UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
   
þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 20072008
COMMISSION FILE NO: 0-17529
DIAMONDHEAD CASINO CORPORATION
(Name of issuer in its charter)
   
Delaware
(State of Incorporation)
 59-2935476
(I.R.S. Employer Identification Number)
1301 Seminole Boulevard,Suite 142, Largo, Florida 33770
(Address of principal executive offices)
   
Registrant’s telephone number, including area code:
 727/674-0055
Securities registered pursuant to Section 12 (b) of the Act:
 None
Securities registered pursuant to Section 12 (g) of the Act:
 Common Stock, par value $.001
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o
     Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer oAccelerated filer þ Non-accelerated filer oSmaller reporting company o

(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The aggregate market value of the voting common equity held by non-affiliates of the Company based on the closing price of the common stock on the Over the Counter Bulletin Board at June 30, 20072008 was $82,001,553.$55,067,069.
     As of March 14, 2008,16, 2009, there were 33,483,53533,830,701 shares of the registrant’s common stock issued and outstanding.
 
 

 


 

TABLE OF CONTENTS
     
Part 1  

Part 1
 Business 1
     
 Risk Factors 14
     
 Unresolved Staff Comments 15
     
 Properties 15
     
 Legal Proceedings 16
     
 Submission of Matters to a Vote of Security Holders 16
     

Part II
  Part II
     
 Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 1716
     
 Selected Financial Data 17
     
 Management’s Discussion and Analysis of Financial Condition and Financial Results 18
     
 Quantitative and Qualitative Disclosures About Market Risk 21
     
 Financial Statements and Supplementary Data 21
     
 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
     
 Controls and Procedures 21
     
 Other Information 2226
     

Part III
  Part III
     
 Directors and Executive Officers of the Registrant 2226
     
 Executive Compensation 2731
     
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 3035
     
 Certain Relationships and Related Transactions 3238
     
 Principal Accountant Fees and Services 3339
     

Part IV
  Part IV
     
 Exhibits and Financial Statement Schedules 34
EX-10.5 PROMISSORY NOTE39
EX-10.5.1 PROMISSORY NOTE
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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PART I
FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding events, conditions, and financial trends that may effect the Company’s future plans of operation, business strategy, operating results, and financial position. Diamondhead Casino Corporation is referred to herein as “the Company,” “we,” or “our.” Except for historical information contained herein, the matters discussed in this document, in particular, statements that use forward-looking terminology such as “believes,” “intends,” “anticipates,” “may,” “will,” “should,” or “expects,” or the negative or other variation of these or similar words, are intended to identify forward-looking statements that are subject to risks and uncertainties including, but not limited to, increased competition, financing, governmental action, environmental opposition, legal actions, and other unforeseen factors. The development of the Diamondhead, Mississippi project, in particular, is subject to additional risks and uncertainties, including but not limited to, risks relating to permitting, financing, the availability of capital resources, licensing, construction and development, litigation, the activities of environmental groups, delays, and the actions of federal, state, or local governments and agencies. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations are reasonable or that they will be correct. Moreover, the financial results reported herein are not necessarily an indication of future prospects of the Company. Future results may differ materially.
All subsequent written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements included in this document. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur.
ITEM 1. BUSINESS
The Company is a Delaware corporation incorporated on November 15, 1988 under the name “Europa Cruises Corporation.” The Company became a publicly-held company in 1989. On or about November 22, 2002, the Company changed its name to “Diamondhead Casino Corporation.” Since November 6, 1998, the Company’s stock has traded on the Over the Counter Bulletin Board (OTCBB). The Company’s stock currently trades under the symbol “DHCC.” Prior to the corporate name change, the Company’s stock traded under the symbol “KRUZ.” Prior to trading on the Over the Counter Bulletin Board, the Company’s stock traded on the NASDAQ Small Cap Market.
The Company currently has three subsidiaries with no current operations. As of December 31, 2007,2008, the Company had four employees. The Company considers its relationship with its employees to be satisfactory.

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I. FLORIDA
From inception through approximately August of 2000, the Company operated gaming vessels in international waters. The vessels sailed from state ports into international waters where gaming operations were conducted. From approximately 1994 through August of 2000, operations were conducted primarily out of ports located in Miami Beach, Florida, Ft. Myers Beach, Florida, and Madeira Beach, Florida. The Company eventually divested itself of its gaming operations to satisfy financial obligations to its vendors, lenders and taxing authorities and to focus its resources on the development of a casino resort on its 404.5 acres of waterfront property located in Diamondhead, Mississippi. The Company has no current operations in Florida. The Company does, however, lease office space in Largo, Florida, where it maintains its corporate headquarters.
II. MISSISSIPPI
The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation (hereafter “MGC”), an approximate 404.5 acre tract of unimproved land in Diamondhead, Mississippi. The property is located at 7051 Interstate 10. The property fronts Interstate 10 for approximately two miles and fronts the Bay of St. Louis for approximately two miles. The property is owned in fee simple and there are no liens or debt on the property. The Company intends, in conjunction with unrelated third parties, to fully develop the site in phases beginning with a casino resort. The casino resort is expected to include a casino, a hotel and spa, a sports and entertainment center, a conference center and a state-of-the-art recreational vehicle park.
The Company has had the site appraised on three occasions, subject to certain material assumptions, by J. Daniel Schroeder Appraisal Company. The appraisals were predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site under Mississippi law prior to October 17, 2005, which required that casinos be water-based. The property was appraised in 1996, assuming full permitting for a water-based casino, at approximately $8 million. The property was reappraised in 1999, again assuming full permitting for a water-based casino, at approximately $42 million. The property was last appraised in 2003, again assuming full permitting for a water-based casino, at approximately $109 million. The property has not been appraised since a new law was passed in Mississippi on October 17, 2005 which permits casinos to be built on land.
The Company maintains an office in Diamondhead, Mississippi and has one employee there. The Company has no current operations in Mississippi.
NEW LEGISLATION PERMITTING LAND-BASED CASINOS IN MISSISSIPPI
All references in this section to Mississippi law are qualified in their entirety by reference to the actual text of the law.
On August 29, 2005, Hurricane Katrina struck the Gulf coast of the United States causing extensive damage to Louisiana and Mississippi, including Biloxi, Gulfport, and Bay St. Louis, Mississippi, where approximately twelve of Mississippi’s casinos were then located. Hurricane Katrina destroyed most of the casinos on the Gulf coast. Prior to Hurricane Katrina, Mississippi law required that casinos on the Gulf

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coast be built in, on, or above the water and be located a minimum of fifty percent below mean high tide.

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Hurricane Katrina destroyed most of these water-based casinos and carried some casino barges from their water-based moorings onto land. In a single day, Hurricane Katrina destroyed the Gulf coast casino industry and left thousands of casino-related workers without jobs. The State of Mississippi suffered an immediate and substantial loss of tax revenue due to the loss of a substantial portion of its casino industry.
On October 17, 2005, in response to the devastation caused by Hurricane Katrina, Mississippi passed new legislation that allows casinos located in certain statutorily-described areas to be constructed on land no more than 800 feet from the mean high-water line of certain bodies of water, including St. Louis Bay. Under Mississippi’s new legislation, the part of the structure in which licensed gaming activities are conducted must be located entirely in an area which is located no more than eight hundred (800) feet from the mean high-water line (as defined in Section 29-15-1 of the Mississippi Code) of the waters within the State of Mississippi, which lie adjacent to the State of Mississippi south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay or, with regard to Harrison County only, no farther north than the southern boundary of the right-of-way for U.S. Highway 90, whichever is greater. In the case of a structure that is located in whole or part on shore, the part of the structure in which licensed gaming activities are conducted must lie adjacent to state waters south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay. When the site upon which the structure is located consists of a parcel of real property, easements and rights-of-way for public streets and highways are not construed to interrupt the contiguous nature of the parcel, nor is the footage contained within the easements and rights-of-way counted in the calculation of the distances specified above.
The Company believes that its property, which fronts Interstate 10 for approximately two miles and St. Louis Bay for approximately two miles, is strategically located to take advantage of the new law. The Company believes that the advent of land-based gaming in Mississippi will have a positive effect on the entire industry in Mississippi and change the perception of the gaming industry in Mississippi from that of a riverboat, dockside, or barge-based industry, to that of a Las Vegas style or Atlantic City style industry. With respect to the Company’s property, management believes the impact of the new law will also be beneficial. Management believes that the new law will allow the Company to avoid certain architectural constraints imposed by the design and construction of a water-based casino located in, on, or above water and a minimum of fifty percent below mean high tide. The new law will also allow the Company to avoid any permits, authorizations, or tidelands leases that water-based construction of a casino would have required, but that construction on land may not require.
Permits/Approvals
The development of the Diamondhead, Mississippi property requires the Company to obtain permits and approvals from various federal, state, and local agencies, boards and commissions. The regulatory environment relating to these permits and approvals is uncertain and subject to constant change. There can be no assurance that all permits and approvals can be obtained, or that if obtained, they will be renewed. Since Mississippi’s new law was passed, the Company has applied for and received the requisite zoning required from Hancock County, but has not applied for any other permits or approvals.
Inasmuch as the Company intends to take advantage of Mississippi’s new law and construct a casino on land, some of the permits, authorizations, and/or leases previously required may no longer be required. For example, since the Company intends to build a casino on land, a tidelands lease from the Mississippi

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Secretary of State, which was previously required to lease State water-bottoms in, on, or over which the

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casino would be placed, is no longer required. The extent, to which previously-required permits, approvals, authorizations, or an environmental impact statement, will be required for a casino constructed on land on the Company’s property, is not yet known.
A. Hancock County
The Company’s Diamondhead, Mississippi property is located in Hancock County, Mississippi. On January 16, 1997, the Hancock County Board of Supervisors adopted a Hancock County Zoning Ordinance. Under the Hancock County Zoning Ordinance, as originally adopted, the Company’s 404-acre site was zoned as a Special Use District-Waterfront District. The Company has obtained an extension of this Special Use designation each year since that time. Most recently, by letter dated October 1, 2007,9, 2008, the Company forwarded a request to the Hancock County Planning Commission for an extension of the Special Use designation. On November 1, 2007,6, 2008, the Hancock County Planning Commission passed a resolution extending the designation through December 31, 2008.2009. On November 5, 2007,December 1, 2008, the Hancock County Board of Supervisors ratified the resolution.
B. Mississippi Gaming Commission
On June 15, 1995, the Mississippi Gaming Commission granted gaming site approval for the original, water-based, Diamondhead casino site. Inasmuch as the Company intends to construct its casino resort on land, the Company believes it will be required to obtain gaming site approval for a land-based casino site (See Mississippi Regulation-Gaming Site Approval/Approval to Proceed with Development). There can be no assurance that the Company will obtain the approvals required from the Mississippi Gaming Commission.
C. Annual In-Lieu Tidelands Assessment
The Company intends to take advantage of Mississippi’s new law and construct its casino on land, therefore, the Company will no longer require a tidelands lease from the Secretary of State. Under Mississippi’s prior law, which required that the Company’s casino be in, on, or above water and a minimum of fifty percent at or below mean high tide, the Company would have required a tidelands lease to lease water-bottoms owned by the State.
On October 17, 2005, when Mississippi passed new legislation permitting casinos to be built on land in certain locations, Mississippi also passed a companion law that requires any person possessing a license under the Mississippi Gaming Control Act, who operates a gaming establishment in any of the three most southern counties of the State (including the county in which the Company’s property is located), and who does not lease public trust tidelands from the State, to pay an annual in-lieu tidelands assessment to the Public Trust Tidelands Assessments Fund. For calendar year 2006, the annual in-lieu tidelands assessment will bewas between $400,000 and $750,000, based on an escalating scale which is based onmeasured by the capital investment in the part of the structure in which the licensed gaming activities are conducted. For each calendar year thereafter, the Secretary of State shall review and adjust the value of the capital investment and the annual in-lieu tidelands assessment due. Such review and adjustment shall be tied to the Consumer Price Index. This annual in-lieu tidelands assessment will apply to any casino constructed on land on the Company’s property.

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D. Other Required Permits
In addition to the foregoing, the Company will, at a minimum, be required to obtain various permits, authorizations, or approvals from the following:

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1) Mississippi Commission on Marine Resources
2) Mississippi Commission on Environmental Quality
3)
1)Mississippi Commission on Marine Resources
2)Mississippi Commission on Environmental Quality
3)U.S. Army Corps of Engineers
There can be no assurance that the Company will be successful in obtaining these permits.
Uncertain Regulatory and Political Environment/Modifications
Any modification of the Company’s originally-approved site plan or any newly-approved site plan may require resubmission to, amendment to, and/or re-approval by the Mississippi Gaming Commission, the Mississippi Department of Marine Resources, the Mississippi Department of Environmental Quality, the U.S. Army Corps of Engineers, Hancock County, and/or other federal, state or local agencies. The foregoing federal, state and local agencies regularly pass new rules and regulations which may affect permits and authorizations required. While there is no pending environmental litigation, the foregoing permits and approvals remain subject to future litigation and the actions of environmental groups and various federal, state and local governments and agencies, including, but not limited to, the foregoing. The regulatory environment relating to these permits, approvals and leases is uncertain and subject to constant change.
The political environment in which the Company and/or its subsidiaries intend to operate is also uncertain, dynamic and subject to rapid change. Existing operators often propose and support legislation and/or litigation designed to make it difficult or impossible for competition to enter a market. This political and regulatory environment makes it impossible to predict the effects that the adoption of and changes in gaming laws, rules and regulations and/or competition will have on proposed gaming operations or development of a gaming resort. Moreover, legislatures in states in which gaming is legal often consider wide-ranging legislation and regulations which could adversely affect operations and expected revenues. Likewise, the federal government often considers legislation which could adversely affect operations and expected revenues. For example, in 1999, the National Gambling Impact Study Commission, which conducted a two-year study of legal gaming in the United States, reported its findings and recommendations to Congress. Some of the recommendations made in its report, if implemented, might result in additional regulation of the gaming industry and could have an adverse effect on the industry and the Company’s proposed development.
Anti-Gaming Referenda
On three separate occasions since 1998, certain anti-gaming groups have proposed referenda that, if adopted, would have banned gaming in Mississippi and required that gaming entities cease operations within two years after the ban. All three of the proposed referenda were ruled illegal by Mississippi State trial courts. If such a referendum were to be approved by the voters, it would have a material adverse effect on the Company.
MISSISSIPPI REGULATION
The Company has no current operations in Mississippi and does not operate any gaming facility in Mississippi. The Company intends to develop its Diamondhead property as a destination casino resort.

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Assuming it is successful in developing its resort, the Company and its subsidiaries and/or affiliates will be subject to federal, state and local, laws, rules, ordinances and regulations with respect to the operation of any gaming facility. The following is intended to serve as a partial description of the Mississippi regulatory environment in which the Company and its subsidiaries or joint venture partner(s) would seek approvals to construct and operate a gaming facility and is not intended to be a complete, precise, or up-to-date recitation of all applicable laws, rules, regulations or ordinances that might affect the Company’s operations or with which the Company would be required to comply. Additional or more restrictive laws, rules and regulations could be adopted at any time or gambling could be completely banned.
The location of, ownership of, and operation of gaming facilities in Mississippi are subject to extensive state and local regulation, primarily through the licensing and control of the Mississippi Gaming Commission and the Mississippi State Tax Commission. The Company and/or its subsidiaries must register and be licensed under the Mississippi Gaming Control Act and its gaming operations will be subject to the regulatory control of the Mississippi Gaming Commission, the Mississippi State Tax Commission and various local and county regulatory agencies.
The Mississippi Gaming Control Act gives the Mississippi Gaming Commission (the “Commission”) extensive power to enforce the Act and adopt regulations in furtherance of the Act (the “Mississippi Regulations”). The laws, regulations and supervisory procedures of Mississippi and the Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming Commission; (4) prevent cheating and fraudulent practices; (5) provide a source of state and local revenues through taxation and licensing fees; and (6) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Commission. Changes in Mississippi law or the regulations or the Commission’s interpretation thereof may limit or otherwise materially affect the types of gaming that may be conducted and could have a material adverse effect on Mississippi gaming operations.
The Commission has divided the approval process into two separate phases: (1) gaming site approval; and (2) approval to proceed with development.
Gaming Site Approval
With respect to gaming site approval, approval constitutes only the Commission’s finding that the location complies with applicable gaming laws and regulations. Gaming site approval does not entitle the recipient to proceed with development, nor does it constitute a license to engage in gaming or a right to a gaming license. Gaming site approval is a revocable privilege, and no holder acquires any vested right therein. The Mississippi Gaming Commission reserves the right to revoke any site approval should the circumstances change that would make the site illegal or unsuitable.
An application for gaming site approval must include evidence satisfactory to the Commission including: (1) a survey indicating the specific location of the property; (2) the current use of any adjacent property as well as the location of the nearest residential area, church and school; (3) evidence that all applicable

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zoning ordinances allow gaming at the proposed site; and (4) a survey establishing the mean high water line, performed by a qualified surveyor for performance of tidal surveys.

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Gaming establishments in the three most southern counties in the State of Mississippi, including Hancock County, are permitted to be permanent inland structures. No point in the gaming area may be more than eight hundred (800) feet from the nineteen (19) year mean high water line. Harrison County establishments south of Highway 90 may exceed the eight hundred (800) foot measurement up to the southern boundary of Highway 90. All public easements and rights-of-way for public streets and highways are excluded from the 800 foot measurement. Any point of reference used to determine the 800 foot distance from the mean high water line must be located on the applicant or licensee’s premises. The applicant or licensee must own and/or lease the land that is contiguous both to the parcel used to conduct gaming and the point of reference used to determine the mean high water line, and this land must be shown to be an integral part of the project. The Commission has final authority in reviewing and approving each site as it pertains to meeting the requirements of this regulation.
Approval to Proceed with Development
With respect to obtaining the Commission’s approval to proceed with development, the following information, together with documentation to support this information, must be submitted to the Commission:
1) Architectural plans or renderings showing details of all proposed construction and renovation for the project, together with a footprint of the project and a description of the construction and type of parking facilities, as well as parking lot capacity.
Commission approval requires that the facility include a 500 car, or larger parking facility in close proximity to the casino complex and infrastructure facilities which will amount to at least 100% of the higher of the appraised value or construction cost of the casino. Such infrastructure shall include any of the following: 250 room, or larger hotel of at least a two star rating as defined by the current edition of the Mobil Travel Guide, a theme park, golf course, marinas, tennis complex, entertainment facilities, or any other such facility as approved by the Commission as infrastructure. Infrastructure facilities are not such items as parking facilities, roads, sewage and water systems, or civic facilities normally provided by cities and/or counties. The Commission may, in its discretion, reduce the number of rooms required, where it is shown to the Commission’s satisfaction that sufficient rooms are available to accommodate the anticipated visitor load. Parking spaces may also be reduced as needed for small casinos, provided that the 100% infrastructure requirement is otherwise met. The qualifying infrastructure must be owned or leased by (i) the holder of the site approval or (ii) an affiliated company of the holder of the site approval where both the affiliated company and the holder of the site approval have identical direct or indirect equity ownership.
In cases where casinos that are not in operation are purchased which do not meet the parking and infrastructure requirements subsequent to February 20, 1999, the infrastructure requirement will be calculated on the higher of the appraised value of the casino barge or acquisition cost of the casino barge. For the purpose of determining compliance with this regulation, the Commission will, in its discretion, determine a fair and equitable method for calculating the construction cost of new casinos and acquisition costs for existing casinos. This regulation applies to any new applicant for a gaming license for a new gaming facility and to the acquisition or purchase of a licensee for which gaming operations have ceased prior to the time of acquisition or purchase. This regulation does not apply to any licensee who has been

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licensed by the Commission, or received a finding of site suitability from the Commission, prior to February 20, 1999 (or to any such licensee upon any licensing renewal after such date). For purposes of complying with this regulation, the appraised value of any casino will be determined by an appraisal

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completed by an appraiser approved by the Executive Director of the Commission prior to the appraisal. The Commission may require more than one appraisal and may obtain its own appraisal with the reasonable cost of same to be paid by the applicant.
Any change to the plan, or placement or design of the establishment, cruise vessel or vessel, shall be submitted in advance to the Executive Director for a determination of whether such change constitutes a material change. If the Executive Director determines that a material change has occurred, Commission approval is required for same.
2) Statements reflecting the total estimated cost of construction or renovation of the establishment, vessel, or cruise vessel and shore and dock facilities, distinguishing between known costs and projections, and separately identifying: facility design expense; land acquisition costs; site preparation costs; construction costs or renovation costs; equipment acquisition costs; costs of interim financing; organization, administrative and legal expenses; projected permanent financing costs; qualified infrastructure costs; and non-qualifying infrastructure costs.
3) A construction schedule for completion of the project, including an estimated date of project completion, indicating whether a performance bond will be required by the applicant to be furnished by the contractor.
4) Current financial statements, including, at a minimum, a balance sheet and profit and loss statement for the proposed licensee.
5) A detailed statement of the sources of funds for all construction and renovation proposed by the site development plans. Any funding, whether equity or debt, to be obtained, must be supported by firm written commitments satisfactory to the Commission.
6) Evidence that the following agencies (if applicable) were notified of the development and/or do not oppose the site development: U.S. Corps of Engineers, U.S. Coast Guard, Mississippi Department of Transportation, Mississippi Department of Environmental Quality, Department of Marine Resources, Port and Harbor Commission, Levee Board, City and County government, and such other agencies as the Executive Director deems appropriate.
The application for a Gaming Operator’s License must be filed no later than ninety (90) days after the Commission grants approval to proceed with development. The gaming site approval will expire three (3) years from the date approval to proceed with development is granted unless the Commission grants an extension. Approval to proceed with development is not subject to sale, assignment or transfer.
Opening of a Casino
Before any gaming facility may open to the public, all infrastructure requirements must be fully operational. Site development must be completed in accordance with the approved plan and be ready for operation within the gaming site approval time period. Gaming site approval may be extended within the discretion of the Commission.

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The Commission requires, as a condition of licensure, that gaming establishments meet strict hurricane, fire-safety, and construction-related standards and regulations.

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Application Information Required
In addition to other information required by law and Commission regulations, an applicant must provide complete information regarding the proposed operation, including but not limited to, a certification that any establishment to be used by the proposed operation has been inspected and approved by all appropriate authorities; fingerprints for each individual applicant; the nature, source, and amount of any financing; the proposed uses of all available funds; the amount of funds available after opening for the actual operation of the establishment; and economic projections for the first three (3) years of operation of the establishment. Each applicant must provide complete information regarding his or her background for the ten-year period preceding submission of the application. Every application must include any feasibility studies done on the type of gaming in the particular locale where the applicant intends to conduct gaming; the actual establishment blueprints, including a layout of each floor stating the projected use of each area; a description of the casino size and configuration of slot machines, video games of chance and table games; a description of the arrangements for food and drink concessions, the names and addresses of the concessionaires and the terms of the concession contracts; the type of slot machines and video games of chance to be used and the proposed distributors and manufacturers of this equipment; a description of the proposed management of the facility, management personnel by function, and tip distribution policies; and a description of procurement policies that emphasize the utilization of Mississippi employees, resources, and goods and services in the operation of the gaming establishment. In cases where the premises used for gaming are not wholly owned by the applicant, information pertaining to the interest held by any other person is required. Applicants must also submit a timetable for financing arrangements and commencement and completion of construction activities, setting forth the date upon which gaming activities will commence. The timetable will be subject to approval by the Commission and monitored for compliance by the Executive Director.
Gaming Licenses
Neither the Company nor any of its subsidiaries has a license to operate a casino in Mississippi or in any other jurisdiction. Gaming licenses require the periodic payment of fees and taxes and are not transferable. Gaming licenses in Mississippi are issued for a maximum term of three years and must be renewed periodically thereafter. There can be no assurance that the Company or any of its subsidiaries will be licensed. There can be no assurance that if licensed, new licenses can be obtained at the end of each three-year licensure period. Moreover, the Commission may, at any time, and for any cause it deems reasonable, revoke, suspend, condition, limit or restrict a license or approval to own shares of stock in a company that operates in Mississippi. The Mississippi Act also requires that a publicly traded company register under the Act. The Company and/or its subsidiaries will be required to periodically submit detailed financial, operating and other reports to the Commission and Mississippi State Tax Commission. Substantial fines for each violation of Mississippi’s gaming laws or regulations may be levied against a company or its subsidiaries and the persons involved. A violation under a gaming license held by a subsidiary of a Company operating in Mississippi could be deemed a violation of all other licenses, if any, then held by the Company. Numerous transactions, including substantially all loans, leases, sales of securities and similar financing transactions entered into by any subsidiary of the Company operating a casino in Mississippi must be reported to or approved by the Commission. In addition, the Commission may, at its

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discretion, require additional information about the operations of the Company. The Company’s gaming operations outside of Mississippi, if any, would also be subject to approval of the Commission.

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Key Employee Licenses
Any executive, employee, or agent of a gaming licensee having the power to exercise a significant influence over decisions concerning any part of the operation of a gaming licensee or who is listed or should be listed in the annual employee report may be required to hold a Key Employee License. A Key Employee License relates only to the specified involvement for which it was made. If the nature of the involvement changes from that for which the applicant is granted a Key Employee License, he may be required to submit himself to a new determination of suitability to hold a Key Employee License. A Key Employee may be required to submit to a finding of suitability at any time after issuance of a Key Employee License. A Key Employee license is granted for a period of no longer than nine years from the date of issue. A Key Employee License may be granted for a period of less than nine years within the discretion of the Commission. A holder of a Key Employee License must file with the Investigations Division of the Commission by June 30th of each year, the “Investigations Division Annual Report,” providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. Commission approval is required for certain acts of licensees or transactions directly or indirectly involving licenses. A holder of a Key Employee License must immediately inform the Commission of any arrest or conviction.
Deborah Vitale, President and Chairman of the Board of Diamondhead Casino Corporation and President and a Director of CWI and MGC, was issued a key person license by the Colorado Gaming Commission during 1994. A Colorado license is ineffective in Mississippi. During 1996, Ms. Vitale’s key person license in Colorado expired and was not renewed. H. Steven Norton, a Director of the Company, is a current holder of a key person license in both Colorado and Indiana. However, neither license constitutes a license to conduct gaming activities in Mississippi.
Findings of Suitability
The Commission can require that certain persons directly and actively involved in the administration or supervision of the gaming activities of gaming licensees be found suitable to hold a gaming license so long as that involvement continues and its regulations require that the following persons shall apply for a finding of suitability and must be found suitable by the Commission in order to be involved with a licensee: each person who serves as Chairman of the Board of Directors of any corporation, public or private, licensed or registered by the Commission; and each person who has a vote on any issue before the Board of Directors of any corporation, public or private, licensed or registered by the Commission and who is also an employee of the corporation or any of its subsidiaries. In addition, each person who serves as Chairman of the audit or compliance committees of any corporation, public or private, licensed or registered by the Commission, must apply for a finding of suitability. If the nature of the job changes from that for which the applicant is found suitable, he may be required to submit himself to a new determination of his suitability.
A finding of suitability is granted for a period of no longer than ten years from the date of issue. A finding of suitability may be granted for a period of less than ten years within the discretion of the Commission. A holder of a finding of suitability must file with the Investigations Division of the Commission by June 30th of each year, the “Investigations Division Annual Report,” providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. A holder of a finding of suitability must immediately inform the Commission of any arrest or conviction.

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The Commission has full and absolute power and authority, at any time, to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered, found suitable or approved, for any cause deemed reasonable by the commission. The Commission has the power, at any time, to investigate and require the finding of suitability of any record or beneficial stockholder of the Company. The Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 5% of any class of voting securities of a publicly traded corporation registered with the Mississippi Gaming Commission, must notify the Mississippi Gaming Commission of this acquisition. The Act also requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of any class of voting securities of a publicly traded corporation registered with the Commission must be found suitable by the Mississippi Gaming Commission and pay the costs and fees that the Commission incurs in conducting the investigation. The Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a registered publicly traded holding company’s stock. However, the Commission has adopted a policy that generally permits certain institutional investors to own beneficially up to 15% of a registered public company’s stock without a finding of suitability. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of beneficial owners. The Commission may, at any time, dissolve, suspend, condition, limit or restrict a finding of suitability to own a registered public company’s equity interests for any cause it deems reasonable.
Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company’s securities beyond such time as the Commission prescribes, may be guilty of a misdemeanor. The Company could be subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its subsidiaries operating casinos in Mississippi, the Company pays the unsuitable person any dividend, interest or other distribution whatsoever; recognizes the exercise, directly or indirectly, of any voting rights conferred through such securities held by the unsuitable person; pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in limited and specific circumstances; makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction; or fails to pursue all lawful efforts to require the unsuitable person to divest himself or herself of the securities, including, if necessary, the immediate purchase of the securities for cash at fair market value.
The Company may be required to disclose to the Commission upon request, the identities of holders of any debt or other securities. Under the Act, the Commission may, in its discretion, (1) require holders of debt securities of registered corporations to file applications; (2) investigate such holders; and (3) require the holders to be found suitable to own such securities. Although the Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Commission retains the discretion to do so for any reason, including but not limited to a default, or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Commission in connection with such an investigation.

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The finding of suitability is comparable to licensing and both require submission of detailed personal financial information followed by a thorough investigation. In addition, the Mississippi Gaming Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources.
The Mississippi regulations provide that a change in control of a Company may not occur without the prior approval of the Commission. Mississippi law prohibits the Company from making a public offering of its securities without the approval of the Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. The Commission has the authority to grant a continuous approval of securities offerings subject to renewal every two years. Regulations of the Commission prohibit certain repurchases of securities of publicly traded corporations registered with the Commission, including holding companies, without prior approval of the Commission. Transactions covered by these regulations are generally aimed at discouraging repurchases of securities at a premium over market price from certain holders of greater than 3% of the outstanding securities of the registered publicly traded corporation. The regulations of the Commission also require prior approval for a “plan of recapitalization” as defined in such regulations.
The Company, once registered, will have to maintain current stock ledgers in the State of Mississippi, which may be examined by the Mississippi Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is required to render maximum assistance in determining the identity of the beneficial owner. Mississippi law requires that certificates representing shares of a registered company’s common stock bear a legend to the general effect that the securities are subject to the Mississippi Gaming Control Act and regulations of the Mississippi Gaming Commission. The Commission has the authority to grant a waiver from the legend requirement. (Isle of Capri obtained such a waiver.) The Commission, through the power to regulate licenses, has the power to impose additional restrictions on holders of the Company’s securities at any time.
Employees associated with gaming in Mississippi must obtain work permits that are subject to immediate suspension under certain circumstances. The Commission will refuse to issue a work permit to a person who has been convicted of a felony, committed certain misdemeanors or knowingly violated the Mississippi Gaming Control Act, and it may refuse to issue a work permit to a gaming employee for any other reasonable cause.
License Fees and Taxes
License fees and taxes are payable to the State of Mississippi and to the counties and cities in which the Mississippi Gaming Subsidiary’s respective operations will be conducted. The license fee payable to the State of Mississippi is based upon “gaming receipts”, generally defined as gross receipts less payouts to customers as winnings, and equals 4% of gross revenue of $50,000 or less per calendar month, plus 6% of gross revenue over $50,000 and less than $134,000 per calendar month, plus 8% of gross revenue over $134,000 per calendar month. License fees paid in any taxable year are allowed as a credit against the Mississippi State income tax liability of a licensee for that taxable year. In addition, a licensee must pay a $5,000 annual license fee and an annual fee based upon the number of games it operates. In addition to state gaming license fees or taxes, a municipality or county may impose a gross revenue fee upon a

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licensee based on all gaming receipts derived from the establishment equal to approximately 4%. Certain local and private laws of the State of Mississippi may impose fees or taxes in addition to the fees described above.

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Beer, Wine and Liquor Licensing
The sale of food or alcoholic beverages, including beer and wine, is subject to licensing, and regulation and control by the applicable state and local authorities. The Miscellaneous Tax Division of the Mississippi State Tax Commission regulates the sale of beer and light wine. The Alcoholic Beverage Control Division of the Mississippi State Tax Commission (the “ABC”), regulates the sale of alcoholic beverages containing more than 5% alcohol. The ABC requires that all equity owners and managers file personal record forms and fingerprint cards for licensing. In addition, owners of more than 5% of a company’s equity, as well as officers and managers, must submit detailed financial information to the ABC for licensing. All such licenses are revocable and non-transferable. The Mississippi State Tax Commission has full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could, and revocation would, have a material adverse impact upon the operations of an affected casino.
Extensive Non-Gaming Laws and Regulations
In addition to the foregoing, the Company and/or its subsidiaries will be subject to additional federal, state and local safety, health, employment, and other laws, regulations and ordinances that apply to non-gaming businesses generally. For example, Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Treasury Department require currency transactions in excess of $10,000 occurring within a gaming day to be reported, including identification of the patron by name and social security number. Substantial penalties can be imposed for failure to comply with these regulations. The foregoing is just one example of the pervasiveness of the non-gaming laws, rules, regulations and ordinances that would apply to a casino operator.
COMPETITION
There is intense competition in the Mississippi market in which the Company intends to operate and in surrounding markets. The Company will compete directly with other existing gaming facilities located in Mississippi and in bordering states, including Louisiana. The Company will also be competing directly and indirectly, with gaming facilities throughout the United States and throughout the world as well as with Native American gaming operations which enjoy certain tax advantages. The Company expects this competition to increase as new gaming operators enter these markets, existing competitors expand their operations, gaming activities expand in existing jurisdictions, and gaming is legalized in new jurisdictions and/or on the internet. Assuming it is successful in developing a destination casino resort, the Company will also be competing with other forms of gaming and entertainment, including but not limited to, bingo, online computer gambling, pull tab games, card parlors, sports-book operations, pari-mutuel betting, dog racing, lotteries, jai-alai, video lottery terminals, and video poker terminals.
MANAGEMENT AGREEMENT
On June 19, 1993, CWI and MGC entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi. If the Company enters into a joint venture arrangement pursuant to which the joint venture partner acquires a controlling interest, the agreement with CAMC will terminate. Unless earlier terminated

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partner acquires a controlling interest, CAMC may terminate the agreement. Unless earlier terminated pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and one hundred million dollars ($100,000,000);$100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and twenty-five million dollars ($25,000,000);$25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars ($25,000,000).$25,000,000.
ITEM 1A. RISK FACTORS
The Company’s property in Diamondhead, Mississippi is the only asset of material value held by the Company. The Company is entirely dependent on the successful development of and/or sale or lease of part or all of this property to generate future cash flow. The successful development of the property will require substantial financial resources. The Company does not have the financial resources to develop the property or any portion thereof. To date, the Company has not found a partner(s) with whom to develop the property on terms that are acceptable to the Company.
The ultimate development of the property is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. In addition, the State of Mississippi could vote to prohibit gambling which would have an enormous, adverse effect on the value of the Company’s Diamondhead property, the development of the property, and any gaming operation that might be in operation at the time any such prohibition was instituted.
The design, construction, and on-time opening of a casino resort are subject to risks and uncertainties associated with cost overruns, contract-related contingencies, developer, contractor or subcontractor failures to perform, costs increases and availability of materials, supplies and equipment, labor shortages, strikes, walkouts and weather-related and other construction delays. The occurrence of a natural disaster could disrupt operations on the property for elongated periods of time. Any such occurrence could also alter the market for the project temporarily or permanently and have an adverse effect on the value of the property and the business of the Company.
The gaming industry is characterized by intense competition. Many companies, with which the Company will compete, are substantially larger and have significantly greater resources than the Company. Furthermore, it is likely that other competitors will emerge in the future. Assuming the Company is successful in constructing a casino resort, the success of the project will be subject to risks and uncertainties, including but not limited to those relating to local, national, and worldwide competition, including competition with Native American casinos which enjoy significant tax advantages. The Company will also be subject to operational risks, including but not limited to those relating to operations in general, insurance coverage problems unique to the area in which the property is located, weather-related problems including hurricanes and floods and labor-related problems unique to the area. The operation will also be subject to risks relating to security, licensing and suitability findings unique to the gaming industry. In addition, the market in which the Company will operate is evolving and uncertain due to Hurricane Katrina. Moreover, while the Company previously operated gambling ships, the Company has never operated a hotel or land-based casino. The Company’s proposed

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operations are also subject to all of the risks inherent in the establishment of a new business enterprise, including the absence of an operating history.

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The Company incurs ongoing expenses but has no current revenue and no revenue stream with which to pay ongoing expenses. The Company will not have any revenue stream unless the Company is able to successfully develop its Diamondhead property or generate cash prior to development of the property or the sale of parts or all of the property. The Company’s inability to raise cash to pay its expenses in the future could adversely affect its ability to continue in the future. It also could give rise to disclosuresCurrent economic conditions in the casino industry, as well as tight credit markets in general, could adversely affect the Company’s financial reporting which the investing public would consider adverse and, therefore, have a negative impact on the stock priceability to obtain reasonable financing for development of the Company. TheDiamondhead property. As of the date of this report, in lieu of any additional source of capital, management believes that the Company will essentially exhaust all cash resources currently available to it by December 31, 2009. In addition, our auditors have expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report of our attached consolidated financial statements for the year ended December 31, 2008.The market price of the Company’s common stock may be highly volatile. Announcements by the Company and its competitors may lead to wide swings in the market price of the common stock.
While the Company is not currently engaged in litigation, the Company is always subject to risk associated with contract-related, employee-related, environmental-related and other litigation. Any such litigation would likely be expensive and time-consuming.
The foregoing are not intended to encompass and do not encompass every risk or uncertainty associated with investment in the Company. The Company may be affected by some or all of the foregoing and other risks and uncertainties, many of which are beyond the Company’s control.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
DIAMONDHEAD, MISSISSIPPI PROPERTY
On June 19, 1993, the Company, through its subsidiary, MGC, exercised an option to purchase 404.5 acres of land in Diamondhead, Mississippi for $4,000,000. MGC obtained a $2,000,000 loan from Casinos Austria Maritime Corporation (“CAMC”) to complete the purchase of the property. The loan was secured by a first mortgage on the property. The first mortgage loan was payable interest only at 8% per annum for fifteen months. The full principal balance on the first mortgage loan was due and payable on June 30, 1995. Prior to its due date, the first mortgage was paid in full from the proceeds of a loan obtained by the Company in May of 1995 from First Union National Bank of Florida. The loan due First Union National Bank of Florida was subsequently paid in full and the property is now debt-free and lien-free.
On June 19, 1993, MGC also entered into an Option Agreement to purchase approximately 80 acres of land included within the 404 acre site for a purchase price of ten dollars ($10.00). The option was originally purchased so as to avoid certain limitations that attached to the underlying parcels. It was in the interest of the Company and its Diamondhead project that certain litigation instituted by the seller of the

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property be completed before MGC exercised this option. The litigation was finalized in 2002 and MGC exercised its option in December of 2002. The property was transferred to MGC by Warranty Deed on December 18, 2002. The exercise of this option gave MGC full title to the entire 404 acre tract.

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MGC now owns the entire 404 acre tract in fee simple. There is no debt and there are no liens on the property. The Company believes the property is adequately insured.
OFFICES
   
Location
 Lease Terms
   
Florida
  
1301 Seminole Blvd., Suite 142 One year commencing August 1, 2007.2008.
Largo, Florida 33770  
   
Mississippi
  
5403 Indian Hill Blvd.
Month-to-month lease.
Diamondhead, Mississippi 39525 Two years commencing June 1, 1998 and continuing month-to-month thereafter
STORAGE FACILITIES
The Company leased storage facilities at the following location in 2007:2008:
   
Florida
 Lease Terms
4319 Duhme Rd.
Madeira Beach, Florida 33708.
 Month-to-month leases on various storage units.
Madeira Beach, Florida 33708.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of shareholders of the Company was held on October 1, 2007 in Alexandria, Virginia. Shareholders of record as of August 15, 2007 were asked to vote on two proposals. A total of 31,800,659 shares were voted. The results of the vote were as follows:
(1)To elect six Directors to hold office until the next annual meeting of stockholders.
         
Nominee For Withheld
         
Benjamin J. Harrell  27,905,353   3,895,306 
Gregory A. Harrison  27,833,874   3,966,785 
Deborah A. Vitale  27,692,375   4,108,284 
Carl D. Stevens  26,880,606   4,920,053 
H. Steven Norton  26,592,348   5,208,311 
Frank E. Williams, Jr.  26,036,884   5,763,775 

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(2)To ratify the appointment of the firm of Friedman LLP as the Company’s independent registered public accounting firm.
          
For Against Abstain
 
29,570,800  2,136,545   93,314 
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since November 22, 2002, shares of the Company’s Common Stock, $.001 par value (the “Common Stock”), have traded on the over-the-counter market under the symbol “DHCC.” The following table sets forth the high and low closing price quotations of the Common Stock in each full quarter during the periods set forth. The over-the-counter quotations reflect inter-dealer prices without retail markup, markdown, or commission and may not represent actual transactions.

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 2007 2006 2008 2007
 High Low High Low High Low High Low
  
First Quarter $3.15 $2.22 $2.76 $1.55  $2.62 $1.56 $3.15 $2.22 
Second Quarter 2.96 2.40 3.12 2.57  2.15 1.30 2.96 2.40 
Third Quarter 2.95 2.60 3.13 2.50  1.95 1.41 2.95 2.60 
Fourth Quarter 2.89 2.20 3.38 2.55  1.70 .55 2.89 2.20 
On February 27, 2008,March 1, 2009, there were 877870 registered holders of record of the Common Stock of the Company.
The Company has never paid a cash dividend on its Common Stock. Reference is made to Part III, Item 11 of this report which describes in full all compensation involving equity securities related to Directors and Officers of the Company.
During the year ended December 31, 2006 the registrant sold unregistered securities pursuant to a private placement to raise funds for general working capital as follows:
In January 2006, the Company sold 421,654 shares of common stock, formerly held in treasury, in a private placement to unrelated accredited investors for $522,850. In October 2006, the Company sold 278,000 shares of common stock, formerly held in treasury, in a private placement to unrelated accredited investors for $278,000.
In each case, common shares issued bore a restrictive legend.
ITEM 6.SELECTED FINANCIAL DATA
The Company has had no operations since the sale of its gaming vessels, which occurred between 1999 and 2000. Since that time, the Company has concentrated on development of its Diamondhead, Mississippi property. The table below depicts the key items which have contributed to the Company’s financial results over the last five years:
                     
  2008 2007 2006 2005 2004
                     
Dock Lease Income $  $  $  $130,841  $157,009 
                     
Operating Expenses  1,049,561   1,182,092   1,655,473   786,841   798,513 
Stock-Based Compensation  2,072,927      1,238,348       
Interest Expense  6,460            87,032 
                     
Net (Loss)  (3,124,574)  (1,155,487)  (1,649,832)  (641,948)  (640,239)
                     
Loss per Share — Basic and Fully Diluted $(.096) $(.038) $(.055) $(.025) $(.025)

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  2007 2006 2005 2004 2003
                     
Dock Lease Income $  $  $130,841  $157,009  $343,602 
 
Operating Expenses  1,182,092   1,655,473   786,841   798,513   1,088,853 
Stock-Based Compensation     1,238,348          
Interest Expense           87,032   89,762 
                     
Net (Loss)  (1,757,192)  (1,757,195)  (749,308)  (640,239)  (421,160)
                     
Loss per Share — Basic And Fully Diluted $(.038) $(.055) $(.025) $(.025) $(.018)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND FINANCIAL RESULTS
Liquidity, Capital Resources, and Financial Results
The Company’s current priority is the development of a destination casino resort in Diamondhead, Mississippi. In the opinion of management, this project holds the greatest potential for increasing shareholder value. The Company’s management, financial resources and assets will be devoted towards the development of this goal. There can be no assurance that the casino resort can be developed and, if developed, that the Diamondhead casino resort would be successful.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. The Company incurred a net loss applicable to common shareholders of $3,227,614 for the year ended December 31, 2008, $1,262,847 for the year ended December 31, 2007, and $1,757,192 for the year ended December 31, 20062006. Costs and $749,308expenses amounted to $3,122,488 for the year ended December 31, 2005. Costs and expenses amounted to2008, $1,182,092 for the year ended December 31, 2007 and $2,893,821 for the year ended December 31, 2006 and $786,841 for the year ended December 31, 2005.2006. Costs and expenses for the year ending December 31, 2008 included a charge in the amount of $2,072,927 for stock based compensation associated with the modification of option grants originally issued in 2003. Costs and expenses for the year ended December 31, 2006 were impacted by an award of additional compensation in the amount of $450,000 to the Company President in the first quarter and the award of stock-based compensation valued at $1,238,348 for stock options granted to directors, officers, and key personnel in April 2006. Both
During 2007 and 2006, costs and expenses increased over 2005 levels due to an increase in CEO base compensation and higher ESOP expenses associated with the higher average market price of the Company’s common stock. The higher costs incurred in 2006 were partially offset by the recognition of gain due to the reversal of a previously recorded sales tax liability.
During 2006 and 2005, the Company was able to sustain its cash position and continue to satisfy its ongoing expenses through the sale of common stock formerly held in treasury and receipt of cash from the exercise of options and warrants to purchase common stock. In 2007,2008, the Company entered into two promissory notes with two Directors of the Company yielding proceeds of $205,000; received a total of $321,650$75,000 from the exercise of options and warrants to purchase 241,000100,000 shares of common stock. Managementstock; and obtained a Line of Credit from an unrelated third party in the total amount of $1,000,000, of which the Company analyzed the historical and planned future spending patterns of the Company andhas drawn $300,000 as of December 31, 2007,2008.
On March 9, 2009, the Company may not have had sufficient cashrequested a second draw on hand to meet expected on-going expenses to be incurredthe Line of Credit in the amount of $300,000 and received the funds on or about March 17, 2009. Therefore, the total indebtedness under the Line of Credit is $600,000 with a remaining $400,000 available for future twelve month period. However, in March 2008, the Company received a total of $261,250. The Company received $56,250 from a Director of the Company whodraws.

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exercised options to purchase common stock. In addition, to meet short term liquidity needs, the Vice President of the Company, who is also a Director of the Company, loaned the Company $150,000 and another Director of the Company loaned the Company $55,000. The loans were made pursuant to two Promissory Notes, the terms of which are more fully discussed in Note 10 to the attached financial statements. As of the date of this report, in lieu of any additional source of capital, management believes that the Company has sufficientwill essentially exhaust all cash on hand to meet expected on-going expenses to be incurred for the year endingresources currently available by December 31, 2008.2009. In addition, our auditors have expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report on our 2008 consolidated financial statements.
The Company is currently in discussions with various parties interested in funding and/or developingdiscussing possible development of all or part of the Diamondhead property. The Companyproperty with interested parties and is currently exploring additional opportunities for financing required to develop the property and meet itsthe Company’s current liquidity needs.
There can be no assurance that the Company will be able to reach an agreement with any party regarding the development or financing of the Diamondhead property. The ultimate development of this project is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. The Company may be affected by some or all of these factors and other risks and uncertainties, many of which are beyond the Company’s control.

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Off Balance Sheet Arrangements
Permits
On October 17, 2005, Mississippi passed new legislation which allows casinos in certain statutorily-described-areas to be built on land up to 800 feet from the mean high water mark of certain bodies of water, including Bay St. Louis. Given the fact that the Company intends to take advantage of the new law and construct its casino resort on land rather than in, on, or above the water, the extent to which various permits, authorizations, and approvals, as well as studies and assessments in support thereof, will be required is unknown at this point. The Company believes that permitting for the project and plans for ultimate development will require significant capital expenditures for engineering, architectural, accounting, and legal services. The amount ultimately required is unknown at this time, but the Company does not have sufficient funds required for this purpose.
Other ArrangementsRelated Parties
The Company has agreements with various current Officers and Directors which is providing or would give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds realized on borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr. Harrison as the Company receives proceeds from the Lender. In the event that this loan facility should require security in the future, the fee payable under the agreement is reduced to 3% of the proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to the terms of this agreement.
The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or its Diamondhead project. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.

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Other
The Company has agreements with unrelated persons and entities thatwho would be entitled to substantial commissions if the Company enters into ana financial agreement relating to the development of its Diamondhead property as a result of their efforts.
Critical Accounting Policies
Impairment of Long-Lived Assets
In accordance with generally accepted accounting principles, the Company currently carries the Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has tested this carrying value for impairment. In the opinion of management, the carrying value is not in excess of the estimated marketfair value of the property or the anticipated cash flows to be generated from the property.

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The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. In addition, the Company rejected an offer to purchase the entire 404 acre site for $100 million in July 2007.
The property is one that meets the Mississippi Gaming Commission’s requirements for a legal gaming site. Accordingly, management believes that use of the property as a gaming site represents the highest and best use of the property and provides for the greatest potential for shareholder value. In the event the Company was unable to obtain all of the permits required to develop a casino resort, the property could be used for other commercial or residential purposes.
Stock Based Compensation Expense
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 of compensation expense for all share-based payment awards madeeither modified or granted to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.
The Company adopted SFASStock-based compensation expense recognized under FASB 123(R) usingfor the modified prospective transition method,year ended December 31, 2008 was $2,072,927, which requires the applicationconsisted of the accounting standard as of January 1, 2006. In accordance with the modified prospective transition method, the Company’s condensed consolidated financial statements for prior periods have not been restateda modification to reflect, and do not include, the impact of SFAS 123(R).all outstanding stock option awards originally granted in 2003. Stock-based compensation expense recognized under FASB 123(R) for the year ended December 31, 2006, was $1,238,348, which consisted of stock-based compensation expense related to non-qualified stock option awards. There was no stock-based compensation expense related to employee equity awards and employee stock purchases recognized during the year ended December 31, 2007 or 2005.2007.

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SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant or modification using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s condensed consolidated statement of loss. Prior to the adoption of SFAS 123(R), the Company accounted for employee equity awards and employee stock purchases using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s condensed consolidated statement of loss because the exercise price of the Company’s stock options granted to employees and directors was equal to or less than the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. SFAS 123(R) requires forfeitures to beForfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual

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forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
The fair value of share-based payment awards isor modifications to prior awards, are estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards or modifications thereto, is measured on the date of grant using an option-pricing model and is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise history.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not subject to any risk of loss from market rates and prices including interest rates, foreign exchange rates, commodity prices or equity prices.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements and notes thereto are included herein beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’sIn connection with the preparation of this Annual Report on Form 10-K, our management, is responsible forwith the integrityparticipation of our Chief Executive Officer and accuracyour Chief Financial Officer, carried out an evaluation of the financial statements. Management believes thateffectiveness of the financial statements for the year ended December 31, 2007 have been prepared in conformity with U.S. generally accepted accounting principles appropriate in the circumstance. The Company’sdesign and operation of our disclosure controls and procedures as of December 31, 2008. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed to ensure that materialthe information that we are required to be discloseddisclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and communicated to management and reported within the time periods specified in the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required time period.
In meeting its responsibility fordisclosure. Based on the reliabilityresults of this evaluation and the material weaknesses in our internal control over financial statements, management relies on a system of internal accounting control. The system is designed to providereporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance that assets are safeguarded and transactions are executed in accordance with U.S. generally accepted accounting principles. The designlevel as of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period.December 31, 2008.

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Management’s Report on Internal Control overOver Financial Reporting
The Company’s management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the Company. Therisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
Under the supervision of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluationassessment of the effectiveness ofCompany’s internal control over financial reporting as of December 31, 2008, based on the framework and criteria established in “Internal Control—Internal Control — Integrated Framework”Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. BasedCommission (“COSO”). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on this evaluation, conducteda timely basis. In connection with management’s assessment of our internal control over financial reporting, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2008.
(1) The Company, in conjunction with its Board of Directors, did not maintain an effective control environment based on the criteria established in Internal Control — Integrated Framework, issued by the COSO because of the following weaknesses:
(a) The Company did not effectively communicate the importance of controls throughout the organization or set an adequate tone around control consciousness.
(b) The Company did not maintain an adequate level of control consciousness as it relates to the establishment and update of appropriate policies and procedures.
(2) The Company did not maintain effective internal controls over financial reporting to ensure disclosures in the Company’s annual or interim financial statements or regulatory filings were complete, because of the following weaknesses:
(a) The Company did not maintain effective internal controls to ensure that the books and records accurately and timely reflect the terms and conditions of all contracts, agreements and arrangements.
(b) The Company did not maintain effective internal controls to ensure that all significant contracts, agreements and arrangements were in writing, approved by the Board of Directors before they were executed, and communicated to all members of management.
(c) The Company did not maintain effective internal controls to ensure that all related party transactions were in writing, approved by the Board of Directors before they were executed and communicated to all members of management.

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These material weaknesses in our control environment contributed to the existence of inadequate disclosures in our 8-K filed October 23, 2008 in our 2008 third quarter 10-Q with respect to the following:
The Company incurred finders’ fees in obtaining a line of credit, including a fee paid to an unrelated party in January 2009 by issuing 20,000 shares of common stock then valued at $13,100.
A Director and Vice president of the Company is entitled to 6% of the amount of funds borrowed under the frameworkabove line of credit for his efforts in securing the facility, $20,000 of which was paid to him in the fourth quarter 2008.
As a result of the material weaknesses described above, our management concluded that, as of December 31, 2008, we did not maintain effective internal control over financial reporting based on the criteria established inInternal Control — Integrated Framework, issued by the COSO.
Interim Measures to Ensure the Accuracy of Financial Reporting
In response to the material weaknesses identified as a result of management’s assessment of internal control over financial reporting, our management, with oversight from the Audit Committee and the Board of Directors, has implemented interim measures to help ensure the accuracy of our financial reporting. Such measures included, among other things:
Review of all written contracts, agreements and arrangements by all members of management to ensure that the books and records accurately and timely reflect the terms and conditions.
Enhance communications among all members of management and the Board of Directors to capture oral agreements that did not exist in writing.
As a result of these procedures, management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
The certifications of our Chief Executive Officer and the Chief Financial Officer concludedrequired in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures and our internal control over financial reporting, referred to in the certifications. Those certifications should be read in conjunction with this Item 9A for a complete understanding of the matters covered by the certifications.
Changes in Internal Control Over Financial Reporting
During the first quarter of 2009, we designed new control policies and procedures relating to contracts, agreements and arrangements and the related recording of the transaction and financial reporting disclosures.

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While we believe these efforts have improved our internal control over financial reporting, we have not had sufficient time to test the process. Accordingly, we will continue to perform the interim measures described above and monitor the effectiveness of our internal control over financial reporting in the areas impacted by the material weaknesses discussed above. Weexpect to report that our internal control over financial reporting wasand our disclosure controls and procedures will be effective as of December 31, 20072009.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Diamondhead Casino Corporation:
We have audited the internal control over financial reporting of Diamondhead Casino Corporation and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Audit Committeefollowing material weaknesses have been identified and included in management’s assessment as of December 31, 2008:
(1) The Company, in conjunction with its Board of Directors, did not maintain an effective control environment based on the criteria established in Internal Control — Integrated Framework, issued by the COSO because of the following weaknesses:
(a) The Company did not effectively communicate the importance of controls throughout the organization or set an adequate tone around control consciousness.
(b) The Company did not maintain an adequate level of control consciousness as it relates to the establishment and update of appropriate policies and procedures.
(2) The Company did not maintain effective internal controls over financial reporting to ensure disclosures in the Company’s annual or interim financial statements or regulatory filings were complete, because of the following weaknesses:
(a) The Company did not maintain effective internal controls to ensure that the books and records accurately and timely reflect the terms and conditions of all contracts, agreements and arrangements.
(b) The Company did not maintain effective internal controls to ensure that all significant contracts, agreements and arrangements were in writing, approved by the Board of Directors is chairedbefore they were executed, and communicated to all members of management.
(c) The Company did not maintain effective internal controls to ensure that all related party transactions were in writing, approved by an Independent Director who is an Audit Committee Financial Expert as that term is defined in rules or regulations issued pursuant to the Sarbanes-Oxley Act of 2002. The Chairman periodically meets with management to review their work and monitor their responsibilities. The Audit Committee Chairman also periodically communicates with the independent auditors who have free access to the Audit Committee and the Board of Directors before they were executed and communicated to reviewall members of management.
These material weaknesses in our control environment contributed to the qualityexistence of inadequate disclosures in our 8-K filed October 23, 2008 in our 2008 third quarter 10-Q with respect to the following:
The Company incurred finders’ fees in obtaining a line of credit, including a fee paid to an unrelated party in January 2009 by issuing 20,000 shares of common stick then valued at $13,100.
A Director and acceptabilityVice president of the Company’sCompany is entitled to 6% of the amount of funds borrowed under the above line of credit for his efforts in securing the facility, $20,000 of which was paid to him in the fourth quarter 2008.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2008 consolidated financial reporting, internal controls,statements, and non-audit related services.this report does not affect our report dated March 31, 2009 on those consolidated financial statements.

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Friedman LLP, an independent registered public accounting firm, has issued an attestation report
In our opinion, because of the effect of the material weaknesses described above on the Company’sachievement of the objectives of the control criteria, Diamondhead Casino Corporation has not maintained effective internal control over financial reporting as of December 31, 2007. This report is included2008, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Diamondhead Casino Corporation. and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the three years in the consolidated financial statements accompanying this Form 10-K.
A control system, no matter how well conceivedperiod ended December 31, 2008 and operated, can provide only reasonable, not absolute assurance, thatour report dated March 31, 2009 expressed an unqualified opinion thereon with an explanatory paragraph regarding the objectivesability of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, withinCompany to continue as a company, have been detected.going concern.
/s/ Friedman LLP
New York, New York
March 31, 2009
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A. Directors and Officers:
The current directors and officers of the Company and their titles are as follows:

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Name Age Title
 
Deborah A. Vitale  5758  Chairman of the Board, President, Chief Executive Officer, Treasurer
Gregory A. Harrison  6364  Director, Vice President, Secretary
Frank E. Williams, Jr.  7374  Director
Benjamin J. Harrell  5455  Director
H. Steven Norton  7475  Director
Carl D. Stevens  6162  Director
Thomas G. Wood55Director (Resigned from the Board on February 27, 2009)
Robert Zimmerman  5859  Chief Financial Officer
Directors elected to office have terms which extend to the next annual meeting.

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DEBORAH A. VITALEhas served as President, Chief Executive Officer and Treasurer of the Company since February 1998 and has served as Chairman of the Board of the Company since March 1995. As President and CEO, Ms. Vitale was responsible for all phases of the day-to-day operations of four casino ships sailing out of three Florida ports into international waters and for the management and supervision of hundreds of ship-based and land-based employees. Ms. Vitale served as Secretary of the Company from November 1994 until July 2002. She has been a Director of the Company since December 1992. On February 14, 1997, Ms. Vitale was appointed Chairman of the Board of Directors of Casino World, Inc. and Chairman of the Board of Directors of Mississippi Gaming Corporation, each a subsidiary of the Company. On September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and Mississippi Gaming Corporation. Ms. Vitale is a trial attorney with over twenty years of experience handling complex civil litigation. Ms. Vitale is licensed to practice law in Maryland, Virginia and Washington, D.C.
GREGORY A. HARRISON, Ph.D., P.E., was elected a Director of the Company on February 20, 1998. Dr. Harrison was appointed Vice-President of the Company on July 18, 2002 and was appointed Secretary of the Company on July 25, 2002. Dr. Harrison is a consulting forensic engineer with forty years of diversified fire protection/safety/project engineering experience with NASA, DOD, NBS, NRC, ARAMCO, and Tenera, L.P. Effective August 27, 2004, Dr. Harrison became a Professional Engineer licensed to practice in the state of Mississippi. Dr. Harrison has qualified as an expert witness in various courts in ten states. Dr. Harrison is a partner of Master Jin Kim of Champion Martial Arts, Inc., in the development of an internet martial arts school. Dr. Harrison received a B.S. degree in Fire Protection Engineering from the University of Maryland in 1966, an M.S. degree in Civil Engineering from the University of Maryland in 1970, an M.S. degree in Engineering Administration from George Washington University in 1979 and a Ph.D. in Safety Engineering from Kennedy-Western University in 1994. Dr. Harrison has held a top secret security clearance with the U.S. Department of Energy, the U.S. Nuclear Regulatory Commission, and the Department of Defense. Dr. Harrison has served on the Board of Directors of Data Measurement Corporation and was an Advisory Board member of United Bank and First Patriot National Bank.
FRANK E. WILLIAMS, JR.JR. was elected a Director of the Company on July 3, 2002. Since 1969, Mr. Williams has served as Chairman of the Board of Williams Enterprises of Georgia, Inc., a holding company controlling six subsidiaries active in various facets of the steel industry. Since 1995, Mr. Williams has also served as Chairman, CEO, and a fifty percent owner of Bosworth Steel Erectors, Inc. of Dallas, Texas, an erector of steel products in the southwestern United States and as Chairman and a major shareholder of Wilfab, Inc., a structural steel fabricator located in Cherokee County, Georgia.

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Mr. Williams is the Managing Partner and principal owner of Structural Concrete Products, LLC of Richmond, Virginia, a manufacturer of pre-stressed concrete building systems for customers in the mid-Atlantic region and of Industrial Alloy Fabricators, LLC of Richmond, Virginia, a fabricator of alloy plate products for the energy and chemical industries. Mr. Williams continues to serve on the Board of Williams Industries, Inc., a public company (NASDAQ), which owns five subsidiaries active in the steel industry, including Williams Bridge Company, one of the largest fabricators of steel plate for bridge structures in the mid-Atlantic region. The company was founded by Mr. Williams, who served as its President, CEO and Chairman through 1994. Mr. Williams is currently Chairman of the Board of Directors of Kaiser Group Holdings, Inc., a public company (NYSE: KGH). Mr. Williams is also currently chairman of Facility Group, a consulting, program management, architecture, engineering, design and construction firm based in Smyrna, Georgia. Mr. Williams is a former Chairman and a

27


current Director of Capital Bank, N.A. Mr. Williams has been appointed by bankruptcy courts as an official representative servingservicing in a pro bono capacity on behalf of investors and debt holders in public companies in bankruptcy. Mr. Williams holds a Bachelor of Civil Engineering degree from the Georgia Institute of Technology.
BENJAMIN J. HARRELLwas elected a Director of the Company on July 18, 2002. Mr. Harrell was the founder and served as President and CEO of Pete Fountain Productions, Inc. from 1979 until it was acquired in 1999 by Production Group International, Inc. (“PGI”), a global event communications company, and subsequently acquired from “PGI” by TBA Global Events, LLC in 2005. Mr. Harrell currently manages the acquiring company’s business in the New Orleans area. Mr. Harrell also currently serves as Vice President of Pete Fountain Entertainment, LLC, which until March 2003, operated one of the largest jazz clubs in New Orleans. Since 1975, Mr. Harrell has served as personal manager for the internationally noted jazz artist, Pete Fountain. Mr. Harrell handles all aspects of Mr. Fountain’s career, including promotion, concerts, personal appearances and commercial endorsements. From 1985 through 2003, Mr. Harrell served as President of Cresent Sound & Light, Inc, a professional sound, lighting, video and staging company for the convention and entertainment industry. Mr. Harrell served as a Director of the New Orleans Metropolitan Convention and Visitors Bureau from 1997 through 1999. On January 15, 2004, Mr. Harrell was elected to the Board of Directors of Mississippi Gaming Corporation, a wholly owned subsidiary of the Company.
H. STEVEN NORTONwas elected a Director of the Company on August 6, 2002. Since 1998, Mr. Norton has served as President and CEO of Norton Management, Inc., a consulting company in Alton, Illinois and Las Vegas, Nevada. Mr. Norton also currently serves as a Director of Centaur, Inc., a privately held company which owns a casino in Central City, Colorado and owns Hossier Park, an Indiana race track, located in Anderson, Indiana. Mr. Norton is also a Director of Colorado Casino Resorts, Inc. in Cripple Creek, Colorado and North East Resorts, Inc., a privately held company pursuing gaming in the state of Massachusetts. Mr. Norton recently became a Director of 8th Wonder International, Ltd., an entity formed in Jersey, in the Channel Islands, which is involved in the concept design and development of casino resorts. Mr. Norton is also a major creditor of and has provided consulting services to Onnam Entertainment, Inc., a privately held Las Vegas based company, with contracts to develop and operate Native American casinos in various U.S. locations. Prior to Hurricane Katrina, Onnam received permission from the Mississippi Gaming Commission to develop a casino site in Biloxi, Mississippi. The casino, if constructed, would compete with any casino resort subsequently developed by the Company.
From 1993 to 1998, Mr. Norton served as President and Chief Operating Officer of Argosy Gaming Corporation, a public company and operator of riverboat casinos. Mr. Norton also previously served as President and Chief Operating Officer of the Sands Hotel & Casino in Las Vegas, Nevada; as President and Chief Executive Officer of the Gold River Gambling Hall & Resort in Laughlin, Nevada; as

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Executive Vice-President of Resorts International, Inc. and Resorts International Casino Hotel in Atlantic City, New Jersey; and as Vice-President, Treasurer and Comptroller of Paradise Island, Ltd/Paradise Island Casino.
Mr. Norton has also previously served as a founder and a Director of the American Gaming Association; as a founder, a Director and Vice-Chairman of the New Jersey Casino Association; as Chairman of the Indiana Gaming Association; as a Director and Vice-President of the Missouri Gaming Association; as a

28


Director of the Illinois River Boat Association and as Chairman of the Casino Commission of the American Hotel Association. Mr. Norton has also served on the Board of Directors and Executive Committee of the American Hotel Association; as Chairman of the Board and President of the New Jersey Hotel Motel Association; as Director and Vice-President of the Bahamas Hotel Association; as Chairman of the Bahamas Hotel Employers Association; as Director and Treasurer of the Bahamas Employers Confederation; as a Board Member of the Nevada Hotel Motel Association; as Chairman of the Atlantic City Convention & Visitors Bureau; as Chairman of the Nassau Paradise Island Promotion Board; and as a member of the Advisory Board of the Governors Office of Travel and Tourism in New Jersey.
CARL D. STEVENSwas elected a Director of the Company on January 10, 2006. Mr. Stevens spent 26 years with the IBM Corporation in various sales and management positions, including Branch Manager, Atlanta, Georgia. Mr. Stevens was responsible for the southeast United States and served as Program Director for Public Sector Sales for the United States. In 1997, Mr. Stevens became President and CEO of ITC Corporation which was headquartered in Herndon, Virginia. ITC, a NASDAQ listed company, was a publisher and distributor of multimedia training materials with worldwide sales. In 1999, Mr. Stevens was named Division President of InfoCast Corporation Inc., which was headquartered in Toronto, Canada. Mr. Stevens headed the Company’s efforts in the e-Learning and Virtual Contact Center divisions. In June of 2001, Mr. Stevens was named CEO and President of Cogient Corporation, a medical software and services provider headquartered in Toronto, Canada. Mr. Stevens resigned as CEO of Cogient Corporation in January of 2005 to return to the U.S. to actively manage his investments. Mr. Stevens attended Indiana University where he majored in business administration. Mr. Stevens is a veteran of the United States Air Force.
THOMAS G.WOODwas elected a Director of the Company on July 8, 2008. Mr. Wood is the founder and sole shareholder of Wood Enterprises, LLC, a Louisiana company, which was established in the mid 1980’s to mange his holdings. Mr. Wood is the President and sole owner of five clubs and a diner in Louisiana. Mr. Wood also maintains a partial ownership interest in a hardware store in Louisiana and is engaged in the purchase, renovation and development of real property, including a former Texaco station which is located in close proximity to the Company’s Diamondhead property. Mr. Wood holds three liquor licenses and three video poker licenses in the State of Louisiana. Mr. Wood resigned from the Board on February 27, 2009.
ROBERT L. ZIMMERMANwas appointed Chief Financial Officer of the Company on July 27, 1998. From May of 1994 until joining the Company, Mr. Zimmerman served as Controller for the North and Central American operations of Casinos Austria International, Ltd. From 1980 through 1993, Mr. Zimmerman served as Vice President of Finance for the Industrial Controls subsidiary of Emerson Electric Company (NYSE: EMR). Prior to 1980, Mr. Zimmerman was employed with the public accounting firm of Fiddler and Co. for seven years.
B. Committees of the Board of Directors
The Audit Committee of the Board of Directors is comprised of Frank E. Williams, Jr. (Audit Committee Chairman), Benjamin J. Harrell, and Gregory A. Harrison (ex-officio member). The Board of Directors has determined that both Mr. Williams and Mr. Harrell are independent members, as that term is defined under the enhanced independence standards for audit committee members in the Securities and Exchange Act of

29


1934. Mr. Harrison does not meet the independence standards. The Board of Directors has also determined

25


that Frank E. Williams, Jr. is an Audit Committee Financial Expert as that term is defined in rules issued pursuant to the Sarbanes-Oxley Act of 2002.
The Compensation Committee is composed of three Directors: Benjamin J. Harrell (Chairman), Carl D. Stevens, and Gregory A. Harrison (ex-officio member). Both Mr. Harrell and Mr. Stevens have been determined to be independent Directors by the Board of Directors based on the general independence standards adopted by the Board. Mr. Harrison, who serves only in an ex-officio capacity, by virtue of his status as a compensated Officer of the Company, is not independent.
The Compensation Committee has no written charter and convenes at regularly scheduled meetings of the Board of Directors. The Compensation Committee advises and makes recommendations to the Board of Directors as to the compensation to be paid to Executive Officers of the Company. In addition, the Compensation Committee advises and makes recommendations to the Board of Directors as to options to purchase common stock, if any, to be awarded.
The Board of Directors has not formed a Nominating Committee, however, the Board acts as a group in considering nominations. The Board considers and reviews, from time to time, the appropriate size and composition of the Board and anticipates future vacancies and needs of the Board. In evaluating possible nominees, the Board considers, among other things, the background, experience, education and knowledge of a candidate, his familiarity with the gaming industry and related industries, his experience with publicly-traded entities, and his integrity and judgment. The Board considers the potential contribution a candidate will bring to the backgrounds, experience, and skills of the existing Board of Directors. The Board also considers a candidate’s ability to devote sufficient time and effort to his duties as a Director. After evaluation and review of candidates who meet the Board’s criteria, the Board considers its then-current needs and selects the nominees that best suit those needs.
The Board will consider candidates recommended by stockholders, provided the names of such nominees, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described in the Company’s last-filed definitive Proxy Statement. The nominees will be submitted to the Board of Directors and receive the same consideration as those nominees identified by members of the Board of Directors.
C. Code of Ethics
The Company adopted a Code of Ethics in 2004 that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code was attached as an exhibit in a prior year’s annual report. A copy of the Code of Ethics will be made available to any shareholder, free of charge, upon written request to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon its review of Forms 3, 4 and 5 and any amendments thereto furnished to the Company pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, all purchases and sales of stock and all required forms were filed timely by reporting persons during 2007.2008.

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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Company compensates four employees, two of which, the CEO and Vice President, are executive officers of the Company. The Compensation Committee and the Board of Directors monitor and approve compensation paid to executive officers. The CEO determines compensation paid to the remaining two key personnel.
Base salary rates paid to all employees, exclusive of the CEO, have remained unchanged since the year ended December 31, 2000. From time to time, additional compensation has been awarded to employees based on merit and affordability. Often an award is based on consideration of merited service over several years when no additional compensation award was paid due to economic constraints. In addition, from time to time, the Board of Directors awards options to purchase common stock of the Company to the employees.
CEO Compensation
In 2006, the Compensation Committee recommended to the Board of Directors that Ms. Vitale’s salary be increased from $125,000 per annum, where it has been since she became President in February of 1998, to $300,000 per annum. Ms. Vitale’s base salary remained at that rate for both 2008 and 2007. The pay increase was recommended to reflect her myriad corporate roles and responsibilities more accurately and to fairly compensate her based upon industry peer review. The Compensation Committee also noted that Ms. Vitale manages the Company’s business without the benefit of administrative staff normally associated with the management of a publicly-traded company at significant savings to the Company.
In addition, in 2006, the Compensation Committee recommended to the Board of Directors of the Company that Deborah A. Vitale be awarded additional compensation in recognition of her significant and material contributions to the Company. The additional compensation award amounted to $450,000 to reflect Ms. Vitale’s significant contributions to the Company arising from her negotiation and settlement of significant tax liabilities with the Florida Department of Revenue arising from two separate tax audits of the Company’s former operating subsidiaries. As a result of Ms. Vitale’s efforts, the Company ultimately paid approximately $917,000 of a $7.4 million assessment with the Florida Department of Revenue and ultimately paid $1.6 million in settlement of a second tax assessment of approximately $3.2 million. As a result of Ms. Vitale’s efforts, the State of Florida did not foreclose on the Company’s assets, the Company was not forced into bankruptcy, and the Company was able to remain in operation so as to sell its vessels and leases, pay its lenders, including First Union National Bank of Florida in full, and avoid the loss of its Mississippi property which was pledged as collateral for its bank loans. The award was also in recognition of Ms. Vitale’s efforts in settling various EEOC related complaints and lawsuits as well as settlement of certain Department of Labor matters.
No other additional cash compensation has been paid to Ms. Vitale during her tenure as CEO.

27


The following table provides information concerning the compensation of the Chief Executive Officer and Chief Financial Officer of the Company. No other executive officer of the Company received cash compensation in excess of $100,000 during any of the last three fiscal years.

31


SUMMARY COMPENSATION TABLE
                                                                
 Nonqualified     Nonqualified    
 Non Equity Deferred All   Non Equity Deferred All  
 Incentive Compensa- Other   Incentive Compensa- Other  
Name and Stock Option Plan tion Compen-   Stock Option Plan tion Compen-  
Occupation Year Salary Bonus Awards Awards (2) Compensation Earnings sation Total Year Salary Bonus Awards Awards (1) Compensation Earnings sation Total
 
Deborah A. Vitale 2007 $300,000 None None None None None  (3) $300,000  2008 $300,000 None None $1,654,559 None None  (2) $1,954,559 
President 2006 $300,000 $450,000 None $190,515 None None  (3) $940,515  2007 $300,000 None None None None None  (2) $300,000 
 2005 $133,654(1) None None $437,171 None None  (3) $570,825  2006 $300,000 $450,000 None $190,515 None None  (2) $940,515 
  
Robert L. Zimmerman 2007 $61,974 None None None None None  (3) $61,974  2008 $65,000 $5,000 None $24,840 None None  (2) $94,860 
CFO 2006 $61,974 $25,000 None $47,629 None None  (3) $109,603  2007 $61,974 None None None None None  (2) $61,974 
 2005 $61,974 $5,000 None $28,052 None None  (3) $95,026  2006 $61,974 $25,000 None $47,629 None None  (2) $109,603 
 
(1) In 2005, Ms. Vitale received $125,000 of her annual salary and the remainder was paid to her in 2006.
(2)On February 10, 2005, Ms. Vitale was awarded an option to purchase 75,000 shares of common stock, exercisable at $.80 per share. On October 24, 2005, an option to purchase 450,000 shares of common stock, exercisable at $.50 per share, expired. On October 27, 2005, Ms. Vitale was awarded an option to purchase 450,000 shares of common stock, exercisable at $1.25 per share. On April 13, 2006, Ms. Vitale was awarded an option to purchase 100,000 shares of common stock, exercisable at $2.70 per share.
On February 10, 2005, Mr. Zimmerman was awarded an option to purchase 50,000 shares of common stock, exercisable at $.80 per share. On April 13, 2006,share and Mr. Zimmerman was awarded an option to purchase 25,000 shares of common stock, exercisable at $2.70 per share. On February 12, 2008, the Board of Directors modified all unexercised option awards originally granted in 2003 by extending the date of expiry an additional five years from the original date of expiry. Option awards to purchase a total of 825,000 shares awarded to Ms. Vitale in 2003, and an option award to purchase a remaining 15,000 shares awarded to Mr. Zimmerman in 2003, had expiry dates extended through 2013.
 
  Reference is hereby made to Note 3, “Summary of Significant Accounting Policies — Stock Based Compensation” in the attached 2008 financial statements, for a determination of the variables used in computing the value of option awards.
 
(3)(2) The Europa Cruises Corporation Employee Stock Ownership Plan (“the Plan”) is a defined contribution pension plan funded with common stock of the Company. Ms. Vitale and Mr. Zimmerman are both participants in the Plan. Common shares contributed by the Plan to Ms. Vitale’s participant account were and 26,515 shares in 2006 and 26,51126,514 shares in 2005.2007. Common shares contributed by the Plan to Mr. Zimmerman’s participant account were and 18,057 shares in 2006 and 16,04518,057 shares in 2005.2007. The number of shares to be contributed to Plan participants for the year ended December 31, 20072008 will be determined following the Trust accounting for that year.
The following tables provide a summary of the outstanding equity awards of the Chief Executive Officer and Chief Financial Officer and option exercises in 2007.2008.

2832


SUMMARY OF OUTSANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
                                        
 Equity     Equity    
 Incentive     Incentive    
 Plan     Plan    
 Awards     Awards    
 Number of Number of Number of     Number of Number of Number of    
 Securities Securities Securities     Securities Securities Securities    
 Underlying Underlying Underlying     Underlying Underlying Underlying    
 Unexercised Unexercised Unexpired Option Option Unexercised Unexercised Unexpired Option Option
 Options Options Unexercised Exercise Expiration Options Options Unexercised Exercise Expiration
Name Exercisable Unexercisable Options Price Date Exercisable Unexercisable Options Price Date
Deborah A. Vitale 750,000 None None $.30 3/11/08  75,000 None None $.80 2/10/10 
 75,000 None None .75 7/23/08  450,000 None None 1.25 10/27/10 
 75,000 None None .80 2/10/10  100,000 None None 2.70 4/13/11 
 450,000 None None 1.25 10/27/10  750,000 None None .30 3/11/13 
 100,000 None None 2.70 4/13/11  75,000 None None .75 7/23/13 
  
Robert L. Zimmerman 15,000 None None $.75 8/12/08  50,000 None None $.72 7/13/09 
 50,000 None None .72 7/13/09  50,000 None None .80 2/10/10 
 50,000 None None .80 2/10/10  25,000 None None 2.70 4/13/11 
 25,000 None None 2.70 4/13/11  15,000 None None .75 8/12/13 
Stock Awards
                 
              Equity
          Equity Incentive
          Incentive Plan Awards
          Plan Awards Market or
          Number of Payout Value
  Number of Market Value of Unearned of Unearned
  Shares or Units Shares or Units Shares, Units or Shares, Units or
  Of Stock That Of Stock That Other Rights That Other Rights That
  Have Not Have Not Have Not Have Not
Name Vested Vested Vested Vested
                 
Deborah A. Vitale None None None None
Robert L. Zimmerman None None None None
OPTION EXERCISES AND STOCK VESTED IN 20072008
                 
  Option Awards Stock Awards
  Number of     Number of  
  Shares Value Shares Value
  Acquired Realized Acquired Realized
  On On On On
Name Exercise Exercise Vesting Vesting
                 
Deborah A. Vitale None None None None
Robert L. Zimmerman  35,000  $83,104  None None
Option AwardsStock Awards
Number ofNumber of
SharesValueSharesValue
AcquiredRealizedAcquiredRealized
OnOnOnOn
NameExerciseExerciseVestingVesting
Deborah A. VitaleNoneNoneNoneNone
Robert L. ZimmermanNoneNoneNoneNone

29


Directors’ Compensation
The current members of the Board of Directors are not paid fees for their services as a Director. Directors are reimbursed for certain approved expenses incurred in connection with Company business and for certain approved expenses incurred in connection with attendance at non-telephonic Board meetings and non-telephonic committee meetings. Directors are, from time to time, awarded non-qualified options to purchase common stock of the Company. No cash compensation was awarded to any Director for their services as a Director in 2007.2008.

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The following table summarizes compensation awarded to Directors in 2008.
DIRECTOR COMPENSATION
                             
                  Change in    
                  Pension    
  Fees             Value and    
  Earned             Nonqualified    
  Or     (2) Non-Equity Deferred    
  Paid in Stock Option Incentive Plan Compensation All Other  
Name Cash Awards Awards Compensation Earnings Compensation Total
Gregory A Harrison (1) None None None  None None None None 
Frank E. Williams, Jr. None None $97,009  None None None $97,009 
Benjamin J. Harrell None None  130,913  None None None  130,913 
H. Steven Norton None None None  None None None None 
Carl D. Stevens None None None  None None None None 
Thomas G. Wood (3) None None None  None None None None 
1)Mr. Harrison is also a Vice President of the Company. As Vice President, he did not receive cash compensation in excess of $100,000 in 2008. Mr. Harrison, by virtue of his employee status with the Company, is a participant receiving contributions to his account in the Europa Cruises Corporation Employee Stock Ownership Plan.
2)On February 12, 2008, the Board of Directors modified all unexercised option awards originally granted in 2003 by extending the date of expiration for an additional five years from the original date of expiration. Option awards to purchase a total of 75,000 shares of common stock awarded to Mr. Williams in 2003, and an option award to purchase 75,000 shares of common stock awarded to Mr. Harrell in 2003, had expiration dates extended through 2013.
Reference is hereby made to Note 3, “Summary of Significant Accounting Policies — Stock Based Compensation” in the attached 2008 financial statements, for a determination of the variables used in computing the value of option awards.
3)Mr. Wood resigned from the Board on February 27, 2009.
Other Compensation Arrangements
The Company has agreements with various current Officers and Directors which is providing or would give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds received on borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr. Harrison as the Company receives proceeds from the Lender. In the event that this loan facility should require security in the future, the fee payable under the agreement is reduced to 3% of the proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to the terms of this agreement.

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The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or its Diamondhead project. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF FEBRUARY 26, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF FEBRUARY 2, 2009.
The following table sets forth, to the Company’s knowledge, as of February 26, 2008,2, 2009, based on filings with the Securities and Exchange Commission by certain beneficial owners, the beneficial ownership of the outstanding Voting Stock held by (i) each person or entity beneficially owning more than 5% of the shares of any class of Voting Stock, (ii) each director, nominee, and certain executive officers, individually, and (iii) all directors and executive officers as a group.
               
  Amount &      
  Nature of      
Name and Address of Beneficial Title of % %
Beneficial Owner Ownership Class of Class Voting (1)
               
Europa Cruises Corporation
Employee Stock Ownership Plan Trust (2)
1301 Seminole Boulevard., Suite 142
Largo, Florida 33770
  3,022,730  Common  7.60%  7.27%
               
Deborah A. Vitale (2) (3)
Chairman, President, CEO, and Treasurer
Chairman, President, and Treasurer of
Casino World, Inc. and Mississippi Gaming Corp.
1013 Princess Street
Alexandria, Virginia 22314
  5,580,944  Common  14.04%  13.42%
               
Gregory Harrison (4)
Director, Secretary, and Vice President
16209 Kimberly Grove
Gaithersburg, Maryland 20878
  1,444,948  Common  3.63%  3.47%
               
Benjamin J. Harrell (5)
Director
237 N. Peters Street, Fourth Floor
New Orleans, Louisiana 70130
  650,000  Common  1.63%  1.56%
               
Frank E. Williams, Jr. (6)
Director
2789b Hartland Road
Falls Church, Virginia 22043
  447,150  Common  1.12%  1.08%
                 
  Amount &      
  Nature of      
  Beneficial Title of % %
Name and Address of Beneficial Owner Ownership Class Of Class Voting (1)
 
Europa Cruises Corporation  2,943,185  Common  7.38%  7.05%
Employee Stock Ownership Plan Trust (2)
1301 Seminole Boulevard., Suite 142
Largo, Florida 33770
                
 
Deborah A. Vitale (2) (3)  5,527,914  Common  13.85%  13.25%
Chairman, President, CEO, and Treasurer
Chairman, President, and Treasurer of
Casino World, Inc. and Mississippi Gaming Corp.
1013 Princess Street
Alexandria, Virginia 22314
                
 
Gregory Harrison (4)  1,465,343  Common  3.67%  3.51%
Director, Secretary, and Vice President
16209 Kimberly Grove
Gaithersburg, Maryland 20878
                

3035


               
  Amount &      
  Nature of      
Name and Address of Beneficial Title of % %
Beneficial Owner Ownership Class of Class Voting (1)
               
Carl D. Stevens (7)
Director
1753 Highway 42 South
Forsyth, Georgia 31029
  602,324  Common  1.51%  1.45%
               
H. Steven Norton (8)
Director
700 Rozier Street
Alton, Illinois 62002
  250,000  Common  .63%  .60%
               
Serco International Limited (9)
P.O. Box 15, A-9010
Klagenfurt, Austria
  1,251,831
900,000
926,000
  Common
S-NR Preferred
S- Preferred
  3.15
100.00
100.00
%
%
%
  7.40%
               
Austroinvest International Limited (9)
P.O. Box 15, A-9010
Klagenfurt, Austria
  1,251,831
900,000
926,000
  Common
S-NR Preferred
S- Preferred
  3.15
100.00
100.00
%
%
%
  7.40%
               
Ernst G. Walter (9)
14700 Gulf Blvd., Apt.401
Madeira Beach, Florida 33708
  1,251,833
900,000
926,000
  Common
S-NR Preferred
S- Preferred
  3.15
100.00
100.00
%
%
%
  7.40%
               
All Directors and Executive Officers as a Group (6 persons)  8,975,366     22.57%  21.58%
                 
  Amount &      
  Nature of      
  Beneficial Title of % %
Name and Address of Beneficial Owner Ownership Class Of Class Voting (1)
 
Benjamin J. Harrell (5)  650,000  Common  1.63%  1.56%
Director
237 N. Peters Street, Fourth Floor
New Orleans, Louisiana 70130
                
 
Frank E. Williams, Jr. (6)  447,150  Common  1.12%  1.07%
Director
2789b Hartland Road
Falls Church, Virginia 22043
                
 
Carl D. Stevens (7)  602,324  Common  1.51%  1.44%
Director
1753 Highway 42 South
Forsyth, Georgia 31029
                
 
H. Steven Norton (8)  250,000  Common  .63%  .60%
Director
700 Rozier Street
Alton, Illinois 62002
                
 
Thomas G. Wood (9)  1,300,000  Common  3.26%  3.12%
Director
One Hughes Center Drive
Las Vegas, Nevada 89169
                
 
Lewis Asset Management Corp. (10)  3,935,980  Common  9.89%  9.43%
45 Rockerfeller Plaza
New York, New York 10111
                
 
Serco International Limited (11)  1,251,831  Common  3.14%  7.38%
P.O. Box 15, A-9010  900,000  S-NR Preferred  100.00%    
Klagenfurt, Austria  926,000  S- Preferred  100.00%    
 
Austroinvest International Limited (11)  1,251,831  Common  3.14%  7.38%
P.O. Box 15, A-9010  900,000  S-NR Preferred  100.00%    
Klagenfurt, Austria  926,000  S- Preferred  100.00%    
 
Ernst G. Walter (11)  1,251,833  Common  3.14%  7.38%
14700 Gulf Blvd., Apt.401  900,000  S-NR Preferred  100.00%    
Madeira Beach, Florida 33708  926,000  S- Preferred  100.00%    
 
All Directors and Executive Officers as a Group (7 persons)  11,542,731       28.92%  27.66%
 
(1) Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages.

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(2) The Europa Cruises Corporation Employee Stock Ownership Plan (“ESOP”) was established on August 18, 1994. The Trustee of the ESOP is Deborah A. Vitale, President, CEO, and Chairman of the Board. As of December 31, 2007, 2,056,8152008, 2,136,360 ESOP shares had been released and 1,977,2702,056,815 ESOP shares had been allocated to participants in the ESOP. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 3,022,7302,943,185 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.
 
(3) Includes 3,022,7302,943,185 unallocated common shares of the ESOP Trust; 767,000 shares of Common Stock owned directly by Ms. Vitale; options to purchase 1,450,000 shares of Common Stock; and 341,214367,729 shares of Common Stock, which represent shares of stock held in Ms. Vitale’s fully vested ESOP participant account.
 
(4) Includes 807,951907,951 shares of Common Stock owned directly by Mr. Harrison; 70,000 shares owned by the Harry and Marie Harrison Trust of which Mr. Harrison is a Co-Trustee; options to purchase

31


425,000 325,000 shares of Common Stock; and 141,997162,392 shares of Common Stock held in Mr. Harrison’s partially vested ESOP participant account.
 
(5) Includes 400,000 shares of Common Stock owned directly by Mr. Harrell and options to purchase 250,000 shares of Common Stock.
 
(6) Includes 143,500218,500 shares of Common Stock owned directly by Mr. Williams; 53,650 shares of Common Stock owned by the Williams Family Limited Partnership of which Mr. Williams is President of the General Partner, the Williams Family Corporation; and options to purchase 250,000175,000 shares of Common Stock.
 
(7) Includes 502,324 shares of Common Stock owned directly by Mr. Stevens and options to purchase 100,000 shares of Common Stock.
 
(8) Includes 75,000 shares of Common Stock owned directly by Mr. Norton and options to purchase 175,000 shares of Common Stock.
 
(9)Includes 1,300,000 shares of Common Stock owned directly by Mr. Wood who resigned from the Board on February 27, 2009.
(10)Lewis Asset Management Corp. is a Delaware corporation that manages investment funds. It is the General Partner of Lewis Opportunity Fund, LP, a Delaware limited partnership which beneficially owns 3,121,896 shares of Common Stock. It is also the General Partner of LAM Opportunity Fund, LTD., a Bermuda partnership, which beneficially owns 814,084 shares of Common Stock.
(11) Serco International Limited (f/k/a Serco International Financial Advisory Services, Ltd.) and Austroinvest International Limited are affiliated entities. The Company understands that Dr. Ernst Walter is the sole director of each company. The total beneficial ownership of securities of the Company held by the foregoing and Dr. Walter includes: 1,251,831 shares of Common Stock owned by Serco International Limited; 900,000 shares of Series S-NR Preferred Stock owned by

37


Serco International Limited; and 926,000 shares of Series S Preferred Stock owned by Austroinvest International Limited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 18, 1994, the Company established the Europa Cruises Corporation Employee Stock Ownership Plan (the “ESOP”). The ESOP, which is a qualified retirement plan under the provisions of Section 401(a) of the Internal Revenue Code and an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code, was established primarily to invest in stock of the Company. All employees as of December 31, 1994, and subsequent new employees having completed 1,000 hours of service, are eligible to participate in the ESOP. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. Deborah A. Vitale, CEO, President and Treasurer of the registrant,Registrant, is the sole Trustee of the Trust. As of December 31, 2007, 2,056,8152008, 2,136,360 shares of Common Stock had been released and 1,977,2702,056,815 shares of Common Stock had been allocated to participants in the ESOP. Unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.
On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000 shares of the Company’s Common Stock with the proceeds of the loan. On August 25, 1994 the Company loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional 2,120,000 shares of the Company’s Common Stock with the proceeds of the loan. The shares of Common Stock were pledged to

32


the Company as security for the loans. The promissory notes will be repaid with the proceeds of annual contributions made by the Company to the ESOP. In April of 1995, the Company agreed to extend the maturity of the loans to twenty years. Effective for the Plan year beginning January 1, 2001, the Company amended the plan and related loans for the purpose of limiting excise tax liability for plan contributions in excess of IRS Code 415 limitations. To accomplish this, the Company agreed to extend the maturity of the loans to fifty years.
In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity needs pursuant to the terms of two promissory notes. The first note provides for the repayment of $150,000 to the Vice-President of the Company, who is also a Director of the Company. The second note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and payable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans are unsecured.
Meetings of the Board of Directors
The Board of Directors held 12thirteen meetings during 20072008 and all directors,Directors, with the exception of Frank E. Williams, Jr.,Mr. Wood, attended at least 75% of the meetings. Mr. Wood, who was named to the Board of Directors on July 8, 2008, attended two of the four meetings held following his election to the Board and subsequently resigned from the Board on February 27, 2009.

38


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee approved all services provided by the Company’s independent registered public accounting firm, Friedman LLP, for the years ended December 31, 2008, 2007 2006 and 2005.2006. The following fees were paid to Friedman LLP for services in those years:
                        
 2007 2006 2005  2008 2007 2006 
Audit Fees $61,275 $57,603 $50,529  $84,268 $61,275 $57,603 
Audit-Related Fees 8,755 7,745 7,745  9,785 8,755 7,745 
Tax Fees 0 0 0  0 0 0 
All Other Fees 0 0 1,500  0 0 0 
              
 
Total Fees Paid to Friedman LLP $70,030 $65,348 $59,774  $94,053 $70,030 $65,348 
              
Audit fees are comprised of fees for professional services rendered in conjunction with the audit of the Company’s annual financial statements, review of the Company’s annual report filed with the Securities and Exchange Commission, and review of the information contained in the Company’s quarterly filings with the Securities and Exchange Commission.
Audit-related fees are comprised of the fees for professional services rendered in connection with the audit of the Company’s Employee Stock Ownership Plan.

33


PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibits
       
(a)  3(a)(i) Certificate of Incorporation of the Company. (ii) Amendment to Certificate of Incorporation of the Company
       
(a)  3(b) By-laws of the Company.
       
(g)  4.1  Subscription and Investment Agreement between Europa Cruises Corporation and Lagoon Cruise Line, Inc. dated August 26, 1994.
       
(g)  4.2  Warrant Agreement between Europa Cruises Corporation and FLC Holding Corp dated July 8, 1992.
       
(g)  4.2.1  Consent and Amendment of Credit Agreement Note and Warrant by and among FLC Holding Corp. (“FLC”), EuropaSky Corporation (“EuropaSky”), Europa Cruises Corporation and Casino World, Inc. (“Casino”), dated May 27, 1993 without Exhibits.
       
(g)  4.3  Warrant Agreement between Europa Cruises Corporation and The Stuart-James Company Incorporated dated June 29, 1989.

39


Exhibits
       
(g)  4.3.1  Warrant Certificates and Assignments for 125,520 shares and 17,000 shares registered in the name of Marc N. Geman dated June 22, 1994.
       
(g)  4.3.2  Motion to Approve Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc. dated October 8, 1993 with Settlement Agreement dated October 6, 1993 attached.
       
(g)  4.3.4  Order Approving Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc.
       
(g)  4.3.5  Agreement between Marc N. Geman and Europa Cruises Corporation dated June 15, 1993.
       
(g)  4.4  Convertible Promissory Note between Europa Cruises Corporation and Serco International Ltd. dated November 11, 1993: Transfer by Serco International Ltd. to Gaming Invest Corp. and election to convert Promissory Note by Gaming-Invest Corp.
       
   5.1  Qualified plan determination letter from the Internal Revenue Service dated April 4, 1996, issued to the Europa Cruises Corporation Employee Stock Ownership Plan.

34


       
(g)  10.1  Consulting Agreement between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated September 16, 1994.
       
(g)  10.1.1  Equipment Lease between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated October 13, 1994.
       
(g)  10.1.2  Promissory Note payable to Casinos Austria Maritime Corporation dated December 30,1994, and Second Naval Mortgage on the M/V Stardancer.
       
(g)  10.1.3  Subordination Agreement between Lagoon Cruise Line, Inc., Europa Stardancer Incorporation and Casinos Austria Maritime Corporation.
       
(a)  10(d) The Company’s 1988 Stock Option Plan.
       
(b)  10(e) Standard Bareboat Charter Agreement, dated August, 1989, between Sea Lanes Bahamas Limited and Europa Cruise Lines, Ltd.
       
(c)  10(f) Service Agreement, dated April 12, 1991, between Service America Corporation and Europa Cruise Lines.
       
(c)  10(g) Lease Agreement, dated June 30, 1991, between Palm Grove Marina, Inc., and Europa Cruises of Florida 1, Inc.

40


Exhibits
       
(c)  10(h) Memorandum of Agreement for lease, dated March 29, 1992, between Durwood Dunn and Mississippi Gaming Corporation.
       
(c)  10(i) Lease Agreement, dated January 29, 1992, between Claiborne County, Mississippi Port Commission and Mississippi Gaming Corporation.
       
(c)  10(j) Contract of Sale, dated February 21, 1992, between Ferry Binghamton, Inc., and Mississippi Gaming Corporation.
       
(b)  10(k) Lease Agreement, dated November 30, 1990, between Europa Cruises of Florida 2, Inc., and Hubbard Enterprises, Inc.
       
(b)  10(l) Reciprocal Relationship Agreement, dated December 28, 1990, amongst Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., the Company and Cordis, A.G.
       
(b)  10(m) Promissory Note, dated December 31, 1990, and Addendum thereto, dated May 2, 1991, from the Company to Charles S. Liberis, P.A., Profit Sharing Plan.
       
(b)  10(n) Promissory Note, dated December 31, 1990, and Addenda thereto, dated April 18 and May 2, 1991, from the Company to Harlan G. Allen, Jr.

35


       
(b)  10(o) Stock Option and Agreement, dated December 31, 1990, between the Company and Charles S. Liberis, P.A., Profit Sharing Plan.
       
(b)  10(p) Stock Option and Agreement, dated December 31, 1990, between the Company and Harlan G. Allen, Jr.
       
(b)  10(q) Promissory Note, dated January 25, 1992, from Europa Cruises of Florida 1, Inc., and Europa Cruises of Florida 2, Inc., to Cordis, A.G.
       
(b)  10(r) Release, dated January 25, 1991, by Europa Cruise Lines, Ltd. in favor of the St. Paul Fire & Marine Insurance Co. Lloyds and certain London companies, through Bain Clarkson, Ltd.
       
(b)  10(s) Promissory Note, dated February 15, 1991, from Europa Cruises of Florida 1, Inc., to Midlantic.
       
(b)  10(t) Assumption Modification and Security Agreement, dated February 15, 1992, amongst Europa Cruises of Florida 2, Inc., the Company and Midlantic.
       
(b)  10(u) Mortgage Modification Agreement, dated February 15, 1992, between Europa Cruises of Florida 2, Inc., and Midlantic.
       
(b)  10(v) Guarantee Agreement, dated February 15, 1991, between Europa Cruises of Florida 2, Inc., and Midlantic, Re:
      Europa Cruises of Florida 2, Inc.

41


Exhibits
       
(b)  10(w) Coordination Agreement, dated February 20, 1991, between Midlantic and Cordis, A.G.
       
(b) 10(aa) Assignment of Note Receivable, Account Receivable and Common Stock from Harlan G. Allen, Jr. to the Company.
       
(b) 10(bb) Stock Purchase Agreement, dated March 31, 1991, between the Company and Freeport Cruise Line, Ltd.
       
(b) 10(cc) Pledge Agreement and Addendum thereto, dated April 18, 1991, between the Company and Harlan G. Allen, Jr.
       
(b) 10(dd) Franchise and Development Agreements between LoneStar Hospitality Corporation and Miami Subs U.S.A., Inc., dated July 1, 1992.
       
(d)  10(ee)  Vessel Purchase Agreement dated July 8, 1992 between the Company and FLC, Re: Purchase of the EuropaSky.
       
(d)  10(ff)  Contract of Sale dated July 21, 1992, between the Company and Ferry Binghamton, Inc. Re: the Purchase of Miss New York.

36


       
(d) 10(gg) Agreement to Lease and Option to Purchase dated July 7, 1992, between the Company and A&M Developers, Inc. Re:
      Bossier City site.
       
(d) 10(hh) Vessel Completion Contract by and between Eastern Shipyards, Inc., and FLC Holding Corporation Re: EuropaSky.
       
(e)  10(ii)  Stock Purchase Agreement dated December 21, 1992 between Europa Cruises Corporation and Jeffrey L. Beck, Trustee.
       
(e)  10(jj)  Copy of the Complaint filed by Charles S. Liberis vs. the Company and others.
       
   10(kk)  Settlement agreement between the Company and Sea Lane Bahamas, Ltd. datedDated February 4, 1994.
       
(f)  10(ll)  Gaming Concession Agreement between the Company and Casinos Austria Maritime Corporation dated February 18, 1993.
       
(f) 10(mm) Management Agreement between the Company and Casinos Austria Maritime Corporation dated June 19, 1993.
       
(f)  10(nn)  Diamondhead, Mississippi Loan Agreement, Continuing Guaranty, Promissory Note, and extension of Promissory Note between the Company and Casinos Austria Maritime Corporation mortgage to September 17, 1994.

42


Exhibits
       
(f) 10(oo) Convertible Promissory Note dated November 11, 1993 issued by the Company to Serco International Ltd.
       
(f) 10(pp) Lease Agreement between the Company and Serco International Ltd dated November 15, 1993.
       
(f) 10(qq) Casino World, Inc. 1993 Stock Option Plan dated March 25, 1993.
       
(f) 10(rr) Form of Stock Option Agreement dated as of August 31, 1994 issued to Deborah A. Vitale, Stephen M. Turner, Ernst G. Walter and Lester E. Bullock.
       
(f) 10(ss) Easement dated December 22, 1994 granted to Mississippi Gaming Corporation adjacent to proposed Diamondhead gaming site.
       
(f) 10(tt) Miami Beach Marina Lease dated February 10, 1995 as amended between Europa Cruises of Florida, 2 and Tallahassee Building Corp.
       
(f) 10(uu) Settlement Agreement dated May 9, 1994 between Europa Cruises Corporation and Harlan G. Allen, Jr.
       
(f) 10(vv) First Union National Bank Credit and Security Agreement and Promissory Note dated May 23, 1995 between Europa Cruises Corporation, Europa Cruises of Florida

37


1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation.
       
(f) 10(ww) First Union National Bank Credit and Security Agreement and Promissory Note dated August 25, 1995 between Europa Cruises Corporation, Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation.
       
(f) 10(xx) Snug Harbor Group, Inc. Lease dated September 20, 1996 between Snug Harbor Group, Inc. and Europa Cruises of Florida 1, Inc.
       
(f) 10(yy) Tidelands Lease and Land Lease dated February 1, 1996, between Hancock County Port and Harbor Commission and Mississippi Gaming Corporation.
       
   10.2  Warrant Agreement Between First Union National Bank of Florida and Europa Cruises Corporation dated October 30, 1996 and February 4, 1997.
       
   10.2.1  Second Modification of Credit and Security Agreement and other Loan Documents and Renewal Promissory Note between First Union National Bank of Florida and Europa Cruises Corporation dated October 31, 1996.
       
   10.2.2  Promissory Note between Europa Cruises of Florida 2, Inc. and dEBIS Financial Services, Inc. dated October 30, 1996.

43


Exhibits
       
   10.2.3  Form of Stock Option Agreements for options granted April 18, 1996 to Lester Bullock, Deborah Vitale, Piers Hedley, Debra Gladstone, Andy Rufo, Michael Reeves, and Jim Monninger.
       
   10.2.4  Lease Agreement between Tierra Verde Marina Development Corporation and Europa Stardancer Corporation dated October 1, 1996.
       
   10.2.5  Agreement between the Company and McDonald & Company Securities, Inc. dated April 2, 1998.
       
(h)  10.3  Charter Agreement between Europa Stardancer Corporation and Seven Star Charters, Inc. dated December 28,1998.28, 1998.
       
(h)  10.3.1  Agreement for Purchase and Sale of a Vessel between Europa Stardancer Corporation and Seven Star Charters, Inc. dated October 30, 1999.
       
(h)  10.3.2  Agreement for Purchase and Sale of a Vessel and Business Assets between Europa Cruises of Florida 2, Inc. and Stardancer Casino, Inc. dated December 30, 1999.
       
(h)  10.3.3  Agreement for the Purchase and Sale of a Vessel and Certain Assets between Europasky Corporation and Stardancer Casino, Inc, dated August 2, 2000.

38


       
(h)  10.3.4  Agreement for the Purchase and Sale of a Vessel between Europa Cruises of Florida 1, Inc. and Stardancer Casino, Inc. dated August 2, 2000.
       
(i)  10.4  Code of Ethics applicable to the Chief Executive Officer, Chief Financial Officer and Vice President of the Company.
       
(j)  10.5  Promissory Note between Diamondhead Casino Corporation and Gregory Harrison dated March 20, 2008.
       
(j)  10.5.1  Promissory Note between Diamondhead Casino Corporation and Benjamin Harrell dated March 20, 2008.
       
(f)  18  Letter from BDO Seidman, LLP regarding 1995 change in accounting principle.
Index to Exhibits
(a) Previously filed as an exhibit to the Company’s Registration Statement No. 33-26256-A and incorporated by reference.
 
(b) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated by reference.

44


(c) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference.
 
(d) Previously filed as an exhibit to the Company’s Form S-2 Registration Statement dated August 26, 1992 and incorporated by reference.
 
(e) Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1992 and incorporated by reference.
 
(f) Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 1993 and 1994 and incorporated by reference.
 
(g) Previously filed as an exhibit to the Company’s S-2 Registration Statement (No. 33-89014) filed January 31, 1995 and incorporated by reference.
 
(h) Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 2000 and 1999 and incorporated by reference.
 
(i) Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference.
 
(j) Attached as an Exhibit to this Annual Report

39


Subsidiaries of the Registrant:
Mississippi Gaming Corporation (Delaware)
Casino World, Inc. (Delaware)
Europasky Corporation (Delaware)
Exhibits 31.1 and 31.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company pursuant to Rule 13A–13A—14 of the Securities and Exchange Commission Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
Exhibits 32.1 and 32.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 10.5
Promissory Note between Diamondhead Casino Corporation and Gregory Harrison dated March 20, 2008.
Exhibit 10.5.1
Promissory Note between Diamondhead Casino Corporation and Benjamin Harrell dated March 20, 2008.

4045


SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 DIAMONDHEAD CASINO CORPORATION
 
 
DATE: March 28, 200831, 2009 By:  /s/Deborah A. Vitale   
  Deborah A. Vitale,President  
   
   
 By:  /s/Robert Zimmerman   
  Robert Zimmerman,Chief Financial Officer  
   
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
   
Signature and Title Date
   
/s/ Deborah A. Vitale
 
President and Chairman of the Board
 March 28, 2008 31, 2009
   
/s/ Gregory A. Harrison
 
Corporate Secretary and Director
 March 28, 2008 31, 2009
   
/s/ Frank E. Williams, Jr.
 
Director
 March 28, 2008 31, 2009
   
/s/ Benjamin J. Harrell
 
Director
 March 28, 2008 31, 2009
   
/s/ Carl D. Stevens
 
Director
 March 28, 2008 31, 2009
   
/s/ H. Steve Norton
 
Director
 March 28, 2008 31, 2009

4146


 

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
   
  Page
   
 F-2
   
 F-4F-3
   
 F-5F-4
   
 F-6F-5
   
 F-7F-6
   
 F-8 to F-19F-20

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Diamondhead Casino Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Diamondhead Casino Corporation and Subsidiaries as of December 31, 20072008 and 2006,2007, and the related consolidated statements of loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. We also have audited the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).2008. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Report on Internal Control Over Financial Reporting”.statements. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements includedmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

F-2


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamondhead Casino Corporation and Subsidiaries as of December 31, 2008 and 2007, and 2006,financial results and the results of their operations and theirits cash flows for each of the years in the three-year period ended December 31, 20072008 in conformity with accounting principles generally accepted in the United States of America. Also
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in our opinion,Note 2 to the consolidated financial statements, the Company has incurred significant recurring net losses over the past few years. In addition, the Company has discontinued all significant operations, except for its efforts to develop the Diamondhead, Mississippi property. Such efforts may not contribute to the Company’s cash flows in the foreseeable future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to raise the necessary capital with which to satisfy liabilities, fund future operations and develop the Diamondhead, Mississippi property. Management’s plans in regard to these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Diamondhead Casino Corporation and Subsidiaries maintained, in all material respects, effectiveCorporation’s internal control over financial reporting as of December 31, 2007,2008, based on criteria established in “InternalInternal Control — Integrated Framework”Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)., and our report dated March 31, 2009 expressed an adverse opinion.
/s/ Friedman LLP
New York, New York
March 26, 200831, 2009

F-3F-2


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20072008 AND 20062007
        
         2008 2007 
 2007 2006  
ASSETS  
  
Current assets  
Cash $739,831 $1,419,955  $295,968 $739,831 
Prepaid insurance and other current assets 17,050 16,288  22,468 17,050 
          
Total current assets 756,881 1,436,243  318,436 756,881 
  
Property and equipment, less accumulated depreciation of $14,980 in 2007 and $14,015 in 2006 225 1,190 
Property and equipment, less accumulated depreciation of $15,205 in 2008 and $14,980 in 2007  225 
 
Land held for development (Note 3) 5,409,913 5,409,913  5,409,913 5,409,913 
 
Deferred Financing Costs net of Amortization of $1,836 37,258  
 
Other assets 26,514 26,514  26,514 26,514 
          
 $6,193,533 $6,873,860  
      $5,792,121 $6,193,533 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY  
 
Current liabilities  
Note Payable to Director $55,000 $ 
Accounts payable and accrued expenses $201,034 $199,909  203,884 201,034 
          
  
Total current liabilities 201,034 199,909  258,884 201,034 
  
Long-Term Debt (net of unamortized discount of $23,095) 276,905  
 
Commitments and contingencies (Notes 3 and 7)      
  
Stockholders’ equity (Note 4)  
Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,122,000 ($2,591,080 aggregate liquidation preference) in 2007 and 2006 21,220 21,220 
Common stock, $.001 par value; shares authorized 50,000,000, Issued: 36,477,066 in 2007, 36,217,053 in 2006, outstanding: 33,483,535 in 2007, 33,143,977 in 2006. 36,477 36,217 
Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,086,000 in 2008 and 2,122,000 in 2007 (aggregate liquidation preference of $2,519,080 in 2008 and $2,591,080 in 2007. 20,860 21,220 
Common stock, $.001 par value; shares authorized 50,000,000, Issued: 36,731,687 in 2008, 36,477,066 in 2007, outstanding: 33,817,701 in 2008, 33,483,535 in 2007. 36,732 36,477 
Additional paid-in capital 31,171,566 30,709,032  33,544,516 31,171,566 
Unearned ESOP shares  ( 4,388,289)  (4,506,890)  ( 4,269,687)  ( 4,388,289)
Accumulated Deficit  (20,840,816)  (19,577,969)  (24,068,430)  (20,840,816)
Treasury stock, at cost, 50,346 shares  (7,659)  (7,659)  (7,659)  (7,659)
          
 
Total stockholders’ equity 5,992,499 6,673,951  5,256,332 5,992,499 
          
 
 $6,193,533 $6,876,860  $5,792,121 $6,193,533 
          
See accompanying notes to consolidated financial statements.

F-4F-3


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 2008, 2007 2006 AND 20052006
                        
 2007 2006 2005  2008 2007 2006 
COSTS AND EXPENSES
  
Administrative and General $925,240 $1,378,067 $648,518  $877,781 $925,240 $1,378,067 
Stock-based Compensation  1,238,348   2,072,927  1,238,348 
Depreciation and Amortization (Note 3) 965 1,671 12,365  2,061 965 1,671 
Other 255,887 275,735 125,958  169,719 255,887 275,735 
              
 
 1,182,092 2,893,821 786,841  3,122,488 1,182,092 2,893,821 
              
  
OTHER INCOME (EXPENSE)
  
Dock Lease Income   130,841 
Reversal of Sales Tax Liability   1,125,752 
Interest Earned on Invested Cash 25,941 21,742 2,670  4,374 25,941 21,742 
Reversal of Sales Tax Liability  1,125,752  
Interest Expense    (41,347)  (6,460)   
Other  664 96,495 52,729    664 96,495 
              
 26,605 1,243,989 144,893   (2,086) 26,605 1,243,989 
              
NET LOSS
  (1,155,487)  (1,649,832)  (641,948)  (3,124,574)  (1,155,487)  (1,649,832)
              
  
PREFERRED STOCK DIVIDENDS
  (107,360)  (107,360)  (107,360)  (103,040)  (107,360)  (107,360)
              
  
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
 $(1,262,847) $(1,757,192) $(749,308) $(3,227,614) $(1,262,847) $(1,757,192)
              
  
Net loss per common share, basic and diluted $(.038) $(.055) $(.025) $(.096) $(.038) $(.055)
              
  
Weighted average number of common shares outstanding 33,376,421 32,125,425 29,892,404  33,689,181 33,376,421 32,125,425 
              
See accompanying notes to consolidated financial statements.

F-5F-4


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 2006 AND 20052006
                             
          Addit’l             
  Preferred  Common  Paid-In  Unearned  Accumulated  Treasury    
  Stock  Stock  Capital  ESOP Shares  (Deficit)  Stock  Total 
Balance, January 1, 2005
 $21,220  $34,166  $26,474,833  $(4,744,094) $(17,071,469) $(190,156) $4,524,500 
ESOP compensation          (41,842)  118,602           76,760 
Issuance of common stock for:                            
Exercise of stock options and warrants      350   174,650               175,000 
Sale of shares held in treasury          473,938           76,062   550,000 
Services                            
Stock-based compensation                            
Preferred stock dividends      58   47,302       (107,360)      (60,000)
Net loss for the year              (641,948)     (641,948)
                      
                             
Balance, December 31, 2005
  21,220   34,574   27,128,881   (4,625,492)  (17,820,777)  (114,094)  4,624,312 
                      
ESOP compensation          105,316   118,602           223,918 
Issuance of common stock for:                            
Exercise of stock options and warrants      1,614   1,042,141               1,043,755 
Sale of shares held in treasury          1,111,415           106,435   1,217,850 
Services      13   35,587               35,600 
Stock-based compensation          1,238,348               1,238,348 
Preferred stock dividends      16   47,344       (107,360)      (60,000)
Net loss for the year              (1,649,832)     (1,649,832)
                      
                             
Balance, December 31, 2006
  21,220   36,217   30,709,032   (4,506,890)  (19,577,969)  (7,659)  6,673,951 
                      
ESOP compensation          93,784   118,601           212,385 
Issuance of common stock for:                            
Exercise of stock options and warrants      241   321,409               321,650 
Sale of shares held in treasury                            
Services                            
Stock-based compensation                            
Preferred stock dividends      19   47,341       (107,360)      (60,000)
Net loss for the year              (1,155,487)     (1,155,487)
                      
                             
Balance, December 31, 2007
 $21,220  $36,477  $31,171,566  $(4,388,289) $(20,840,816) $(7,659) $5,992,499 
                      
             
  2008  2007  2006 
Preferred Stock
            
Balance January 1
 $21,220  $21,220  $21,220 
Conversion of shares to Common  (360)      
          
Balance December 31
 $20,860  $21,220  $21,220 
          
             
Common Stock
            
Balance January 1
 $36,477  $36,217  $34,574 
Exercise of Stock Options  200   241   1,614 
Issued for Services        13 
Preferred Stock Dividends  19   19   16 
Conversion of Preferred  36       
          
Balance December 31
 $36,732  $36,477  $36,217 
          
             
Additional Paid-In Capital
            
Balance January 1
 $31,171,566  $30,709,032  $27,128,881 
ESOP Compensation  4,693   93,784   105,316 
Exercise of Stock Options  199,800   321,409   1,042,141 
Shares Issued for Services        35,587 
Stock-based Awards  2,135,512      1,238,348 
Conversion Preferred to Common  324       
Sale of Treasury Shares        1,111,415 
Preferred Stock Dividends  32,621   47,341   47,344 
          
Balance December 31
 $33,544,516  $31,171,566  $30,709,032 
          
             
Unearned ESOP Shares
            
Balance January 1
 $(4,388,289) $(4,506,890) $(4,625,492)
ESOP Compensation  118,602   118,601   118.602 
          
Balance December 31
 $(4,269,687) $(4,388,289) $(4,506,890)
          
             
Accumulated (Deficit)
            
Balance January 1
 $(20,840,816) $(19,577,969) $(17,820,777)
Preferred Stock Dividends  (103,040)  (107,360)  (107,360)
Net Loss for Year  (3,124,574)  (1,155,487)  (1,649,832)
          
Balance December 31
 $(24,068,430) $(20,840,816) $(19,577,969)
          
             
Treasury Stock
            
Balance January 1
 $(7,659) $(7,659) $(114,094)
Sale of Treasury Shares          106,435 
          
Balance December 31
 $(7,659) $(7,659) $(7,659)
          
             
Total Stockholders Equity
 $5,256,322  $5,992,499  $6,673,951 
          
See accompanying notes to consolidated financial statements

F-6F-5


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)9)
YEARS ENDED DECEMBER 31, 2008, 2007 2006 AND 20052006
                        
 2007 2006 2005  2008 2007 2006 
OPERATING ACTIVITIES       
Net loss $(1,155,487) $(1,649,832) $(641,948) $(3,124,574) $(1,155,487) $(1,649,832)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization 965 1,671 12,365  2,061 965 1,671 
ESOP provision 212,385 223,918 76,760  123,295 212,385 223,918 
Issuance of common shares for services  35,600     35,600 
Issuance of stock-based compensation  1,238,348  
Issuance of stock options 2,072,927  1,238,348 
Amortization of loan discount 396   
(Increase) decrease in:  
Accounts receivable  16,956  (10,645)   16,956 
Prepaid insurance and other  (762) 3,473 13,884   (5,418)  (762) 3,473 
(Decrease) increase in:  
Accounts payable and accrued expenses 1,125  (19,708)  (41,020)  (7,550) 1,125  (19,708)
Deferred Dock Lease Income    (28,000)
Sales tax settlement liability   (1,125,752) 36,515     (1,275,752)
              
Net cash used in operating activities  (941,774)  (1,275,326)  (582,089)  (938,863)  (941,774)  (1,275,326)
              
  
INVESTING ACTIVITIES       
Land development   (7,333)  (31,625)    (7,333)
              
Net cash used in investing activities   (7,333)  (31,625)    (7,333)
              
  
FINANCING ACTIVITIES  
Proceeds from sale of common shares held in treasury  1,217,850 550,000    1,217,850 
Proceeds from exercise of options and warrants to purchase common stock 321,650 1,043,755 175,000 
Proceeds form issuance of Notes payable to Directors 205,000   
Payment of Note payable to Director  (25,000)   
Proceeds from exercise of options and warrants to purchase    
common stock 75,000 321,650 1,043,755 
Proceeds from Line of Credit 300,000   
Payment of preferred stock dividends  (60,000)  (60,000)  (60,000)  (60,000)  (60,000)  (60,000)
              
Net cash provided by financing activities 261,650 2,201,605 665,000  495,000 261,650 2,201,605 
              
  
Net increase (decrease) in cash  (680,124) 918,946 51,286   (443,863)  (680,124) 918,946 
Cash beginning of year 1,419,955 501,009 449,723  739,831 1,419,955 501,009 
              
Cash end of year $739,831 $1,419,955 $501,009  $295,968 $739,831 $1,419,955 
              
See accompanying notes to consolidated financial statements.

F-7F-6


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Diamondhead Casino Corporation (the “Company”) owns a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi on which it plans, in conjunction with one or more partners, to construct a casino resort and hotel and associated amenities.The Company officially changed its name from Europa Cruises Corporation to Diamondhead Casino Corporation in November of 2002. The Company was originally formed to principally own, operate and promote gaming vessels offering day and evening cruises in international waters.
2. Liquidity and Going Concern
The consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, and as of December 31, 2008, has an accumulated deficit of $24,068,430. Certain conditions raise substantial doubt about the Company’s ability to continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company incurred a loss applicable to common shareholders of $3,227,614, $1,262,847 and $1,757,192 for the years ending December 31, 2008, 2007 and 2006 respectively and expects continued losses for the foreseeable future.
The Company has hadgenerated no operationsoperating revenues since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, whether through equity and/or debt financing, to master plan, obtain permits for,2000 and construct a casino resort.
The Company has had no operations since it endedto rely on alternative means to raise capital to meet its gambling cruise ship operations in 2000. The Company incurred a net loss applicable to common shareholders of $1,262,847, $1,757,192financial obligations. During 2007 and $749,308 for the years ending December 31, 2007, 2006, and 2005 respectively. During 2006 and 2005, the Company was able to sustain its cash position and continue to satisfy its ongoing expenses through the sale of common stock formerly held in treasury and receipt of cash from the exercise of options and warrants to purchase common stock. In 2007,2008, the Company entered into two promissory notes with two Directors of the Company yielding proceeds of $205,000, received a total of $321,650$75,000 from the exercise of options and warrants to purchase 241,000100,000 shares of common stock.stock, and obtained a Line of Credit from an unrelated third party investor in the total amount of $1,000,000 of which the company has drawn $300,000 as of December 31, 2008.
At December 31, 2008, the Company had cash on hand totaling $295,968. Management of the Company analyzedexamined the historical and planned future spending patterns of the Company and as of December 31, 2007, the Company may not have had sufficient cash on hand to meet budgeted on-going expenses to be incurred in the future twelve month period. However, in March 2008 the Company received a total of $261,250. The Company received $56,250 from a Director of the Company who exercised options to purchase common stock. In addition, to meet short term liquidity needs, the Vice President of the Company, who is also a Director of the Company, loaned the Company $150,000 and another Director of the Company loaned the Company $55,000. The loans were made pursuant to two Promissory Notes, the terms of which are more fully discussed in Note 10 to these financial statements. As of the date of this report, management believes that the Company has sufficientwill essentially exhaust all cash on hand to meet expected on-going expenses to be incurred for the year endingresources currently available by December 31, 2008.
The Company is currently in discussions with various parties interested in funding and/or developing all or part of the Diamondhead property. The Company is currently exploring additional opportunities for financing to meet its liquidity needs.2009.
At December 31, 2007,2008, the Company does not have the financial resources to develop its proposed casino resort. There can be no assurance that the Company can successfully develop its Diamondhead, Mississippi property, and in the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, beyond December 31, 2008, it wouldcould have a significant adverse impact on the Company’s ability to continue as a going concern and ultimately develop the property.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

F-8


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-7


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Cash
The Company’s cash balances are maintained primarily in two banksone bank and are currently insured up to $100,000 by the Federal Deposit Insurance Corporation for each bank.subject to certain limitations.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following:
     
Land under development $4,868,139 
Licenses  77,000 
Engineering and costs associated with permitting  464,774 
    
     
  $5,409,913 
    
Fair Value Measurements
In the first quarter of 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflects our own assumptions.

F-8


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Fair Value Measurements (continued)
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, delaying the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial InstrumentsAssets and Financial liabilities”. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The adoption of this standard did not have a material effect on the consolidated financial statements as the Company did not elect to report its financial instruments at fair value.
In September 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This staff position clarifies the application of SFAS No. 157 “Fair Value Measurements” in a market that is not active and provides examples to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted the provisions of SFAS No. 157 in the first quarter of 2008 and the provisions of SFAS No. 157-3 became effective upon issuance for financial statements, including prior periods, which have yet to be issued. The Company does not expect either the statement or the FSP to have a material effect on its consolidated financial statements.
The carrying amounts of cash, a note payable to a Director, accounts payable and accrued expenses, approximate fair value due to the short term nature of the instruments. The carrying amount of the fixed interest loan payable approximates the fair value based on level 2 observations as described in SFAS 157. The transaction was entered into in the fourth quarter of 2008 at borrowing rates and terms currently available to the Company.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets.assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2007.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method.

F-9


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)2008.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. Compensation expense is measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations. As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:

F-9


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Employee Stock Ownership Plan (continued)
(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.
Income Taxes on Income
Under the asset and liability method of SFAS No. 109 “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basesbasis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2008, the Company does not have a liability for unrecognized tax benefits.
The Company files federal and various state income tax returns. The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2003. During the periods open to examination, the Company has net operating loss (“NOL”) carry forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOL’s carry forwards may be utilized in future periods, they remain subject to examination until they expire.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2008, the Company has no accrued interest or penalties related to uncertain tax positions.
Net Loss per Common Share
Basic earnings/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings/ (loss) per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. Dilutive securities included stock purchase options and convertible preferred stock which totaled 3,225,000 for the year ended December 31, 2008, 3,336,000 for the year ended December 31, 2007 and 3,577,000 for the year ended December 31, 2006 and 4,540,500 for the year ended December 31, 2005.2006. The foregoing is excluded from diluted net loss per share as their effect would be antidilutive.

F-10


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Segment Information
Operating segments are components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company currently operates solely in one segment, development of land, which relates to planned future operations.
Stock Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R) “Share-Based Payments,” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. As a result of adopting SFAS 123(R), net loss applicable to common stockholders was $2,072,927 for the year ended December 31, 2008 and $1,238,348 for the year ended December 31, 2006, was $1,238,348 higher than if the Company had continued to account for stock-based compensation under APB No. 25. The impact on basic and diluted earnings per share for the year ended December 31, 2006 was a reduction of $.062 and $.039 per share.share for the years ended December 31, 2008 and 2006 respectively. There was no stock-based compensation expense recognized for the years ended December 31, 2007 and 2005.

F-10


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
Stock Based Compensation (continued)2007.
In determining the fair value of each option granted in 2006 and those modified in 2008, the Black-Scholes option-pricing model, consistent with the provisions of SFAS 123(R) and SAB No.107, was used, with the following weighted-average assumptions: dividend yield of zero, expected volatility of 86.45%, an average expected option life of 5 years, and an average risk-free interest rate of 4.86%. All awards were fully vested at December 31, 2006. The weighted average estimated value of employee stock options granted during the year ended December 31, 2006 was $1.91 per share.
Prior to January 1, 2006, the Company accounted for stock compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” No stock-based employee compensation cost was recognized for stock option awards for periods prior to January 1, 2006, as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.
Consistent with the disclosure provisions of SFAS 148 “Accounting for Stock-Based Compensation-Transition and Disclosure–an amendment to SFAS No. 123,” the Company’s net income and basic and diluted net income per share for the year ended December 31, 2005, would have been adjusted to the pro forma amounts indicated below:
     
Net loss applicable to common shareholders $(749,308)
Deduct: Total stock-based compensation expense determined under fair value based method  951,213 
    
Pro forma net loss applicable to common Shareholders $(1,700,521)
    
     
Per share, as reported $(.025)
Per share, pro forma $(.057)
In determining the fair value of each option granted in 2005, the Black-Scholes option-pricing model, as prescribed by SFAS No. 123, was used with the following weighted-average assumptions: dividend yield of zero, expected volatility of 87.49%, an average expected option life of 5 years, and an average risk-free interest rate of 3.65%.
         
  2008 2006
Dividend Yield  0%  0%
Expected Volatility  49.25% - 96.10%  86.45%
Expected Option Life (years)  5   5 
Average Risk-Free Interest Rate 2.31% to 2.82%  4.86%
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
New Accounting Pronouncements
In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). The intent of SAB 108 is to reduce diversity in practice for the method companies use to quantify financial statement misstatements, including the effect of prior year uncorrected errors. SAB 108 establishes an approach that requires quantification of financial statement errors using both an income statement and a cumulative balance sheet approach. SAB

F-11


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
New Accounting Pronouncements (continued)
108 is effective for fiscal years ending after November 15, 2006. The adoption of this statement did not have any effect on the Company’s consolidated financial position, results of operations, or cash flows.
In October 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 123(R)-5, Amendment of FSP FAS 123(R)-1, (“FSP FAS 123(R)-5”) to address whether a

F-11


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
New Accounting Pronouncements (continued)
change to an equity instrument in connection with an equity restructuring should be considered a modification for the purpose of applying FSP No. FAS 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services” under FAS Statement No.123(R) (“FSP FAS 123(R)-1”). FSP FAS 123(R)-1 states that financial instruments issued to employees in exchange for past or future services are subject to the provisions of SFAS 123(R) unless the terms of the award are modified when the holder is no longer an employee. In FSP FAS 123(R)-5, the FASB staff concluded that changes to the terms of an award that are made solely due to an equity restructuring are not considered modifications as described in FSP FAS 123(R)-1 unless the fair value of the award increases, anti-dilution provisions are added, or holders of the same class of equity instruments are treated unequally. FSP FAS 123(R)-5 is effective for the first reporting period beginning after October 10, 2006. The adoption of FSP FAS 123(R)-5 did not have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial liabilities”. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS no. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement No. 157. The Company did not adopt early implementation and is currently assessing the impact of SFAS No. 159. However, the Company does not believe the adoption of this standard will have a material effect on our consolidated financial statements.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.”
The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2007, the Company does not have a liability for unrecognized tax benefits.

F-12


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
New Accounting Pronouncements (continued)
The Company files federal and various state income tax returns. The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2003. During the periods open to examination, the Company has net operating loss (“NOL”) carry forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOL’s carry forwards may be utilized in future periods, they remain subject to examination until they expire.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2007, the Company has no accrued interest or penalties related to uncertain tax positions.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement 141(R)(“SFAS 141(R)”)- Business Combinations,-revision to SFAS 141. SFAS 141(R) improves the reporting by creating greater consistency in the accounting and reporting of business combinations. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all the information they need to evaluate and understand the nature and financial effect of the business combination. The statement does not apply to the formation of a joint venture. The Statement is effective for fiscal years beginning after December 15, 2008 and earlier application is prohibited. The Company expects no immediate impact from the implementation of the Statement.Statement as no business combinations are currently pending.
In December 2007, the FASB also issued SFAS 160, Non-Controlling Interests in Consolidated Financial Statements, an amendment to Accounting Research Bulletin No. 51 (“ARB 51”). SFAS 160 improves the relevance, comparability and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and a non-controlling interest by requiring that those transactions also be treated as equity transactions. The Statement is effective for fiscal years beginning after December 15, 2008 and earlier application is prohibited. The Company expects no immediate impact from the implementation of the Statement.
In December 2007,May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States. The statement highlights the fact that the entity, as opposed to its’ auditors, are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The statement becomes effective 60 days following the Securities and Exchange Commission issued StaffCommission’s approval by the Public Company Accounting Bulletin No.110 (SAB 110). SAB 110 expresses views regarding the useOversight Board approval of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options in accordance with FASB 123-R, Share-Based Payment. The Staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.The Company has not used this method in the past and does not believe SAB 110 will have a significant affect on its financial statements.amendments
In MarchJune 2008, the FASB issued SFAS 161, DisclosuresFSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on its consolidated financial statements.

F-12


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies(continued)
New Accounting Pronouncements (continued)
In October 2008, the FASB issued FSP No. FAS 133-1, “Disclosures about Derivative InstrumentsCredit Derivatives and Hedging Activities,Certain Guarantees,” an amendment ofto FASB Statement 133, Accounting“Accounting for Derivative Instruments and Hedging Activities. This statement” The staff position requires enhanced disclosuresthat sellers of credit derivatives disclose information about an entity’s derivativecredit derivatives and hedging activities and thereby improves the transparencyhybrid instruments that have embedded credit derivatives to enable users of financial reporting.statements to assess their potential effect on its financial position, financial performance, and cash flows. The Statement isFSP also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others,” to require additional disclosure about the current status of the payment/performance risk of a guarantee. The statements became effective for financial statements for fiscal yearsannual and interim reporting periods beginningending after November 15, 2008. The Company does not expect these statements will have a material effect on its consolidated financial statements.
4. Note Payable to Director
In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity needs pursuant to the terms of two promissory notes. The first note provided for the repayment of $150,000 to the Vice President of the Company, who is also a Director of the Company. The second note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and is not expectedpayable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans are unsecured.
On March 28, 2008, the Vice President of the Company, who had previously loaned the Company $150,000 pursuant to havethe aforementioned promissory note, exercised an impactoption to purchase 100,000 shares of common stock at an exercise price of $1.25 per share by applying $125,000 of the $150,000 which the Company owed him to exercise the option. The remaining balance on this note was retired in the second quarter of 2008 leaving a note in the amount of $55,000 outstanding at December 31, 2008.
5. Long-Term Debt
On October 23, 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provides for funds to be drawn from time to time and carries an interest rate of 9% per annum payable quarterly based on the Company’s financial statements.number of days any portion of the advances are outstanding. All funds advanced under the facility will be due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender has an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share based on the proportion any amount borrowed bears to the $1,000,000 Line of Credit. The options expire following repayment in full by the Company of the amount borrowed. The Company incurred finders’ fees in obtaining the facility, including a fee paid to an unrelated party in January 2009 by issuing 20,000 shares of common stock then-valued at $13,100. In addition, under the terms of an agreement with the Company, a Director and Vice President of the Company is entitled to 6% of the amount of funds borrowed under the facility for his efforts in securing the Line of Credit, $20,000 of which was paid to him in 2008.
Upon signing of the Line of Credit, the lender was entitled to an option to purchase 50,000 shares of common stock at $1.75 per share. The Company valued the option in the amount of $39,094 using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of zero, expected volatility of 69.88%, expected life of 4.02 years

F-13


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.5. Long-Term Debt(continued)
and average risk-free interest rate of 1.76%. The value of the option is recorded as deferred loan cost and will be amortized over the expected life of the loan. Deferred loan amortization amounted to $1,836 for the year ended December 31, 2008.
On December 8, 2008, the Company requested and received an initial draw on the Line of Credit in the amount of $300,000 entitling the lender to an option to purchase 75,000 shares of common stock at $1.75 per share. The Company valued the option in the amount of $23,491 using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of zero, expected volatility of 64.99%, expected life of 3.9 years and average risk-free interest rate of 1.357%. The value of the option is recorded as debt discount and will be amortized to interest expense over the expected life of the loan. Unamortized debt discount at December 31, 2008 amounted to $23,095.
On March 9, 2009, the Company requested a second draw on the Line of Credit in the amount of $300,000 and received the funds on or about March 17, 2009. Therefore, the total indebtedness under the Line of Credit is $600,000 with a remaining $400,000 available for future draws.
6. Stockholders’ Equity
At December 31, 2008, 2007 and 2006, the Company had a stock option plan and non-plan options, which are described below.
Non-Plan Stock Options
On February 12, 2008, the Company modified all unexercised options originally issued in 2003 by extending the expiration date five years from the original expiration date. A total of 990,000 options to purchase common shares were affected by the modification.
In March 2008, a Director of the Company exercised an option to purchase 75,000 shares of common stock at an exercise price of $.75 per share. Also in March 2008, a Director and Vice President of the Company exercised and option to purchase 100,000 shares of common stock at $1.25 per share.
In July 2008, a key employee of the Company exercised an option to purchase 25,000 shares of common stock at an exercise price of $.75 per share.
In February 2007, a key employee of the Company exercised an option to purchase 106,000 shares of common stock at an exercise price of $.90 per share and an officerOfficer of the Company exercised an option to purchase 35,000 shares of common stock at an exercise price of $.75 per share.
In February 2006, the President and Vice President of the Company each exercised options to purchase 100,000 shares of common stock at an exercise price of $.50 per share. In March 2006, a former Director of the Company exercised options to purchase 150,000 shares of common stock at an average exercise price of $.775 per share. Also in March 2006, another former Director of the Company exercised an option to purchase 150,000 shares of common stock at an exercise price of $.50 per share.
In April 2006, the President of the Company exercised an option to purchase 800,000 shares of common stock at an exercise price of $.50 per share and the Vice President of the Company exercised an option to purchase 75,000 shares of common stock at an exercise price of $.75 per share. In June 2006, a key employee of the Company exercised an option to purchase 63,500

F-14


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders’ Equity(continued)
shares of common stock at $.63 per share. In July 2006, a Director of the Company exercised an option to purchase 75,000 shares of common stock at $.75 per share.
In April 2006, the Company awarded options to purchase 100,000 shares of common stock at an exercise price of $2.70 per share to each of the six Directors of the Company. On the same date, the Board of Directors awarded an option to purchase 50,000 shares of common stock at an exercise price of $2.70 per share to a key employee of the Company and awarded an option to purchase 25,000 shares of common stock at an exercise price of $2.70 per share to an Officer of the Company. For the year ended December 31, 2006, the Company recorded stock-based compensation expense of $1,238,348.
In February 2005, the Company awarded options to purchase 75,000 shares of common stock at an exercise price of $.80 per share to each of the six Directors of the Company. On the same date, the Board of Directors awarded an option to purchase 75,000 shares of common stock at an exercise price of $.80 per share to a key employee of the Company, awarded an option to purchase 50,000 shares of common stock at an exercise price of $.80 per share to an Officer of the Company and awarded an option to purchase 25,000 shares of common stock at an exercise price of $.80 per share to a Director of a subsidiary of the Company.
In October 2005, a key employee of the Company exercised an option to purchase 50,000 shares of common stock at $.50 per share, and an Officer of the Company exercised an option to purchase 25,000 shares of common stock at $.50 per share. Also,in October 2005, a former Director of the Company exercised an option to purchase 250,000 shares of common stock at $.50 per share, and a Director of a subsidiary of the Company exercised an option to purchase 25,000 shares of common stock at $.50 per share. In October 2005, an option to purchase 450,000 shares of common stock issued to the President of the Company and an option to purchase 250,000 shares of common stock issued to the Vice President of the Company, expired.
In October 2005, the Board of Directors awarded an option to purchase 450,000 shares of common stock at an exercise price of $1.25 per share to the President of the Company, and an option to purchase 250,000 shares of common stock at an exercise price of $1.25 per share to the Vice President of the Company.

F-14


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity(continued)
Stock Option Plan
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company
reserved 1,000,000 shares for issuance under the Plan. The option price may not be less than 100% of the market value of the shares on the date of the grant. The options expire within ten years from the date of grant. At December 31, 2007,2008, no options from this plan were issued or exercised.
Accounting for Stock Options
A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2008, 2007 2006 and 2005,2006, and changes during the years ended on December 31, 2008, 2007 2006 and 20052006 is presented below:
                                                
 December 31, 2007 December 31, 2006 December 31, 2005  December 31, 2008 December 31, 2007 December 31, 2006 
 Weighted Weighted Weighted  Weighted Weighted Weighted 
 Average Average Average  Average Average Average 
 Exercise Exercise Exercise  Exercise Exercise Exercise 
 Shares Price Shares Price Shares Price  Shares Price Shares Price Shares Price 
 
Outstanding at beginning of year 3,181,000 $1.17 4,044,500 $.69 3,794,500 $.52  3,040,000 $1.18 3,181,000 $1.17 4,044,500 $.69 
Granted   650,000 2.70 1,300,000 1.04  125,000 1.75   650,000 2.70 
Exercised  (141,000)  (.86)  (1,513,500)  (.56)  (350,000)  (.50)  (200,000)  (1.00)  (141,000)  (.86)  (1,513,500)  (.56)
Expired      (700,000) .50        
                          
Outstanding at end of year 3,040,000 $1.18 3,181,000 $1.17 4,044,500 $.69  2,965,000 $1.22 3,040,000 $1.18 3,181,000 $1.17 
                          
Options exercisable at year-end 3,040,000  3,181,000  4,044,500   2,965,000  3,040,000  3,181,000  
Weighted-average fair value of options granted during the year $ $2.70 $1.04  $1.75 $ $2.70 
              
The following tables, summarizes information about stock options outstanding and exercisable at December 31, 20072008 and 2006:
                     
  December 31, 2007
  Options Outstanding Options Exercisable
      Weighted-      
  Number Average Weighted Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/07 Life Price 12/31/07 Price
 
$.30  750,000   .19  $.30   750,000  $.30 
$.72 — $.80  940,000   1.51   .78   940,000   .78 
$1.25  700,000   2.82   1.25   700,000   1.25 
$2.70  650,000   3.28   2.70   650,000   2.70 
                     
   3,040,000           3,040,000     
                     
2007:

F-15


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.6. Stockholders’ Equity(continued)
Accounting for Stock Options (continued)
                     
  December 31, 2006
  Options Outstanding Options Exercisable
      Weighted-      
  Number Average Weighted Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/06 Life Price 12/31/06 Price
$.30  750,000   1.19  $.30   750,000  $.30 
$.72 — $.90  1,081,000   2.34   .79   1,081,000   .79 
$1.25  700,000   3.82   1.25   700,000   1.25 
$2.70  650,000   4.28   2.70   650,000   2.70 
                     
   3,181,000           3,181,000     
                     
December 31, 2008
                     
  Options Outstanding Options Exercisable
      Weighted-      
  Number Average Weighted Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/08 Life Price 12/31/08 Price
     
$.30  750,000   4.19  $.30   750,000  $.30 
$.72 - $.80  840,000   2.05   .78   840,000   .78 
$1.25  600,000   1.82   1.25   600,000   1.25 
$1.75  125,000   3.84   1.75   125,000   1.75 
$2.70  650,000   2.28   2.70   650,000   2.70 
                     
   2,965,000           2,965,000     
                     
December 31, 2007
                     
  Options Outstanding Options Exercisable
      Weighted-      
  Number Average Weighted Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/07 Life Price 12/31/07 Price
     
$.30  750,000   .19  $.30   750,000  $.30 
$.72 - $.80  940,000   1.51   .78   940,000   .78 
$1.25  700,000   2.82   1.25   700,000   1.25 
$2.70  650,000   3.28   2.70   650,000   2.70 
                     
   3,040,000           3,040,000     
                     
WarrantsOther
In connection with a refinancing in 1996, the Company granted Wachovia Bank (formerly First Union National Bank of Florida) ten-year warrants to purchase an aggregate of 200,000 shares of the Company’s common stock at $2.00 per share. In February 2007, a warrant to purchase 100,000 shares of common stock was exercised. Previously, a warrant to purchase 100,000 shares of common stock was exercised in 2006.
Preferred Stock
On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting, Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of $1,000,080. The Company pays quarterly cumulative dividends of three percent per annum on these shares.
These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share for each quarter that such shares are outstanding. The shares also have a $1.08 per share preference in involuntary liquidation of the Company. At

F-16


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders’ Equity(continued)
Preferred Stock (continued)
December 31, 20072008 and 2006,2007, outstanding Series S preferred stock totaled 926,000 shares. No cumulative dividends were in arrears at December 31, 20072008 and 2006.2007.
On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned subsidiary of Austroinvest International, Inc.), in exchange for proceeds of $999,000. The Company pays quarterly, non-cumulative dividends of three percent per annum on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At December 31, 2008 and 2007, outstanding Series S-NR preferred stock totaled 900,000 shares.

F-16


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity(continued)
Preferred Stock (continued)
In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit, each unit consisting of one share of the Company’s $.001 par value common stock and two shares of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of the Company’s common voting stock at any time after February 15, 1995. NoA total of 36,000 shares were converted during 2007 or 2006.2008 and no shares were converted during 2007. The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of the Company
Company. Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of $2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK preferred stock. At December 31, 2008 and 2007, outstanding Series S-PIK preferred stock totaled 260,000 and 296,000 shares.shares respectively.
During 2008, the Company paid $32,640 of the total preferred dividends of $103,040 with 18,621 shares of its common stock. The Company paid $10,400 of preferred dividends due for the fourth quarter of 2008 with 12,235 shares of its common stock in January of 2009.
During 2007, the Company paid $47,360 of the total preferred dividends of $107,360 with 19,013 shares of its common stock. During 2006, the Company paid $47,360 of the total preferred dividends of $107,360 with 16,746 shares of its common stock. During 2005, the Company paid $47,360 of the total preferred dividends of $107,360 with 57,560 shares of its common stock. No dividends were in arrears at December 31, 2007 or 2006.2007.
5.7. Employee Stock Ownership
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.
Shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company and 79,545 shares were released in each year of the three year period ending December 31, 2007.2008. At December 31, 2008, 2,863,640 shares with a fair market value of $1,718,184 are unearned. At December 31, 2007, 2,943,185 shares with a fair market value of $7,505,122 are unearned. At December 31, 2006, 3,022,730 shares with a fair market value of $8,554,326 arewere unearned.
The Company recognized net compensation expense equal to the shares allocated multiplied by the current market value of each share less any dividends received by the ESOP on unallocated shares. Compensation expense related to the ESOP amounted to $123,295 in 2008, $212,385 in 2007 and $223,918 in 2006 and $76,760 in 2005.2006. The unearned ESOP shares in

F-17


DIAMONHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Employee Stock Ownership(continued)
stockholders’ equity represented deferred compensation expense to be recognized by the Company in future years as additional shares are allocated to participants.
6.8. Income Taxes
At December 31, 2007,2008, the Company had net operating loss carryforwards for income taxes of approximately $18.3$15.7 million, which expire during various periods through 2027.2028. Realization of deferred income taxes as of December 31, 20072008 is not considered likely. Therefore, a valuation allowance of approximately $6$5 million at December 31, 2007, $6 million at December 31, 2006, and $5.2 million at December 31, 2005, washas been established for the entire amount of deferred tax assets relative to the net operating losses.

F-17


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments9.Commitments and Contingencies
Leases
The Company leases office space in Largo, Florida pursuant to a lease with Wyndham Office Properties, Inc.The Gentile Group LLC which expires July 31, 2008.2009. The Company also leases storage facilities in Madeira Beach, Florida and offices in Diamondhead, Mississippi on a month-to month basis. Rental expenses for all facilities totaled $28,149 in 2008, $26,735 in 2007 and $24,680 in 2006 and $17,012 in 2005.2006.
The Company is liable for future minimum lease payments of $5,019$5,150 through July 2008.2009.
Management Agreement
On June 19, 1994, the Company entered into a Management Agreement with Casinos Austria Maritime Corporation (“CAMC”) to operate, on an exclusive basis, all of its proposed dockside gaming casinos in the State of Mississippi. If the Company enters into a joint venture arrangement pursuant to which the joint venture partner acquires a controlling interest, the agreement with CAMC will terminate.may terminate at the option of CAMC. The Management Agreement is for a term of five years beginning when the casino resort becomes operational and provides for the payment of an operational term management fee based on a percentage of gross gaming revenues, as defined therein.
Sales Tax Settlement
On November 28, 1994, the Florida Department of Revenue issued a Notice of Intent to make Sales and Use Tax Audit Changes to five subsidiaries of the Company for the period February 1, 1989 through June 30, 1994. The total proposed assessments, including estimated penalties and interest, through June 15, 1997, totaled approximately $7.4 million. InAs of May 1997,2005, the five subsidiaries settled this liability by entering into fifteen separate Closing Agreements withceased all payments regarding the Florida Department of Revenue. The settlements, which included all audits forassessments and the covered period, totaled approximately $1.76 million. The settlements included a payment schedule of approximately $21,000 per month which, in March 1998, was reduced, by agreement of the parties, to $10,476 per month. The settlements provided for no interest for the first 3 years and interest accruing at a rate of 6% per year for the last 4 years. A balloon payment in the amount of $964,093 was due under the agreements after the final installment was to be made on May 5, 2005. The total amount, including accrued interest, due the Florida Department of Revenue at that time amounted to $1,125,752.
The five subsidiaries which entered intowere the fifteen Closing Agreementssubjects of the assessment are no longer operating, have no assets, and are unable to make further payments pursuant to their respective Closing Agreements. The parent corporation did not guarantee the payments under these settlement agreements. On May 18, 2006, the Company received correspondence from the Florida Department of Revenue stating that the Department had filed tax warrants with respect to the amounts owed by the

F-18


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies(continued)
Sales Tax Settlement (continued)
subsidiaries in question and had placed these warrants as uncollectible and no further collection efforts would be pursued by the Florida Department of Revenue.
Therefore, as of June 30, 2006, the Company has ceased to recognize the liability due the Department of Revenue in the amount of $1,125,752 and has recorded income in the same amount for the year ended December 31, 2006.
Other ArrangementsRelated Parties
The Company has agreements with various current Officers and Directors which is providing or would give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds realized on borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr. Harrison as the Company receives proceeds from the Lender. In the event that this loan facility should require security in the future, the fee payable under the agreement is reduced to 3% of the proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to the terms of this agreement.
The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or its Diamondhead project. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.
Other
The Company has agreements with various unrelated persons and entities that would be entitled to substantial commissions if the Company enters into an agreement relating to the development of its Diamondhead property as a result of their efforts.

F-18F-19


DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.Supplemental Cash Flow
10. Supplemental Cash Flow
Supplemental schedules are as follows:
                        
 2007 2006 2005  2008 2007 2006 
Interest paid:  
Cash paid for interest $ $ $1,892  $3,041 $ $ 
              
Non-cash transactions: 
Stock issued to satisfy Note payable to Director $125,000 $ $ 
       
Conversion of 36,000 shares of Preferred Stock to Common $ $ $ 
       
Preferred stock dividends paid with shares of common stock $47,360 $47,360 $47,360  $32,640 $47,360 $47,360 
              
9.11. Quarterly Financial Data (Unaudited)
                     
  1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
2007
                    
Costs and Expenses $321,634  $318,405  $279,840  $262,213  $1,182,092 
Other Income and (Expense), Net  8,123   7,391   6,033   5,058   26,605 
Net (Loss)  (313,511)  (311,014)  (273,807)  (257,155)  (1,155,487)
Loss per Share  (.010)  (.010)  (.009)  (.009)  (.038)
                     
2006
                    
Costs and Expenses $727,705  $1,580,499  $295,741  $289,876  $2,893,821 
Other Income and (Expense), Net  4,127   1,131,358   100,875   7,629   1,243,989 
Net (Loss)  (723,578)  (449,141)  (194,866)  (282,247)  (1,649,832)
Loss per Share  (.024)  (.015)  (.007)  (.009)  (.055)
                     
2005
                    
Costs and Expenses $186,484  $182,613  $180,661  $237,083  $786,841 
Other Income and (Expense), Net  70,752   25,446   34,787   13,908   144,893 
Net (Loss)  (115,732)  (157,167)  (145,874)  (223,175)  (641,948)
Loss per Share  (.005)  (.006)  (.006)  (.008)  (.025)
10. Subsequent Events
In March 2008, a Director of the Company exercised an option to purchase 75,000 shares of common stock at an exercise price of $.75 per share by tendering $56,250 to the Company.
In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity needs pursuant to the terms of two promissory notes. The first note provides for the repayment of $150,000 to the Vice-President of the Company, who is also a Director of the Company. The second note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and payable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans are unsecured.
                     
  1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
2008
                    
Costs and Expenses $2,330,504  $282,636  $239,236  $270,112  $3,122,488 
Other Income and (Expense), Net  1,933   (339)  (903)  (2,777)  (2,086)
Net (Loss)  (2,328,571)  (282,975)  (240,139)  (272,889)  (3,124,574)
Loss per Share  (.070)  (.009)  (.008)  (.009)  (.096)
                     
2007
                    
Costs and Expenses $321,634  $318,405  $279,840  $262,213  $1,182,092 
Other Income and (Expense), Net  8,123   7,391   6,033   5,058   26,605 
Net (Loss)  (313,511)  (311,014)  (273,807)  (257,155)  (1,155,487)
Loss per Share  (.010)  (.010)  (.009)  (.009)  (.038)
                     
2006
                    
Costs and Expenses $727,705  $1,580,499  $295,741  $289,876  $2,893,821 
Other Income and (Expense), Net  4,127   1,131,358   100,875   7,629   1,243,989 
Net (Loss)  (723,578)  (449,141)  (194,866)  (282,247)  (1,649,832)
Loss per Share  (.024)  (.015)  (.007)  (.009)  (.055)

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