Southwest common stock at a price of $0.63 per share that are exercisablefor two years from the date of the agreements. The exercise price equals theweighted average closing price for one Southwest share on the Over-the-CounterBulletin Board market for the five trading days immediately preceding the dateSouthwest entered into the Investor Relations Agreement. Beginning July 17,2007, SGI will have the right to request the inclusion of the common sharesunderlying its warrants on any registration statement that Southwest files onwhich the shares are eligible for inclusion. Beginning January 17, 2008, SGIwill have the right to require Southwest to file a registration statementcovering those shares.

Southwest has the right to terminate the agreements atthe end of six months. This right was void if SGI met certain performancegoals. If Southwest terminated the agreement at the end of six months, thenumber of shares subject to the warrants issued to SGI would have been reducedby 50 percent (this right was not exercised by the Company on July 17, 2007).Southwest has the right to terminate the agreement at the end of any month ofits term during the second year of the agreement. Southwest also agreed toindemnify SGI against certain claims that may arise in connection with theservices provided by SGI under the agreements.

The Company reviewed EITF 96-18 “*Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices*” in determining the fair value of the warrants. The Companyvalued the warrants based upon the consideration received. The warrants havebeen valued at $220,000, which is being amortized to consulting expense andadditional paid in capital quarterly over the term of the serviceagreements.  For the three and six monthsended June 30, 2007, approximately $27,500 and $50,500 has been amortized.

The following is a description of each agreement:

·                  *Investor Relations Services:*

Underthe terms of a letter agreement accepted January 17, 2007, Southwest retainedSGI to assist the company as an investor relations advisor and develop acomprehensive financial relations program designed to achieve increasedawareness of Southwest and its business and enhanced liquidity in the publicmarket for the Company’s stock.

Southwestwill pay SGI $10,000 per month for a period of two years for these investorrelations services. Southwest also agreed to reimburse SGI’s reasonableaccountable expenses incurred in connection with services. In addition,Southwest will issue to SGI a warrant to purchase 100,000 shares of Southwestcommon stock, see terms of warrant described above.

·                  *Financial Consulting Services:*

Southwestalso entered into an agreement with SGI for financial consulting services onJanuary 17, 2007 (the “Consulting Agreement”). Under the Consulting Agreement,SGI will assist Southwest in developing a strategy to raise additional capitalfor gaming projects the company is pursuing and for general working capital.SGI will also help Southwest arrange and conduct meetings with potentialsources of capital and advise Southwest regarding the terms of any proposedfinancing arrangements.

Southwest is to pay SGI $8,000 per month for 24 monthsfor the financial consulting services provided under this agreement, however,SGI has agreed to waive the monthly fee in exchange for a warrant to purchase700,000 shares of Southwest common stock, see terms of warrant discussed above.

8

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

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

**NOTE 5 —SALE OF UNREGISTERED SECURITIES**

On January 24, 2007 and February 26, 2007, SouthwestCasino Corporation (“Southwest”) entered into a Securities Purchase Agreement (“SPA”)with certain institutional and other accredited investors, as defined in Rule501 of Regulation D promulgated under the Securities Act of 1933, as amended,under which Southwest sold in a private placement an aggregate of 7.44 millionshares of its common stock with accompanying warrants to purchase an aggregateof 2.98 million shares of its common stock, at a purchase price of $0.55 pershare of common stock. The warrants are exercisable for a period of five years,beginning six months after the date of issuance, at an exercise price of $0.61per share. The number of shares issuable upon exercise of the warrants and theexercise price of the warrants are adjustable in the event of stock splits,combinations and reclassifications, but not in the event of the issuance bySouthwest of additional securities, unless such issuance is pursuant to arights offering or pro rata distribution to all security holders except theinvestors.

The securities that were issued in this privateplacement were not registered under the Securities Act of 1933, asamended.  However, Under the terms of aRegistration Rights Agreement dated January 24, 2007 and February 26, 2007 betweenSouthwest and the investors, Southwest agreed to register the resale of theshares sold in the private placement, including shares issuable upon exerciseof the warrants on a registration statement that became effective on May 11,2007.  Under the Securities PurchaseAgreement, Southwest and the investor parties have made other covenants andrepresentations and warranties regarding matters that are customarily includedin financings of this nature.  If certainof its obligations are not met, Southwest has agreed to make pro-rata cash paymentsas liquidated damages to each investor.

The private placement resulted in net proceeds toSouthwest of approximately $3.94 million, after the deduction of approximately,$150,000 of direct offering expenses. The placement agent agreed to accept thecash portion of its placement agent commission in common stock and warrants onthe same terms as the investors, which resulted in the placement agentreceiving approximately 517,000 shares of common stock and warrants to purchasean aggregate of approximately 207,000 shares of common stock. In addition, theplacement agent received a warrant to purchase approximately 277,000 shares ofcommon stock, which is exercisable for a period of five years, beginning sixmonths after the date of issuance, at an exercise price of $1.00 per share.

The following officers and directors of Southwestparticipated in the private placement on the same terms as the other investors:James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, Presidentand Chief Operating Officer and entities in which Mr. Fox holds an ownershipinterest; Jeffrey S. Halpern, Vice President of Government Affairs; Gus A.Chafoulias, Director; and David H. Abramson, Director. Other than with respectto the SPA, there are no material relationships between Southwest and any ofthe other investors in the private placement.

 **NOTE 6 — PROMOTIONALALLOWANCES**

Revenue does not include the retail amount of rooms,food, and beverages provided gratuitously to customers, which was $562,000 and$580,000 for the six months ended June 30, 2007 and 2006, respectively and wasapproximately $289,000 and $289,000 for the three months ended June 30, 2007and 2006, respectively.

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

*Organization:*

North Metro Harness Initiative, LLC (a developmentstage Minnesota Limited Liability Company) (“North Metro”) was formed on June16, 2003 for the purpose of developing, owning, and operating a horse racetrack and card room north of Minneapolis, Minnesota, in Anoka County. NorthMetro has purchased land and obtained zoning, permitting and regulatoryapprovals and begun construction of its facilities. On June 8, 2004, SouthwestCasino and Hotel Corp. (“Southwest”) sold a 50% interest in the Company to MTR —Harness Inc. (“MTR”), a wholly owned subsidiary of MTR Gaming, Inc. for$10,000.

9

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

North Metro will do business in Minnesota under thename “Running Aces Harness Park”.

*Accountingfor North Metro:*

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

Due to contributions of capital made by MTR as ofOctober 20, 2005, in accordance with the North Metro Member Control Agreementdated June 8, 2004, the Company, since that date, has no longer providedfinancial support in excess of its 50 percent decision making power. As of June30, 2007 the Company has provided approximately 42 percent of the financialsupport, but still retains its 50 percent decision making power. Therefore,since October 20, 2005, the Company has accounted for its investment in NorthMetro on the equity method. The Company’s investment in North Metro as of June30, 2007 was $7,364,607, which is recorded on the Company’s consolidatedbalance sheet.

The following represents North Metro’s incomestatement and the Company’s calculation of the loss of unconsolidatedsubsidiary net of tax benefit:
| ** **                                              | ** ** | **Three months  ended  June 30, 2007** | ** ** | **Three months  ended  June 30, 2006** | ** ** | **Six months  ended  June 30, 2007** | ** ** | **Six months  ended  June 30, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Revenues                                                |       | $                                                     | 23,159     |                                                  | $          | —                                              |       | $                                                   | 48,461     |   | $ | — |   |
|                                                    |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Lobbying  expenses                                      |       | $                                                     | 34,500     |                                                  | $          | 44,000                                              |       | $                                                   | 88,512     |   | $ | 78,000 |   |
| License fees—Minnesota  Racing Commission          |       | 61,090                                                |       | 63,506                                                |       | 122,501                                             |       | 126,791                                             |       |
| Other                                                   |       | 120,445                                               |       | 53,232                                                |       | 270,665                                             |       | 59,468                                              |       |
| Total                                                   |       | 216,035                                               |       | $                                                     | 160,738    |                                                | 481,678    |                                                | $          | 264,259 |   |
|                                                    |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Net (loss)                                              |       | $                                                     | (192,876   | )                                                     | $          | (160,738                                            | )          | $                                                   | (433,217   | ) | $ | (264,259 | ) |
|                                                    |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| 50% share of net  (loss)                                |       | (96,437                                               | )          | (80,369                                               | )          | (216,608                                            | )          | (132,130                                            | )          |
| Net tax benefit                                         |       | —                                                |       | 19,846                                                |       | —                                              |       | 31,664                                              |       |
| (Loss) of  unconsolidated subsidiary net of tax benefit |       | $                                                     | (96,437    | )                                                     | $          | (60,523                                             | )          | $                                                   | (216,608   | ) | $ | (100,465 | ) |

 

In 2006, North Metro formed a wholly-owned subsidiarythat acquired a nearby motel in December 2006 that North Metro continues tooperate in 2007 and will be used to house personnel involved in the care ofhorses at the track during the racing season. The motel has 15 rooms availableto rent.

Southwest did not record a tax benefit related toNorth Metro’s losses during the three and six months ended June 30, 2007, whileSouthwest did record a tax benefit during the three and six months ended June30, 2006, see Note 12.

North Metro FinancingAgreement

On April 20, 2007, North Metro entered into a CreditAgreement (the “Credit Agreement”) with Black Diamond Commercial Finance,L.L.C. (“Black Diamond”) as agent and lender. Under the terms of the CreditAgreement, North Metro will borrow $41.7 million to construct, equip and openits harness racetrack and card club facility in Columbus, Minnesota on thenorth side of the Minneapolis — St. Paul metropolitan area. The initial advanceof $5 million of loan proceeds was made April 20, 2007. As part of the loanagreement the members of North Metro agreed to complete aggregate membershipcontributions of $20.8 million prior to closing the loan. The total cost of theproject is expected to approximate $62 million. As of June 30, 2007, Southwest contributed $8.9 million of the

10

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

total amount of $21.2 million contributed by themembers.  Certain amounts related tonon-construction costs continue to be funded by the members.  These amounts are not considered to bematerial.  Under the Credit Agreement,the initial advance of loan proceeds will be followed by additional advancesbased on progress in building and opening the racetrack and card room facility.During construction, North Metro will make monthly payments of interest onlybased on a floating index rate plus 4 percent or on a 1-month, 2-month or3-month LIBOR rate plus 6 percent, at North Metro’s option. After the projectopens, interest rates will reduce to the applicable index rate plus 2.5 percentor the applicable LIBOR rate plus 4.5 percent, again at North Metro’s option.North Metro must also pay a fee equal to 4.5% per annum on any unused portionof the $41.7 million credit facility. Principal payments of $104,250 will bedue on the last day of each fiscal quarter beginning the first full quarterafter the project opening, as defined in the agreement. North Metro will alsobe required to prepay the loan in an amount equal to 50 percent of the project’sexcess cash flow for each fiscal year beginning with the fiscal year endedDecember 31, 2008, as defined in the agreement. Final payment equal to alloutstanding principal and accrued interest is due April 20, 2014.

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

The Credit Agreement contains standard affirmative andnegative covenants regarding North Metro and its wholly-owned subsidiary NorthMetro Hotel, LLC that restrict, among other things, the ability to dispose ofassets, transfer or pledge equity interests, incur indebtedness, and makeinvestments or distributions. Financial covenants applicable to North Metroinclude, among other things, limits on capital expenditures after opening,minimum EBITDA requirements, satisfaction of leverage ratio limits, anddelivery of financial statements.

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

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

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

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

In addition, Southwest entered into a Sponsor SupportAgreement (the “Support Agreement”) under which each member of North Metro hasagreed to contribute additional capital to North Metro if proceeds from theloan are insufficient to complete construction and open the facility.

**NOTE8 — MANAGEMENT CONTRACT WITH THE CHEYENNE AND ARAPAHO TRIBES**

On May 18 2007, the National Indian Gaming Commission approvedAmendment No. 11 to the Third Amended and Restated Gaming Management Agreementdated June 16, 1995 between the Company and the Cheyenne and Arapaho Tribes ofOklahoma (the “Tribes”).

The Company entered into Amendment No. 11 with theTribes on April 14, 2007, following authorization of the Amendment by theCheyenne and Arapaho Tribal Council and ratification of the Amendment by thetribal Legislature.  Under federal law, the Amendment was not effectiveuntil approved by the National Indian Gaming Commission (“NIGC”).

11

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

Amendment No. 11 extends the Third Amended andRestated Gaming Management Agreement until the earlier of May 19, 2009 or NIGCapproval of a new gaming management contract between the Company and theTribes.  Amendment No. 11 also reduces the management fee to be paid tothe Company by the Tribes from 20 percent of Net Revenue (as defined in theAgreement) to 10 percent of the first $28 million of Net Revenue with anadditional 15 percent management fee on Net Revenue above $28 million.

In addition to Amendment No. 11, Southwest has enteredinto eight other contracts with the Tribes that have also been approved by theTribal Council and ratified by the tribal Legislature that would extend andexpand the gaming management relationship between the Tribes and Southwest. TheTribal Council includes all adult enrolled members of the Tribes and is one ofthe four branches of government under the Tribes’ 2006 Constitution.   These additional contracts have beensubmitted to the NIGC for approval but have not been approved.  Under the terms of these four gamingmanagement and four development agreements Southwest would:

·                       continue tomanage the Tribes’ existing Lucky Star casinos in Concho and Clinton, Oklahoma;

·                       expand theLucky Star Concho and Clinton facilities to provide more gaming space andgreater amenities;

·                       assume themanagement of and expand the Tribes’ existing casinos in Watonga and CantonLake, Oklahoma; and

·                       develop andmanage new gaming facilities on tribal land in four other Oklahoma cities,Seiling, Colony, Hammon and Elk City.

In addition, Southwest’s management relationship withthe Tribes would continue for an additional 5 years beginning on the daySouthwest begins management of the Tribes’ gaming facilities under the new agreements.In addition to expanding the Lucky Star casinos managed by Southwest for theTribes and expanding or developing casinos in six other locations, thecontracts would require Southwest to manage construction and pay up to $5million of the costs of a proposed Indian Health Service clinic building out ofthe management fees it receives.

The Tribal Councilresolutions direct the Governor of the Tribes to enter into the gamingmanagement agreements on behalf of the Tribes within five days of final approvalby the Tribal Council and direct the tribal Legislature to ratify theagreements no later than five days after the tribal Governor signs it or, ifthe Governor does not sign, no later than 10 days after final approval by theTribal Council. The Tribal Legislature ratified the agreements on April 14,2007.  The tribal Governor has actively opposed any extension of ourmanagement relationship with the Tribes and has disputed the authority of theTribal Council and the tribal Legislature to cause him to take any action on agaming management agreement or enter into a gaming management agreement withouthis approval.

On April 3, 2007,the tribal Governor filed a lawsuit in the Cheyenne and Arapaho district courtalleging that the resolutions adopted by the Tribal Council approving thecontracts between Southwest and the Tribes violate the Tribes’Constitution.  Southwest intervened in this proceeding on April 13, 2007and filed its response to the Governor’s allegations and a request for an orderdirecting the Governor to sign the management agreements on May 2, 2007.

After a hearing onMay 18, 2007, the Cheyenne and Arapaho Trial Court issued an order validatingthe two-year extension of the existing Gaming Management Agreement.  The Trial Court ruled that (a) the TribalCouncil resolutions authorizing the extension of the gaming managementagreement between Southwest and the Tribes were valid and constitutional, (b)sufficient negotiations had occurred among Southwest, the Governor and theTribes, for a two-year contract extension, (c) no further action by the tribalGovernor was required to validate the two-year contract extension, (d) thetribal Legislature had ratified the extension of the management contract inaccordance with the tribal Constitution, and (e) the two-year contractextension was sufficient and appropriate given the requirement under thatcontract that the Tribes enter into good faith negotiations with Southwest foran extension of that contract.  However,the Trial Court ruling did not address the validity of any contract other thanAmendment No. 11.

On May 16, 2007, before the Trial Court issued that ruling, theChairman of the National Indian Gaming Commission had rejected the agreementsto extend and expand the gaming management relationship between Southwest  and the Cheyenne and Arapaho Tribes in aletter stating that the NIGC could not conclude that the Tribes had properlynegotiated and executed the contracts without the signature of the tribalGovernor.

12

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

The Chairman of the NIGC noted that he was prepared to reconsider thisdecision should a tribal court rule that the contract had been validlyapproved.  After receipt of the May 18,2007 Order of the Cheyenne and Arapaho Trial Court validating the two-yearcontract extension, the Chairman of the NIGC issued a letter approving thattwo-year contract extension.  Southwestcontinues to manage the Lucky Star — Concho and Lucky Star — Clinton casinosfor the Cheyenne and Arapaho Tribes under that two-year extension agreement.

On May 21, 2007, the Governor of the Cheyenne and ArapahoTribes filed an appeal to the Cheyenne and Arapaho Supreme Court seeking tooverturn the decision of the tribal Trial Court validating the two-yearcontract extension.  The arguments inthis case have been briefed by all parties, including Southwest.  The Supreme Court has not scheduled oralargument in this case and may elect not to do so.  As of August 14, 2007 the Supreme Court hasnot issued an opinion on this matter.  Inaddition, on June 18, 2007, the tribal Governor submitted an appeal of the NIGC’sdecision to approve the two-year contract extension to the NIGC.  Southwest responded to that filing with amotion to intervene and for summary disposition on July 31, 2007.  Southwest believes that if the Supreme Courtwere to overturn the Trial Court decision and rule that the two-year extensionhad not been validly authorized in accordance with the Tribes’ Constitution,the NIGC will likely institute a review process that could cause the NIGC towithdraw its approval of the contract which could lead to termination of thatcontract extension and loss of the management contract and accompanyingrevenue.  Because of the legal challengesto the validity of the two-year contract extension under which Southwest currentlymanages the Lucky Star casinos and potential approval of the other managementand development agreements, Southwest remains uncertain how long and under whatterms it will continue to manage gaming operations for the Cheyenne and ArapahoTribes.

On March 30, 2007,the tribal Governor of the Cheyenne and Arapaho Tribes of Oklahoma, delivered aletter to Southwest alleging that Southwest had breached the terms of the ThirdAmended and Restated Gaming Management Agreement between Southwest and theTribes (the “Management Agreement”) and notifying Southwest that the Tribesintend to terminate that agreement.  As described above, Southwestcurrently manages two casinos for the Tribes under Amendment No. 11 to theManagement Agreement.  In the tribal Governor’s letter, the tribalGovernor alleged that Southwest had breached the management agreement byinterfering with or attempting to influence internal affairs or governmentaldecisions of the Tribes in connection with Southwest’s ongoing efforts toextend its gaming management relationship with the Tribes.

The Company doesnot believe it has improperly interfered with or attempted to influenceinternal governmental decisions of the Tribes and Southwest will challenge anyeffort to terminate the Gaming Management Agreement on those grounds. Under itsGaming Management Agreement with the Tribes, Southwest is permitted to oppose,publicly or privately, any action by the Tribes that Southwest believes is notin the best interest of the Tribal gaming operations. Southwest believes thatall of the actions it has taken on behalf of the gaming operations it managesor as part of its efforts to extend its gaming management relationship with theTribes are consistent with that provision. Southwest provided a detailed response to the tribal Governor refuting hisclaims on April 30, 2007.

Under the terms ofthe Gaming Management Agreement, the Tribes must give Southwest 60 days noticeof a breach before termination.  Southwest has the right to cure anyalleged breach during that 60-day period, and if it does so, the Tribes willnot have the right to terminate the Agreement.  Under the agreement, anydispute between Southwest and the Tribes regarding a breach of the agreementmust be settled through binding arbitration under the Commercial ArbitrationRules of the American Arbitration Association. Arbitration awards may beenforced in the United States District Court for the District of Oklahoma.

In addition tonotifying Southwest of the alleged breach of the Management Agreement, theGovernor notified the NIGC, which undertook an investigation of theallegations.  As part of itsinvestigation, representatives of the NIGC interviewed employees and reviewedfiles at Southwest’s Minneapolis, Minnesota headquarters and at the Lucky StarCasinos in Oklahoma.  Southwest alsoprovided detailed written responses to the Governor’s allegations and questionsraised by the NIGC in the course of its investigation.  The NIGC did not provide a formaldetermination in response to the Governor’s allegations, but did subsequentlyapprove Amendment No. 11 to the Management Agreement.  The NIGC’s May 18, 2007 letter approvingAmendment No. 11 to the Management Agreement states the Chairman of the NIGCmay reconsider his approval if the NIGC determines that Southwest hasexercised, or attempted to exercise, undue influence on the Tribal Government.

13

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

On July 24, 2007, thetribal Governor delivered notice to Southwest that he had initiated anarbitration proceeding as required under the Management Agreement on July 13,2007.  On July 30, 2007, the tribalGovernor delivered a copy of subsequent correspondence to the AmericanArbitration Association providing additional information required to initiatean arbitration proceeding.  Southwest ispreparing its response to the arbitration demand and intends to vigorouslydefend itself.

**NOTE9 — LINE OF CREDIT AND TERM LOAN**

On April 16, 2007, the Company entered into the ThirdAmendment to the Revolving Credit and Term Loan Agreement with CrownBank.  The agreement has been amended to extend the maturity date of the$450,000 revolving line of credit to April 30, 2008.  The amendment didnot alter the terms of the $2.5 million term loan and the Company made thefinal payment on the term loan on April 30, 2007.  Additionally, 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.  As of June 30, 2007, no amounts were outstanding under the TermLoan or the Revolving Credit facility.

The interest rate is Prime +1%, and not less than7.5%.  Currently the interest rate is 9.25%.  At June 30, 2007,$450,000 was available to borrow.

**NOTE 10— REDEMPTION OF SECURITIES**

The Company redeemed 357,000 shares of common stock inaccordance with Article XI of the Company’s Articles of Incorporation effectiveJanuary 22, 2007.  The shares were redeemed at a price of $0.90 per sharebased upon the closing stock price of the Company’s common stock as reported onJanuary 22, 2007.  The Company recorded the redemption as a reduction tostockholder’s equity for the buy back of shares.  The shares of commonstock are included in Treasury Stock in the Consolidated Statements of Changesin Stockholders’ Equity as of June 30, 2007.

**NOTE11 — EARNINGS (LOSS) PER SHARE**

For all periods, basic earnings (loss) per share iscalculated by dividing earnings (loss) by the weighted-average number of commonshares outstanding.  Diluted earnings per share for the three months endedJune 30, 2007 and three and six months ended June 30, 2006, 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 six months ended June 30,2007; therefore a calculation of earnings per share on a fully diluted basiswould be anti-dilutive.

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

 

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

Options andwarrants to purchase approximately 1,672,000 shares of common stock at anexercise price of $1.00 per share were not included in the computation ofdiluted earnings per share for the three months ended June 30, 2007 because theexercise price was greater than the average market price of the common stockfor the period.  All of these options and warrants were outstanding as ofJune 30, 2007.
| ** **                                                 | ** ** | **Net Earnings** | ** ** | **Weighted Average  Equity** | ** ** | **Earnings  Per Share** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **(Numerator)**       | ** ** | **(Denominator)**                 | ** ** | ** **                   | ** ** |
| **Three months ended June  30, 2006:** |       |                  |       |                              |       |                         |       |
| Basic Earnings per  Share                                  |       | $                     | 377,577    |                              | 19,688,656 |                         | $          | 0.02 |   |
| Effect of Dilutive  Securities:                            |       |                  |       |                              |       |                         |       |
| Outstanding  Options and Warrants                          |       |                  |       | 1,156,866                         |       |                         |       |
|                                                       |       | $                     | 377,577    |                              | 20,845,522 |                         | $          | 0.02 |   |

 

Options andwarrants to purchase 1,395,000 shares of common stock at an exercise price of$1.00 per share and options to purchase 50,000 shares of common stock at anexercise price of $0.75 per share were not included in the computation ofdiluted earnings per share for the three months ended June 30, 2006 because theexercise price was greater than the average market price of common sharesduring the period.  All of these options were outstanding as of June 30,2006
| ** **                                               | ** ** | **Net Earnings** | ** ** | **Weighted Average  Equity** | ** ** | **Earnings  Per Share** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **(Numerator)**       | ** ** | **(Denominator)**                 | ** ** | ** **                   | ** ** |
| **Six months ended June  30, 2006:** |       |                  |       |                              |       |                         |       |
| Basic Earnings per  Share                                |       | $                     | 675,221    |                              | 19,662,545 |                         | $          | 0.03 |   |
| Effect of Dilutive  Securities:                          |       |                  |       |                              |       |                         |       |
| Outstanding  Options and Warrants                        |       |                  |       | 1,040,852                         |       |                         |       |
|                                                     |       | $                     | 675,221    |                              | 20,703,397 |                         | $          | 0.03 |   |

 

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

**NOTE12 — INCOME TAXES**

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

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

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

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

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

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 six months ended June 30,2007 based upon uncertainty surrounding the Company’s management contract withthe Cheyenne and Arapaho Tribes, see Note 8.   As a result of thisevaluation, a tax benefit was reduced by a comparable valuation allowance forthe three and six months ended June 30, 2007.  As of June 30, 2007, theCompany’s deferred tax asset is zero.

At December 31, 2003, theCompany established a deferred tax asset relating to net operatinglosses.  As of December 31, 2005, management evaluated all evidence anddetermined that a portion of the deferred tax assets relating to net operatinglosses would be utilized in 2006 based upon forecasted income for the Companyin 2006.  During the three and six months ended June 30, 2006, the Companyrecorded a tax provision to reduce the previously established deferred taxasset.

**NOTE13 — RELATED PARTY TRANSACTIONS**

In addition to $150,000 of unpaid bonuses, see Note16, the Company has a liability to certain officers and stockholders for unpaidcompensation and expenses of $122,467 as of June 30, 2007, relating to periodsprior to December 31, 2003.

James B. Druck, Chief Executive Officer and Director;Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, VicePresident of Government Affairs; Gus A. Chafoulias, Director; and David H.Abramson, Director each participated in our January 24, 2007 and February26, 2007 private placement of common stock with accompanying warrants. See Note 5.

**NOTE14 — PROJECT DEVELOPMENT COSTS**

The Company continues to pursue additional gamingopportunities and as a result continues to incur project developmentexpenses.  For the three and six months ended June 30, 2007, developmentexpenses were $84,295 and $252,571, respectively.  For the three and six months ended June 30,2006, development expenses were $81,115 and $177,483, respectively.

**NOTE 15 —SEGMENT INFORMATION**

Segment information related to the three months endedJune 30, 2007 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                     |       | $                      | 3,954,541  |                   | $          | 1,501,628                |       | $          | —     |   | $ | 5,456,169 |   |
| Segmented profit  (loss) before income taxes |       | 103,662                |       | 428,587                |       | (180,732                 | )          | 351,517    |       |
| Segmented assets                             |       | 12,296,434             |       | 1,340,942              |       | 7,374,607                |       | 21,011,983 |       |
|                                              |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

Segment information related to the three months endedJune 30, 2006 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                     |       | $                      | 4,053,206  |                   | $          | 1,391,195                |       | $          | —     |   | $ | 5,444,401 |   |
| Segmented profit  (loss) before income taxes |       | 264,662                |       | 480,241                |       | (161,484                 | )          | 583,419    |       |
| Segmented assets                             |       | 13,448,251             |       | 1,700,698              |       | 4,554,894                |       | 19,703,843 |       |
|                                              |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

Segment information related to the six months endedJune 30, 2007 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                     |       | $                      | 7,466,947  |                   | $          | 3,131,451                |       | $          | —     |   | $ | 10,598,398 |   |
| Segmented profit  (loss) before income taxes |       | (162,521               | )          | 568,153                |       | (469,179                 | )          | (63,547    | )          |
| Segmented assets                             |       | 12,296,434             |       | 1,340,942              |       | 7,374,607                |       | 21,011,983 |       |
|                                              |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

Segment information related to the six months endedJune 30, 2006 follows:
| ** **                                   | ** ** | **Casino  Operations** | ** ** | **Casino  Management** | ** ** | **Project  Development** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| Revenues                                     |       | $                      | 7,725,100  |                   | $          | 3,093,813                |       | $          | —     |   | $ | 10,818,913 |   |
| Segmented profit  (loss) before income taxes |       | 26,905                 |       | 1,326,618              |       | (309,612                 | )          | 1,043,911  |       |
| Segmented assets                             |       | 13,448,251             |       | 1,700,698              |       | 4,554,894                |       | 19,703,843 |       |
|                                              |            |                        |            |                        |            |                          |            |            |            |  |  |  |  |

 

**NOTE16 — COMMITMENTS AND CONTINGENCIES**

In 2004, the Companypurchased player tracking software and slot accounting software from IGT. On December 29, 2005, the Company reached an agreement with IGT to finance$460,324 of the purchase price for this system over 48 months with interestrate equal to the prime rate, which is currently 7.5%.  In addition, theCompany agreed to purchase additional software for $200,000, which will allowthe Company to offer bonusing to its customers.  The purchase is contingentupon IGT receiving necessary approvals for the bonusing system from theColorado Division of Gaming.

Under the Company’s employment agreements with JamesB. Druck, CEO, Thomas E. Fox, President and COO, and Jeffrey S. Halpern, VicePresident of Government Affairs, which were effective July 1, 2004, theseexecutives can elect to continue their employment in a reduced capacity, withcontinuing medical benefits and a salary equal to their base pay at the time oftermination for 12 months and not less than $25,000 after 12 months, if theCompany terminates the executive’s employment without cause or in connectionwith a change in control of the Company (as defined in the employmentagreement) or if the executive terminates his employment with the Company forgood cause (as defined in the employment agreement).  The initial term ofthese agreements expired July 1, 2006, after which the agreement renewed andwill continue to renew automatically for additional one-year terms unlessterminated.

The Company has enteredinto employment 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.

ManagementAgreement:

The Company has an agreement with the Cheyenne andArapaho Tribes of Oklahoma (CATO) for management of CATO’s casinos located inConcho and Clinton, Oklahoma that expires on May 19, 2009.  Themanagement fees received from this contract are significant to the Company’scash flow from operations.  Because ofthe legal challenges to the validity of the two-year contract extension underwhich Southwest currently manages the Lucky Star casinos and to the potentialapproval of the other management and development agreements, Southwest remainsuncertain how long and under what terms it will continue to manage gaming operationsfor the Cheyenne and Arapaho Tribes, see Note 8.

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

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, theCompany paid $210,000 during the six months ended June 30, 2007.  Bonusesin the amount of $175,000 remain to be paid on or after July 1, 2007, at suchtime as management determines that Southwest has sufficient financial resourcesfor the payments.  Unpaid bonuses in the amount of $175,000 are reflectedas a liability at June 30, 2007.

Other:

The Company is involved in various claims, legalactions and 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 financialstatements, and the ultimate outcome of these other matters will not have amaterial effect on our financial position or results of operations.

**NOTE 17 — NEW ACCOUNTINGPRONOUNCEMENTS**

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

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

In February 2007, the FASB released SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115*”This Statement permits entities to choose to measure many financial instrumentsand certain other items at fair value. This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, Fair Value Measurements.  TheCompany is evaluating the impact of this statement.

**NOTE 18 —CASINO ACQUISITION**

On December 18, 2006, Southwest Eagle, LLC (“SouthwestEagle”), a wholly-owned subsidiary of Southwest Casino Corporation, entered intoan Asset Purchase Agreement and a long-term lease with Pinnacle Casinos andResorts, LLC (“Pinnacle”).  Under theAsset Purchase Agreement, Southwest Eagle had agreed to acquire the operatingassets and lease the real property of the Double Eagle Hotel and Casino andGold Creek Casino in Cripple Creek, Colorado (collectively, the “Double Eagle”).

On April 13, 2007, Southwest Casino Corporation andits wholly-owned subsidiary Southwest Eagle notified Pinnacle that Southwesthad elected to terminate the Asset Purchase Agreement between Southwest Eagleand Pinnacle dated December 18, 2006 and all related agreements.

Southwest terminated the Asset Purchase Agreement inresponse to notice Southwest received on April 10, 2007 from Pinnacle that theseparate Stock Purchase Agreement under which Pinnacle was to acquire all ofthe outstanding capital stock of Colorado Casino Resorts, Inc. (“CCRI”), theowner of the Double Eagle, had terminated in accordance with its terms whenPinnacle did not make a required payment. Because Pinnacle was unable tocomplete its proposed acquisition of the CCRI stock in accordance with theStock Purchase Agreement, as amended, Pinnacle is also unable to perform itsobligations under the Asset Purchase Agreement with Southwest Eagle.  Inconnection with this acquisition the Company incurred approximately $540,000 oftransaction costs.  Of this amount theCompany wrote-off approximately $127,000 related to estimated costs specific tothis acquisition.  Discussions to pursuethis acquisition have ceased.  Theremaining costs of approximately $413,000 have been included in Other Assets inthe consolidated balance sheet as of June 30, 2007, as the Company continues todiscuss various financing alternatives with the lender.

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**SOUTHWEST CASINO CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****June 30, 2007**

**NOTE 19 — SALE OF UNCLE SAM’S CASINO**

On June 25, 2007, the Company entered into anagreement with the landlord to purchase the leased real property on which itoperated Uncle Sam’s Casino in Cripple Creek, Colorado.  The purchase agreement provided that theCompany would not be obligated to purchase the real property unless the Companyassigned its rights under the purchase agreement to a third party.  On June 26, 2007, the Company entered into anagreement to assign its rights under the purchase agreement and the operatinglease.  On July 29, 2007 the Companyclosed Uncle Sam’s Casino and on July 31, 2007 the Company assigned its rightsunder the purchase agreement and lease and received an assignment fee ofapproximately $450,000 less closing costs. Of the assignment fee, $14,000 will be held in escrow until August 31,2007 pending removal of all of the Company’s personal property.  The Company expects to recognize a gain inexcess of $400,000 on this transaction that will be recorded in the thirdquarter of 2007.  The Company transferredthe operations of Uncle Sam’s to its Gold Rush and Gold Diggers properties.

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**Item 2.**    **Management’sDiscussion and Analysis or Plan of Operation**

The following is a discussion and analysis of thefinancial position and operating results of Southwest Casino Corporation(referred to in this discussion, together with its consolidated subsidiarieswhere appropriate, as “Southwest Casino”, “Southwest”, the “Company”, “we”, “our”and “us”) for the three and six months ended June 30, 2007 and 2006.

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

For the second quarter ended June 30, 2007, we had netincome of $351,517 on revenues of $5,456,169 compared to net income of $377,577on revenues of $5,444,401 for the same period in 2006.  This amounts tobasic and fully diluted earnings per outstanding share during the secondquarter of 2007 and 2006 of $0.01 and $0.02, respectively.

For the six months ended June 30, 2007, we had a netloss of $63,547 on revenues of $10,598,398 compared to net income of $675,221on revenues of $10,818,913 for the same period in 2006.  This amounts to a basic loss per outstandingshare of $0.00 during the six months ended June 30, 2007 compared to basic andfully diluted earnings per outstanding share of $0.03 during the same period in2006.

The net loss of $63,547 in the first six months of2007, compared to net income of $675,221 for the same period in 2006, primarilyresults from increased operating expenses of $810,000 and decreased revenues ofapproximately $220,000, as well as an increase of approximately $116,000 in ourloss from unconsolidated subsidiary (North Metro), which was offset by a taxprovision of $400,000 recorded in the prior year with no tax provision in thecurrent year.  Our financial performanceimproved in the second quarter of 2007 over the first quarter, but bad weatherand increased operating expenses in the first quarter of 2007 continue toreduce  our results for the first sixmonths of the year.

***Overview:***

Our principal business is the management, operationand development of gaming facilities in emerging and established gaming jurisdictions. Currently, we operate two casinos in Cripple Creek, Colorado — Gold Rush Hoteland Casino and Gold Digger’s Casino. Until July 28, 2007, we also operated Uncle Sam’s Casino in CrippleCreek.  We manage two Native American gaming operations in Oklahoma forthe Cheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star- Clinton.  Lucky Star - Concho is located on U.S. Highway 81, just northof the Oklahoma community of El Reno.  Lucky Star - Clinton is located 60 mileswest of Lucky Star - Concho in the community of Clinton, Oklahoma on Old Route66 near Interstate I-40.  We also own a 50% membership interest in NorthMetro Harness Initiative, LLC, (“North Metro”).  North Metro is building aharness racetrack and 50-table card room in Columbus, Minnesota on the northside of the Minneapolis — St. Paul Metropolitan area.  North Metro securedfinancing for the project and began construction in April 2007 and plans tobegin harness racing in Spring 2008 and open the card room after completing 50days of live racing (as required by Minnesota statue).

Southwest entered into a Gaming Management Agreementwith the Otoe-Missouria Tribe of Indians under which Southwest was to managethe Tribe’s Seven Clans Paradise Casino in Red Rock, Oklahoma, on March 24,2006.  The Otoe-Missouria Tribe submitted the Gaming Management Agreementto the National Indian Gaming Commission, who must approve it before it can beeffective, on April 10, 2006.   Inresponse to comments from the NIGC, Southwest and the Tribe submitted a revisedagreement to the NIGC in August 2006. The NIGC provided additional comments on and requested additionalchanges to the management agreement on September 15, 2006.  The Tribe has not responded to the NIGC or toSouthwest’s efforts to complete a revised management agreement.  On July 11, 2007, the NIGC delivered a letterto Southwest and the Chairman of the Tribe requesting that we submit a revisedmanagement agreement or withdraw the request for approval of the current agreementwithin 30 days.  Southwest met withrepresentatives of the Tribe’s Economic Development Authority (“OMDA”) onAugust 6, 2007 and discussed the status of the management agreement.  The OMDA is discussing whether or not to goforward with the management agreement. We believe that the OMDA will recommend that the Tribe terminate themanagement agreement with us.  We havenotified the NIGC that we have withdrawn our request for review of thismanagement agreement. We will resubmit a revised management agreement to theNIGC for approval if the OMDA recommends that the tribe continue to pursue amanagement agreement with us.

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

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***Operating segments:***

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

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

 

**CasinoManagement:**

We manage two casinos for the Cheyenne and ArapahoTribes of Oklahoma under the Third Amended and Restated Gaming ManagementAgreement dated June 16, 1995 between us and the Cheyenne and Arapaho Tribes ofOklahoma (the “Tribes”).  This Agreement has been extended three times,most recently on May 18, 2007, when the Chairman of the National Indian GamingCommission approved Amendment No. 11 to the Agreement.  We entered into Amendment No. 11 with theTribes on April 14, 2007, following authorization of the Amendment by theCheyenne and Arapaho Tribal Council and ratification of the Amendment by thetribal Legislature.  Under federal law, the Amendment was not effectiveuntil approved by the National Indian Gaming Commission (“NIGC”).

Amendment No. 11 extends the Third Amended andRestated Gaming Management Agreement until the earlier of May 19, 2009 or NIGCapproval of a new gaming management contract between the Tribes and us. Underthe management agreement, the tribes pay us a percentage of net revenue as ourmanagement fee. Amendment No. 11 reduces that percentage on the first $28 millionof net revenue and slightly increases that percentage on net revenue above $28 million.

**LuckyStar - Concho**

We earned management fees of $862,922 and $841,848from Lucky Star - Concho during the three months ended June 30, 2007 and 2006,respectively, an increase of 2.5%.   We earned management fees of$1,779,527 and $1,912,603 from Lucky Star - Concho during the six months endedJune 30, 2007 and 2006, respectively, a decrease of 7.0%.   Thedecrease in management fees for the six months ended June 30, 2007 compared tothe same period in the prior year is primarily due to poor weather experiencedin January and February 2007.  Wecontinue to improve the mix of games on the floor, which resulted in improvedresults for the three months ended June 30, 2007.  The increase in management fees during thesecond quarter occurred despite a reduction in our management fee percentage.  This reduction took effect May 19, 2007.  Improved operating results more thancompensated for the management fee percentage reduction, however, the lower feepercentage only applied to the last half of the second quarter.

Due to the continuing uncertainty surrounding ourmanagement contract with the Cheyenne and Arapaho Tribes of Oklahoma (seediscussion below), we are unable to give an outlook on revenues for theremainder of 2007.  Assuming we continueto manage Lucky Star — Concho, we do not anticipate growth in management feesduring the third quarter because of the reduction in our management feepercentage as well continued growth in competition from other tribal gamingoperations closer to Oklahoma City and from Remington Park, a racetrack inOklahoma City that began offering electronic gaming near the end of 2005.

**LuckyStar - Clinton**

We earned management fees of $638,706 and $549,347from Lucky Star - Clinton during the three months ended June 30, 2007 and 2006,respectively, an increase of 16.3%.   We earned management fees of$1,351,924 and $1,181,210 from Lucky Star - Clinton during the six months endedJune 30, 2007 and 2006, respectively, an increase of 14.5%.   Theincrease in management fees is the result of an improved mix of games on thefloor, including the use of slim line cabinets that allowed us to put moregaming machines in the same amount of space, and the successful renegotiationof machine vendor fees on a number of our more popular electronic games.  As with Lucky Star — Concho, the increase inmanagement fees during the second quarter occurred despite a reduction in ourmanagement fee percentage.  Thisreduction took effect May 19, 2007. Because the lower fee percentage only applied to the last half of thesecond quarter and will apply throughout the third quarter, we do notanticipate growth in management fees during the third quarter.  Moreover, because of the uncertaintysurrounding our management contract with the Cheyenne and Arapaho Tribes ofOklahoma, we are unable to give an outlook on any revenue from these operationsfor the remainder of 2007.

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**Status of Management Agreement**

On March 31, 2007 the Tribal Council of the Tribesapproved nine separate agreements between Southwest and the Tribes, includingAmendment No. 11 to the Third Amended and Restated Gaming Management Agreementbetween Southwest and the Tribes, which was to expire on May 19, 2007.  The Tribal Council includes all adultenrolled members of the Tribes and is one of the four branches of governmentunder the Tribes’ 2006 Constitution. Each of these nine agreements was subsequently ratified by the tribalLegislature on April 14, 2007.  TheTribal Council resolutions direct the Governor of the Tribes to enter into thegaming management agreements on behalf of the Tribes within five days of finalapproval by the Tribal Council.

The tribal Governor has actively opposed any extensionof our management relationship with the Tribes and filed a lawsuit in theCheyenne and Arapaho Trial Court alleging that the resolutions adopted by theTribal Council approving the contracts and directing the Governor to enter intothose agreements with Southwest violate the Tribes’ Constitution. Southwest intervened in this proceeding, filed its response to the Governor’slawsuit and a request for an order directing the Governor to sign themanagement agreements, and requested an expedited hearing.

After a hearing on May 18, 2007, the Cheyenne andArapaho Trial Court issued an order validating the two-year extension of theexisting Gaming Management Agreement (Amendment No. 11).  The Trial Court ruled that (a) the TribalCouncil resolutions authorizing the extension of the gaming managementagreement between Southwest and the Tribes were valid and constitutional, (b)sufficient negotiations had occurred among Southwest, the Governor and theTribes, for a two-year contract extension, (c) no further action by the tribalGovernor was required to validate the two-year contract extension, (d) thetribal Legislature had ratified the extension of the management contract inaccordance with the tribal Constitution, and (e) the two-year contractextension was sufficient and appropriate given the requirement under thatcontract that the Tribes enter into good faith negotiations with Southwest foran extension of that contract.  The TrialCourt ruling did not address the validity of any contract other than AmendmentNo. 11.

On May 16, 2007, before the Trial Court issued thatruling, the Chairman of the National Indian Gaming Commission had rejected theagreements to extend and expand the gaming management relationship betweenSouthwest Casino and Hotel Corp. and the Cheyenne and Arapaho Tribes in aletter stating that the NIGC could not conclude that the Tribes had properlynegotiated and executed the contracts without the signature of the tribalGovernor.  The Chairman of the NIGC notedthat he was prepared to reconsider this decision should a tribal court rulethat the contract had been validly approved. After receipt of the May 18, 2007 Order of the Cheyenne and ArapahoTrial Court validating the two-year contract extension, the Chairman of theNIGC issued a letter approving that two-year contract extension.  We continue to manage the Lucky Star — Conchoand Lucky Star — Clinton casinos for the Cheyenne and Arapaho Tribes under thattwo-year extension agreement.

The eight other contracts with the Tribes that havealso been approved by the Tribal Council and ratified by the tribal Legislaturewould further extend and expand the gaming management relationship between theTribes and Southwest. These additional contracts have been submitted to theNIGC for approval but have not been approved. Under the terms of these four gaming management and four developmentagreements Southwest would:

·                       continue tomanage the Tribes’ existing Lucky Star casinos in Concho and Clinton, Oklahoma;

·                       expand theLucky Star Concho and Clinton facilities to provide more gaming space andgreater amenities;

·                       assume themanagement of and expand the Tribes’ existing casinos in Watonga and CantonLake, Oklahoma; and

·                       develop andmanage new gaming facilities on tribal land in four other Oklahoma cities,Seiling, Colony, Hammon and Elk City.

Southwest’s management relationship with the Tribeswould continue for an additional 5 years beginning on the day Southwest beginsmanagement of the Tribes’ gaming facilities under the new agreements. Inaddition to expanding the Lucky Star casinos now managed by Southwest for theTribes and expanding or developing casinos in six other locations, thecontracts would require Southwest to manage construction and pay up to $5million of the costs of a proposed Indian Health Service clinic building out ofthe management fees it receives.

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On May 21, 2007, the Governor of the Cheyenne andArapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Courtseeking to overturn the decision of the tribal Trial Court validating thetwo-year contract extension.  Thearguments in this case have been briefed by all parties, includingSouthwest.  The Supreme Court has notscheduled oral argument in this case and may elect not to do so.  As of August 14, 2007 the Supreme Court hasnot issued an opinion on this matter.  Inaddition, on June 18, 2007, the tribal Governor submitted an appeal of the NIGC’sdecision to approve the two-year contract extension to the NIGC.  Southwest responded to that filing with amotion to intervene and for summary disposition on July 31, 2007.  Southwest believes that if the Supreme Courtwere to overturn the Trial Court decision and rule that the two-year extensionhad not been validly authorized in accordance with the Tribes’ Constitution,the NIGC will likely institute a review process that could cause the NIGC towithdraw its approval of the contract which could lead to termination of thatcontract extension and loss of the management contract and accompanyingrevenue.

Because of the legal challenges to the validity of thetwo-year contract extension under which Southwest currently manages the LuckyStar casinos and to the potential approval of the other management anddevelopment agreements, Southwest remains uncertain how long and under whatterms we will continue to manage gaming operations for the Cheyenne and ArapahoTribes.

On March 30, 2007, the tribal Governor of the Cheyenneand Arapaho Tribes of Oklahoma, delivered a letter to Southwest alleging that Southwesthad breached the terms of the Third Amended and Restated Gaming ManagementAgreement between Southwest and the Tribes (the “Management Agreement”) andnotifying Southwest that the Tribes intend to terminate that agreement. As described above, Southwest currently manages two casinos for the Tribesunder Amendment No. 11 to the Management Agreement.  In the tribalGovernor’s letter, the tribal Governor alleged that Southwest had breached themanagement agreement by interfering with or attempting to influence internalaffairs or governmental decisions of the Tribes in connection with Southwest’songoing efforts to extend its gaming management relationship with the Tribes.

The Company does not believe it has improperlyinterfered with or attempted to influence internal governmental decisions ofthe Tribes and Southwest will challenge any effort to terminate the GamingManagement Agreement on those grounds. Under its Gaming Management Agreementwith the Tribes, Southwest is permitted to oppose, publicly or privately, anyaction by the Tribes that Southwest believes is not in the best interest of theTribal gaming operations. Southwest believes that all of the actions it hastaken on behalf of the gaming operations it manages or as part of its effortsto extend its gaming management relationship with the Tribes are consistentwith that provision.  Southwest provideda detailed response to the tribal Governor refuting his claims on April 30,2007.

Under the terms of theGaming Management Agreement, the Tribes must give Southwest 60 days notice of abreach before termination.  Southwest has the right to cure any allegedbreach during that 60-day period, and if it does so, the Tribes will not havethe right to terminate the Agreement.  Under the agreement, any disputebetween Southwest and the Tribes regarding a breach of the agreement must besettled through binding arbitration under the Commercial Arbitration Rules ofthe American Arbitration Association. Arbitration awards may be enforced in theUnited States District Court for the District of Oklahoma.

In addition to notifying Southwest of the allegedbreach of the Management Agreement, the Governor notified the NIGC, whichundertook an investigation of the allegations. As part of its investigation, representatives of the NIGC interviewedemployees and reviewed files at Southwest’s Minneapolis, Minnesota headquartersand at the Lucky Star Casinos in Oklahoma. Southwest also provided detailed written responses to the Governor’sallegations and questions raised by the NIGC in the course of itsinvestigation.  The NIGC did not providea formal determination in response to the Governor’s allegations, but didsubsequently approve Amendment No. 11 to the Management Agreement.  The NIGC’s May 18, 2007 letter approvingAmendment No. 11 to the Management Agreement states the Chairman of the NIGCmay reconsider his approval if the NIGC determines that Southwest hasexercised, or attempted to exercise, undue influence on the Tribal Government.

On July 24, 2007, thetribal Governor delivered notice to Southwest that he had initiated anarbitration proceeding as required under the Management Agreement on July 13,2007.  On July 30, 2007, the tribalGovernor delivered a copy of subsequent correspondence to the AmericanArbitration Association providing additional information required to initiatean arbitration proceeding.  Southwest ispreparing its response to the arbitration demand and intends to vigorouslydefend itself.

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**Casinooperations**:

**Gold Rush/Gold Digger’s Casino (“GR/GD”)Results**
| ** **       | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                     | 3,558,985  |                                                  | $          | 3,605,416                            |       | (1.3                                                | )%         | $                                                   | 6,731,498  |                                 | $          | 6,898,879 |   | (2.4 | )% |
| Total revenues   |       | 3,731,612                                             |       | 3,783,360                                             |       | (1.4                                 | )%         | 7,030,041                                           |       | 7,246,144                                           |       | (3.0                                 | )%         |
| EBITDA           |       | 811,238                                               |       | 988,527                                               |       | (17.9                                | )%         | 1,268,496                                           |       | 1,538,115                                           |       | (17.5                                | )%         |
| Operating margin |       | 21.7                                                  | %          | 26.1                                                  | %          |                                 |       | 18.0                                                | %          | 21.2                                                | %          |                                 |       |
|                  |            |                                                       |            |                                                       |            |                                      |            |                                                     |            |                                                     |            |                                      |            |  |  |  |  |

 

For the three monthsended June 30, 2007, GR/GD’s total gaming revenues declined 1.3% vs. the sameperiod last year.  The Cripple Creekmarket increased by 1.7% during this same time period.  This decline can be directly attributed toGR/GD poor performance in the bad weather month of April when we were down13.8%.  The Cripple Creek market wasessentially at breakeven year over year. On a positive note GR/GD gaming revenues grew in May 4.5% and June 5.4%while the Cripple Creek market revenues increased only 2.2% and 2.5% duringthose months.  The increases in May andJune were not enough to offset the decrease in revenues during April.   A number of our competitors have parkinggarages which gives them an advantage in bad weather months.  The company did spend additional marketingdollars in May and June to recapture customers potentially lost during badweather months.

As a result of revenuereductions and increased marketing expenses, EBITDA declined 17.9% from prioryear.  We plan on improving revenues andEBITDA in the third quarter by building on our success in increasing revenuesin May and June and refining our marketing programs.

Finally, the companyclosed Uncle Sam’s casino on July 29, 2007. We plan no layoffs as a result of this closure as the Company hastransferred the operations of Uncle Sam’s to its GR/GD properties.  Therefore certain salaries and expenses previouslyincurred by Uncle Sam’s will now be included with operations of the GR/GDproperties.   We are developing plans toretain customers and their revenues from Uncle Sam’s to offset the continuationof the Uncle Sam’s retained expenses.

For the six months endedJune 30, 2007, GR/GD’s total gaming revenues declined 2.4% vs. the same periodlast year.  Again the decrease inrevenues can be directly attributed to the bad weather months of January andApril.  During these two months wesuffered a decline in gaming revenues of 24.5% for January and as mentioned adecline of 13.8% for April.   By contrastthe Cripple Creek market was down 12.2% and essentially flat for the same twomonths respectively.  During this sametime period, EBITDA declined 17.5% from prior year, again primarily due tolower revenues and higher marketing expenses.

**UncleSam’s Casino Results**:
| ** **       | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Percentage  Increase  (Decrease)** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| Casino revenues  |       | $                                                     | 184,899    |                                                  | $          | 263,935                              |       | (29.9                                               | )%         | $                                                   | 393,778    |                                 | $          | 471,807 |   | (16.5 | )% |
| Total revenues   |       | 190,206                                               |       | 263,332                                               |       | (27.8                                | )%         | 404,183                                             |       | 472,442                                             |       | (14.4                                | )%         |
| EBITDA           |       | (121,558                                              | )          | (100,813                                              | )          | (20.6                                | )%         | (228,753                                            | )          | (240,557                                            | )          | (4.9                                 | )%         |
| Operating margin |       | (63.9                                                 | )%         | (38.3                                                 | )%         |                                 |       | (56.6                                               | )%         | (50.9                                               | )%         |                                 |       |
|                  |            |                                                       |            |                                                       |            |                                      |            |                                                     |            |                                                     |            |                                      |            |  |  |  |  |

 

Operating results at Uncle Sam’s continue todeteriorate because the property is small, detached from the GR/GD and we havenot made significant improvements to the property.  As a result, on June 26, 2007, we enteredinto an agreement to assign our rights under a purchase agreement with ourlandlord for the real property and the operating lease.   On July 29, 2007 we closed Uncle Sam’sCasino and on July 31, 2007 we assigned our rights under the purchase agreementand lease and received an assignment fee of approximately $450,000 less closingcosts.  Of the assignment fee, $14,000will be held in escrow until August 31, 2007 pending removal of all ourpersonal property.  

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We expect to recognize a gain in excess of $400,000 onthis transaction that will be recorded in the third quarter of 2007.

***Project Development***costs for the three months ended June 30, 2007 and 2006 were $84,295 and$81,115, respectively.  Project development costs for the six months endedJune 30, 2007 and 2006 were $252,571 and $177,483, respectively.  The increase for the six months ended June30, 2007 of $75,088 is primarily a result of increased costs associated withobtaining our contract extension with the Cheyenne and Arapaho Tribes, seeabove discussion under “Casino Management”.

***Corporate expenses***were $821,234 and $687,321 during the three months ended June 30, 2007 and2006, respectively an increase of $133,913.  Corporate expenses were$2,124,819 and $1,312,296 during the six months ended June 30, 2007 and 2006,respectively an increase of $812,523.

The increase in corporate expenses during the threemonths ended June 30, 2007 over the comparable period in 2006 is primarily dueto increased salary and benefit expense of approximately $107,000, fees forinvestor relations and financial consulting services of approximately $30,000,increased legal and accounting fees of approximately $34,000 offset bydecreases in other corporate expenses.

The increase in corporate expenses during the sixmonths ended June 30, 2007 over the comparable period in 2006 is primarily dueto increased salary and benefit expense of approximately $543,000 (whichincluded discretionary bonuses approved by the board of directors in March 2007of approximately $385,000 with no corresponding amount in the same period in2006), fees for investor relations and financial consulting services ofapproximately $87,000, increased legal and accounting fees of approximately$80,000, increased fees with the National Indian Gaming Commission ofapproximately $43,000 and increased travel related expenses of $33,000.  The bonus approved and recorded in March 2007consisted of $210,000 that was paid in March 2007, and $175,000 to be paid onor after July 1, 2007 at such time as management determines that we havesufficient financial resources for the payment.  The $175,000 is accruedas a liability at June 30, 2007.

***Interest Expense***was $203,374 and $262,177 for the three months ended June 30, 2007 and 2006,respectively, a decrease of $58,803. Interest expense was $452,823 and $584,523 for the six months ended June30, 2007 and 2006, respectively, a decrease of $131,700.  The decrease is primarily due to less interestfrom our $2.5 million term loan as the loan was fully paid in April 2007.

***Write off ofacquisition and financing cost.***$126,650 was written offduring the three months ended June 30, 2007 as the Double Eagle acquisitionagreement was terminated and further discussion ceased. See further discussionbelow under “Liquidity and Capital Resources”.

***Loss ofunconsolidated subsidiary, net of tax benefit*** representsour share of the losses of North Metro, which were $96,437 and $60,523 duringthe three months ended June 30, 2007 and 2006, respectively, and $216,608 and$100,465 during the six months ended June 30, 2007 and 2006, respectively.    The increase in losses in 2007compared to 2006 is primarily due to increased real estate taxes in 2007 fromhigher assessed land values following the purchase of land by North Metro inlate 2005.

***Effective taxrate.- ***For thethree and six months ended June 30, 2007, we did not record a tax benefit forthe net loss as a result of our evaluation of deferred tax assets and ourability to utilize the deferred tax assets in the future.  In the threeand six months ended June 30, 2006 we recorded a tax provision that resulted inan effective tax rate of approximately 34%.  As of December 31, 2005, we evaluatedall evidence and determined that a portion of the deferred tax assets relatingto net operating losses in previous years would be utilized in 2006 based uponforecasted income for 2006.  We evaluated the valuation allowance againstthe deferred tax assets at June 30, 2007 and concluded to continue to record a 100%valuation allowance because of uncertainty surrounding our managementrelationship with the Cheyenne and Arapaho Tribes.  As of June 30, 2007,our deferred tax asset is zero.

***Liquidity and Capital Resources:***

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

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On January 24, 2007 and February 26, 2007, we enteredinto a Securities Purchase Agreement (“SPA”) with certain institutional andother accredited investors, as defined in Rule 501 of Regulation D promulgatedunder the Securities Act of 1933, as amended, under which we sold in private placementsan aggregate of 7.44 million shares of our common stock with accompanyingwarrants to purchase an aggregate of 2.98 million shares of our common stock,at a purchase price of $0.55 per share of common stock.  The warrants areexercisable for a period of five years, beginning six months after the date ofissuance, at an exercise price of $0.61 per share.  The number of sharesissuable upon exercise of the warrants and the exercise price of the warrantsare adjustable in the event of stock splits, combinations andreclassifications, but not in the event of the issuance by us of additionalsecurities, unless such issuance is pursuant to a rights offering or pro ratadistribution to all security holders except the investors.

The securities that were issued in this privateplacement were not registered under the Securities Act of 1933, asamended.  However, pursuant to the termsof the Registration Rights Agreements dated January 24, 2007 and February 26,2007 between us and the investors, we agreed to register the resale of theshares sold in the private placement, including shares issuable upon exerciseof the warrants.  The registrationstatement became effective on May 11, 2007.  Under the Securities PurchaseAgreement, we and the investor parties have made other covenants andrepresentations and warranties regarding matters that are customarily includedin financings of this nature.  If certain of our obligations are not met,we have agreed to make pro-rata cash payments as liquidated damages to each investor.

The private placement resulted in net proceeds to usof approximately $3.94 million, after the deduction of approximately $150,000of direct offering expenses.  The placement agent agreed to accept thecash portion of the placement agent commission in common stock and warrants onthe same terms as the investors, which resulted in the placement agentreceiving approximately 517,000 shares of common stock and warrants to purchasean aggregate of approximately 207,000 shares of common stock.  In addition,the placement agent received a warrant to purchase approximately 277,000 sharesof common stock, which is exercisable for a period of five years, beginning sixmonths after the date of issuance, at an exercise price of $1.00 per share.

The following officers and directors participated inthe private placement on the same terms as the other investors: James B. Druck,Chief Executive Officer and Director; Thomas E. Fox, President and ChiefOperating Officer and entities in which Mr. Fox holds an ownership interest;Jeffrey S. Halpern, Vice President of Government Affairs; Gus A. Chafoulias,Director; and David H. Abramson, Director.  Other than with respect totheir participation in this offering, there are no material relationshipsbetween us and any of the other investors in the private placement.

On April 20, 2007, North Metro entered into a CreditAgreement (the “Credit Agreement”) with Black Diamond Commercial Finance,L.L.C. (“Black Diamond”) as agent and lender.  Under the terms of theCredit Agreement, North Metro will borrow $41.7 million to construct, equip andopen its harness racetrack and card club facility in Columbus, Minnesota on thenorth side of the Minneapolis — St. Paul metropolitan area. As part of the loanagreement the members of North Metro agreed to complete aggregate membershipcontributions of $20.8 million prior to closing the loan. The total cost of theproject is expected to approximate $62 million. As of June 30, 2007, Southwest contributed $8.9 million of the totalamount of $21.2 million contributed by the members.  Certain amounts related to non-constructioncosts continue to be funded by the members. These amounts are not considered to be material.

While the Credit Agreement does not provide forrecourse against us in the case of a default by North Metro, we have pledgedour membership interest in North Metro and North Metro pledged its membershipinterest in North Metro Hotel, LLC as security for repayment of the loan underthe terms of a Pledge Agreement with Black Diamond (the “Pledge Agreement”).

We also entered into a Subordination Agreement withBlack Diamond (the “Subordination Agreement”) under which we agreed thatrepayment of a $1.65 million membership preferred capital contribution to NorthMetro, which North Metro was to repay to us out of the first available revenuefrom operations, will be subordinated to the payments due under the loanagreements.

In addition, we entered into a Sponsor SupportAgreement (the “Support Agreement”) under which each member of North Metroagreed to contribute additional capital to North Metro if proceeds from theloan are insufficient to complete construction and open the facility.  Webelieve the loan financing secured by North Metro will be sufficient toconstruct and open the facility.

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If our management relationship with the Cheyenne andArapaho Tribes terminates, we than will have to raise additional capitalthrough debt or equity financing.    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 would in all likelihood requirenew equity or debt financing.

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

On April 13, 2007, we notified Pinnacle that we hadelected to terminate the Asset Purchase Agreement between us and Pinnacle datedDecember 18, 2006 and all related agreements. 

We terminated the Asset Purchase Agreement in responseto notice we received on April 10, 2007 from Pinnacle that the separate StockPurchase Agreement under which Pinnacle was to acquire all of the outstandingcapital stock of Colorado Casino Resorts, Inc. (“CCRI”), the owner of theDouble Eagle, had terminated in accordance with its terms when Pinnacle did notmake a required payment. Because Pinnacle was unable to complete its proposedacquisition of the CCRI stock in accordance with the Stock Purchase Agreement,as amended, Pinnacle was also unable to perform its obligations under the AssetPurchase Agreement with us.  In connection with this acquisition we incurredapproximately $540,000 of financing costs. Of this amount we wrote-off approximately $127,000 related to estimatedcosts specific to this acquisition. Discussions to pursue this acquisition have ceased.  The remaining costs of approximately $413,000have been included in Other Assets in the unaudited consolidated balance sheetas of June 30, 2007, as we continues to discuss various financing alternativeswith the lender.

Net cash provided by operating activities during thesix months ended June 30, 2007 was $1,278,032 compared to $1,968,648 during thesame period in the prior year, a decrease of approximately $691,000.  Thedecrease between periods is primarily due to a decrease in net income of$738,000.

Net cash used in investing activities for the sixmonths ended June 30, 2007 and 2006 was $3,015,444 and $516,590, respectively,an increase of approximately $2,499,000.  The increase in use of cashbetween the periods was due primarily to an increase in our investment in NorthMetro of approximately $2,149,000 in connection with the closing of theconstruction financing secured by North Metro in April 2007 and additionalcosts of approximately $306,000 associated with obtaining our two yearextension of the Cheyenne and Arapaho management contract.  These costs are included on the consolidatedbalance sheet as an intangible asset and will be amortized over the contractterm of two years.

Net cash provided by financing activities for the sixmonths ended June 30, 2007 was $1,614,781 compared to net cash used infinancing activities for the six months ended June 30, 2006 of$1,222,254.  During the six months ended June 30, 2007 we had thefollowing financing activities:

·                  We completed anequity financing resulting in proceeds of approximately $4.1 million, seefurther discussion above.

·                  During the sixmonths ended March 31, 2007 we made payments of approximately $1.2 million onlong-term borrowings compared to approximately $1.1 million during the sixmonths ended March 31, 2006.

·                  We paid costs ofapproximately $322,000 related to the redemption of 357,000 shares of commonstock in accordance with Article XI of our Articles of Incorporation effectiveJanuary 22, 2007.  The shares were redeemed at a price of $0.90 per sharebased upon the closing stock price of our common stock as reported on January22, 2007.  We recorded the redemption as a reduction to stockholder’sequity for the buy back of shares.  The shares of common stock areincluded in Treasury Stock in the Consolidated Statements of Changes in Stockholders’Equity as of June 30, 2007.

·                  We made paymentsof approximately $437,000 related to our proposed acquisition of the DoubleEagle Hotel and Casino in Cripple Creek, Colorado, see further discussion above

·                  We made paymentson our line of credit of $446,292 during the six months ended June 30, 2007compared to $0 in the first six months of 2006.

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·                  We made paymentsof $110,000 during the six months ended June 30, 2006 to three officers relatedto unpaid compensation from prior periods. No such amount was paid during the same period in 2007.

***Line of Credit.***  On October 20, 2005, we established a $450,000 line of credit with CrownBank of Minneapolis, Minnesota.  The line of credit is due April 30,2008 with a variable interest rate at one percent above prime but not less than7.5% (9.25% at June 30, 2007).  As of June 30, 2007, the outstandingbalance was $0.  Our three principal officers have guaranteed up to$450,000 of this line of credit.

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

***Equipment Loan.*** On December 23, 2005, the Company negotiated a loan of $460,324 to payoff outstanding payables in connection with the installation of a player trackingsystem at our three casinos in Cripple Creek, Colorado. The loan is for a termof 48 months with interest equal to the prime rate, which is 8.25% as of June30, 2007.   The outstanding balance as of June 30, 2007 wasapproximately $297,000.

***Seasonality:***

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

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

**CompetitivePressures:**

Many casinooperators are either entering or expanding in our markets — Colorado andOklahoma — thereby increasing competition. As companies have completed new orexpanded projects, supply has sometimes grown at a faster pace than demand, andcompetition has increased significantly. Furthermore, several operators,including Southwest, have plans for additional developments or expansions inour markets.

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

The Governor ofColorado recently signed a bill that removes the exemption for casinos from thestate’s 2006 smoking ban, effective January 1, 2008.  We expect the extension of the ban toColorado casinos will have some negative impact on business volumes at ourCripple Creek property, the magnitude of which we cannot predict at this time.

**PoliticalUncertainties:**

The casinoentertainment industry is subject to political and regulatoryuncertainty.  From time to time, individual jurisdictions and NativeAmerican Tribes we do business with 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 casinoentertainment industry represents a significant source of tax revenues to thevarious jurisdictions in which casinos operate.  From time to time,various state and federal legislators and officials have proposed changes intax laws, or in the administration of tax laws, that would affect the industry. It is not possible to determine with certainty the scope or likelihood ofpossible future changes in tax laws or in the administration of tax laws. If adopted, changes in tax law could have a material adverse effect on ourfinancial results.

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

We prepare ourConsolidated Financial Statements in conformity with accounting principlesgenerally accepted in the United States.  Certain of our accountingpolicies, including, but not limited to, the estimated lives assigned to ourassets, the determination of bad debt, asset impairment, valuation of stockoption or warrant awards, and income taxes, require that we apply significantjudgment in defining the appropriate assumptions for calculating financialestimates.

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By their nature, these judgments are subject to aninherent degree of uncertainty.  Our judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate.  We cannot assure you that ouractual results will not differ from our estimates.  For a discussion ofour significant accounting policies and estimates, please refer to Management’sDiscussion and Analysis or Plan of Operation and Notes to ConsolidatedFinancial Statements presented in the 2006 Financial Statements included in ourAnnual Report on Form 10-KSB.

***New Accounting Pronouncements*:**

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

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

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

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

Our executive officers consider “EBITDA” (earningsbefore interest, taxes, depreciation and amortization) a useful tool formeasuring the operating performance of Southwest.  EBITDA is also a widelyused measure of operating performance in the gaming industry and a principalbasis for valuation of gaming companies.  We use EBITDA to establishbudgets, analyze results as compared to our budgets, and as a basis forincentive compensation for some personnel.  However, EBITDA is not ameasurement of financial performance under accounting principles generallyaccepted in the United States and should not be considered an alternative tonet income, cash flows from operating activities, or other performance measuresderived in accordance with accounting principles generally accepted in theUnited States as indicators of our operating performance or as measures of ourliquidity.  Southwest has significant uses of cash flows, includingcapital expenditures, interest payments and debt principal repayments that arenot reflected in our EBITDA calculations.  Our management uses EBITDA, andwe present it in this discussion and analysis, only as a supplement to measuresprepared in accordance with accounting principles generally accepted in theUnited States.  Please be aware that other companies in our industry maycalculate EBITDA differently than we do, which limits its usefulness as acomparative measure.

***Forward-Looking Statements:***

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

We caution the reader that forward-looking statementsinvolve risks and uncertainties that cannot be predicted or quantified and,consequently, actual results may differ materially from those expressed orimplied in the forward- looking statements. These risks and uncertaintiesinclude, but are not limited to, the following factors as well as other factorsdescribed from time to time in our reports filed with the Securities and ExchangeCommission:

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·      the approval, continuation or extension ofmanagement contracts with our Tribal partners;

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

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

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

·                  access to andthe cost of available and feasible financing;

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

·                  success of ourcustomer tracking and customer loyalty programs;

·                  abnormal gamingholds;

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

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

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

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

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

Any forward-looking statements are made pursuant tothe Private Securities Litigation Reform Act of 1995 and, as such, speak onlyas of the date made. We undertake no obligation to publicly update anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

***Risk Factors***

In reviewing this quarterly report on Form 10-QSB, youshould carefully consider the matters concerning Southwest Casino Corporationdescribed under the heading “Risk Factors” in the annual report on Form 10-KSBfiled by the Corporation on March 21, 2007, which are incorporated in thisdocument by reference.

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**Item3.  Controls and Procedures**

(a)           Evaluationof Disclosure Controls and Procedures

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

(b)           Changes in Internal Controls overFinancial Reporting

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

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**PART II— OTHER INFORMATION**

**Item1.  Legal Proceedings.**

*Approval of Gaming ManagementContracts with Cheyenne and Arapaho Tribes of Oklahoma*

At a special meeting held on March 31, 2007, theTribal Council of the Cheyenne and Arapaho Tribes of Oklahoma voted to approvenine separate agreements to extend and expand the gaming managementrelationship between Southwest and the Tribes and to authorize and direct theGovernor of the Tribes to sign those agreements and the tribal Legislature toratify them.  One of the nine approvedagreements was a two-year extension of the existing management agreement thatincluded changes to Southwest’s management fee. On April 3, 2007, the Governor filed a declaratory judgment action inthe Cheyenne and Arapaho Trial court asking the court to declare thoseresolutions invalid.  The Trial Courtgranted Southwest’s motion to intervene in this case on April 13, 2007.  On May 2, 2007, we filed our response to theGovernor’s complaint and a request for an order directing the Governor to signthe management agreements.  On May 8,2007, we requested an expedited hearing in this case, and the Trial courtscheduled a hearing on May 18, 2007.

After a hearing on May 18, 2007, the Cheyenne andArapaho Trial Court issued an order validating the two-year extension of theexisting Gaming Management Agreement. The Trial Court ruled that (a) the Tribal Council resolutionsauthorizing the extension of the gaming management agreement between Southwestand the Tribes were valid and constitutional, (b) sufficient negotiations hadoccurred among Southwest, the Governor and the Tribes, for a two-year contractextension, (c) no further action by the tribal Governor was required tovalidate the two-year contract extension, (d) the tribal Legislature hadratified the extension of the management contract in accordance with the tribalConstitution, and (e) the two-year contract extension was sufficient andappropriate given the requirement under that contract that the Tribes enterinto good faith negotiations with Southwest for an extension of that contract.

On May 16, 2007, before the Trial Court issued that ruling, theChairman of the National Indian Gaming Commission had rejected the agreementsto extend and expand the gaming management relationship between SouthwestCasino and Hotel Corp. and the Cheyenne and Arapaho Tribes in a letter statingthat the NIGC could not conclude that the Tribes had properly negotiated andexecuted the contracts without the signature of the tribal Governor.  The Chairman of the NIGC noted that he wasprepared to reconsider this decision should a tribal court rule that thecontract had been validly approved. After receipt of the May 18, 2007 Order of the Cheyenne and ArapahoTrial Court validating the two-year contract extension, the Chairman of theNIGC issued a letter approving that two-year contract extension.  We continue to manage the Lucky Star — Conchoand Lucky Star — Clinton casinos for the Cheyenne and Arapaho Tribes under thattwo-year extension agreement.

On May 21, 2007, the Governor of the Cheyenne andArapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Courtseeking to overturn the decision of the tribal Trial Court validating thetwo-year contract extension.  Thearguments in this case have been briefed by all parties, includingSouthwest.  The Supreme Court has notscheduled oral argument in this case and may elect not to do so.  As of August 14, 2007 the Supreme Court hasnot issued an opinion on this matter. Southwest believes that if the Supreme Court were to overturn the TrialCourt decision and rule that the two-year extension had not been validlyauthorized in accordance with the Tribes’ Constitution, the NIGC will likelyinstitute a review process that could cause the NIGC to withdraw its previousapproval of the contract which could lead to termination of that contractextension and loss of the management contract and accompanying revenue.

*Recall of Tribal Governor*

Concurrent with the litigation described above regarding the validityof the agreements to extend and expand the management relationship betweenSouthwest and the Cheyenne and Arapaho Tribes, separate legal proceedingsrelated to efforts to recall the Governor of the Cheyenne and Arapaho Tribesare ongoing.  While Southwest is not aparty to this, the proceedings described below may impact our managementagreements with the Tribes.

On May 7, 2007, the Cheyenne and Arapaho ElectionCommission received a petition requesting that it hold an election to vote on arecall of tribal Governor Darrell Flyingman. On May 14, 2007, the Election Commission certified the recall petition.  The Election Commission then notified Gov.Flyingman that his status as Governor of the Tribes was in “recall status” andthat his Lieutenant Governor would assume the duties of Governor effectiveimmediately.

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On May 17, 2007, the Cheyenne and Arapaho Trial Courtissued an order in another legal proceeding that Southwest is not involved inremoving Governor Flyingman from that office. On May 21, 2007, in the same filing in which he appealed the Trial CourtOrder validating the two-year extension of Southwest’s Management Agreementwith the Tribes, Governor Flyingman appealed the May 17th Order removing him from office to the SupremeCourt of the Cheyenne and Arapaho Tribes.

On June 14, 2007, the Cheyenne and Arapaho Tribes helda recall election in which they voted 1,120 to 567 to remove Governor Flyingmanfrom office.  On June 19, 2007, thetribal Election Commission certified the results of the recall election.

On June 21, 2007, Darrell Flyingman filed an appealwith the tribal Supreme Court challenging the validity of the recall electionand the Election Commission’s determination that he had been recalled fromoffice.  On July 9, 2007, the SupremeCourt of the Cheyenne and Arapaho Tribes ruled that due to procedural errors bythe tribal Election Commission with regard to timing of the election andelection notices, the election was invalid and Darrell Flyingman remained theGovernor of the Cheyenne and Arapaho Tribes of Oklahoma.

On July 13, 2007, the tribal Election Commission againscheduled a recall election for September 1, 2007 based on the previouslysubmitted petition.

*Alleged Breach of GamingManagement Agreement*

On July 24, 2007, thetribal Governor delivered notice to Southwest that he had initiated anarbitration proceeding as required under the Management Agreement on July 13,2007.  On July 30, 2007, the tribalGovernor delivered a copy of subsequent correspondence to the American ArbitrationAssociation providing additional information required to initiate anarbitration proceeding.  Southwest ispreparing its response to the arbitration demand and intends to vigorouslydefend itself.

The Governor’s arbitration demand is based onallegations raised in a March 30, 2007 letter alleging that Southwest hadbreached the terms of the Third Amended and Restated Gaming ManagementAgreement between Southwest and the Tribes (the “Management Agreement”) andnotifying Southwest that the Tribes intend to terminate that agreement. The tribal Governor alleged that Southwest had breached the managementagreement by interfering with or attempting to influence internal affairs orgovernmental decisions of the Tribes in connection with Southwest’s ongoingefforts to extend its gaming management relationship with the Tribes.

The Company does not believe it has improperlyinterfered with or attempted to influence internal governmental decisions ofthe Tribes and Southwest will challenge any effort to terminate the GamingManagement Agreement on those grounds. Under its Gaming Management Agreementwith the Tribes, Southwest is permitted to oppose, publicly or privately, anyaction by the Tribes that Southwest believes is not in the best interest of theTribal gaming operations. Southwest believes that all of the actions it hastaken on behalf of the gaming operations it manages or as part of its effortsto extend its gaming management relationship with the Tribes are consistentwith that provision.  Southwest provideda detailed response to the tribal Governor refuting his claims on April 30,2007.

Under the terms of theGaming Management Agreement, the Tribes must give Southwest 60 days notice of abreach before termination.  Southwest has the right to cure any allegedbreach during that 60-day period, and if it does so, the Tribes will not havethe right to terminate the Agreement.  Under the agreement, any disputebetween Southwest and the Tribes regarding a breach of the agreement must besettled through binding arbitration under the Commercial Arbitration Rules ofthe American Arbitration Association. Arbitration awards may be enforced in the United States District Courtfor the District of Oklahoma.

On July 24, 2007, the tribal Governor delivered noticeto Southwest that he had initiated an arbitration proceeding as required underthe Management Agreement on July 13, 2007. On July 30, 2007, the tribalGovernor delivered a copy of subsequent correspondence to the AmericanArbitration Association providing additional information required to initiate anarbitration proceeding. Southwest is preparing its response to the arbitrationdemand and intends to vigorously defend itself.

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

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**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

We held our annual meeting of shareholders atour corporate offices on June 14, 2007. At that meeting our shareholders elected five directors, all of whom hadpreviously served as Southwest directors, approved an increase in the number ofshares available for grant under our 2004 Stock Incentive Plan and confirmedthe selection of Eide Bailly LLP as our independent registered publicaccounting firm and auditors for the fiscal year ending December 31,2007.  The votes on each of these matters were as**** ****follows:

Election of Directors:

|                        | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| **David  H. Abramson** |       | 19,048,808 |       | 4,560       |       | 14,610      |       | 0                    |       |
| **Gus A.  Chafoulias** |       | 19,047,308 |       | 6,060       |       | 14,610      |       | 0                    |       |
| **James  B. Druck**    |       | 19,047,308 |       | 6,060       |       | 14,610      |       | 0                    |       |
| **Jim  Holmes**        |       | 19,050,308 |       | 3,060       |       | 14,610      |       | 0                    |       |
| **Gregg P. Schatzman** |       | 19,003,238 |       | 50,130      |       | 14,610      |       | 0                    |       |

 

Proposal #2, amendment to the Company’s 2004Stock Incentive Plan to increase the number of shares issuable under the Planfrom 1,500,000 to 3,000,000.

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 14,091,253 |       | 961,449     |       | 149,285     |       | 3,865,991            |       |

 

Proposal #3, to confirm the selection of EideBailly LLP as public accountants and independent auditors for the fiscal yearending December 31, 2007.

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 18,993,542 |       | 19,806      |       | 54,630      |       | 0                    |       |

 

**Item6.  Exhibits**

The following exhibitsare attached to this Quarterly Report on Form 10-QSB:
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  SEC Rule 13a-14.                                                                                                       |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Financial and Accounting  Officer Pursuant to SEC Rule 13a-14                                                                                     |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                    |
| 32.2 |   | Certification of Principal Financial and Accounting  Officer Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

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

 
|  August  14, 2007 | ** ** | ** ** | ** ** | **SOUTHWEST CASINO CORPORATION**             |
|------------------------|------------|------------|------------|----------------------------------------------|
|                   |       |       |       |                                         |
|                   |       |       |       |                                         |
|                   |       | By:        |       | /s/ James B. Druck                           |
|                   |       |       |       | James B. Druck                               |
|                   |       |       |       | Chief Executive Officer                      |
|                   |       |       |       | (principal executive officer)                |
|                   |       |       |       |                                         |
|                   |       | By:        |       | /s/ Thomas E. Fox                            |
|                   |       |       |       | Thomas E. Fox                                |
|                   |       |       |       | President and Chief Operating Officer        |
|                   |       |       |       | (principal financial and accounting officer) |

 

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